Health Insurance Co-ops as an Alternative to the Public Option

Conventional political wisdom now says that President Obama is backing off of the public option as a part of the health care reform bill. This seems to stem from an answer he gave at a town hall last week, where he said that having a public option is not the only element of health care reform, and there are other important elements to the reform effort.

While the public option might be losing steam for the moment, another idea to create competition seems to be gaining in popularity: health insurance co-ops. Even ultra conservative Republican Richard Shelby (R-AL) is not completely opposed to it, saying “We ought to look at it. I think it’s a far cry from the original proposals.” Kent Conrad (D-ND) is behind the co-op proposal, which would likely offer several billion in loans and grants to help set up cooperative networks. There was a good article in the Kansas City Star explaining what a co-op would look like:

What’s a health insurance co-op? A private, nonprofit organization — most likely one in every state — would compete with for-profit companies to offer coverage to individuals and perhaps businesses.

How would a co-op work? Individuals seeking insurance would go to an “exchange” that would list available health care plans, both from private companies and the co-op. The customer could compare prices and coverage and choose a carrier. The co-op, as a nonprofit enterprise, would in theory provide the same coverage as the private companies at a slightly lower price. That would force private insurers to lower their prices to compete.

The article also mentioned one of the most famous health co-ops that currently exists, the Group Health Cooperative in Washington State. I looked into what kind of coverage they offered to individuals in their low income program. According to the website, those in the program pay a $150 annual deductible, get free preventative care (such as physicals), a $15 co-pay for other office visits, and $10 co-pay for generic prescriptions. However, the Group Health Cooperative is having some issues with their low income program. They are being forced to raise rates due to recent legislation, including raising the deductible from $150 to $250, and have instituted a wait list for new applicants (certain individuals are able to bypass the wait list).

Although the Group Health Cooperative is relatively successful, many efforts to establish co-ops in the past have failed. A notable example being the attempt made in Iowa, home state of swing vote Senator Chuck Grassley (R-IA), which saw it's co-op program fail in two years. According to an article in The Washington Post, a co-op needs 25,000 members to be financially viable, and over 500,000 to be able to negotiate rates with doctors and hospitals. The Washington Post article also mentioned other major drawbacks to this idea:

"Co-ops would lack perhaps the main advantage of the public option: reimbursement rates for doctors and hospitals set by federal law, like those paid by Medicare, the program for older Americans. Federally determined reimbursement rates were central to the cost-saving promise of a government-run health plan and a potentially powerful competitive advantage… [They would also] lack the ability to piggyback onto existing government institutions, like the ones that help administer Medicare."

However, since these co-ops would be non-profit, they would not be motivated to maximize returns for shareholders like public insurance companies. This would theoretically allow them to reduce premiums or reinvest money to improve care. So it’s not all bad news.