New Public Option, Same As the Old Public Option?

Are health insurance co-ops a good idea?

Ronald Bailey | August 18, 2009

What a difference a month of raucous town hall meetings makes. In June, President Barack Obama declared, "I strongly believe that Americans should have the choice of a public health insurance option," and the Democratic leadership in the House of Representatives rammed through 1,018 pages of health care reform, including $2 billion in seed capital to establish a public health insurance option. 

But by Saturday, Obama backed down from his government-run health insurance scheme, saying in Grand Junction, Colorado: "The public option, whether we have it or we don't have it, is not the entirety of health care reform." A day later, his Secretary of Health and Human Services, Kathleen Sebelius, told CNN that the government run health insurance was "not the essential element" of the Democratic Congress' health care reform plans.

Obama and Sebelius have both hinted at an alternative to the hated private insurers—health insurance co-ops—and have started talking more about the importance of competition in general. "There will be a competitor to private insurers," Sebelius added in her CNN appearance. "That's really the essential part, is you don't turn over the whole new marketplace to private insurance companies and trust them to do the right thing." Democratic firebrand and government single payer health care advocate Rep. Anthony Weiner (D-N.Y.) was more colorful on this point. "Leaving private insurance companies the job of controlling the costs of health care is like making a pyromaniac the fire chief." Given the current burn rate of the government's Medicare health insurance program, the congressman might consider looking in the mirror to find the real arsonists.

OK, so what is a health insurance co-op? Many Americans are familiar with neighborhood food co-ops in which members join and then purchase a variety of produce, meats, and other groceries at cost. Some 120 million Americans are served by various co-ops according to the National Cooperative Business Association. Unlike most private companies, cooperatives are owned and controlled by their members, not by outside investors. In addition, co-ops return any surplus revenues they may earn to members.

In June, Sen. Kent Conrad's (D-N.D.) floated a plan for creating consumer-owned nonprofit health insurance cooperatives as an alternative to the Democratic plan. Conrad is part of a senatorial gang of six which includes three Republicans and three Democrats that has been trying to hammer out a bipartisan health care reform package for several months. He sees rural electric cooperatives and agricultural cooperatives as models for his health insurance cooperatives.

The details are still fuzzy, but reports suggest that under Conrad's plan the medical co-ops would receive $3 to $4 billion in start-up funds from the federal government and operate under a national structure with state affiliates at first. Afterwards, they would function independently, living solely off the premiums charged to co-op members, and maintaining the same financial reserves that private companies do in order to cover any unexpectedly high claims. Ideally, membership would be around 500,000 to give the co-ops sufficient bargaining power with physicians, hospitals, and drug companies. "For those against a public option because they fear government control, the co-op structure has some appeal because its not government control," declared Conrad. "It's membership control, and membership ownership."

Health care co-ops could function in two ways. A co-op might be a group of consumers who band together to negotiate the best coverage deal from private insurers. Or like mutual life insurance companies, a health insurer could be a co-op owned by its member policyholders. Policyholders would be pushing for the co-op to cut costs to keep premiums low while simultaneously encouraging the co-op's management to expand benefits. As members, co-op policyholders would not likely try to control costs by denying claims or limiting access to medical care. True co-ops are funded by members and controlled by members. The conservative Heritage Foundation cautiously agrees that such medical cooperatives might be marginally useful, but correctly worries that government start-up funding of co-ops would lead to federal control since Congress would justify its further interference on the grounds that federal officials are stewards of taxpayer dollars.

Fostering more competition among health insurers is a great idea. Right now, most states are dominated by one or two insurers. To really get co-ops going, Congress and the administration need to change tax laws to grant nonprofit tax status to mutual health insurance companies just like credit unions enjoy today. Congress also needs to give consumers the same tax breaks for getting insurance from a co-op (or any other private insurer) as they currently get from their employer. But more competition could also be had by the simple expedient of passing legislation allowing insurers licensed to sell policies in one state to offer them to residents of any other state. This would immediately create a competitive nationwide market for individual health insurance policies.

One reason we don't have much health insurance competition right now is that the proliferation of coverage mandates in each state operates as a barrier to entry for many insurers, keeping them from expanding into new states. Mandates also lessen the scope for competition since all policies must essentially offer the same coverage. The Council for Affordable Health Insurance identified 2,133 mandated benefits in a 2009 report, and estimates that state and federal mandates increase the cost of basic health coverage by between 20 and 50 percent. "Mandating benefits is like saying to someone in the market for a new car, if you can't afford a Cadillac loaded with options, you have to walk," notes the report. Allowing insurers to sell policies not loaded up with mandates would significantly lower premiums.

