July 6 (Bloomberg) -- A network of health insurance plans run by the customers they serve, proposed in the U.S. Congress to offset opposition to a government-run system, may take a generation to pay off, even with $10 billion in seed money.

The cooperatives would follow the model of decades-old credit unions and farming co-ops, fixtures in the home state of Senator Kent Conrad, the North Dakota Democrat who floated the idea on June 8. The proposal gained interest after Health and Human Services Secretary Kathleen Sebelius said on June 26 that President Barack Obama is “open” to the idea, though he prefers a new government-backed health plan.

Co-ops could thrive under rules being considered by Democrats to insure more Americans and lower costs, and may draw more Republican support than a public plan, Conrad said. Paul Keckley, executive director of the Deloitte Center for Health Solutions, said the experience of existing co-ops, including the 600,000-member Group Health Cooperative in Seattle, Washington, suggests such plans may take decades to develop.

“If we had 25 years, and we weren’t staring down the barrel of a shotgun on health costs, it’s a pretty neat concept,” said Keckley, whose Washington, D.C. center is an arm of the accounting and consulting company Deloitte Touche Tohmatsu, in an interview. “It’s a politically interesting solution. I just don’t think it’s a real practical one.”

If Keckley is right, Obama, 47, would reach his 70s by the time cooperatives like Group Health take root and can compete with the private sector.

Keeping Insurers ‘Honest’

Obama on July 2 said he supported creation of a government plan that will compete with private systems, making medical coverage more affordable and keeping private companies “honest” in how they set prices.

The industry, whose biggest companies are UnitedHealth Group Inc., of Minnetonka, Minnesota, and WellPoint Inc. of Indianapolis, is fighting Obama’s public plan with the support of Republican leaders in Congress. While Democrats control the Senate 60-40, Obama has said he wants legislation with bipartisan support.

Only one Republican so far has expressed interest in a public plan, Conrad said in a telephone interview. He said he envisions statewide or regional nonprofits, owned by the members they cover, that would negotiate with local doctors and hospitals. A national board would bargain with drug companies for local affiliates.

“It’s not hard to imagine” the model working in health- care, Conrad said. “There are a number of Republicans who have expressed interest.”

Other Industries

While rare as underwriters, co-ops have thrived in other industries, Conrad said.

Ace Hardware Corp., the Oak Brook, Illinois-based hardware chain, is a cooperative. So is Land O’ Lakes Inc. of Arden Hills, Minnesota, the dairy-products company with $12 billion in sales last year, according to its Web site.

Benjamin Franklin formed the first co-op on U.S. soil, the Philadelphia Contributorship for the Insurance of Houses from Loss by Fire, according to the National Cooperative Business Association. Many health-maintenance organizations began as co- ops, the Washington-based trade group says on its Web site.

Conrad would give the co-ops at least $10 billion in seed funding, said New York Senator Charles Schumer, the chamber’s third-ranking Democrat, in an interview last week. Christopher Thorne, a Conrad spokesman, didn’t immediately return e-mails over the weekend asking about the funding.

While the co-op plan may whet Republican appetites for an alternative to the president’s public plan, Schumer said he doesn’t believe it meets a key criteria for approval by the Democratic majority.

‘From the First Day’

“Any plan absolutely must be available to all Americans from the first day in order to successfully keep private insurers honest,” said Schumer, a member of the Senate Finance Committee that is drafting health-care legislation. In a July 1 statement, he said he plans to introduce an amendment for a public plan as soon as this week.

Much of the debate centers on the success of Group Health, the oldest U.S. health-care cooperative. The nonprofit was founded in 1947 by local farmers, consumer activists and labor unions, who bought a medical clinic that owned its own hospital, according to its Web site.

The insurer now employs 922 doctors and about 1,700 nurses, and holds about a third of the insurance market in Washington, said Diana Birkett, director of federal relations. Clients range from individuals and government-benefit plans to aircraft-maker Boeing Co. and software developer Microsoft Corp.

