Analysis of Purchasing Pools

Economic theory suggests that purchasing pools should concentrate consumer purchasing power and result in lower health insurance premiums; however, evidence from past and current purchasing pools fails to show this relationship:

• Economic theory argues that purchasing pools should reduce health insurance premiums by concentrating the purchasing power of individuals and small employers and by reducing administrative overhead. Read more below
• Studies of purchasing pools to date show that such pools have not been able to reduce premiums below those offered in the small group and individual health insurance markets. Read more below
• Analysis of the problems of past and existing purchasing pools suggests that a variety of regulatory and policy options might improve the viability of purchasing pools and enhance their ability to decrease insurance premiums. Read more below

Economic theory argues that purchasing pools should reduce health insurance premiums by concentrating the purchasing power of individuals and small employers and by reducing administrative overhead.

One of the primary goals of purchasing pools is to reduce premiums for workers in small firms and for people previously in the individual market. The reduction in premiums is expected to occur because small employers and individual purchasers wield more power to negotiate lower prices with health insurers when acting as a group. In addition, large group purchasing can potentially reduce administrative costs and thus reduce the cost of coverage.

For purchasing pools to have an effect on consumer financial risk, they must increase the collective purchasing power of the small firms, giving them the leverage to negotiate lower rates of premiums. In addition, it is assumed that purchasing pools will take advantage of economies of scale in the marketing and administration associated with pooled purchasing (GAO, 2000; Yegian et al., 2000). Most important, it is assumed that these lower premiums induce non-insuring firms to participate in the pool, thus increasing coverage among the previously uninsured.

Studies of purchasing pools to date show that such pools have not been able to reduce premiums below those offered in the small group and individual health insurance markets.

The evidence suggests that purchasing pools, as currently implemented, have not been able to reduce premiums below those offered in the traditional small group and individual markets (Long and Marquis, 2001; GAO, 2000; Wicks, 2002) and thus have not increased coverage among the previously uninsured. Long and Marquis (2001) studied the three largest small group purchasing pools. They found no difference between the premiums inside and outside the purchasing pool for two of the three pools studied. In a study focused on the small group pool in California, Yegian et al. (2000) found that initially premiums in the pool were lower than those in the commercial market, but over the course of several years, those differences disappeared.

A report prepared by the GAO (2000) argues that there are several reasons that purchasing pools have not achieved premium reductions. First, they do not have sufficient leverage to negotiate better prices because their market share is small. Second, the expected savings in administrative costs have not been realized. Third, in some cases, state regulations limit variation in premium prices among different groups purchasing the same plan. A pool's viability depends critically on its ability to compete in the state's insurance marketplace. A pool is at a particular disadvantage in states that allow for rate variation based on health.

Moreover, for purchasing pools to succeed in offering reduced premiums, they must be able to maintain a sufficient number of participating insurers and employers. Insurance agents play a key role in helping small businesses to identify and select among their health insurance options. It has been argued that purchasing pools that do not solicit and maintain cooperation from insurance agents will not be able to attract enough employers to achieve the market share necessary to have the leverage to negotiate better prices (Trude and Ginsburg, 2001).

In addition, in an employee choice pool, i.e., a pool in which employers offer multiple plans and employees choose which one they want to participate in, little incentive is given for health plans to offer a better price through the pool than in the commercial market. This is because health plans in the commercial market can expect a more balanced risk profile in terms of the composition of members' health status and health care needs. In the commercial market, health plans would get the entire employee group, whereas in an employee choice pool, they would get only some portion of the group.

Analysis of the problems of past and existing purchasing pools suggests that a variety of regulatory and policy options might improve the viability of purchasing pools and enhance their ability to decrease insurance premiums.

It has been argued that purchasing pools would have the potential to reduce premiums if new regulations were implemented to address the problems described in the GAO report. Curtis and Neuschler (2005) argue that purchasing pools have not been able to achieve the same benefits for their participants as large employers do because the pools typically do not function as a cohesive group. Small employers and individual purchasers are able to move in and out of the pool and do so in an effort to find the best deal. This is not a problem for large employer groups because the employer's contribution to the premium is not available to employees if they do not take up the employer sponsored plan. Therefore, very few employees choose to purchase insurance in the commercial market because they would forgo a substantial benefit if they did so.