In fact, however, Democrats are unlikely to give up on the dream of a public health insurance scheme in favor of truly private co-ops or real competition. Sen. Charles Schumer (D-N.Y.) has recently said that he could support the idea of health insurance co-ops. But Schumer insists that what he calls "co-ops" must be national in scope, jump-started with $10 billion in federal government funding, have the power to negotiate payment rates to medical providers nationwide, and be governed by a presidentially-appointed board of directors. Discerning any differences between Schumer's idea of co-ops and the government health insurance option that the Democrats in the House of Representatives have already passed would take the equivalent of a public policy electron microscope.

When the administration backed off the public option, fury from left-wingers was swift. "You can't have reform without a public option," said former Democratic Party chair Howard Dean on CBS on Monday, "Let's not pretend we're doing reform without a public option." Daily Kos blogger-in-chief Markos Moulitsas warned, "I wonder if the White House truly understands the depth of anger they'll face from the progressive side if they fail to pass health care reform with a strong public option."

But the left should calm down. Co-ops, implemented a certain way, will essentially be their public option. Senate Majority Leader Harry Reid (D-Nev.) summed up Democratic intentions well: "We're going to have some type of public option, call it 'co-op,' call it what you want." Sen. Orrin Hatch (R-Utah) has clearly been listening to his colleague from Nevada. In The New York Times, Hatch noted, "You can call it a co-op, which is another way of saying a government plan."

If it stinks like a skunk, it's most likely a skunk. And no matter what health care co-op plan emerges from the Democratic Congress in September, it is unlikely to pass this smell test.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

Comments

|8.18.09 @ 3:05PM|#

No he didn't. Either that or Bob Gibbs is a lying worm, and I'm loath to believe that.

WASHINGTON - White House spokesman Robert Gibbs insists the Obama administration has not shifted its goals on health care reform or distanced itself from a government-run public insurance option.

He said in a meeting with reporters Tuesday morning that news stories suggesting that the administration was ready to abandon the public option as it battles to push health care reform through were overblown. The rash of reports began after Health and Human Services Secretary Kathleen Sebelius (seh-BEEL'-yuhs) appeared to signal the president was open to health care cooperatives as an alternative.

Gibbs said there was no intention to indicate a change in policy. He said, "If it was a signal, it was a dog whistle we started blowing weeks ago."

|8.18.09 @ 3:14PM|#

Tulpa: Or an Obama administration trial balloon that the "progressives" just shot down.

|8.18.09 @ 3:24PM|#

So, if it's a co-op, how is it different from a mutual health insurance company? (They exist, like mutual life and auto insurance companies.)

The only way it would seem to be different would be if it were government subsidized. For me, I'd be much happier if the subsidy were direct to poor people who needed help buying insurance (or as a voucher, or, hey, this thing called Medicaid) rather than a subsidy direct to the co-ops.

Tomcat1066|8.18.09 @ 3:25PM|#

I have no problem with co-ops that let groups of people negotiate for bulk rates on health insurance. Frankly, I don't see any legitimate reason people shouldn't be allowed to associate with whomever they want and to negotiate a contract with another body regarding health insurance.

But government finances co-ops that are the insurors bug me. Like is outlined in the article, government control could easily be justified by claiming tax dollars being used allow it. The exception would be for the co-ops to use tax dollars as a loan for start-up, then pay it off within so many years. Unfortunately, I can see the downsides to that one too.

|8.18.09 @ 3:27PM|#

Sebelius saying "not essential" is the same thing as Gibbs saying "not ... distanced itself from a government-run public insurance option."

"When I use a word,' Humpty Dumpty said in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less."

-- Alice Through the Looking Glass

|8.18.09 @ 3:29PM|#

Shorter Gibbs: No change in policy, but we signaled our intentions ("dog whistle") several weeks ago, wink, wink!

Isn't that what's know as a non-denial denial?

And what is it with the Left and their use of "dog whistle" as a metaphor? (Though usually, they accuse conservatives using a dog whistle to signal racism.)

|8.18.09 @ 3:47PM|#

"under Conrad's plan the medical co-ops would receive $3 to $4 billion in start-up funds from the federal government and operate under a national structure with state affiliates at first. Afterwards, they would function independently,..."

And under Marx's plan, since the state would only exist to regulate class conflict, after the revolution the state would be redundant and would wither away.

We all know how well that plan turned out.

|8.18.09 @ 3:55PM|#

Co-ops?
I told you, we're an anarco-sydicalist commune. We take it in turns to be a sort of executive officer for the week...

Invisible Finger|8.18.09 @ 3:59PM|#

how is it different from a mutual health insurance company?

The costs are supported by non-members, of course.