Incentive Alignment

“The incentives are aligned toward doing what’s right for the patient at the right time and delivering value rather than volume,” Birkett said in a telephone interview.

While Group Health’s premiums are generally no cheaper than competitors’, the plan has been less aggressive than private companies at trying to purge sicker, costlier patients, said Michael Kreidler, Washington state’s insurance commissioner, in a telephone interview.

That’s earned the plan a “loyal following” among members, said Kreidler, a Democrat elected in 2000.

“It’s a good insurer, but it’s not one that in my opinion is going to be easy to replicate in a relatively short period of time,” Kreidler said. “This is one with 60 years of history and it has developed a culture that is unique in the insurance world.” Building a national network of Group Healths in short order would be a challenge, he said.

‘The Low Side’

Even Conrad’s $10 billion seed offer seems “on the low side,” according to Kreidler. He cited the effort by another Washington insurer, Premera Blue Cross, to turn itself into a for-profit venture. The Mountlake Terrace nonprofit, which says it covers 1.3 million people in the state, valued its assets at $1 billion, said Kreidler, who denied the application in 2004.

Keckley, of the Deloitte center, says cooperatives will face the same pressures as everyone else in health care from local doctors, hospitals and patients to add coverage for the newest budget-busting treatments or technologies, regardless of whether they’ve been proven effective.

“Competition and the high cost of health care have reduced the number of consumer-owned HMO co-ops,” the National Cooperative Business Association says on its Web site.

“If the notion is that a co-op like Group Health per se will make the marketplace more efficient, I think the evidence of that is pretty darn slim,” said Aaron Katz, a health-policy professor at the University of Washington in Seattle. “There’s plenty of evidence that would raise questions about whether health care in this state is any more efficient than anywhere else.”

12% Uninsured

Twelve percent of Washington residents were uninsured in 2007, according to the Kaiser Family Foundation, the Menlo Park, California-based health-policy researcher. That’s below the 15 percent for the nation, according to Kaiser data.

More recently, the number of uninsured in the state has surged, with 150,000 losing coverage this year, Kreidler said in a statement on June 8.

Washington had the nation’s sixth-lowest premiums for individuals covered through their job in 2006, Kaiser said. Premiums for family coverage were above the U.S. average that year, ranked 25th nationwide, Kaiser said.

Group Health rates last year ranged from $45 a month per child for a plan with a $5,000 deductible to $683 a month for a senior citizen with a $500 deductible and a history of smoking. Both were for coverage purchased by individuals.

Largest Consumer Plan

The nation’s largest consumer-governed plan, HealthPartners Inc. of Minneapolis, Minnesota, covers 1.25 million people, mainly in that state, Wisconsin and North Dakota, said Donna Zimmerman, a co-op vice-president.

The 15-member board for HealthPartners Inc. has set the co- op’s yearly earnings goal at 2 percent of annual sales, leaving more money for preventive care, patient education and other services, she said.

“I don’t think you’ll find many for-profit companies that would be able to make their shareholders happy with a 2 percent bottom line,” she said.

UnitedHealth, the largest insurer by sales, had a 3.8 percent profit margin last year. For WellPoint, it was 4.1 percent and Aetna Inc. of Hartford, Connecticut, the third largest insurer, 4.5 percent, according to Bloomberg data.

Conrad, the North Dakota senator, said legislation overhauling health care will level the playing field, making virgin co-ops more viable.

Private insurers, for example, will be barred from rejecting sick customers or charging them more than healthier peers, he said. If lawmakers succeed in covering more of the uninsured, co-ops will have more business to pursue as well, Conrad said.

‘Very Good Job’

Group Health “has been doing a very good job in the current, unreformed market,” he said. “With 40 million new entrants, those co-ops would be even more effective.”

If so, Democrats need it to happen soon, Keckley said.

“You’ve got a 2010 and a 2012 election cycle where insuring everybody and cutting costs are the two White House directives,” he said. “I’m not sure you deliver on both of those very fast if the co-op model is the means of getting there.”

To contact the reporter on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net.

Last Updated: July 6, 2009 00:00 EDT