Monday, August 13, 2007

Attention Costco Shoppers

Costco now offers small-business health insurance plans in Nevada, Oregon, Hawaii, Washington and California. Offers in each state are different depending on which insurance company the retailer partners with, but the company promises to offer a better value then business owners can get by themselves.

This is a good idea as long as it works.

Plans like this have been tried before without much long term success. Eventually it starts to fall apart. Premiums start to rise to cover claims. Those who are healthy enough to find something better leave. New entrants drop off and the plan goes into a death spiral.

This might be different. Only time will tell.

By combining numerous small businesses together into one health care pool, Costco is able to get better insurance rates. The company also tries to negotiate cheaper high-deductible insurance policies that carry enough benefits to be feasible. The discount is also due to lower commission to Costco and lower administrative costs. Unlike other insurance brokers, who manage a large number of plans, Costco only manages one or two in every state — the same way the company runs its warehouse stores.

Lower commission. Group insurance usually doesn't pay that much commission to start.

Only offering 1 or 2 plans is nice but has minimal impact on the rates.

Between a lower commission and (presumably) lower admin fees, I can't see a savings of more than 2 - 4% overall.

The insurance service is not a profit driver for Costco, but the company says it fits perfectly into serving its most important customer base, small-business owners, who make up one-third of its members and contribute two-thirds of its revenue.

Not a profit center? So this is a loss leader?

Some state governments are also experimenting with insurance-pooling ideas to support small-business owners. Most recently, Oklahoma expanded a program under which the state pays 60 percent of the insurance costs for small businesses by moving some Medicaid dollars that were used to pick up the bills for the uninsured.

But one problem with most state-sponsored insurance pools is that they often experience low enrollment and higher administrative costs. Minnesota installed a public-administered program in 1993 but discontinued it five years later due to lack of financial viability.

Wonder how many of the states who have recently decided to get in the insurance business bothered to check out the MN plan?

My guess would be none.

If the answers were easy everyone would be jumping on the wagon.
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