Dear Workforce Should We Consolidate Our Health Purchasing Power
How common a practice is it for different employers to combine their workforces to get a better deal when purchasing group health insurance for their employees? What are the pros and cons of this approach?
Dear Power in Numbers:
While it is not common practice, there have been numerous attempts by employers to use their consolidated purchasing power to buy health care coverage for their employees. In some cases, employers in the same industry formed a coalition, while in other cases, employers in the same geographic proximity banded together.
Purchasing coalitions hold the promise of lowering costs by bargaining with hospitals, physicians, and other providers for lower reimbursement rates. This spreads fixed administrative costs over a larger membership base, and enables better management of cash flow.
Unfortunately, coalitions face a number of obstacles:
Many employers join a coalition with the expectation that they will accept the results of the coalition's negotiations with insurers (and/or providers) if it's better than the deal that employer gets on its own. But this thinking can undermine the very ability of the coalition to negotiate, since the coalition cannot bind its membership to the terms it negotiates. Nor can it promise the insurer volume from the full coalition. Insurers learn pretty quickly whether the coalition has any "teeth." If not, the coalition will be ineffective in offering better deals to employers.
Employers may be unable to modify their benefit plans to take advantage of the insurer's offer to the coalition. It may be particularly difficult for employers whose benefits are collectively bargained.
Although the coalition may be successful in consolidating certain administrative functions (e.g., remitting premium), and hence obtaining a rate concession from the insurer, in many cases the coalition itself becomes responsible for these functions. The coalition would then have to charge member employers for assuming these functions, which may offset the negotiated savings.
There are laws that govern this whole area, like laws that prevent or restrict the ability of insurers to give employer coalitions more favorable premium rates. New York insurance law, for example, prohibits insurers from granting more favorable rates to coalitions that have any members who employ 50 or fewer employees.
State law not withstanding, many insurers will not underwrite coalitions due to concerns about adverse selection (i.e., the insurer ending up with the worst risks in the group) and the legalities of covering multiple employers (e.g., which one becomes liable for delinquent premiums).
Some employers have attempted to establish coalitions that self-fund health benefits. These arrangements are generally considered Multiple Employer Welfare Arrangements, or MEWAs, and are governed by federal law. However, as a result of the perceived failure of MEWAs, the federal government allows states to regulate their financial solvency. Many states have laws limiting the ability of MEWAs to operate.
Michigan, for example, only permits employers to self-fund health benefits if: 1) they are members of an association of five or more businesses that are in the same trade or industry, 2) the association is not formed solely to provide health benefits to its members, and 3) the association has been in existence for at least two years.
Despite these many obstacles, there are examples of successful coalitions. Many state governments allow local counties, school districts, and other public employers to join their state health benefits program. These states have been able to achieve tremendous economies of scale and use their large membership bases to negotiate favorable arrangements with insurers and third-party administrators.
SOURCE: Harvey Sobel, FSA, Principal & Consulting Actuary,Buck Consultants, Inc., Secaucus, New Jersey, Jan. 17, 2003.
LEARN MORE: ReadSelling Health to High-Risk Workers.
The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.