State Campaigns for Its Health Coverage Plan


Gov. Pete Wilson today will launch a promotional campaign for the nation's first statewide health insurance purchasing pool, a state-run venture designed to use market forces to deliver coverage to small businesses at reasonable rates.

California's effort, which has raised skepticism over whether it can work, will be closely watched. Such health insurance purchasing cooperatives--HIPCs in industry parlance--are expected to be a keystone of the federal health care reforms being developed by the Hillary Rodham Clinton task force.

Purchasing pools are part of the "managed competition" model devised by economists such as Stanford University's Alain Enthoven. The idea is that by speaking with one voice--in this case, the state's--small employers can flex the same kind of muscle as big corporations in bargaining for health coverage.

To set up the cooperative, the state negotiated with 18 private insurance carriers to provide standard health insurance packages for small businesses (defined as five to 50 employees) in six geographical areas throughout California. The rates will vary depending on the company's location and the ages of its employees.

Although its coverage will not take effect until July 1, the cooperative has generated controversy.

Some private insurers question whether it is good public policy--or fair competition--for the state to be active in the market as a regulator and competitor.

The 18 carriers in the cooperative include several of California's largest, but there are also some major carriers who opted not to join, notably Blue Cross of California, Foundation Health and Pacificare.

Insurance brokers say that the cooperative offers skimpy commissions compared to private sector carriers.

"You need brokers and agents to reach out to the small group market," said Blue Cross Chairman Leonard D. Schaeffer. He and others believe that without cementing its ties to the broker community, the cooperative could have trouble finding customers.

A potentially more serious concern is that the cooperative might be flooded with small groups that until now have not been able to get coverage at any price because of severe health problems in their work force. Such "adverse selection" could cause the cooperative to run at a loss. Except for $3 million in start-up promotional costs, the cooperative is legally required to operate at break-even or better, with no state subsidies.

The California cooperative originated along with some of the most sweeping state health insurance reforms enacted in the United States. Wilson signed the reforms into law last September in a rare bipartisan political effort. The law takes effect July 1.

Besides creating the cooperative, the new law guarantees coverage for any small business that wants it, caps annual price increases, reduces the waiting period before certain medical conditions are covered, and makes insurance "portable" so that workers stay covered when they switch jobs.

Coverage is guaranteed for any company that seeks it, but there is no such guarantee for workers if their employer is not interested. Thus, the California reforms stop well short of where the Clinton plan is expected to go: requiring all employers to provide health coverage.

"It's the small half of the Clinton loaf," said Bill Schulz, spokesman for California Insurance Commissioner John Garamendi, a Democrat and likely candidate for governor whose own health reform ideas have influenced the Clinton team's.

Some experts worry that the only people who will be drawn into the market by the California reforms will be those with medical problems. Until all employers--including those with mainly healthy employees--are forced to enter the market, experts say the reforms will do little to lower overall costs. For these reasons, some doubt whether the reforms will significantly reduce the ranks of 6 million Californians who lack health insurance.

Today is Day One of the selling blitz for the state cooperative, named the Health Insurance Plan of California. The HIPC initials were not chosen accidentally; the state wanted its cooperative to become synonymous with the generic term that is becoming a buzzword in health policy circles.

National Concrete Cutting, a small Sacramento company that has decided to switch from its private carrier to the state cooperative, is the ceremonial first customer. Wilson will kick off the campaign there this morning with a news conference at which he will unveil the price schedule for the Health Insurance Plan of California.

Officials connected with the cooperative say the monthly premiums will be lower than those of the California Public Employees' Retirement System, the quasi-public agency that has been praised for lowering health care costs for its state employee members.

The cooperative is a complex beast. It is overseen by the state Major Risk Medical Insurance Board, which also runs the state-subsidized high-risk insurance program for people who cannot get medical coverage elsewhere.

All 18 carriers offer some kind of "managed care," either through stand-alone health maintenance organizations such as giant Kaiser Foundation Health Plan, or through preferred provider organizations, networks of independent doctors and hospitals.

If a firm buys its health plan from the cooperative, the employees will be allowed to select from a wide array of carriers within the pool. The Los Angeles region will offer 14 companies to choose from; rural regions will have fewer choices.

Explaining the options can be a daunting task, especially for small business owners who do not have benefits administrators on staff.

That is why brokers say the state erred when it created a compensation system for the cooperative that pays them lower initial commissions and provides a less-reliable future income stream.

"I think the state failed to understand that from the consumer's standpoint, they (the cooperative) are just one of many products on the market," said Alan Katz, a wholesale broker and president of the California Assn. of Health Underwriters.

Indeed, spurred by the state reforms, many private carriers have stepped up their small group marketing efforts.

The most aggressive campaign is being carried out by Blue Cross of California, which, with 260,000 people covered by its small group plans, is the leading player in that slice of the California market, ahead of Kaiser.

Schaeffer, who is widely respected for engineering Blue Cross' financial turnaround, said his company intended to join the state cooperative. It decided to stay out because the cooperative requires member carriers to link the prices of the plans they sell inside the pool to the products they sell outside.

Schaeffer said he could not agree to cede that much control over a line of business that is central to Blue Cross' growth.

HealthNet, California's second-largest network of health maintenance organizations, decided to join the cooperative because "we supported the reforms and every political leader asked us to participate," said Chairman Roger F. Greaves.

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