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Deflating the Fight for Real Health Care Reform

09/19/2009 05:12 am ET | Updated May 25, 2011

Co-operatives: A Failure on all Fronts

Trial balloons are part and parcel of politics in America. President Obama recently floated one by calling the government-run public health insurance option a mere "sliver," and other White House officials spoke openly about accepting a compromise solution: health insurance co-operatives. It's a balloon that seems to be deflating quickly on all fronts. Politically, they are a loser because progressives won't accept such a do-nothing compromise, the GOP, truly earning their nickname as the party of "no," has of course immediately rejected the idea, and the public can't get excited about them. Most importantly, regardless of the political reality: co-ops are a bad idea.

The whole point of compromise is to make both sides happy, and cooperatives don't even come close to doing that. The apparent primary target of the White House's surrender before the fight, Sen. Chuck Grassley on the Senate Finance Committee, had this to say when asked if he would go along with a White House compromise (presumably co-ops) and vote with three or so other Republicans for health reform: "Certainly not. And I told the president that a week ago Thursday, and I told Max Baucus that over a period of three or four months, so I'm not telling you anything new." The pattern seems set in stone: White House reaches hand out; GOP chomps it off. Here is Sen. Hatch: "You can call it a co-op, which is another way of saying a government plan."

Progressives are even less excited. Sixty members of the House sent a letter to Kathleen Sebelius saying they won't vote for a health care bill that does not contain a strong public option. Gov. Howard Dean has called reform without a robust public plan no reform at all. Paradoxically, a White House move toward co-op might even weaken the bill with so called Blue Dog Democrats. Since co-ops wouldn't reduce federal expenditures (Obama has vowed that the public option will be deficit neutral and self sufficient) and would surely create far less competitive pressure on the insurance companies to control costs, the compromise might leave even less incentive for Blue Dogs to side with the President on a tough vote.

Then there's the public. Polls show that anywhere between 62-83 percent of the public favors a strong government-run public option. This, even in the face of withering attacks about socialized medicine and a less than vigorous defense from the White House. Democrats still support the option by an 80-13 margin and amongst independents, support for the public remained static from July (66-29) to August (64-30). The public option remains far more popular than the reform package as a whole. Perhaps more importantly is the level of excitement for reform amongst activists - the people we must depend on to fight back against the $1.4 million being spent every day by the insurance lobbies to defeat reform. People simply aren't going to be energized to call to Congress and say, "We demand co-ops now."

All of this might be worth the political risk if co-ops were worth fighting for, but they are not.

Co-ops are bad on cost. A GAO report reviewing health cooperatives concluded that "cooperatives' potential to reduce overall premiums is limited because (1) they lack sufficient leverage as a result of their limited market share; (2) the cooperatives have not been able to produce administrative cost savings for insurers; or (3) their state laws and regulations already restrict to differing degrees the amount insurers can vary the premiums charged different groups purchasing the same health plan." To take one example, Group Health Cooperative of Puget Sound, perhaps the largest cooperative, has averaged a 12.3 percent increase in annual premiums - 4 times the rate of inflation.

Co-ops are bad on competition. Here's GAO: "None of the purchasing cooperatives we reviewed had a large enough market share to create bargaining leverage and therefore had a limited ability to significantly increase the percentage of small employers offering coverage in their state." Moreover, many co-ops will simply defect into the private market for the profits. According the Washington Post: "Many non-profit health-care institutions, including CareFirst in the Washington area, have tried to convert themselves into for-profit corporations listed on the stock markets."

Most co-ops will fail. The co-op experiment has already been run and it failed. We used to have hundreds of health insurance co-ops in America, and the ones that didn't go out of business have mostly converted into private insurers or some other format. It is very difficult to start up a new insurance company and break into markets where insurers are very established. Over a decade ago, Iowa passed a law to help health care co-ops. One was created, and it died within two years. Although the law is still on the books, the state does not have a co-op now.

Co-ops would take decades to influence the health market. Even if the private insurance companies aren't able to kill these tiny co-ops in their start up phases, it will take decades for them to reach a level to actually influence the quality of health insurance in America. Group Health Cooperative of Puget Sound took over 60 years to reach its current level of 600,000 members - a level considered the minimum necessary to have a substantial influence on its market.

Co-ops as pork barrel spending. Is it a coincidence that the leading co-op champion is Sen. Kent Conrad of North Dakota where Blue Cross Blue Shield has said they would immediately apply to qualify as co-op, presumably to take advantage of $6 billion in federal transition assistance?

The administration has floated its trial balloon and found out what it needs to know. The co-op trial balloon just won't fly. Now it's time to resume the fight for a real public option that can actually help provide greater coverage, control costs and increase quality.

It's a watershed moment that requires courage and leadership.