Curtis and Neuschler (2005) suggest several possible strategies for increasing group cohesion in purchasing pools that would enable the pools to maintain the size necessary to wield negotiating power with health plans: subsidies that would be available only to participating firms, mandatory participation (as in an individual or employer mandate), and allowing pools to use the same factors for rating that are used in the commercial market. In addition, Trude and Ginsburg (2001) suggest that pool participation could be increased if the pool incorporated a role for and worked with insurance agents rather than trying to bypass them and replicate their services. Another option for improving the ability of a pool to reduce premiums is for the pool to have a risk adjustment mechanism to account for any adverse selection that may occur in pools in which employees choose which plan they would like. In other words, pool payments to the health plans would be adjusted for how sick or healthy the plan participants are.

In Massachusetts, the Commonwealth Connector (a form of purchasing pool) has played a role in reducing the cost of health insurance for employees who do not receive insurance through their employer. The state requires that employers have a "Section 125 Plan" allowing employees to purchase health insurance through the Connector with pretax dollars (The Massachusetts Health Insurance Connector Authority, 2008). In this case, the purchasing pool in combination with a legislative change (i.e., requiring employers to allow employees to purchase insurance with pretax dollars) has reduced the cost of insurance for people who work but do not have access to insurance through their employer.

One of the key factors required for purchasing pools to succeed in offering reduced premiums is the ability to maintain a sufficient number of participating insurers and employers. Some of the pools succeed, but others have faced declining participation. Agents' cooperation may play a very important role in guiding employers to the pools. The literature does suggest some strategies for increasing the effectiveness of purchasing pools; however, there is little empirical evidence of how well these changes would work.

It is not clear whether purchasing pools can change the reliability of the health care system:

• Purchasing pools may not include quality improvement activities in their purview. Read more below
• Evidence from the literature has shown that large purchasing coalitions have tried to improve quality of care through increased public reporting of performance data. Read more below
• We do not know whether the efforts of these purchasing coalitions have resulted in improvements in the reliability of care. Read more below
• We also do not know whether smaller purchasing pools will have the same leverage as larger coalitions to push for improvements in quality. Read more below

Purchasing pools may not include quality improvement activities in their purview.

We do not know whether newly formed purchasing pools will elect to include quality improvement activities in their set of responsibilities. Since these activities can be expensive and time consuming, newly formed pools may not be able to include quality reporting or incentives in the first years of operation. In the absence of such activities, we would not expect to see an effect on reliability.

Evidence from the literature has shown that large purchasing coalitions have tried to improve quality of care through increased public reporting of performance data.

Although improving the quality of care is not the primary function of small group purchasing pools, it has been argued that they can exert their purchasing power toward that end. Quality of care can be improved through purchasing groups' efforts to acknowledge the importance of high quality care; measurement of quality of care, with rating of performance and recognition and rewards for better performance; and consumer education. Large purchasing groups have the leverage, willingness, and capability to monitor the health care delivery system and to identify and reward high quality performance (Castles, Milstein, and Damberg, 1999; Fraser et al., 1999).

The ability of the pool to promote high quality care is enhanced if the pool offers a standardized benefit across all plans so that consumers can easily make informed comparisons across all of the plan options. Such standardization will be possible only for pools that are able to compete successfully in the state's insurance marketplace. Therefore, the characteristics and rules of the insurance market in which the pool operates will affect its ability to improve the quality of care.

The literature shows that a number of large purchasing coalitions have promoted the public reporting of performance data in an effort to provide employers and employees with information about the value of the care they receive and to force the health care industry to compete on quality as well as cost (Sandrick, 2001; Castles, Milstein, and Damberg, 1999; Fraser et al., 1999; Borland, Smith, and Nankivil, 1994).

We do not know whether the efforts of these purchasing coalitions have resulted in improvements in the reliability of care.

