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The Hidden Snags in Health-Care Pools

By Kimberly Weisul When Justine and Gabriel Marous started their law firm two years ago, they knew they needed health insurance. Easier said than done. "I had forms sitting on my desk for several months," says Justine. Then she stumbled onto HealthPass, a health insurance purchasing pool for small businesses in the New York area. A HealthPass counselor returned Justine's call right away, then visited her office, and explained how the program worked. There was just one form to fill out.

"We went on vacation two days later, and when we came back, we had health care," says Justine. Best of all, because she and her husband were able to choose two different plans -- a basic plan for him, and a plan for her that had better hospital and neonatal benefits -- Justine figures they're saving about $200 a month on premiums.

Cases like the Marous' show why health-insurance purchasing pools, or cooperatives, remain popular among advocates for small businesses. In theory, by allowing small outfits to buy insurance together, the pools bestow some of the negotiating power that large companies enjoy. The pools are supposed to mitigate price hikes if an employee becomes seriously ill, since all individuals in the pool are considered as members of one large group for underwriting purposes. And the pools also aim to cut administrative costs, which can eat up between 30% and 40% of premiums at small companies, vs. to 8% to 10% at bigger ones.

FLIES IN THE OINTMENT. In reality, the pools often fail, usually thanks to a combination of factors. It might be that they don't attract enough member businesses and insurance companies, or because the pool becomes a refuge of last resort for workers with chronic conditions, making premiums too high to be competitive. The result: Administrators almost never get the negotiating power they would like.

Consider the fate of the Florida Community Health Purchasing Alliances, which reached a peak of 92,000 enrolled members in 1998, but closed up shop in 2000. In 2002, Colorado's Alliance shut down. Purchasing cooperatives in Texas and North Carolina also have failed. The pools have had such trouble that a November, 2002, report from the National Academy for State Health Policy, a nonprofit that consults with states on health-care issues, describes the pools as "important demonstrations" that nonetheless "had not proved effective as strategies to reduce the number of uninsured."

Still, the National Federation of Independent Business (NFIB) is aggressively pushing legislation -- the Association Health Plan Bill -- that would let pools sponsored by trade organizations and employer groups more easily cross state lines. As it stands now, pools that operate in more than one state must comply with different sets of mandates for each state in which they do business. The bill, which has been passed by the House but not yet considered in the Senate, would let pools follow federal guidelines instead. "This bill would help us have larger pools with more purchasing power," says Amanda Austin, the NFIB's manager of legislative affairs. "The larger the pool, the bigger the spread of risk, so the less you have to pay."

COMMUNITY RATING. Size is one of the key hurdles pools need to overcome. The more participants a pool has, the less effect any one person's ill health will have -- and the more likely insurance companies will be interested in offering competitive policies and premiums. Yet "many of the pools have not gotten to a scale where everybody comes and stays," says Cathy Schoen, vice-president at the Commonwealth Fund, a foundation that supports research into health and social issues. "If the businesses don't come and stay, the pools never quite get the economies of scale of large companies."

Even if businesses do join and stick around, cost savings are hard to capture. Someone still has to collect premiums and keep track of enrollment. It's hard for an association with 2,000 members to do that, and if they do, they often have to charge for the service.

Tied to a pool's size, and its success, is its attractiveness to relatively healthy people. That depends in large part on the existence of "community rating" -- laws that limit the difference between what an insurer can charge a healthy individual and a sick one. In states with strict community-rating laws, almost no differentiation is allowed. "In New York, there's this big misconception that we can group small employers together to get a better rate," says Laurel Pickering, executive director of the New York Business Group on Health, which sponsors HealthPass. "That only works where you don't have community rating. In New York, we can't group together to get a better rate."

Ironically, that could prove key to HealthPass's viability. In states without community rating, businesses with healthy employees don't benefit by being lumped together with others. So they're some of the most likely to leave purchasing pools and cut their own deals, making premiums higher for those businesses that remain. As rates in the pool climb, more businesses -- those with relatively healthy employees -- are able to find better rates elsewhere. The result: The pool becomes a last resort for outfits with above-average numbers of sick employees, unable to provide rates that are competitive with the wider market.

UNLIKELY SALVATION. So far, HealthPass seems to have avoided most of these problems, and can be expected to find a measure of protection in New York's strict community-rating laws. HealthPass has a respectable 1,600 businesses and 12,600 people signed up, 62% of whom had no previous health insurance. Insurance agents are helping HealthPass' continued growth: Unlike some other pools, HealthPass pays commissions to the agents who bring it business, and it pays them in the same month the new business is signed. Five carriers participate, offering 26 different plans.

About 20% of HealthPass's budget still comes from the city of New York. HealthPass hopes to be self-sufficient by December 2004, and to have about 18,000 people enrolled by then. Other cities are taking notice. "We are constantly called by other municipalities to talk about HealthPass," says Mitch Zaretsky, the program's executive director. "We're in the business of spreading the word." And hoping, no doubt, that in 2004, the word is still good. Weisul covers small-business issues for BusinessWeek in New York

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