purchasing cooperatives for indiana's small businesses

Purchasing Cooperatives for

Indiana’s Small Businesses

Affordable Health Insurance Now

Policy Brief | December 2009

Prepared by Alex Beeman

Purchasing Cooperatives for Indiana’s Small Businesses

According to a recent survey by the National Federation of Independent

Business, the “cost of health insurance” remains the number one

small business problem.1

The importance of small business to Indiana’s economic prosperity and well-being is easily understood. Around 41% of all Indiana employees work in small businesses and 93.5% of all employers are small businesses.0F

1 Many problems persist in running small businesses, especially in the current macro and microeconomic environment, and healthcare is at the forefront of the agenda.

Healthcare inflation is not only a problem for small businesses but can undermine all Indiana’s businesses through demand and supply-side economic forces.1F

2 Healthcare inflation in Indiana has been

worse than other states. In the United States, employer-sponsored premiums the past six years have increased 26% for single and 33% for

1 See Justis, R. (2006, September). Small Businesses in Large Numbers. InContext. Bloomington, IN: Indiana Business Research Center. 2 Most economists believe that relatively higher healthcare cost means lower wages. That is, overall compensation is relatively static and the data seems to back the theory up. Therefore, the increased costs of health insurance means there is less money in the employees pockets of small businesses. Health insurance has larger repercussions for economic systems. See Klein, E. (2009, October 21). Will Lower Health-care Costs Mean Higher Wages? Ezra Klein: Economic and Domestic Policy, and Lots of It. Retrieved November 28, 2009, from http://voices.washingtonpost.com/ezra-klein/2009/10/will_lower_health-care_costs_m.html.

family premiums. Indiana premiums have increased 29% and 45% respectively.2F

3 On the price side of the equation, increased incomes for all occupations in Indiana have increased at a much lower rate than healthcare prices—mean annual wages increased over 14% the past six years, while prices increased a little more than 29%.3F

4 Many firms did not anticipate the current

crisis of healthcare inflation. Employers in the past have either explicitly or implicitly contracted with their employees to bear the risks associated with providing health insurance. Smaller employers are more vulnerable to the costs and price increases4F

5 because they commonly run on smaller margins and are less risk-adverse. With the increased costs and prices, smaller firms either have to pay for increasingly expensive health insurance benefits or renege on their obligations.

5F

6 The results of healthcare inflation on the provision of health insurance by small businesses is staggering. 3 The family premium increase for Indiana (and North Carolina) represents the largest increase of all States. See Schoen, C. J.L. Nicholson, and S.D. Rustgi. (2009, August). Paying the Price: How Health Insurance Premiums Are Eating Up Middle-Class Incomes: State Health Insurance Premium Trends and the Potential of National Reform. (The Commonwealth Fund Data Brief #1313, Volume 17). New York, NY: The Commonwealth Fund. 4 Mean annual wages increased 14.212% and median hourly wages increased 13.276% for all occupations. Healthcare prices increased 29.129% over the same six year period (2003-2008). See Bureau of Labor Statistics. (2003-2008, May). State Occupational Employment and Wage Estimates—Indiana. Washington, D.C.: Bureau of Labor Statistics.; Bureau of Labor Statistics. (2003-2008). Consumer Price Index—Urban Wage Earners and Clerical Workers. Washington, D.C.: Bureau of Labor Statistics. 5 Aforementioned. 6 See Kotlikoff, L.J. (2007). The Healthcare Fix: Universal Insurance for All Americans. Cambridge, MA: MIT Press.


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Over the last 10 years there has been a 10.4% decrease in the number of people in Indiana covered through employer-sponsored health insurance.6F

7 As a result only 38.1% of Indiana small businesses, firms with fewer than 50 employees, provide their employees a health insurance option.7F

8 On the other hand, firms with more than 50 employees provide 96.8% of their employees with an option.8F

9 Comparatively, Indiana’s small businesses have a harder time providing health insurance options than neighboring states.9F

10 Data indicates smaller employers are wising

up by either completely getting out of health insurance10F

11 or utilizing cost-cutting measures. Firms have hedged healthcare inflation by limiting choice in a health insurance plan and/or increasing cost-sharing to their employees. Currently only 18.7% of Indiana’s small firms provide more than one health insurance plan options.11F

