Monday, June 15, 2009

Making the Case for Public Plan Option, Part III: Coops are Not the Answer

Frank Pasquale

I've been writing a series of posts in favor of a public health insurance option in health reform. You can find Part I here and Part II here. The post below addresses the leading current rival to a public plan option, "cooperative" nonprofit health insurers.

The House of Representatives is strongly endorsing a public plan option in health reform, and the Senate is groping toward something less scary for private health insurers. As Jacob Hacker observes,

In most of the discussion of public plan choice . . . the plan has been described as “Medicare-like”--a national plan roughly modeled after Medicare that would, however, be separate from Medicare and compete on a level playing field with private plans. That is still the leading model, and thoughtful Democrats have usefully fleshed it out. . . . But the last couple months has featured a proliferation of putative compromise alternatives to the public plan [such as] creating a bunch of state plans modeled after self-insured health plans for state workers.

Now Sen. Kent Conrad has proposed that private health insurance "cooperatives" take on the role envisioned for a public plan option. Some important legal scholars have taken a look at the idea, and consensus is building: without a great deal of new regulation, it will be very difficult for cooperatives to effectively compete with existing insurance companies and contain costs.

As leading health law scholar Tim Greaney argues, "market entry by health care cooperatives [would be] neither quick nor easy:"

[D]eveloping effective coop-sponsored plans will not come easily or quickly. It is clear that new entrants into health insurance markets face a host of obstacles. The prevalence and magnitude of entry barriers is evidenced by the dominance and profitability of existing insurance plans. One or a handful of companies dominate most health insurance markets around the country and these firms have enjoyed consistent and robust profits. Economic theory would suggest that such profit opportunities should have invited entry by rivals eager to capture some of the profits available in those markets.

[I]t is hard to envision numerous regional coops gathering the necessary data, experience and reputation to serve as a benchmark or counterweight to dominant hospitals and provider groups across the country. Further, there is a serious question regarding the independence and mission of coops. It is a mistake to assume that nonprofit entities will necessarily work to the advantage of the public.

Business analysts also appear doubtful. According to Carl McDonald, health insurance industry analyst for Oppenheimer and Co., “As the co-ops are currently described, we think they would be a big positive for the managed care group [of publicly traded health insurance companies], but it seems to us that they would be destined to fail from the moment of creation.”

There is historical support for such a position. Tim Jost, a prolific and well-regarded health law scholar who understands the history of reform as well as anyone, has this to say about cooperatives:

We have tried cooperatives before. During the 1930s and 1940s, the heyday of the cooperative movement in the United States, the Farm Security Administration encouraged the development of health cooperatives. At one point, 600,000 mainly low-income rural Americans belonged to health cooperatives. The movement failed.

The cooperatives were small and undercapitalized. Physicians opposed the cooperative movement and boycotted cooperatives. When the FSA removed support in 1947, the movement collapsed. Only the Group Health Cooperative of Puget Sound survived. Over time, moreover, even Group Health, though nominally a cooperative, has become indistinguishable from commercial insurers–it underwrites based on health status, pays high executive salaries, and accumulates large surpluses rather than lower its rates.

Jost offers an array of governance prescriptions that could lead to a successful national cooperative, but concludes that it "will only work with concerted and probably long-lasting support from the federal government." Conrad's preference for co-ops reminds me of this quote from Robert Kuttner on the paradoxical effect of half-baked health care reform: the more we try to avoid public provision of one insurance option, the more heavily regulated everything else has to be:

Ironically, by maintaining a largely private health insurance system aimed at limiting the reach of government regulation, we reap ever more complex regulation to compensate for the inadequacies of that very system. . . . In a universal system . . . there is no regulatory need to resolve issues of continuity and eligibility, let alone interminable certifications, appeals, and adjudications. . . .There are no questions of rate-banding, cross-subsidies, guaranteed issues, or permissible exclusions for various categories of applicants and conditions. . . .

If we want to guarantee universal, affordable access to health care, we need to actually provide insurance coverage to those who can't buy into the private market---not hope that some Rube Goldberg contraption of legal carrots and sticks can accomplish what it's failed to generate for decades.

As Hacker concludes, "a national cooperative would . . . fall so dramatically short of a public plan that it would only be attractive in addition to a national public plan, not as a substitute for it." Both antitrust and regulatory approaches have repeatedly failed to bring real market discipline to the health industry. Perhaps that's why 83% of Americans support a public plan option---not the ersatz reform Conrad and others in the Senate are cooking up.

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