New state program enhances small-business coverage.

It may be used as model for other states, or for nation

Small-business owners and their employees throughout California are enjoying lower premiums, guaranteed coverage, greater choice of health plans, lower renewal rates and several other improvements as a result of the Small Employer Health Reform Act enacted last year, according to several insurers contacted by the Business Journal.

The bill's centerpiece -- the Health Insurance Plan of California -- is already a huge success, sources said. They asserted HIPC may turn out to be a model for similar programs in other states and in Washington, D.C.

HIPC is a voluntary purchasing pool established by state legislation to provide affordable health care and a wide choice of plans to employees of California small businesses.

Eligible employees are those who work for small businesses, and have been employed there for at least 30 consecutive weeks for at least 30 hours a week. A "small business," as defined by HIPC, is any California firm employing five to 50 people. That range drops to four to 50 people as of July 1994, and then three to 50 as of July 1995.

Health care plans are able to provide low-cost care by pooling their risk. The legislation segments the state into various zones, and specifies that health care services in each zone be provided by plans operating in that zone. Los Angeles County, for example, is in Zone 5, where small-business employees may choose from 14 health maintenance organizations (HMOs) and three preferred provider organizations (PPOs) situated in this area.

There are 18 plans participating in HIPC throughout California, all but one of which are available to L.A.-area employees. Three more plans are expected to begin participating in HIPC in July. A pamphlet is available from the Managed Risk Medical Insurance Board detailing each of the 18 participating plans.

Authored by California Assemblyman Burt Margolin, D-Los Angeles, AB 1672 went into effect on July 1, 1993. In its first 10 months, HIPC signed up 43,788 members from 2,520 California businesses (24,778 employees and 19,010 dependents).

That represents roughly 150 percent of HIPC's original sales projections by the Managed Risk Medical Insurance Board, which is the state agency charged with overseeing the HIPC program. More than 23 percent of the firms enrolled with HIPC were previously uninsured, according to the state board.

There are 9,351 HIPC members in L.A. County -- 5,350 employees and 4,001 dependents -- who are participating in either one of the 14 HMOs or one of the three PPOs under HIPC.

Each HMO and PPO participating in HIPC offers both a low-benefit and high-benefit plan, and the benefits offered under each of the low-benefit plans are identical, as are the benefits offered under the high-benefit plans. What differs are the deductibles for the PPO plans and the co-payments for the HMO plans.

California small businesses can choose to obtain insurance from insurance companies, directly from HMOs or through HIPC. The advantages HIPC offers include guaranteed access, the choice of a wide range of programs, set pricing for a year and the increased leverage that comes from being part of a purchasing entity that is larger than any one plan's own membership pool.

HIPC seeks to obtain the lowest rates for its members. And some of the premiums available through HIPC match the lowest rates that the insurers themselves offer their healthiest groups.

Managed competition is the guiding principle behind both HIPC and President Clinton's proposed health plan.

"Managed competition is based on a standard benefits package, no medical underwriting, employee (vs. employer) choice of plan, incentives for employees to choose lower-cost plans and limited differentials in health plan rates based on geography, family size and/or age," explained Richard Figueroa, deputy director of the Managed Risk Medical Insurance Board.

"HIPC requires employer contributions of 50 percent of the lowest-cost employee-only plan in the program," he said. "Any employee who selects a costlier plan pays the difference."

Figueroa estimated that HIPC will have about 50,000 members by July 1. Membership is expected to rise more sharply after July, when rates in the pool drop anywhere from 2 to 20 percent.

He said: "Almost every health plan in HIPC has dropped its rates for the (fiscal) year beginning this July. And the spread between rates (offered by the 18 plans participating in HIPC) will be much lower in the program's second year. HIPC was something of an unknown last year and (none of the participating plans) knew each other's rates.

"This year everyone knows that HIPC has been a success in attracting lots of small businesses," Figueroa added. "We have added PacifiCare, Omni and MetLife for the program's second year (beginning in July 1994). The knowledge that over time, people will gravitate to the plans offering the best quality for the best price has served as a strong disincentive to raising rates year to year."

HIPC has gotten more than 72 percent of its business through insurance agents and brokers, and has been holding agent/broker seminars throughout the state to further spread the word. The plan has been very well received by brokers, even though it provides them a reduced rate of remuneration. Under HIPC, broker commissions average about 3 percent of premium in the first year vs. 7 to 10 percent for non-HIPC small-business plans.

Since AB 1672 became law, California, which traditionally has high health care costs, has led the movement toward establishing affordable health care in the U.S. As a result of the legislation, more and more California insurance carriers are offering "guaranteed issue," which means insurance accessible to anyone, regardless of pre-existing conditions. Florida and Ohio currently offer similar mechanisms for small businesses to buy health insurance, but the California system is considered by many to be a model for the Clinton plan.

The availability of affordable insurance is widely felt to be a positive factor that will attract more small businesses to California and encourage entrepreneurs here to take on the risks of starting their own firms.

"Many more small employers are signing up with HIPC as they become aware of its existence," said Joe Criscione, senior vice president, government relations, at Woodland Hills-based HMO Health Net. "As the program starts to show results -- maintaining reasonable control on premiums -- it will attract more employers. HIPC is proving that voluntary purchasing alliances can work."