Invisible Finger|8.18.09 @ 4:02PM|#

Here's a little experiment anyone can do.

http://www.ehealthinsurance.com/ehi/Alliance?allid=Yah26044&sid=tlp

Go to this website and get a health insurance quote for a 28 year old male in the Chicago area (zip 60614). Then do the same quote but for a New York City zip code.

Then decide if the disparity is because of insurance company greed or something else.

|8.18.09 @ 4:11PM|#

Dammit, Digit!

Quit confusing me with facts!

|8.18.09 @ 4:24PM|#

And what is it with the Left and their use of "dog whistle" as a metaphor?

Dunno, it's not like shibboleth isn't a perfectly cromulent word for most uses.

Tman|8.18.09 @ 4:24PM|#

What vexes me is how democrats are able to get away with arguing that they should be left anywhere near the controls of healthcare spending. In 2007, 40 percent of all federal revenues in were used to pay Medicare and Social Security benefits. It is calculated that if no changes are made to either program and federal revenues remain at 18 percent of GDP, by 2040 this percentage will grow to 80%.

EIGHTY PERCENT OF THE BUDGET.

In 30 years.

And this is without any additional programs such as a co-op or single payer plan.

We are farking doomed.

|8.18.09 @ 6:49PM|#

Healthcare cooperatives, mutuals, or reciprocals are insurance plan options that have successful counterparts in the private sector insurance market. These counterparts are available now for commercial property, casualty and liability insurance to selected markets. The common features are: control of the plan by the insured risks, careful cost control by managing and properly underwriting risk and encouraging management to control named perils (and penalizing by raising premium).

This CAN and WILL work for the population regarding healtcare and may be started wholly in the private sector without any Government funding and minimal control. It has been done in the markets named above; there are insurance executives who could and will start these types of programs. What they will need is encouragement to start the process and sell the product.

Frankly, this could be the answer to reforming the broken process and must be vigorously pursued by the private sector and the encouraged by conservative/libertarian politicians. This is the ultimate free market answer to the issue. However, the Government MUST NOT provide any financial support and control MUST only be at the local level where it can be managed by the members of the plan.

Let the Government offer the "public options" of Medicare and Medicade and go broke. The cooperative/mutual/reciprocal could withstand the influx of the entitlement gang from the Government sector. (Although technically a reciprocal would most likely not accept indigent members who require more medical care than normal)

Bruce Majors|8.18.09 @ 7:27PM|#

So the government bureaucrats we are supposed to let nationalize and centrally plan the medical industry have failed (again) to produce and deliver the number of units of flu vaccine they say are needed. Hmmmm.

|8.18.09 @ 9:12PM|#

"I strongly believe that Americans should have the choice of a public health insurance option,"


Ok Mr Obama. If that is what you really want, then deregulate the current industry. Allow more companies to compete.

|8.18.09 @ 10:02PM|#

A. Freeman: Thanks for the comment. I am obviously not against private co-ops. It's hard to tell if they would work any better than actual competition among private insurers freed from excessive government regulation, but that's what markets can sort out for us if they are allowed to operate.

|8.19.09 @ 2:48AM|#

The thing is, there are private co-ops and mutual health insurance companies already. Physicians Mutual. HCSC, who owns Blue Cross/Blue Shield of Oklahoma, Texas, Illinois, and New Mexico, is a mutual.

Mutuals don't necessarily seem to offer better rates, but it's good that they exist to test the thesis that insurance profits are the cause of our problems.

Plenty of people have mutual auto insurance and don't necessarily know it. I know someone who was quite surprised when State Farm declared a dividend to policyholders.

|8.19.09 @ 6:42PM|#

The key problem I have with this co-op plan is the governance by Presidential appointees. Co-ops by their nature are "owned" by their members. These co-ops therefore need to be run by a board selected by the policyholders.

Dan Blachly|8.20.09 @ 5:54PM|#

The biggest cost savings would come from allowing medical acts between consenting adults. Get governments out of the licensing rackets.

|8.22.09 @ 8:56AM|#

Why oh why is the left obsessed with sating its guilt and angst with other peoples' money?
Why is it abortion is a choice but my health care is not?
Health care is a personal responsibility.
MY responsibility.
Not my neighbor's.
Nor am I responsible for my neighbor's health care.
Barak 0bama's inauguration was themed 'Era of Responsibility'.
Yet, he seems to think we're responsible; for everyone else.
We are witnessing the culmination of the failure of the Great Society programs of the 1960's.
It is time to acknowlege and accept these programs have been collosal failures in so many aspects.
Financial failures and failures in socila engineering.
Both failures will take decades to repair.
We must start with the disposal of this congress in 2010 and 0bama in 2012.