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| Posted on: Wednesday, July 12, 2006 |
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Proposed Federal legislation that would extend ERISA regulations to health insurance risk pools (aka association, community health, MET or MEWA plans; herein referred to as community health pools) is intended to foster competition within the insurance industry and make group insurance more affordable. As with many “new” ideas, this harkens back to the pre-1990 era when hundreds of such community health pools existed. Today, relatively few of these pools are still around. What circumstances led to the demise of these programs? Are such community health pools a viable option for smaller and larger employers?
The desire to believe that there is an easy solution to controlling rising health care costs by pooling the purchasing power of several thousands of members and getting better "rates" is powerful. Employers who offer group insurance plans are, whether they are aware of it or not, already part of large healthcare care purchasing groups via their Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO) networks. In Colorado, HMS/Sloans Lake is the dominant PPO network for self funded plans, while all other major insurance companies offer similar PPO arrangements for their tens of thousands of insured members.
Because employers already have increased purchasing power through these networks, banding employers together in community health pools does not greatly increase purchasing power unless medical care itself is controlled more effectively. In a typical group insurance plan, Medical care accounts for 70%-80% of plan premiums. Unless community health pools can control factors such as patient demands, new medical technology, provider fees and physician treatment protocols better than traditional group insurance vendors, they may well end up being a more costly solution.
Next, is it possible for a community health pool to reduce the other 20%-30% of premiums charged to cover administration, reinsurance, profit, broker services and product marketing costs commonly found in group insurance plans? If the community health pool creates true, sustainable economies of scale, yes. Well-designed benefit plans administered efficiently could generate savings of 10%-20% on these non-medical claims line items. However, even a 20% savings in this cost segment only translates to an overall premium reduction of 4%-6%. Some national leaders use this “greater efficiency” argument to lobby for moving all citizens into Medicare which claims an administrative cost burden of less than 5%. Ah yes, there are always trade offs and the devil is in the details.
Larger employers are often solicited to join community health pools because they lend credibility to the pool. They also are occasionally invited to join to subsidize rates for smaller business members of the pool. In practice, no employer has extra funds to dedicate to a subsidy of unrelated businesses and that is one of the reasons why larger employers rarely participate in such pools. It is, however, in their best interest for smaller businesses to participate because it mitigates the cost shifting that occurs when individuals with high medical needs choose to work for larger employers because they need the insurance that may not be available at employers without group health plans.
Community health pools currently exist in the Eagle, Montrose, Pitkin, Steamboat, and Summit markets and dozens of other health pool feasibility studies have been conducted in communities around Colorado. All face the same daunting challenges. As a practical matter, if these community health pools do not negotiate lower-than-market provider fees and get physician buy-in to adopt and practice more efficient "best practice" treatment protocols, no sustainable advantage exists that will bond business buyers to those plans. And, while many such plans tout the undeniable importance of promoting healthy lifestyles (behavior change), it is unrealistic to believe that it will lower costs in the short to mid-term (3-5 years). This is especially so in many areas of Colorado where residents already lead healthier lifestyles.
Lastly, many businesses are not strategic buyers of medical insurance. They’ve been conditioned to buy the most convenient, lowest cost plan of the moment and change when a better deal is offered. As price buyers they will leave a community health pool for the next better deal just as fast as they bought the Plan that last offered better rates. Typically, employers with healthy members leave first, driving up the costs for those that remain. The insurance industry refers to this as a "death spiral" and is what has driven most community health pool plans out of business in the past.
In a best case scenario, community health pools can provide substantive value if three key commitments occur: The local medical community does its part by agreeing to lower fees; physicians adopt "best practice" treatment protocols; and, employers agree to be contractually bound to the community health pool for a reasonable, multiyear period of time. Without these essential yet hard to obtain ingredients, outperforming traditional insurance and self insurance arrangements is highly unlikely.
Should you have any additional employee benefit questions or would like to discuss this material in detail, please don’t hesitate to call the Denman Team. |
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