JosttFirst, a word about history. We have tried cooperatives before.
During the 1930s and 1940s, the heyday of the cooperative movement in
the United States, the Farm Security Administration encouraged the
development of health cooperatives. At one point, 600,000 mainly
low-income rural Americans belonged to health cooperatives. The
movement failed. The cooperatives were small and undercapitalized.
Physicians opposed the cooperative movement and boycotted cooperatives.
When the FSA removed support in 1947, the movement collapsed. Only the
Group Health Cooperative of Puget Sound survived. Over time, moreover,
even Group Health, though nominally a cooperative, has become
indistinguishable from commercial insurers-it underwrites based on
health status, pays high executive salaries, and accumulates large
surpluses rather than lower its rates.

The Blue Cross/Blue Shield movement, which also began in the 1930s,
shared some of the characteristics of cooperatives. Although the Blue
Cross plans were initiated and long-dominated by the hospitals and the
Blue Shield plans by physicians, they did have a goal of community
service. The plans were established under special state legislation
independent from commercial plans. They were non-profit and, in many
states, exempt from premium taxes. They were exempt from reserve
requirements in some states because they were service-benefit rather
than indemnity plans and because the hospitals and physicians stood
behind the plans. They were exempt from federal income tax until the
1980s. In turn, they initially offered community-rated plans and
offered services to the community, such as health fairs. In some states
their premiums were regulated and they were generally regarded as the
insurer of last resort for the individual market.

Over time, however, the Blues lost their focus on community service
and began to look more and more like their competitors. They abandoned
community rating (which, realistically, they could not maintain when
faced with competition from experience-rated commercial plans) and
began to impose underwriting and cost-sharing requirements
indistinguishable from the private plans. Although providers lost
control of the Blue plans, the plans never took a leadership role in
bargaining aggressively with providers, despite their market dominance
in many states. Many of the largest Blue plans became for-profit, and
those that remain non-profit are largely indistinguishable from
commercial insurers. Although the national Blue Cross/Blue Shield
association offers some coordination services to local plans, it has
not resisted the move of Blue plans away from a community-service
toward a for-profit orientation. Lacking a national focus on public
service, state and regional plans have become indistinguishable from
their commercial competitors.

Blue plans are not the only non-profit insurers that survive. Many
church and fraternal organizations have their own non-profit plans.
Although these plans often try to serve their communities, they usually
have a small presence and little bargaining power in most communities
in which they operate; tend to insure individuals and small groups, the
most costly market; are often the victims of adverse selection; usually
underwrite much like commercial plans; and tend to offer low value,
high cost-sharing policies. They are not a model on which to build
national reform. Mutual insurers are also in theory owned by their
members. They also, however, are indistinguishable from for-profit
insurers in most states.

What can we learn from this history? First, health care cooperatives
are, in fact, an American response to health care reform. Cooperatives
and non-profit insurers were there before for-profit commercial
insurers entered the health insurance business, and we could try to
revive the idea again.

But why would state or locally-run cooperatives be any more successful now than they were when we tried them before?

First, it is hard to imagine how they would get underway.
Capitalization and critical size were problems before and would likely
be problems again. Senator Conrad’s recent draft suggests that members
of the coops would elect their boards, and that the coops would then
obtain state licensure as mutual insurers, meeting state standards for
solvency and reinsurance (with the help of federal seed money). But
there is a chicken and egg problem here. Until the coops had members
they could not have a board. Until they had a board, how would they
meet licensure requirements? The state coops, moreover, would, under
Conrad’s proposal be supervised by a national board, but the national
board would be elected by the state coops. Again, the state coops would
presumably not be able to get underway until the national board
provided policy guidance, but the national board could not get underway
until the state coops were formed to elect it. None of this makes sense.

Second, there is every reason to believe that small, state run coops
would fail like their predecessors did in the 1930s and 1940s. Unless
they reached the critical mass necessary to bargain effectively with
providers, to accumulate reserves, and to compete with national private
insurance plans, they would be doomed to failure. Even if they managed
to succeed here and there, they would contribute nothing to a national
effort to control costs, drive value, and make affordable care
accessible.

Third, if state-run coops in fact, against all odds, became large,
successful competitors for insurance business, what would keep them
from following the course of the Blue and mutual plans before them?
Without strong Congressional direction and a unifying national
leadership, what could keep them focused on cost control, quality
improvement, transparency, and service rather than simply becoming
indistinguishable from their commercial competitors? How would they
drive the delivery system change we need?

