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Myths & Facts |
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Would voluntary purchasing pools lower health insurance premiums?
What’s Behind It?
Workers at small businesses and individuals whose only option is to purchase coverage on their own are more likely to be uninsured than other Californians. Both of these groups cite affordability as the main barrier to obtaining coverage. Direct comparisons are difficult, but small employers and individuals often do pay higher premiums than large employers do for similar benefits. These observations suggest that larger purchasers benefit from their size in two ways: through lower per-person administrative costs (“economies of scale”) and by exerting greater negotiating power with health plans. Based on this reasoning, gathering many small groups and individuals in a purchasing pool seems a promising strategy for making coverage more affordable for individuals and small businesses.
The Broader Picture
California sponsored a purchasing pool for small business – Pac Advantage – which recently ceased operations. In fact, purchasing pools were established in many states and regions in the early 1990s. Experience accumulated through these real-world efforts leads to the following observations:
Assembling many small groups or individuals into a pool does not automatically reduce administrative costs. For example, even a large pool made up of many small employers must still bill each group independently, so significant savings are unlikely unless the basis or mechanism for premium collection can be re-engineered. And, if the pool is relatively small, health plans – a source of potential administrative efficiencies in larger pools – will be unable to streamline enrollment and premium collection systems.
If participation in the pool is voluntary, premiums can’t be sustained at levels below those available outside the pool. If offered a choice of obtaining coverage inside or outside the pool, individuals and small businesses will buy where they can get the best value. For example, if health plans in the outside market use information about health status to set premiums but the pool must accept purchasers and set premiums without considering health status, the pool will end up attracting higher risk and costlier people, thereby driving up premiums inside the pool.
The Bottom Line
Establishing a voluntary purchasing pool will not automatically reduce premiums. Only if the pool is structured so that its enrollment is stable and cohesive – only if its target population either is required to use the pool or obtains a unique benefit by doing so – will the pool have the potential to achieve economies of scale and negotiate effectively with health plans.
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