Publications

Health Care Purchasing Coalitions (2000)

Health care coalitions (sometimes referred to as alliances or cooperatives) are established by purchasers who wish to use their collective strength to buy the best benefits at the lowest price. Most coalitions are self-governing not-for-profit membership organizations. Generally, coalitions assess each member group minimal fees to cover operating costs. Only a few have hired staff. The remainder use volunteer management committees made up of representatives from each fund.

Coalitions are formed by multi-employer, single employer and public or private health plans. Because health care providers offer price discounts and administrative efficiencies to large purchasers in exchange for patient volume, coalitions can purchase health care services for less money than individual funds could on their own and, at the same time, maximize employee choice.

Most coalitions are formed by employer groups. While many larger coalitions include unionized companies and public employers, union involvement in coalitions is generally limited. Of the union coalitions that do exist, most are Taft-Hartley funds. The majority of these funds are in construction, retail and the service industry. Coalitions vary in size and geographic coverage. For example, the Cooperative Health Network in Ohio covers 14,000 people and includes four health funds while the Health Care Cost Containment Cooperative of the Mid-Atlantic Region covers 350,000 people and includes 55 funds. Most coalitions include 15 to 20 member funds.

Funds considering participating in a coalition need to consider a number of design issues. Here are questions and answers that address some of these issues.

Q: What is the role of coalitions?


A: Health care coalitions seek to contain cost and provide health care quality by enhancing bargaining strength, increasing competition among insurance plans and medical service providers, sharing information on the cost and performance of providers, and on the terms of contracts. Roles of coalitions vary. Some only collect information. Others may share information and jointly purchase services. A few negotiate PPO networks, prescription drug care programs, and mental health and substance abuse networks.

Q: How are coalitions designed?


A: Coalition design varies considerably. "Loosely organized" coalitions maximize the autonomy of fund members while "tightly organized" coalitions limit independent activities. A loosely organized coalition might provide information on the price and quality of health plans, certify or endorse high-quality plans, and/or bargain with service providers for reduced fee schedules and other cost controls. The decision to offer any benefit, and the authority to contract, is retained by each member. Members design their own benefit packages, set their own cost-sharing requirements, and assume the financial risk for their health costs. However, when the coalition contracts with a Preferred Provider Organi-zation (PPO) or network, the coalition must typically "steer" a specific amount of services to the PPO. This is usually accomplished by a financial incentive for members to use the PPO.

Tightly organized coalitions may contract directly with providers or insurers for all members of the coalition, design benefit packages and provide or contract for cost containment services. They may also pool the financial risks of the individual funds. Collective purchasers typically offer at least one standard benefit package. This is the least-flexible coalition arrangement because it requires a common delivery system and benefits. However, it provides the most leverage in determining the cost and quality of services received. It maximizes the bargaining power of individual funds, lowers administrative costs through economies of scale, provides an efficient method of educating employees about benefits and maximizes employees' benefit choices. In spite of these advantages — because many funds and employers wish to maintain their autonomy — few of them jointly contract for all medical benefits. Instead, they may jointly purchase components of a health package, such as prescription drugs and vision care.

Q: Can a coalition require its member funds to participate in a standardized benefit plan?


A: While the coalition may negotiate standardized contracts with providers, trustees of each participating fund make the final decision concerning benefits offered by their fund. Trustees are not permitted to delegate their fiduciary responsibilities.

Q: Is it difficult to coordinate different benefits for different funds?


A: Although funds can realize significant savings due to the bargaining power of group purchasing, most do not feel that savings are worth changing their benefits structure. If a fund decides to participate in a standardized plan, it will likely have to modify the current benefit structure to take advantage of discounts. This can be difficult where existing benefits and/or cost sharing arrangements vary drastically among the member funds.

Q: Do insurers and health care providers require that a minimum number of coalition members participate in the program?


A: Plans and providers are less willing to negotiate favorable terms, unless they have agreements on minimum participation. Coalitions deal with this in a couple of ways. Many use discounts negotiated with providers and insurers to fund financial incentives that steer plan participants toward using those plans. Another alternative is for plans and provider networks to agree to a schedule of discounts that can be adjusted based on the number of employees that enroll in the plan.

Q: Should a coalition self-insure its benefits or purchase a fully insured plan?


A: By self-insuring, a coalition maintains more control over health care costs and benefits. A coalition that self-insures pays health care claims out of a trust fund or other account set aside for this purpose. Coalitions typically use a third-party administrator (TPA) to handle duties such as enrollment, claims payment and utilization review. Also, self-insured entities usually purchase "stop-loss" insurance to protect them from unexpected high claims costs. A self-insured coalition can purchase "individual" stop-loss coverage, which covers claims of an individual when they reach a specified level and/or "aggregate" stop-loss coverage, which covers claims of the entire group when they reach a specified level.

