While Massachusetts lawmakers consider opening the state's health plan to other public entities, lawmakers in neighboring New Jersey are grappling with the unintended consequences of a similar pooling arrangement.

The legislation, which was introduced by Rep. Rachel Kaprielian, D-Watertown, and Sen. Richard Moore, D-Uxbridge, would permit cities and towns to join Massachusetts' Group Insurance Commission—as long as representatives of employees and retirees agree. Communities would pay an administrative fee of 1% of premiums paid. While GIC would negotiate plan terms and rates, municipalities would bargain with unions to determine the employer-employee premium split.

The legislation was introduced earlier this month in response to recommendations of the state's Municipal Health Insurance Working Group, which has been meeting since September 2005 to try to find a way to slow the rate of increase in municipal employee health insurance rates, which climbed 63% in a four-year period (see chart).

The group's recommended solution would allow the public entities to participate in the GIC, which provides health insurance and other benefits for 266,000 state employees, retirees and their families. GIC health insurance rates have increased about half as much as those of many municipalities.

"Our track record has been better than that of municipalities," said Dolores Mitchell, chief executive officer of the Boston-based GIC. She estimated the city of Boston, for example, would have paid $38 million less for health benefits this year had it been able to buy through the GIC.

"They are much bigger than any of the purchasing groups we have in the state and can negotiate better deals," said Sanford Pooler, chief administrative officer for Newton, Mass., which averaged 10% annual health care premium increases for the last decade. By contrast, the GIC has experienced an annual average increase of just 6.6% since 2001.

Springfield, Mass., joined the GIC Jan. 1 under an emergency regulation responding to its dire financial situation. The town of Saugus, facing a $2.5 million health insurance trust fund deficit, is seeking permission to join.

New Jersey's experience

But pooling health care purchasing of public employees has had just the opposite effect in New Jersey, where public entities that participate in the State Health Benefits System are required to offer a uniform level of benefits, resulting in a 150% cost increase over five years—in large part because unions resisted increased cost-sharing. Just last week, the New Jersey Legislature passed legislation to allow public entities to negotiate benefit packages locally.

"Once upon a time, everyone was part of the State Health Benefits System—teachers included," explained L. Mason Neely, finance director for East Brunswick, N.J., and chairman of the League of Municipalities' pension and health benefits committee. "If a public entity withdraws from the state health benefits system, it would have to maintain the benefit levels."

With the just-passed legislation allowing withdrawal from the state fund, Mr. Neely estimates public entities would save $34 million the first year alone—primarily from reduced benefits and increased cost-sharing.

Concern about groups coming and going in response to market fluctuations has led many states to put certain requirements on the local governments that participate in their plans, said Tom Billet, a senior consultant at Watson Wyatt Worldwide in Stamford, Conn., citing New Jersey's situation as an example.

"Years ago, the states were more than happy to have local or municipal groups to participate because pooling provides an opportunity to increase number of lives and negotiate better terms, plus the larger the group the more stable experience tends to be," Mr. Billet said. "In-and-out cherry-picking year-to-year makes the experience of the group unstable and, therefore, unattractive to insurers."

New Jersey's situation also shows how large benefit purchasing cooperatives can sometimes reach a point of diminishing returns, said Paul Hackleman, director of benefits for San Mateo County, Calif. (see sidebar)

He cited the California Public Employees' Retirement System, the nation's largest statewide purchasing agent, which can no longer control costs as well as it once did.

"Their strategy focused singularly on using economies of scale. That was a dead-end strategy," Mr. Hackleman said. "That precluded them from doing what many of us who weren't the gorilla on the block were doing," such as wellness programs and disease management.

A spokeswoman for Sacramento-based CalPERS was unavailable for comment.

Darrell Wells, director of risk management and benefits for Odessa, Texas, agreed that savings from pooling are not always sustainable.

"Group purchasing and pooling, per se, do nothing to control claim costs," which represent more than 90% of the total cost of health benefit programs, Mr. Wells said.

"Even if successful, all you've done is reduce the administrative portion of the cost—not the huge, untouched, mass of claims," Mr. Wells said.