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Co-Ops: The Three-Card Monte of Health Reform

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The Three-card Monte of Healthcare Reform

Feel the fool? Well, you should. Or at least you will if you let them get away with the latest health care reform bait and switch.

This weekend the Obama administration backed away from the public health insurance option. Instead they say they are open to "health insurance cooperatives," instead.

Let me be as clear as I can be here; accepting health insurance co-ops over a government-run health insurance system is like trading an modest annuity for a Nigerian bank scam. And it's not just me saying that.

Take a recent study completed by the Commonwealth Fund on the pros and cons of health insurance co-ops. Here's a link to the full pdf file, but here are the highlights of that paper:


The key advantage attributed to purchasing cooperatives is risk-pooling...by joining together, small employers (and individuals) can spread risk by pooling. Unfortunately, this advantage can seldom be realized in practice...(because) insurers to use risk-rating to set premiums for firms that buy coverage outside of the co-op lower-risk employers will typically find it more advantageous to buy coverage in the outside market, since they will be offered a price that reflects their lower risk profile. When that happens the average level of risk of the employers remaining in the purchasing cooperative rise, and the cost of coverage will rise in turn. This will set off a chain reaction of spiraling prices and employers bailing out of the co-op, destroying the pool's viability.

It's Been Tried Already
In practice, purchasing cooperatives have not always met expectations. Although there are certainly successful models, there have also been some notable failures. In real-life trials, a significant proportion of co-ops have failed. The failures have included co-ops that initially seemed to be quite successful:

-The demise of theFlorida Community Health Purchasing Alliance was perhaps the most notable failure because the co-op had once seemed quite successful. Originally a state-created consortium of 11 separate alliances, the cooperatives enrolled 92,000 people when enrollment peaked in 1998. But over the years, the Florida alliances had increasing difficulty attracting any but the smallest employers and gradually found themselves losing health plans. As a consequence, enrollment also fell, and the purchasing alliances ceased operations in 2000.

- The Texas Insurance Purchasing Alliance, begun in 1994, never reached the enrollment levels of the Florida effort, covering only about 1,000 firms and 13,000 people at its height. Difficulty in attracting employers led to the withdrawal of health plans, and the Alliance governing board ultimately decided that the operation was not viable and closed it down.

- The North Carolina Purchasing Alliances, which opened for enrollment in 1995, were patterned after the Florida model, but they struggled to attract employers throughout their existence, and the leaders finally admitted defeat in 2000.

- The Alliance in Colorado, established in 1995, the Alliance closed in the summer of 2002 after one of its three health plans withdrew from the state small-group market, a second capped enrollment, and the last decided to stop participating.

Co-ops will Compete on Quality
Proponents sometimes assumed that if a co-op offered a high-quality, high-value product, it would more or less sell itself. That assumption proved to be incorrect. Selling health insurance of any kind in the small-group market is extremely difficult without the cooperation and even enthusiastic support of insurance agents and brokers. Early efforts to save the cost of commissions by diminishing agents' roles or eliminating them altogether backfired. Insurance agents not only did not sell purchasing co-op plans, they also became strong and effective opponents of the concept

Co-ops Can Compete on Price
Early proponents of cooperatives also hoped that these new organizations could offer prices somewhat lower than were generally available in the market. This hope was not fulfilled. With very few exceptions, premiums for employers buying through co-ops have not been lower than thoseavailable to small employers elsewhere. This failure to realize the expected price advantage is attributable to several factors:

Co-ops have not been able to reduce administrative costs. They have not had enough market share to bargain for discounts. And in many instances state laws have prohibited insurers from offering co-ops premiums lower than those they charge to employers outside the coop, even if the insurers' costs are lower for co-ops.

Co-ops Can Cover the Uninsured
Many supporters hoped that purchasing coops would attract a large number of employers who had not previously offered coverage. The prospects for success in this area were dimmed by co-ops' inability to offer lower premiums. Even if co-ops had realized price reductions, however, most uninsured small employers would still not have been induced to offer coverage to their employees. The research evidence shows that even a 30 percent reduction in premiums""far more than co-ops could be expected to produce""would cause only 15 percent of currently uninsured small employers to offer coverage.

An analysis of the efforts to implement the purchasing cooperative model yields the following lessons:

1. The principal advantage that current co-ops offer to small employers is not lower premiums but the opportunity for individual employees to select different health plans from the variety the co-op
offers.

2. In the future, co-ops might be able to offer more attractive prices, but that would depend on reaching "critical mass" size. To offer attractive prices, a co-op has to be able to realize administrative savings and/or have bargaining leverage with health plans. Both these conditions require that co-ops control significant market share.

3. (But) Achieving critical mass size is difficult. To persuade a number of health plans to participate and continue participating, a co-op must have a significant market share. But without the participation of a variety of highly reputable plans, it will be difficult for co-ops to attract the number of employers that would yield a significant market share. Furthermore, co-ops do not sell themselves. Without the support of (private, for profit) health plans and insurance agents, small employers will not seek out co-op coverage. But health plans and agents have often been hostile or, at best, indifferent, to the co-op model.

4. Even if co-ops could offer lower premiums, (which so far they have not) they would not substantially reduce the number of uninsured because the premium reductions would not be big enough to induce large numbers of uninsured employers and uninsured workers to opt for coverage.

5. Co-ops cannot be the vehicle for pooling high-risk, low-risk, and medium-risk employers. If co-ops follow (existing) premium rating rules or rules for accepting applicants that are significantly more permissive than those that apply in the outside (for profit) market, they will suffer from adverse selection and ultimately fail.

6. Co-ops are likely to become an important source of health coverage only if some significant change makes them the favored or perhaps renders them the sole source of coverage for particular groups (AKA.. the public option) This could... if government offered co-ops as the source of coverage for individuals who receive certain kinds of subsidies. Without a change of this sort, purchasing cooperatives are unlikely to become a major feature on the health care landscape.
(Full Report Here)


So, pick a card, any card. But be warned, under none of the cards being hawked as a "comprise" will turn up a winner for you, or me, or our kids, or their kids. Without a strong, undiluted public health insurance option the same people who run the health insurance universe today will own it tomorrow, and all the tomorrows that follow.

Let your member of Congress know:


 

Stephen Pizzo has been published everywhere from The New York Times to Mother Jones magazine. His book, Inside Job: The Looting of America's Savings and Loans, was nominated for a (more...)
 

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