updated 6/13/2005 12:03:50 PM ET 2005-06-13T16:03:50

Tires, toilet paper, health insurance?

Costco Wholesale Corp. is starting a pilot program in California to offer individual health insurance policies to members who pay $100 a year for the store chain's "executive" membership.

The program will begin next month at 34 stores in Los Angeles and Orange counties, although it could expand statewide by year's end, said Dellanie Fragnoli, Costco's assistant vice president for insurance services.

Costco has 3.4 million executive members, with about 1.5 million in California. The pilot program is geared to people who cannot get group insurance, such as the jobless and the owners of mom-and-pop businesses.

There are no plans to offer the insurance to all 18 million Costco members, and it may prove unfeasible to offer it nationwide, Fragnoli said.

"It's a challenge because of all the regulations surrounding insurance and because they differ by state," she said. "Everything we do has to be a state-by-state initiative," and some states may lack the customer base to be worth the hassle, she said.

Costco's move to sell health plans through its membership stores probably won't have much effect on the nation's estimated 45 million uninsured. But if other big-box discounters jump in, it could do to brokers what Wal-Mart did to small retailers, analysts said Friday.

Costco will offer two types of policies from PacifiCare Health Systems Inc. of Cypress, Calif., through which Costco already sells group health plans to small businesses.

Costco, based in Issaquah, Wash., declined to disclose its premiums, which would vary depending on the participant's age, medical condition, number of dependents and other factors routinely taken into account when buying health coverage.

But she estimated customers could save as much as 20 percent on coverage. The discounting is due, in part, to Costco's lower commission and to lower administrative costs.

"We only have to manage two plans. We don't have to manage 20 plans, like some other agencies," Fragnoli said.

PacifiCare benefits from working with a chain that, through its members, has a proven marketing base.

Costco's business model of offering steep discounts while providing a limited number of products could translate into fierce competition for health insurance brokers.

"This could take substantial business away from them if it catches on," said Paul Ginsburg, president of the Washington, D.C.-based Center for Studying Health System Change. But, he added, "I just don't see it addressing any of the issues with the medical care system."

The high cost of health care is spurring such innovations, analysts said. A study released Thursday by Hewitt Associates, a benefits consultancy, found that the proposed 2006 rate increase for health maintenance organizations nationwide averaged 12.4 percent _ the lowest level in more than five years but still worrisome.

In addition, companies are increasingly shifting health care costs to employees.

If Wal-Mart Stores Inc. or other big discount chains start brokering lower-priced health products, "that can really shake up the market," said Glenn Melnick, director of the USC Center for Health Financing, Policy and Management.

In the long run, discounters might become a significant channel for reaching the uninsured, he said.

The outlets could accelerate an emerging trend of offering locally based, low-premium niche plans that reduce costs by limiting care to one or two hospitals, Melnick said.

Giants such as Blue Cross and Blue Shield will have trouble matching such small, narrowly crafted policies because they serve big employers and must cover large geographical areas.

"Other insurers will respond by developing low-cost products and using the big-box stores as low-cost distribution channels," Melnick said.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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