Obamacare's Failing Co-ops Show That a Government Run Public Option Would Have Been a Disaster



During the Obamacare debate in 2009, arguably the biggest item on the progressive wish-list for the law was the so-called "public option," a fully government run health plan that would compete ("compete") with private sector insurers. Some backers of the public option were explicit in saying that they viewed it as a way to ease into a full-fledged single-payer system; others insisted that it was primarily designed to keep private insurers in check. After all, the argument went, a government-run public plan, without the profit motive, would be well positioned to offer efficient, inexpensive service.

For various reasons, the public option didn't make it into the final bill. Instead, a sort of compromise measure did, in the form of non-profit health insurance co-ops. They wouldn't be fully government run, but they would be government backed in the form of several billion dollars worth of government loans. Because they would be designed as non-profits, they would still be able to serve as a check on the rest of the insurance providers. More than 20 of the plans were set up across the country, and in the weeks before Obamacare's exchanges opened in October, 2013, representatives from several of those plans told The Washington Post that their rates were lower than other plans, and that their lower rates were helping to hold down rates across the board.

In an op-ed for today's Wall Street Journal Grace-Marie Turner of the Galen Institute and Tom Miller of the American Enterprise Institute check in on the current state of affairs with Obamacare's co-ops.

As it turns out, they are not doing very well. They have attracted about a million people. Yet all but one is underwater financially, the pair note, and one of the co-ops, CoOpportunity Health, which served Iowa and Nebraska, has already closed its doors—but only after blowing through $145 million in federal loans.

Another 10 are in worse financial shape than that plan, at least by one measure, and big premium hikes are likely for several of the plans. Turner and Miller make a fairly convincing case that the problem is simply that the co-ops underpriced, attracted a large number of sicker-than-expected customers, and then found that medical claims came in far higher than projected.

As a result, many are now coasting on government loans—surviving, essentially, on what remains of the law's taxpayer funding. As Turner and Miller write, "All the upfront money from the feds has been allocated mostly in the form of 'solvency' loans. Most co-ops survive on what little remains unspent from those loans."

All told, the co-op loans represent a relatively small loss: The Affordable Care Act initially allocated $6 billion for the program, but Congress has since cut funding to a total $2.4 billion. To be sure, that's money that shouldn't have been spent, and Turner and Miller are right to call for an investigation into how that money was spent and who might be on the hook for paying it back. But in some ways it's a small price to pay compared with what likely would have happened if the law had included a public option.

Most likely, a public option would have been managed in a similar fashion, with low up front premiums attracting customers, perhaps far more than joined the co-ops. But as we're seeing in many Obamacare plans, not just co-ops, medical claims would almost certainly have come in higher than expected. It's unlikely, however, that a public option, or any part of it, would ever have shut down. Instead, taxpayers would have been on the hook—not just for a few billion in loans, but for ongoing losses associated with a massive government-run insurance program. 

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  1. "[...]a fully government run health plan that would compete ("compete") with private sector insurers.[...]"

    'Nice little insurance company you have there. Shame if something happened to it'

  2. These are NOT co-ops... well, they were, but they were (as accurately describes) health insurance co-ops, not health care co-ops.

    Co-ops are the answer, but only those that provide healthcare and employ medical professionals on a salary, not those that provide coverage as a nonprofit insurance company.

  3. "[...]Because they would be designed as non-profits, they would still be able to serve as a check on the rest of the insurance providers[...]"

    Man, it makes my ass tired to read that a non-profit is automatically going to be less expensive that for-profits in ANY field.
    Non-profits, by their structure, tend to employ drunken uncle Ted in the janitorial dept, since he really can't do a lot of harm there, and they tend to have entire divisions devoted to assuring the employees are of the 'proper diversity'.
    The profit motive is a powerful incentive to make costs as low as possible and no amount of feel-good bullshit by proggies makes a damn bit of difference.

    1. yes. It's silly. Some nonprofits are efficient, but not most.

      What about hospital memberships?

    2. Aw, come on! Everyone knows that non-profits are more efficient because they don't waste money on paying profits to rich people! That's what makes government more efficient as well! Profits are waste!