The literature to date has focused on the ability of large purchasing coalitions to influence health care quality. It is not clear that small group coalitions will have the same leverage as larger coalitions to force providers to compete on quality as well as cost.

We also do not know whether smaller purchasing pools will have the same leverage as larger coalitions to push for improvements in quality.

Moreover, there is little evidence to determine which strategies used by purchasing coalitions to improve quality hold the most promise and under what circumstances they are most successful (Fraser et al., 1999).

No evidence is available on the effects of purchasing pools on health:

• No studies examine the relationship between purchasing pools and health. Read more below
• In theory, if purchasing pools can expand coverage, particularly to those individuals with greater health care needs, they have the potential to improve health. Read more below
• If purchasing pools attain adequate purchasing power, they may wield influence over providers to improve quality of care, which could yield improvements in health. Read more below

No studies examine the relationship between purchasing pools and health.

None of the literature about purchasing pools directly addresses their effect on health or quality of life; however, the literature does address the question of whether pools are able to expand coverage. The evidence suggests that the ability of a pool to expand coverage depends heavily on how it is designed. Purchasing pools, as currently implemented, have not achieved expanded coverage, in large part because they have not been able to reduce premium prices below those available in the commercial market (Long and Marquis, 1999, 2001) and thus have not been able to attract small employers that do not already offer coverage. However, it has been suggested that changes in the design of purchasing pools could help to increase group cohesion and enable the pools to maintain the size necessary to wield negotiating power with health plans. Such pool design options include providing subsidies that would be available only if participating in the pool, making participation mandatory (as in an individual or employer mandate), and allowing pools to use the same factors for rating that are used in the commercial market.

In theory, if purchasing pools can expand coverage, particularly to those individuals with greater health care needs, they have the potential to improve health.

If purchasing pools are able to expand coverage to previously uninsured individuals, they have the potential to improve health. However, the health effects of health insurance, although generally positive, may be more modest than generally appreciated; therefore, whether purchasing pools can improve health depends on both their ability to expand coverage and the extent to which health insurance improves health.

Some purchasing pools are designed to address the needs of high risk individuals who may be unable to purchase health insurance or who find policies unaffordable. In such cases, access to insurance through the purchasing pool could have a beneficial effect on health for highly vulnerable populations. However, such pools have to be subsidized in order for them to serve a high risk population at affordable prices and still be viable.

Any positive effect of purchasing pools on health would be expected to accrue primarily to people who had previously been uninsured and had gained coverage through the pool. The effect on health for others in the pool would be expected to be minimal.

If purchasing pools attain adequate purchasing power, they may wield influence over providers to improve quality of care, which could yield improvements in health.

Although improving the quality of care is not the primary function of small group purchasing pools, it has been argued that such pools can exert their purchasing power to improve the quality of care and thus improve health by improving quality. The quality of care can be improved through purchasing groups' efforts to acknowledge the importance of high quality care; to measure quality of care, and rate, recognize, and reward better performance; and to educate consumers. Large purchasing groups have the leverage and capability to monitor the health care delivery system and to identify and reward high quality performance (Castles, Milstein, and Damberg, 1999; Fraser et al., 1999).

There is no evidence that purchasing pools will affect the capacity of the health care system:

• Indirectly, if purchasing pools increase insurance coverage, they could increase the use of health care resources and strain capacity. Read more below

Indirectly, if purchasing pools increase insurance coverage, they could increase the use of health care resources and strain capacity.

Capacity refers to the availability of health care resources, such as personnel (e.g., doctors, nurses) and capital (e.g., hospital beds, medical equipment). It is possible that implementing purchasing pools could impose a strain on existing capacity. Whether such an effect is realized depends on the extent to which purchasing pools increase coverage of the previously uninsured and whether such coverage increases the use of health care services among this group.

A direct relationship between purchasing pools and capacity has not been established, and the literature has yet to examine such a relationship. However, the literature indicates that unsubsidized purchasing pools have not been able to reduce premiums enough to induce non-insuring employers to participate (Long and Marquis, 1999, 2001). Therefore, as currently implemented, pools have not extended coverage to the previously uninsured. Therefore, we would not expect a significant effect on capacity.