12 As for cost-sharing, average

7 See United States Census Bureau and the Bureau of Labor Statistics. (1999-2008). Current Population Survey (CPS). Washington, D.C.: United States Census Bureau. 8 See Agency for Healthcare Research and Quality (AHRQ). (2008). Medical Expenditure Panel Survey (MEPS)—Insurance Component. Rockville, MD: AHRQ. 9 Firms in the United States as a whole provide 43.2% and 96.5% respectively. See Agency for Healthcare Research and Quality (AHRQ). (2008). Medical Expenditure Panel Survey (MEPS)—Insurance Component. Rockville, MD: AHRQ. 10 Percentage of small firms (less than 50 employees) offering a health insurance option by state: Illinois (41.4%), Michigan (43.6%), Ohio (45.5%), and Kentucky (41.2%). From Agency for Healthcare Research and Quality (AHRQ). (2008). Medical Expenditure Panel Survey (MEPS)—Insurance Component. Rockville, MD: AHRQ. 11 Aforementioned. 12 See United States Census Bureau and the Bureau of Labor Statistics. (1999-2008). Current Population Survey (CPS). Washington, D.C.: United States Census Bureau.

deductibles for single and family coverage have increased 42% and 78% respectively since 2003.12F

13 Average copayments have increased $3 over the same time, while coinsurance rates have decreased 1.4%.13F

14 ▪ Disadvantages of Being Small

Indiana’s small businesses ability to offer health insurance is limited because of the problems that arise from the inherent size of the firms and limited competition in the health insurance markets. Smaller risk pools increase the risk to the insurer and therefore the premium.14F

15 Administrative costs increase as the firm gets smaller because the increased risks require extensive underwriting.15F

16 Limited competition provides small employers with little choice and more discrimination by insurers. Insurers can easily drop small employers with higher expected medical costs

13 The average deductible in 2003 for single and family plans were $913 and $1356 respectively, by 2008 single and family increased to $1300 and $2412. See Agency for Healthcare Research and Quality (AHRQ). (2008). Medical Expenditure Panel Survey (MEPS)—Insurance Component. Rockville, MD: AHRQ. 14 The decrease in coinsurance is likely caused from more employees having a coinsurance measure added to their plan because if an employee does not have any coinsurance they are not covered in the MEPS data. See Agency for Healthcare Research and Quality (AHRQ). (2008). Medical Expenditure Panel Survey (MEPS)—Insurance Component. Rockville, MD: AHRQ. 15 See Bivens, J., E. Gould, and A.Hertel-Fernandez. (2009, July). Health Care Reform: Big Benefits for Small Businesses (Economic Policy Institute (EPI) Issue Brief #258). Washington, D.C.: EPI. 16 See Bivens, J., E. Gould, and A.Hertel-Fernandez. (2009, July). Health Care Reform: Big Benefits for Small Businesses (Economic Policy Institute (EPI) Issue Brief #258). Washington, D.C.: EPI.


or adjust the higher risk to the following year’s premium increases.16F

17

▪ Working Within Means Recent revenue receipts have increased

pressure on the General Assembly to cut outlays.17F

18

However, inaction certainly does not increase outlays, but will increase the number of Indiana’s small businesses employees’ uninsurance rate and exposure to financial risk of both the employees and businesses.

17 Across Indiana, the average market saturation of two health insurance companies is about 80%. On the high-end Gary, Indiana’s saturation rate is 92% while Lafayette, Indiana is on the low-end at 67%. See Bivens, J., E. Gould, and A.Hertel-Fernandez. (2009, July). Health Care Reform: Big Benefits for Small Businesses (Economic Policy Institute (EPI) Issue Brief #258). Washington, D.C.: EPI.; Dean, R.A., H. Jameson, J.D. Fanning, D. Emmons, and P. Hill. (2007). Competition in Health Insurance: A Comprehensive Study of U.S. Markets—2007 Update (American Medical Association). Chicago, IL: American Medical Association. 18 Recent estimates state year-end revenue targets could come up $2 billion short. See Swiatek, J. (2009, November 18). Indiana Tries to Improve Its Revenue Forecasts: Panel is Tweaking Its Revenue Model to Get More Accurate Results. Indianapolis Star.

▪ Purchasing Cooperatives and Current Policies Healthcare purchasing cooperatives in the

United States were once popular, now they only occupy niche markets covering about 4 million people.18F

19 Recently a reinvigoration in this model makes this option viable. There are some successful healthcare cooperatives which provide some insights into successful purchasing pool arrangements. One organization is Group Health Cooperative of Puget Sound, which provides coverage to 600,000 members in Washington and northern Idaho.19F

20 The critical prerequisite underlying the purpose of cooperatives lies in the size of the organization.20F

21 As a Commonwealth Fund report explains, “Without large numbers or substantial marker share, co-ops cannot exert purchasing power, they cannot achieve economies of scale, and they cannot attract and retain health plans.”21F

22 Successful cooperatives often capture significant small business market share, failing cooperatives lack that criterion and proper insurer participation.22F