Fourth, how does setting up cooperatives on a state-by-state basis
drive national health care reform? Each state currently can set up
cooperatives if it wishes to, but none have done so. Why would states
suddenly embrace this concept? And what assurance do we have that they
would pursue anything like a common strategy? To approach this issue on
a state-by-state basis is simply to surrender on national health care
reform. A federal fallback plan to be implemented in the future is also
unlikely to work. HIPAA contained a federal fallback plan for states
that failed to implement reforms in the individual market, but it was
poorly implemented and eventually abandoned. To revert to a
state-by-state approach is to surrender on national health care reform.

What Would Make the Cooperative Concept Work?

In fact the cooperative idea in itself is promising. The proposed
cooperatives look much like the social insurance funds of Germany and
of other central European states. Those funds are governed by their
members and do a comparatively good job of keeping health care costs in
check. But they operate in a strong framework of national laws and
under the guidance of national leadership.

The only viable strategy is Senator Conrad’s Option 2–a federal
charter to license and regulate a national non-profit coop, with coop
governance prescribed by Congress. Leadership could initially be
appointed as directed by Congress to represent consumer, labor, and
small business interests, and thereafter be elected by the membership.
The federal government could provide seed funding to assure initial
solvency, but thereafter the coop could be self-supporting. It would be
financed through premiums, and compete on a level playing field with
private insurers (although some account would have to be taken of the
fact that private insurers, no matter what underwriting rules were
imposed, would still dump high-risk insureds into the coop). Some
administrative functions could be delegated to the regional level, much
as Medicare Advantage or drug plans are administered at the regional
level. Regional councils could also be elected by members, who could
have a role in selecting the national board and an influence on
national policy.

A national cooperative could perhaps compete effectively with
national private insurers. It could perhaps bargain effectively with
providers, including global pharmaceutical firms and national hospital
chains. It is possible that it could drive creative national quality
initiatives and provide national data on health care use. It would not
be government-run insurance, the great fear of the American right. But
it could perhaps provide a national solution for a national problem. It
will not happen on its own, however. It will only work with concerted
and probably long-lasting support from the federal government.

Timothy S. Jost is the Robert L. Willett Family Professor of Law and Ethan Allen Faculty Fellow at the Washington and Lee University School of Law. He is a co-author of a casebook, Health Law, used widely throughout the United States in teaching health law, and of a treatise and hornbook by the same name. He is also the author of Health Care Coverage Determinations: An International Comparative Study; Disentitlement? The Threats Facing our Public Health Care Programs and a Rights-Based Response; and Readings in Comparative Health Law and Bioethics, the second edition of which appeared this spring. This post first appeared at Health Reform Watch.

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10 Responses for “Are Cooperatives a Reasonable Alternative to a Public Plan?”

  1. john says:

    I’m a bit confused how Group Health Cooperative can underwrite based on health status in a state which bans such practices. And according to the WA State insurance commissioner, Group Health has had loss ratios greater that 100% for 4 of the past 5 years.

