One for All and All for One

Health purchasing co-operatives for 501(c)3 organizationsIn the state of Illinois, there are a couple of laws on the books that allow for organizations to band together for the purpose of providing insurance coverage to members. There is an inter-governmental law that allows municipalities, counties, school districts and other units of government to form co-operatives to insure (or self-insure) various risks. These include work comp, property and health care. There is also the Charitable and Religious Risk Pooling Trust Act which allows for 501(c)3 organizations and religious institutions to insure (or self-insure) various risks including work comp and property – but not healthcare. Finally, there is a law that allows for private employers to come together and form a health insurance purchasing group in order to buy insurance for their organizations (this law does not allow self-insuring).

Why would any employer or organization want to combine with others to purchase insurance? The main reason most do it is to create a larger population group. A larger population results in more stable insurance rates, partly because of a smoothing out of claims experience due to the law of large numbers. It is much easier to predict the number and amount of claims in a group of 1,000 than it is in a group of 10. Additionally, it levels out the insurer’s profit margin for fully insured groups. An insurer builds in a larger profit margin on small groups because of the additional risk (lack of predictability) in insuring them. Again, the larger a group is, the more predictable the risk becomes, which in turn lowers the risk premium (profit margin) that an insurer needs to build into the contract. Self-funded co-operatives are able to remove this ‘risk premium’ entirely, resulting in an immediate reduction in cost.

A group purchasing co-operative could also benefit its members by using its group purchasing power to provide additional services, such as wellness programs, at a cost lower than small individual groups could get on their own. Currently, I am working with not-for-profit organizations in the Chicago metro area to form a health insurance purchasing co-operative. It is hoped that we can reach a sustainable number of participants over a set period of time so that the purchasing co-operative will become an attractive target for a large number of health insurers, or that the regulatory environment allows for the co-operative to eventually become a true self-funded entity. If you would like more information about this health insurance purchasing co-operative, please contact me.

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