Health-Care Cooperatives: Fig Leaf or Fix?

With Obama softening his stance on a public insurance option in the face of stiff opposition, health-care co-ops emerge as an untested alternative

Senator Kent Conrad (D-N.D.) says he is trying to revive apparently deadlocked health-care talks by pushing nonprofit insurance cooperatives. But the co-op model he is touting has been tested only on a small scale and is a questionable vehicle to generate real competition for huge health-insurance corporations, injecting further uncertainty into the White House's attempt to pass health-care reform this year.

Conrad has been talking up the idea of establishing consumer-run cooperatives across the country as competition for the private sector. The recommendation has followed virtual across-the-board Senate Republican rejection of a government-run insurance option favored by many Democrats as a necessary component of any health-care reform legislation. One of the foremost proponents of that so-called public plan had been President Barack Obama, although comments on Sunday by the President and Health and Human Services Secretary Kathleen Sebelius seemed to suggest that it could be dropped if needed to advance reform legislation. In a speech Aug. 16, Obama said the public plan is "just one sliver" of health-care reform, only "one aspect of it." And in an interview the same day with CNN, Sebelius said the public option is "not the essential element" of reform.

Some 300 health-care cooperatives already exist in parts of the country, including Arizona, California, Minnesota, Tennessee, and Washington state, according to Paul Hazen, president and CEO of the National Cooperative Business Assn. But these health-care co-ops don't actually underwrite and sell health insurance; they simply negotiate rates on preexisting plans with health-insurance companies. To operate as Conrad has proposed, Hazen says, the co-ops would have to be able to negotiate directly with health-care providers—doctors, hospitals, and drug companies—thus cutting out the insurance company middleman.

Gaining Leverage

Conrad and other co-op advocates say these organizations already demonstrate a successful competitive model for health-care reform. But analysts and critics say that in addition to changing the way they operate, the co-ops would have to grow at least to statewide or regional scale in order to exert cost-suppressing bargaining leverage with doctors and hospitals. The Tennessee Rural Health Plan, for example, which calls itself the largest rural health co-op in the nation, provides coverage to more than 186,000 people. WellPoint (WLP), the country's largest health-insurance provider, has some 30 million members nationwide.

And while they would not be government controlled, the federal government will probably need to provide startup funding, such as the low-interest, long-term loans that were provided to many rural electric co-ops that have since become independent. Otherwise, Hazen says, "you're not going to have the same ability to negotiate on health services as the national providers." One of three versions of the House bill includes $6 billion in seed money for the co-ops.

Republicans have appeared to gain political traction among voters with criticism of Obama's insistence on a public insurance option, using that to suggest Democrats want to hand health care over to the government to run. Republican critics of the health-care bills have not as yet expressed support for Conrad's proposal.

It is unclear, meanwhile, whether the White House can calm liberal Democrats' concerns that Obama is conceding too much. Administration officials spent Monday trying to tamp down media reports that Obama was retreating on the issue. White House aide Linda Douglass said that Obama's position is unchanged. "The President has always said that what is essential is that health-insurance reform must lower costs, ensure that there are affordable options for all Americans, and it must increase choice and competition in the health-insurance market," Douglass said in a written statement. "He believes the public option is the best way to achieve those goals."

"Unproven" Model

Senator Jay Rockefeller (D-W. Va.), a leading backer of the government insurance option, continued to call public competition "a must." In a written statement, Rockefeller said, "There are real concerns about the potential impact of health-care co-ops on consumers, and we cannot afford to hang our hat on any unproven, unregulated, or unreliable model for health-insurance coverage. At a minimum, we need to know more of the facts. And I've asked these outside experts to give us detailed responses on a tight turnaround so we can keep moving forward."

Critics of the cooperative proposal say co-ops cannot fundamentally change the economics of health care the way that a national-scale government-run program can. Jacob Hacker, a health-care expert at Yale University, said cooperatives don't enjoy the bargaining heft of a public option. A public option would be nationwide compared with separate, localized entities that could take years to start from scratch. "They are going to be a waste of the Administration's energy and dollars because of a lack of effectiveness on the ground," Hacker said.

The chicken-and-egg quandary remains: how to attract a large enough number of consumers to a co-op so it has the kind of purchasing power that would let it negotiate lower rates.

This could be negated if the government required individuals to have coverage and provided a subsidy for those unable to afford market rates, which could then be redeemed for co-op coverage, says David Manning, a former Tennessee Commissioner of Finance and Administration who now works as a private consultant. "Then they would accumulate membership faster because you'd create a demand for their services rather quickly."

Before it's here, it's on the Bloomberg Terminal.