      1. The profit motive is precisely what drives efficiency in getting the job done. Take away the profit and what incentive do you have for efficiency? Historically, incentives other than money involve armed men and the creative use of pain. (Or voluptuous women and the creative use of pain, whatever floats your boat.)
        You would have to believe that most people are good, altruistic and willing to work hard for the common good, to believe that non-profits could ever out-compete for-profits, and I know of no evidence whatsoever to support the proposition that human beings have ever been good. All of human history supports the opposite, in fact.
        Have these people never even heard of Adam Smith, "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest"? Or Machiavelli, "Yet the way men live is so far removed from the way they ought to live that anyone who abandons what is for what should be pursues his downfall rather than his preservation"? Sure, it would be nice if everybody just did what I tell them to do rather than me having to pay them or jab them with a pointied stick, but in this world that's how it works. Pay 'em or poke 'em.

        1. You're right of course, but that won't sway those who reflexively have an emotional reaction when the subject of profits come up. They will contend that profits are theft from workers and customers alike. That's how they feel, and no amount of logic or reason will change it.

        2. I once quoted that Adam Smith line to someone and they refuted it by pointing out that we no longer patronize butchers and bakers like we once did.

    3. There are already plenty of non-profit health insurers. They are called mutual insurance companies and are owned by their policyholders (usually the board is made up of local providers, a consumer advocate or two, and appointees from the largest insured groups). The pricing for mutuals works the same as it does for insurers (they tend to have much the same in terms of overhead, often have better discounts), but instead of having an explicit profit load built into their premiums, they have a contribution to surplus which is meant to provide a Provision for For Adverse Deviation (or "PAD") to help ensure that the company rates for more than adequate. If a mutual's surplus fund gets too big, the mutual will release some of the accumulated surplus in the form of a dividend to policyholders, basically credits to pay for some of the current year's premium. In an analogous situation, a for-profit insurer would share excess premium with the stockholders (dividend payments and/or share buy-back programs).

      1. For profit health insurers tend to do care management better than mutuals, though the latter is trying to keep up for competitive reasons. This is because care management was initially more popular with insurance company management than with their policyholders (makes sense, who wants their care managed?), and having shareholders making decisions led to a stronger push for care management. However, the companies that do care management well tend to have marginally lower claims costs, which results in marginally lower premiums, which attracts better risks (contrary to what Peter and the WSJ authors said about lower premiums attracting worse risks. It isn't that simple, but if you don't expect to use services that much, you want the lowest premiums to cover unexpected expenses).

        Health Insurance is expensive because health care is expensive. Health care is expensive because of third party payment, plaintiffs' attorneys, and regulations that artificially lower the supply of providers. Government will not fix that. All government will do is ration care. Outcome measures that truly measure the effectiveness of care (not differences in population health, cultural attitudes, ethnic mix, age/gender mix, measurement "error", etc.), show that the US's healthcare system is the best. If we transform that system into a market, we will get less expensive care.

        1. Charlotte, that is very well put!

          1. +1

            Well done.

        2. Health Insurance is expensive because health care is expensive.

          This is why the left intentionally uses those two terms as synonyms. They don't like the fact that there is indeed a clear distinction, and they especially don't like the fact that policies they favor have cause health care to be artificially expensive. By equating the two they can go after the insurance companies, and blame their evil profit motive as the sole cause for the high cost of health care. The end goal of course being total control, not universal access.

        3. Health care is also expensive because being healthy costs more than being dead and there is a huge group of Baby Boomers exiting their peak earning/tax paying years and entering their peak heart attack/stroke/cancer/hip replacement years who don't want to be dead. For years Medicare/Medicaid worked pretty well because more people were paying more money into it than were taking money out, now that the demographics are shifting we are seeing the flaw in this plan. (Some of us are seeing the flaw in this plan, some are arguing that if you just try hard enough you can make two plus two equal five.)

          1. Medicaid has never worked well. Yoi qant an example of the disaster that is single payer? Look no farther than meducaid

    4. Well, since we are talking about government I have to point out that the term non-profit doesn't mean exactly what you would think it does. Non-profit does not mean not for profit. While there are restrictions on profits the entity is allowed to carry forward to maintain their non-profit status. The people working for the non-profit can make money hand over fist. Which is why most non-profits are just as expensive as the for evil for profit counter-parts. I used to work for a non-profit and if we had taken in too much money over the course of the fiscal year. They would pay out the extra as bonuses to our 401k's to get us below the threshold.

      1. the term non-profit doesn't mean exactly what you would think it does. Non-profit does not mean not for profit. While there are restrictions on profits the entity is allowed to carry forward to maintain their non-profit status. The people working for the non-profit can make money hand over fist.

        See: Exhibit A, "non-profit" colleges and universities.

