HIPC - PacAdvantage
California’s Previous Small Employer Exchange
California had another small employer exchange. It was created in 1992, as the Health Insurance Plan of California (HIPC). It started as a state-operated, voluntary, small-employer health insurance purchasing pool. This purchasing exchange was designed to give small employers collective purchasing clout. Brokers were excluded. Insurers were allowed to charge different rates for the same plan inside and outside the exchange.
The state handed off the plan to private management—the Pacific Business Group on Health (PBGH) in 1999. PBGH renamed the pool PacAdvantage and wholeheartedly endorsed brokers to help attract new small businesses. Brokers and insurers were attracted to the potential of a large new market and the program grew. At its zenith, PacAdvantage insured about 150,000 lives and about 10,000 small businesses.
Eventually, however, the PacAdvantage exchange attracted an unbalanced amount of high-risk participants. This process, known as adverse selection, caused rates to increase inside the pool, and employers began opting out. The number of participating insurers dwindled as enrollment decreased, and PacAdvantage was forced to close in 2006.
What Went Wrong
- Voluntary Approach: The voluntary nature of the HIPC program contributed to low enrollment from the beginning. Participation was voluntary for insurers, voluntary for brokers, and voluntary for small employers.
- Ineffective Outreach: In the mid-to-late-1990s, less than a third of small employers were well-informed of the HIPC Exchange.
- High Administrative Costs: Low enrollment numbers resulted in high per-capita administrative costs.
- Alienated Brokers: HIPC did not pay brokers competitive commissions. Some brokers directed low-risk groups out of the exchange, while high-risk groups stayed and new ones entered the exchange. The risky groups raised premiums and dissuaded small employers from participating.
- Adverse Selection: The lack of competitive premium rates inside the HIPC exchange caused healthy policyholders to opt out. These policyholders found better rates for the same plans outside the exchange. As they dropped out, only high-risk policyholders were left.
- No Risk Adjustment Mechanism: The Exchange could not adjust premiums for individual employer groups up or down 10 percent as the non-exchange market could. Consequently rates in the exchange were tied to the risk of its overall pool. PacAdvantage tried to put together an effective risk-adjustment mechanism, but carriers did not consider the mechanism strong enough to offset losses. Carriers eventually pulled out.