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19 See Nayar, K.R. and O. Razum. (2003). Health Co-operatives: Review of International Experiences. Croatian Medical Journal 44, 5: 568-575. 20 See Larson, E.B. (2009, November 19). Group Health Cooperative—One Coverage-and-Delivery Model for Accountable Care. New England Journal of Medicine 361, 17: 1620-1622. 21 See Haislmaier, E.F. (2007, July 23). State Health Reform: How Pooling Arrangements Can Increase Small-Business Coverage (The Heritage Foundation WebMemo #1563). Washington, D.C.: Center for Health Policy Studies. 22 See Wicks, E.K. (2002, November). Health Insurance Purchasing Cooperatives (The Commonwealth Fund Issue Brief). New York, NY: The Commonwealth Fund. 23 See Haislmaier, E.F. (2007, July 23). State Health Reform: How Pooling Arrangements Can Increase Small-Business Coverage (The Heritage Foundation WebMemo #1563). Washington, D.C.: Center for Health Policy Studies.

“The current economic forces playing out on the state government

indicates any option to provide small businesses with an affordable health insurance option must not add to the

up-and-coming budget cycle.”


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In fact, some legislation has already addressed healthcare cooperatives in Indiana. With the passage of Public Law 12823F

24 the Commissioner of the Indiana State Department of Insurance was given the ability to “implement a program to allow (2) or more small employers to join together to purchase health insurance.”24F

25 As of August 29, 2008, the Commissioner published a bulletin which allows an insurer or health maintenance organization to rate the pool as a whole and not under the Small Employer Group Law25F

26 which provided each employer be rated separately.26F

27 To take advantage of group pooling, the purchased plan must be “sponsored by an association engaged in a substantial activity for its members other than sponsorship of the Pool and that has been in existence for a period of not less than two years before engaging in any activities relating to the provision of employee health benefits for its members” and it must be “controlled and sponsored by the participating employers and operated pursuant to a trust agreement by a board of trustees that has complete fiscal control over the Pool and is responsible for all operations of the Pool...”27F

28 The current policies in Indiana have not been extensive enough to make any impact.

24 Also known as the Healthy Indiana Plan, the Indiana Check-up Plan, or HEA 1678. 25 See Atterholt, J. (2008, August 29). Small Employers Health Insurance Pooling (Indiana State Department of Insurance Bulletin 164). Indianapolis, IN: Department of Insurance. 26 (IC 27-1-15-1) 27 See Atterholt, J. (2008, August 29). Small Employers Health Insurance Pooling (Indiana State Department of Insurance Bulletin 164). Indianapolis, IN: Department of Insurance. 28 See Atterholt, J. (2008, August 29). Small Employers Health Insurance Pooling (Indiana State Department of Insurance Bulletin 164). Indianapolis, IN: Department of Insurance.

▪ Proposed Solutions There have been a number of recent

bipartisan attempts to provide small businesses more opportunities and incentives to provide health insurance to their employees. However, some of the recent ideas are now not economically or politically feasible.

▫ Health Benefit Tax Credit. In 2005, a version of a health benefit tax credit passed both chambers of the General Assembly but could not be reconciled in conference committee. The bill would have provided a credit to employers with at least one full-time employee if the employer provided the individual with a health insurance plan.28F

29 Even at a rate of $50 per enrolled employer and a cap of $2,500 for the employer, the affect on State revenues would have increase budget outlays for millions of dollars per year for multiple years.29F

30 Moreover, if tax credits were to provide small employers enough incentive to offer a health insurance plan it is likely the credit would have to be more intense and extensive. ▫ Health Insurance Exchanges. A health insurance exchange is another mechanism gaining attention in other states as well as the national level.30F

31 While exchanges might not increase outlays, except for increased administrative costs to the State, the political possibility of initiating such a complex vehicle would be difficult. The success of exchanges mostly hinges on

29 See Health Benefit Plan Credit. (2005). SB 459. Indiana General Assembly. 30 The tax credit alone would have increase outlays by $2.2 million the first two fiscal years. See Landers, J. (2005, March 31). Fiscal Impact Statement, SB 459. Indiana Legislative Services Agency. 31 Rhode Island has considered the idea, Utah and Massachusetts both have health insurance exchanges.


regulatory reform of the insurance markets.31F

32 A number of State insurance policies would have to be changed. Specifically, the General Assembly would have to set a minimum level of benefits for the plans in the exchange and require guaranteed-issue of members. Moreover, to avoid adverse selection and maximum risk-sharing, subsidies would have to be provided to allow higher-risk and lower-income members.32F

33

32 See Blumberg, L.J. and K. Pollitz. (2009, April). Health Insurance Exchanges: Organizing Health Insurance Marketplaces to Promote Health Reform Goals (Urban Institute and Robert Wood Johnson Foundation Policy Report). Washington, D.C.: Urban Institute. 33 See Blumberg, L.J. and K. Pollitz. (2009, April). Health Insurance Exchanges: Organizing Health Insurance Marketplaces to Promote Health Reform Goals (Urban Institute and Robert Wood Johnson Foundation Policy Report). Washington, D.C.: Urban Institute; Lueck, S. (2009, March 31). Rules of the Road: How an Insurance Exchange Can Pool Risk and Protect Enrollees (Center for Budget and Policy Priorities Report). Washington, D.C.: Center for Budget and Policy Priorities.