  2. Nate says:

    Tim,
    Your completely ignoring 2 huge examples that disprove almost all of your concerns. Self Funded Plans and Taft Hartley plans work and have for 30 plus years.
    “Unless they reached the critical mass necessary to bargain effectively with providers”
    If my 100 employee self funded group can rent a PPO sufficient to compete with the carriers why could a co-op not rent the same PPO? They aren’t available in all states, MA, but who really cares about them anyways, they deserve to pay to much.
    “to accumulate reserves,”
    Carriers inflate rates to build reserves, if you take what you would have been paying to the carriers reserves and apply it to your own reserve account your breaking even, except you keep the money.
    “and to compete with national private insurance plans,”
    I don’t remember the exact numbers but something like half of all groups with more then 500 employees self fund and 80-90% of all groups with more then 1000 do it. I think the 90 million people currently covered by self funded plans is ample proof you can compete with national carriers.
    “Even if they managed to succeed here and there, they would contribute nothing to a national effort to control costs, drive value, and make affordable care accessible.”
    If Democrats had not stopped small employers from banding together for the past 15 years we wouldn’t be here today. An immediate reduction of 10-15% in premium would be a huge factor in changing our system.
    Further if groups returned to self funding the could more aggressively manage their risk and thus be in a position to control cost, drive value and make it more accessible. There is proof of this now in the small groups I self fund under fully insured high deductibles. They average single digit rate increase compared to 20-30% for other groups, that is because we are looking at the claims, educating employees, and managing the plan.
    I don’t think the experts and academic wankers in the ivory towers realize the damage HIPAA and ADA has done to our health insurance market. If you are a 2-50 life group the carrier won’t give you any information. Each year you get a renewal offer, usually double digit, with no explanation of why, or of what drove your cost. If you do manage to pierce the HIPAA wall you then get smacked by ADA and HIPAA again which prevents you from forcing employees to be accountable or change bad habits. With zero data or information please tell us how employers are expected to deliver any of the changes you say we need? By working with firms like mine or joining a co-op they would have access to this data which is the first step to everything you claim needs done.
    No national insurance company or government agency is going to be 5% as effective as me and the employer in educating employees and controlling cost. Neither of them can economically deal with a 10 life group let alone make repeated visits to meet with employees and educate them. Only one example of how the employer based system pays for its self 100 times over. Can you imagine detaching insurance form work and trying to educate 300 million individuals?
    Co-ops need limited to no more then 10-20,000 members. With re-insurance there is no reason to allow huge co-ops to repeat the same mistakes of large insurers. Nor allow any of them to be to large to fail. The economies of scale between 20K people and 100K or 1 million are minimal.
    “Without strong Congressional direction and a unifying national leadership, what could keep them focused on cost control, quality improvement, transparency, and service rather than simply becoming indistinguishable from their commercial competitors?”
    First it is a complete joke to mention congressional direction and cost control in the same sentence. Congress alone is responsible for 30%+ of the cost of insurance. We need less Congress not more if anything is to have any chance to work.
    Co-ops owned by the employers and individual insured and kept to an accountable size are answerable to their members who want to keep cost low. It’s when the insurer is not beholden to anyone they get away with the abuse we deplore. Why do the tens of thousands of self funded plans do such a great job keeping cost low?
    “Why would states suddenly embrace this concept?”
    They wont that is why it needs done under ERISA. States have a vested interest in keeping premium high, premium taxes, and shifting cost away from public plans to private. They need to be pre-empted.

  3. David C. Kibbe, MD MBA says:

    Fascinating post, Tim. I was not aware that there was a national health coop proposal on the table. Thank you for quickly getting me up to date on the whole health coop concept. Regards, dCK

  4. DrWonderful says:

    Considering HMO’s are exempt from anti-trust laws and actually allowed to collude and price fix, there really is no competition for them. When was the last time you saw an HMO compete for dcotors on their panel, for customer service, or to even produce the products they market? They’re basically a dormant industry with rivers of money flowing passively to them.
    I personally feel the only entity strong enough to break their total control on the market and force the HMO’s to actually compete is a public plan. We do not need health care reform. We need health insurance reform and co-ops will not be a strong enough counter- measure to balance the market.
    We either need a public option or a total repeal of the HMO’s anti-trust exemption. All you need to know is Sen. Enzi supports cooperatives so they must actually be good for the HMO’s and not so good for the doctors and patients.

  5. Nate says:

    DrWonderful you might want to return to reality, HMOs have less then 25% of the market, are in decline, and barely exist in most states. Outside of CA, NY, NJ and other liberal states that have destroyed their healthcare systems HMOs are a non factor.
    If HMOs are so bad why did Ted Kennedy make it a federal law employers had to offer one? It’s almost like politicians aren’t really any good at designing health care systems.

  6. DrWonderful says:

    Please Nate- United, Cigna, Atena and Blue Cross themselves alone make up more that 40% of the market and then add in the other 500 plans. You need to stop spreading the lies. You mean to to tell me there are no managed care companies left because they’ve all gone broke? What planet are you living on?

  7. Tim says:

    A “managed care company” is not an “HMO”.

  8. Rick says:

    If DrWonderful is a physician, he has been farming out too much of his interaction with insurers to subordinates to comment with any authority in this forum. Otherwise, s/he would know that United, CIGNA, Aetna, et. al. are not HMOs. HMO is one segment of the health insurance business, and a decidedly small one at that. Market penetration of HMOs in Kentucky, for example? 7 percent last year. Nate has it right. HMOs have been on the wane for the last five years. Most saw their enrollments peak between 1998 and 2003.
    United and Humana in particular have shifted massive volumes of members from HMOs to PPOs, usually at the request of employers whose workers want a broader slate of providers to choose from. Now that the economy is bad, however, and costs are the prime concern of group plan sponsors, many insurers are shrinking their networks and in some cases, actively marketing their HMOs again with a low price point, and narrow networks of the most-efficient providers.

  9. DrWonderful says:

    Rick- what’s the difference? They all enjoy anti-trust exemptions that allow them to collude and price fix. Without any real competition they just lay there and rivers of money flow to them passively. This is not good for America. Please, your semantics are a silly waste of everyone’s time here.

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