New Public Option, Same As the Old Public Option?

Are health insurance co-ops a good idea?


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.