▪ Recommendation: Supporting Purchasing Cooperatives for Indiana’s Small Businesses

As opposed to current policies, any proposal must provide for the assembly of associations and groups from the same jurisdiction or more broad trade or industry and they must be permitted to band together specifically for purchasing health insurance. By allowing for larger segments, like small businesses, to join together and purchase health insurance, policymakers can ensure a large risk pool. The larger risk pools can benefit from economies of scale as well as make certain the insurers will participate for new members.


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Works Cited and Consulted

Agency for Healthcare Research and Quality (AHRQ). (2008). Medical Expenditure Panel Survey (MEPS)—Insurance Component. Rockville, MD: AHRQ.

Atterholt, J. (2008, August 29). Small Employers

Health Insurance Pooling (Indiana State Department of Insurance Bulletin 164). Indianapolis, IN: Department of Insurance.

Bivens, J., E. Gould, and A.Hertel-Fernandez. (2009,

July). Health Care Reform: Big Benefits for Small Businesses (Economic Policy Institute (EPI) Issue Brief #258). Washington, D.C.: EPI.

Blumberg, L.J. and K. Pollitz. (2009, April). Health

Insurance Exchanges: Organizing Health Insurance Marketplaces to Promote Health Reform Goals (Urban Institute and Robert Wood Johnson Foundation Policy Report). Washington, D.C.: Urban Institute.

Bureau of Labor Statistics. (2003-2008). Consumer

Price Index—Urban Wage Earners and Clerical Workers. Washington, D.C.: Bureau of Labor Statistics.

Bureau of Labor Statistics. (2003-2008, May). State

Occupational Employment and Wage Estimates—Indiana. Washington, D.C.: Bureau of Labor Statistics.

Haislmaier, E.F. (2007, July 23). State Health Reform:

How Pooling Arrangements Can Increase Small-Business Coverage (The Heritage Foundation WebMemo #1563). Washington, D.C.: Center for Health Policy Studies.

Health Benefit Plan Credit. (2005). SB 459. Indiana

General Assembly. Justis, R. (2006, September). Small Businesses in

Large Numbers. InContext. Bloomington, IN: Indiana Business Research Center.

Klein, E. (2009, October 21). Will Lower Health-care

Costs Mean Higher Wages? Ezra Klein: Economic

and Domestic Policy, and Lots of It. Retrieved November 28, 2009, from http://voices.washingtonpost.com/ezra-klein/2009/10/will_lower_health-care_costs_m.html.

Kotlikoff, L.J. (2007). The Healthcare Fix: Universal

Insurance for All Americans. Cambridge, MA: MIT Press.

Landers, J. (2005, March 31). Fiscal Impact

Statement, SB 459. Indiana Legislative Services Agency.

Larson, E.B. (2009, November 19). Group Health

Cooperative—One Coverage-and-Delivery Model for Accountable Care. New England Journal of Medicine 361, 17: 1620-1622.

Lueck, S. (2009, March 31). Rules of the Road: How

an Insurance Exchange Can Pool Risk and Protect Enrollees (Center for Budget and Policy Priorities Report). Washington, D.C.: Center for Budget and Policy Priorities.

Nayar, K.R. and O. Razum. (2003). Health Co-

operatives: Review of International Experiences. Croatian Medical Journal 44, 5: 568-575.

Phillips, B.D. and H. Wade. (2008, June). Small

Business Problems and Priorities. (National Federation for Independent Business (NFIB) Research Foundation). Washington, D.C.: NFIB Research Foundation.

Schoen, C. J.L. Nicholson, and S.D. Rustgi. (2009,

August). Paying the Price: How Health Insurance Premiums Are Eating Up Middle-Class Incomes: State Health Insurance Premium Trends and the Potential of National Reform. (The Commonwealth Fund Data Brief #1313, Volume 17). New York, NY: The Commonwealth Fund.

Swiatek, J. (2009, November 18). Indiana Tries to

Improve Its Revenue Forecasts: Panel is Tweaking Its Revenue Model to Get More Accurate Results. Indianapolis Star.

United States Census Bureau and the Bureau of

Labor Statistics. (1999-2008). Current Population Survey (CPS). Washington, D.C.: United States Census Bureau.

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