A new actuarial analysis finds health insurance purchasing arrangements – also called connectors, exchanges, and health insurance purchasing cooperatives – lead to higher health insurance premiums and fail to increase risk pooling.
The report, titled “Government-Sponsored Health Insurance Purchasing Arrangements: Do They Reduce Costs or Expand Coverage for Individuals and Small Employers?”, was authored by actuaries Karen Bender and Beth Fritchen of Oliver Wyman Actuarial Consulting, Inc., and commissioned by the Blue Cross and Blue Shield Association (BCBSA).
Many proposals to expand health insurance coverage include some form of government purchasing arrangement in the hope that these arrangements would reduce costs by encouraging greater pooling of individuals and small groups. BCBSA commissioned this study to evaluate whether these purchasing arrangements could be successful in improving coverage for small employers or individuals.
Drawing on experience with previous government-sponsored purchasing arrangements, Bender and Fritchen conclude that purchasing arrangements are “unlikely to meet many of the objectives of their proponents.” Among their key findings:
Purchasing Arrangements Will Likely Increase Health Insurance Premiums: Past experience demonstrates that purchasing arrangements increase premiums by as much as 6 percent by: 1) duplicating administrative functions already performed by other entities such as state insurance departments, health plans, and insurance agents; and 2) converting the group market into an individual market, which is more expensive to administer and results in adverse selection.
Purchasing Arrangements Will Not Increase Risk Pooling: Pooling of risk actually occurs at the level of the health plan, not the purchasing arrangement. Substantial pooling already occurs in the small employer market as a result of state small group reform laws requiring insurers to pool together all small employers and limit premium variation.
Encouraging small employers to buy coverage through a purchasing arrangement will not create larger pools or economies of scale similar to those of a single large employer. Some proposals would actually fragment existing pools by requiring that insurers create separate pools for coverage sold inside and outside of the purchasing arrangement.
Purchasing Arrangements Would Limit Choice of Plans: Under most proposals, a state or federal agency would determine what coverage could be offered within a purchasing arrangement, thus limiting the diversity and tailoring of products. Purchasing arrangements also convert the market from one in which employers make benefit decisions on behalf of all their employees to an environment where each individual selects coverage based on their perceived healthcare needs. This results in significant adverse selection that has traditionally limited choices in state purchasing arrangements to HMOs and other highly managed plans.
The “Government-Sponsored Health Insurance Purchasing Arrangements” study can be found on the BCBSA Web site at: www.bcbs.com/issues/uninsured/health-insurance-purchasing-arrangements-report.pdf.
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