Health Care Cooperatives Can Work

03/18/2010 05:12 am ET | Updated May 25, 2011

Watching the torturous turns of the health care debate in Congress is mind-numbing, even for the most savvy policy wonks, let alone for members of the public. Each side in this debate has its own set of facts and scare statistics, and the resulting FUD -- fear, uncertainty and doubt -- have led to a colossal misunderstanding about health care cooperatives. That is unfortunate, since these co-ops may hold the key to a substantive compromise.

For liberals, and especially for single-payer advocates, their line in the sand has been drawn at the government-run public option, and so health care cooperatives represent another degree of sellout. Picking up a whiff of this discontent, some conservatives are supporting co-ops merely as a foil that can siphon support away from the much-demonized public option.

Yet private, nonprofit health care cooperatives, properly designed, actually could offer quite a lot to both the left and the right, as well as to anyone who is interested in expanding health care coverage, reducing costs and improving care. If the Senate combined nonprofit cooperatives with negotiated fees for each health care service -- both components having been offered up individually in various Senate proposals but not yet combined into the same package -- the making of a deal would be in sight. Indeed, nonprofit co-ops might prove to be a gift on the proverbial silver platter, because they could be just as effective as the public option and yet they will be easier to pass because Obama has some of the conservative senators thinking that it was their idea to begin with.

To understand why co-ops can work, it's important to understand how the health care market works. Or rather, doesn't work. According to the American Medical Association, insurance markets lack vigorous competition in more than nine out of 10 metropolitan areas. In 16 states, a single insurer writes more than half the policies, and nearly three-fifths of hospitals have little competitive pressure in the markets in which they operate.

That's because dominant insurers in a local market often pay health care providers high reimbursement rates to discourage them from participating in rival insurance plans. That discourages other insurers from entering the market, which in turn frees the dominant insurer to raise its premiums charged to its patients to cover the inflated reimbursements. In other words, the insurance companies make out, the doctors make out -- but the patients pay for it all.

The most direct way to break this logjam is to introduce a nonprofit element into the health care market. And here's the beauty of it: If designed correctly, it matters little if that nonprofit element is provided by the government or by a private organization, such as a cooperative. The effect on market dynamics is substantially the same, if the nonprofit can produce quality care for less money.

To see how this potentially could work, look to Germany. Germany has more than 200 private, nonprofit health care companies, which cover 92 percent of its population. Germany does not use a single-payer system but instead uses a "shared responsibility" system in which individuals and employers each are required to pay a premium of 6-7 percent of the individual's salary to the nonprofit health care companies. That percent is much smaller than what U.S. employers pay for their employees' health care. Despite spending only about 55 percent per capita of what the United States spends on health care, Germany still gets much better results for the 74 million Germans who use these nonprofits.

But while having more nonprofit players is necessary, it is not sufficient. After all, Kaiser and Blue Cross/Blue Shield are nonprofits, but they rake in huge earnings and pay multimillion-dollar CEO salaries. Group Health actually is a nonprofit cooperative, and while premiums at Group Health have increased less compared to those of competitors, the increases still have been fairly significant, averaging 12.3 percent per year since 2000.

So that's why negotiated fees for service are an additional crucial component needed to rein in costs. The impact of negotiations is best illustrated by another German practice, where representatives of the health care nonprofits deal with organizations of physicians, nurses, technicians and other health care professionals. Patient representatives also are given a seat at the table, and together they determine fees and rate ceilings for every treatment, procedure and doctor visit.

That combination -- of nonprofit companies and negotiated fees for service -- prevents costs from spiraling out of control. This system is better not only for individuals and families but also for businesses, since it not only makes health care costs for Germany's employers lower than in the United States but also allows them to better forecast and plan for these costs.

To be successful, however, the co-ops would need to have enough clout to set rates with doctors and hospitals. To accomplish this, the co-ops likely would have to cut individual deals with each provider, instead of negotiating across-the-board terms. A bill that actually married co-ops with real negotiating clout -- the bargaining power of a public option without needing to involve the government -- might be the best way to get the votes needed.

The good news for both liberals and conservatives is that nonprofit health care cooperatives could substantially impact market dynamics, without increasing the size of government. Both sides can have some of their cake, and eat it too. For those liberals who want a robust nonprofit element in the health care market, they'll get that. For those conservatives who don't want government playing a bigger role in health care, they'll get that.

Senators, what are we waiting for?

Steven Hill is a program director at the New America Foundation. His next book, Europe's Promise: Why the European Way is the Best Hope for an Insecure Age, will be published in January 2010. A version of this article was published in the Washington Post and