      2. Non-profit is not a business model/plan. It is an IRS tax definition. 7 out of 8 people attracted to work for a non-profit will never be able to understand this. They end up packed with people who constantly think that money is icky. They are allergic to budgeting, planning, cost/benefit analysis, accounting, inventory auditing, etc...

        This is only from my experience with three unrelated non-profits. I cannot believe I have any hair left after dealing with these organizations. I believe in the work they do/ products they provide, (hell, I started one of them) but I have given up on the ability to reach sustainability from an organization that cannot understand the first two sentences of this comment.

        1. Quite a few non-profits run either on grant, fundraising or donation money so their financial projections are probably more crucial than the average small business. I'm the treasurer for a small club and we essentially run off memberships, donations and event revenues. We don't have a budget or do much planning (for now anyway) My wife has been volunteer treasurer for some larger entities and it's a lot of work; not a place for those who are financially illiterate.

          1. "We don't have a budget or do much planning"

            I rest my case.

    5. A lot of people have the idea that something costs what it costs, and no one can change the costs. Under this view, profit is just an additional fee on top of the costs, so a non-profit (or government) by definition is cheaper. They fail to realize that organizations can change the cost of something by finding more efficient ways to get it done, or by bloating up overhead, etc.

      1. Which is why we must suffer such historically illiterate epithets as "robber barons" every time 19th century capitalism is brought up. The Rockefellers and Carnegies and Vanderbilts should have their faces carved in mountainsides for the miracles they did with steel, oil and shipping prices. These guys blew up public monopolies and showed that generation of Earthlings how competition and profit serve to bring cheap goods and prices to the masses. For their efforts, they live in American mythology as villains and monocled fat cats. Because people are indeed too willfully stupid to understand that costs are not magically ordained and that profit and loss are the only way to go if you think people should have broad access to affordable necessities.

        1. Envy, baby! It's ENVY all the way down!
          Green is the real red.

  4. Still two mutch capitalism in the healthcarez.


    1. If it were true that the .gov could provide healthcare more efficiently and cheaper than the market because no profit motive, wouldn't that mean that there really would be no industry that wouldn't true for and therefore communism should have succeeded and left capitalism in the dustbin of history?

      1. Of course. Reality, however, isn't going to stop our progressive friends from their narrative. That being Single Payer is the only answer allowed in this discussion. We might as well be labeled 'deniers' for pointing out that their answer leads to failure.

      2. Healthcare is magic.

        The past century leftist intellectuals have engaged in special pleading on a number of goods and services that shouldn't be tainted by profits.

        Their logic clearly would apply to every good and service, but none of them ever think that far. A lot of the buy in is just from the idea that it is dirty to get profits from someone's poor health. Just like you can't sell water in some places...

  5. When do I get my slave doctor?

    /Socialized Medicine

    1. If you think nurses are salty today, just wait until they are government employees.

  6. This was just done to shut down free marketers who talk about bringing back the old co-op "Friendly societies."*

    "We tried co-ops again, they just don't work."

    *I really don't believe this, but that'd be some amazing political maneuvering.

  7. "After all, the argument went, a government-run public plan, without the profit motive, would be well positioned to offer efficient, inexpensive service."

    It drive me nuts when I hear people say that government entities don't have a profit motive. While the entity itself may not be driven by profit. Every single person who works for it is. And, for the most part those people will do as little as possible for as much compensation as possible. So, there goes your efficient, inexpensive service. Which is why government programs always fail.

    1. I'd be interested to hear these same people explain why the government won't let go of Fannie Mae or Freddie Mac.

  8. So, the co-ops suffered from a very rapid death spiral. The one that progressives claim isn't real and isn't happening in the current Obamacare marketplace.

  9. These were state-sponsored high-risk pools. Which have a long history of going into death spirals.

    But they did it anyway, because they are (a) historically and economically ignorant, (b) arrogant to the point of believing "this time will be different, because ME!", and/or (c) cynical political opportunists who don't care that it will fail, because they win a news cycle.

    Did I miss anything?

  10. Medicare is more efficient than the other options. It will not bankrupt us. it already has a good history and plenty of examples in other governments. Not everybody will be happy, but that is what private money is for.

  11. While I do not say that nothing good ever comes from government, the claim of a government program being efficient and low cost, is ridiculous on it's face. This is not to attribute undeserved virtues to the private sector, especially where "insurance" is involved, but re the claim or inference of government programs being low cost and efficient, please give me a break.

  12. You mean like VT's Single Payer system that is on life-support?

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