Self-insurance offers many advantages including relief from state premium taxes (typically 2-3 percent of the total premium), the elimination of risk charges, the retention of earnings from the investment of funds until used to pay benefits, and the ability to spread the risk among the larger coalition group. Self-insurance also poses some risks. If a group experiences higher than anticipated costs, they may be forced to move back into a fully insured arrangement and pay unusually high premiums. This risk can be reduced or eliminated by purchasing pooled stop-loss coverage (see below). Self-insurance may also be burdensome administratively and politically.

Q: Should funds in the coalition pool their risks?


A: Risk pooling (also referred to as community rating) may increase the coalition's bargaining power and provide administrative economies of scale. Also, risk pooling might allow small funds to join together and self-fund their benefits. When claims are significantly different among funds, however, risk pooling can be difficult, both technically and politically.

Some coalitions partially pool their risks. This can be done in several ways:

  • Premiums can first be paid on a community-rated basis by each fund in the coalition. Then, each fund makes a payment or receives rebates based on risk factors, such as their demographics and claims experience.
  • The coalition can base the portion of the premium for actual medical costs on the claims experience of each fund and spread other costs, such as administration and marketing fees, among the entire group.
  • Self-insured funds can pay claims up to a certain pooling point based on their own experience. Claims in excess of the pooling point can be covered by a pooled stop-loss arrangement in which all funds participate.

Generally, smaller funds favor group purchasing and risk pooling because such arrangements offer them greater bargaining clout than they would have otherwise. Conversely, larger funds are less likely to grant contracting authority to the coalition, because they already have bargaining clout in the health care market and prefer to retain their autonomy.

Q: Which is more desirable — negotiations with the employer for a defined benefit or a defined contribution?


A: As health care costs rise, employers are increasingly proposing a shift from bargaining over health benefit levels and cost sharing requirements (defined benefits) to bargaining over dollar contributions (defined contributions) that can used to purchase benefits. A change to a defined contribution plan offers both benefits and risks.

Benefits: Employers may be concerned about the cost of a plan, but not about the quality of care provided. A defined contribution arrangement allows the coalition to move forward in its efforts to offer quality benefits at reduced costs. Any savings achieved by the coalition might be used to provide employees with additional wages or improved benefit levels.

Risks: Because health care costs are unpredictable, the employer contribution may not keep pace with increasing costs. To reduce this risk, some unions tie increases in the employer's contribution level to some measure of local medical costs, such as the medical CPI. The problem with this method is that it does not consider increased utilization. Instead, or along with the medical CPI, the union may want to tie increases to actuarial projections. Typically, health plans hire actuaries to estimate how much their health plan costs will increase in the next plan year.

Q: What is direct contracting?


A: Direct contracting is a relatively new way of buying health care, in which purchasers, such as self-insured employers and coalitions, buy services directly from providers, such as physicians and hospitals, or contract directly with a provider-sponsored network. Proponents believe that eliminating involvement of insurers can lower administrative costs and eliminate the profits that are built into insurers' premiums. Proponents also believe that direct contracting gives more control to the health care providers, who are in the best position to lower costs and improve outcomes. Some coalitions begin by contracting with providers that offer ancillary benefits, such as dental or vision care, while a few negotiate for full medical coverage. Others have contracted with "centers of excellence" for specific services, such as cancer treatment or open heart surgery. Negotiating jointly for a subset of benefits allows member funds to begin working together on individual contracts.

There are two major concerns with direct contracting. The first is the question of who is liable for care that results in poor outcomes — the health care provider or the coalition. The law is unclear, so a coalition may find itself charged with malpractice and/or denial or delay of appropriate medical care. Second, requiring plan participants to obtain care through contracted providers is key in direct contracting. Unless a sufficient number of providers bid for the coalition's contract, access to care could be limited.

Q: What other benefits do coalitions negotiate?


A: In addition to medical, prescription drug, vision and dental, the following are other benefits that coalitions provide:

  • fiduciary liability insurance;
  • accidental death and disbursement (AD&D) coverage;
  • life insurance;
  • disability insurance;
  • Employee Assistance Programs (EAPs);
  • discounted amenities such as auto insurance, auto leasing deals and fitness club memberships; and
  • disease management programs.

Q: How can a coalition improve the quality of the plan(s) offered to its members?


A: New coalitions often start by sharing information on providers, terms of contracts with insurers and satisfaction with care and services. Some collect information on clinical quality or jointly sponsor member satisfaction surveys. Coalitions push for systems that reduce long-term medical costs and improve standardization and quality measurement in plan design. For example, several years ago coalitions began collecting data on issues such as consumer satisfaction and clinical outcomes. Now with several years of data, they can increase their impact on quality of care and negotiate performance guarantees with insurers and health care providers.

For more information on health care coalitions, contact the Department of Research and Collective Bargaining Services at (202) 429-1215, e-mail or visit our Web site.

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