Health Pool to Close for Lack of Insurers

A state-established health insurance pool that helped cover 116,000 small-business employees in California will cease operations at year-end because of a lack of insurers, officials said Friday.

PacAdvantage was created more than a decade ago on the notion that small businesses could band together and negotiate lower insurance premiums for their employees. But it did little to make insurance more affordable, the program’s managers acknowledged Friday, and most insurers that once participated in the voluntary program have left.

The majority of PacAdvantage members should be able to find coverage with their existing insurers or elsewhere next year, the pool’s managers and the remaining health plans said. But the program’s demise underscores the problem of affordability in the face of rapidly rising healthcare costs in a system that rewards the healthiest with the lowest premiums.

Over time, employers whose workers had the lowest health risks were lured away from the pool with cheaper premiums, PacAdvantage said, leaving the program with the highest-risk members and driving up costs.

The latest insurer to announce its departure was Blue Shield of California.

“We just weren’t able to sustain the losses that the program generated,” company spokesman David Seldin said, declining to provide details.

The nonprofit insurer was the eighth health plan to abandon PacAdvantage since it was created in 1992. Others included Aetna Inc., Cigna Corp. and PacifiCare Health Systems Inc. Blue Shield’s departure meant that only Kaiser Permanente and Health Net Inc. would be offering insurance through PacAdvantage.

“The core premise of the program is choice,” said John Grgurina, PacAdvantage’s president. With only two health insurers left, the system was no longer viable, he said.

New enrollments have stopped and PacAdvantage will help existing members, from about 6,200 employers, find health insurance elsewhere for next year.

Kaiser Permanente, which insures the largest number of program members, 67,000, said those workers should have little trouble finding Kaiser plans that offer similar benefits.

Under the program, participating health insurers tailored benefits to PacAdvantage members and competed on price and the strength of their provider networks in various geographic areas.

The arrangement offered a slew of health plan choices to participating small employers who, on their own, had access to one or two plans at the most. But PacAdvantage had much less success when it came to making health insurance less costly to small businesses.

According to the California Healthcare Foundation, 64% of the state’s smallest employers, those with fewer than 10 workers, offer health insurance. That grows to 84% for those with 10 to 49 workers. Benefits may have been trimmed over the years and the employee portion of payments may have increased, but the proportion of small businesses that offer insurance has not changed significantly in the last decade, said Marian Mulkey, an analyst with the foundation.

Efforts to mandate that all California employers offer health insurance have failed in the Legislature and in ballot initiatives.

Combining small business’ buying power has done little to increase affordability, Mulkey said, because a voluntary program’s “fundamental flaw is that people will participate only when it is in their best self-interest.”

Scott Hauge, who owns an insurance brokerage firm in San Francisco that employs 33 people, said he used PacAdvantage for a year but switched when rates rose almost 30%. He was able to find much less expensive plans outside the pool.

“Here we had a pool and we couldn’t get better rates,” said Hauge, who is also president of the trade group Small Business California.

In the end, the exodus of employers like Hauge from PacAdvantage, which had 147,000 members at its peak in 2002, made the system unprofitable for many insurers, program managers said.

No amount of pooling can stop rising healthcare costs, experts said. Healthcare spending as a proportion of the country’s economic output has more than doubled since 1970, reaching 16% in 2004, and continues to grow.

The only way a pool of buyers would have enough power to significantly influence costs, most sources agreed, is if it included virtually everyone in a form of universal care brought about by mandate or government subsidy.