If you claim that states or municipalities can get together to leverage such scale, then you've just reintroduced bureaucracy and waste. This is why centralized control is useful. The US Federal government, one of the largest employers in the US (cause there is a lot of stuff to do for citizens) can guarantee health insurance to its workers because it's big.

This is what frustrates me so much about republican/conservative free market rhetoric. They hate government because it interferes with markets, and then they try and hobble the government's ability to use market forces to save tax payers money. And then they accuse the government of being wasteful.