Hartford, Conn.-based Aetna Health Plans, whose HMO and PPO plans were among the lowest-priced in HIPC during its first year, has written 38.4 percent of all HIPC business to date, adding 16,799 new customers.

Ronald Brewer, regional director for Aetna, said: "We lowered our rates 2 to 3 percent in HIPC for 1994-95, while some of our competitors had to drop theirs 15 to 20 percent to get down to our level."

The current health insurance price war is a happy development for small-firm employees and represents a dramatic change from the previous situation in California and across the country, where health insurance premiums rose every year -- often substantially.

"We have found that HIPC is a truly rate-driven distribution vehicle," explained Deborah Gustke, client manager for Cigna Healthcare of Los Angeles. "Our pricing was extremely high the first year, so our participation was rather low. But from July 1 on, our pricing will be much more competitive. And we hope to add a lot of new HIPC members."

Since merging with QualMed, Health Net has become the third-largest HMO in HIPC. Sales Vice President Tim Littlefield said: "Joining HIPC increased our small-business volume considerably. From a risk perspective, we find the HIPC enrollees to be representative of the population as a whole, if a bit younger.

"HIPC has created significant administrative cost savings in everything from eligibility to billing," he continued. "It is easier to work with one large organization of 50,000 small-business people than with 3,000 small companies. We used to be very passive in the small-business market. But since the Margolin bill, we have become quite aggressive. With community rating, guaranteed issue, guaranteed renewal -- things we have been offering for years as a federally qualified HMO -- the environment is now more conductive to the way we do business."

Cypress, Calif.-based PacifiCare of California entered the small-business arena last year and now has 42,000 small-business members of its own. In July, it is slated to join HIPC.

"We have dropped the minimum size of the group we insure to three persons and plan to add another 100,000 small-business members in the next year," said Arnold Hebert, PacifiCare's senior vice president of commercial sales and marketing.

Although HIPC and the other Margolin-authored reforms point the way for progressive health care insurance, specific provisions of the health reform plan that will eventually come out of Congress and how it will affect California businesses remain largely a mystery.

The Clinton administration's plan would replace the voluntary HIPC with mandatory purchasing alliances.

Steven Steele explained: "Many insurance companies are cleaning up their acts and are merging with their competitors in order to acquire market share and be a player in the Clinton plan. The carriers want a large market presence so they can remain alive as administrators of whatever plan is adopted by Congress."

Insurers broaden business coverage

Under Assembly Bill 1672, insurers outside HIPC have the right to risk-adjust their pricing up or down by only 20 percent. Beginning in July, that adjustment cap drops to 18 percent.

Inside the HIPC pool, participating plans set their rates for the year and no adjustments are allowed.

Outside of HIPC, AB 1672 outlaws pre-existing condition exclusions of more than six months, assures insurance coverage for all small-business employees and guarantees portability of coverage. Portability means that anyone who has satisfied the pre-existing condition exclusion with their previous insurance carrier can take that approval with them when moving to another plan.

"Before AB 1672, we all had the right to cherry-pick," said Deborah Gustke, client manager for Cigna Healthcare of Los Angeles. "If an industry had a lot of occupational risk or health conditions, we could choose not to rate that group. That freedom is now gone. Within 30 working days, we must provide a quote to any group that comes to us."

Currently, the four strongest trends in the small-business insurance market are: increased price competition, more managed care, higher deductibles and more mergers.

"More than 75 percent of the members of the small groups we deal with are choosing to join HMOs instead of PPOs," said Steven Steel, a partner in the Los Angeles health care brokerage firm Sauthier, Steele & Associates. "HMOs offer lower deductibles, relatively low co-payments and the general encouragement of preventive care.

"The disadvantages (of HMOs) include lack of choice of doctor, longer waits for appointments and the need to get approval before obtaining specialist services and various tests and procedures," he said. "In the process of protecting themselves against possible lawsuits, PPOs conduct more medical tests.

Ronald Brewer, regional director for Hartford, Conn.-based Aetna Health Plans, said he sees another trend in the market: "A lot of HMO plans are getting insurance licenses and offering 'point of service' plans, in which a member can choose to use the HMO physician panel provided or can opt out and use a traditional fee-for-service plan with co-payments and deductibles. Point of service offers a comfort zone for people new to managed care."

Arnold Hebert, senior vice president, commercial sales and marketing, at Cypress, Calif.-based insurance company PacifiCare of California, said: "We offer a point of service triple option: a choice of HMO, PPO or fee-for-service for a single premium. The benefits are highest in the HMO, smaller in the PPO and smallest in the indemnity plan. Managed care is more accepted today and is losing the stigma it had in the past with concerns about quality of care.

"People like choice, however," Hebert said. "So I think the bulk of our future business will be in the triple option point of service plan, which offers the cost savings of an HMO with the right to opt out."

Plans offered by Woodland Hills-based Blue Cross of California and Rancho Cordova, Calif.-based Foundation Health are selling extremely well for broker Steven Steele. "Many employers really appreciate the nothing-up-our-sleeves rating approach that Blue Cross offers," he said. "They have set their pool up so that 85 percent of the groups quoted will fall within their standard group plan. In the past year, about 40 percent of our small-business volume was with Blue Cross, followed by 20 percent with Foundation and 10 percent with HIPC."