Uwe’s Nightmare: Why Co-ops Will Be Crushed By Private Insurers

Yesterday, the Washington Post reported that the Senate Finance Committee was considering replacing the public health insurance option with “a network of co-ops.” Proponents believe that a truly consumer-drive health plan that elects a board of directors and hires a CEO could reduce costs for its members and champion delivery system innovations that improve care quality and efficiency.

But experience tells a different story. In reality, co-ops have a hard time attracting enrollees. Small businesses or individuals enroll in co-ops because they “offer substantial choice among well-known health plans,” or allow for greater control over the kind of insurance available, or provide cheaper coverage. To attract a wide array of health plans and secure bargain rates, co-ops must enroll a large pool of healthy individuals to cover the costs of sicker applicants. To attract these applicants, a co-op has to “offer substantial choice among well-known health plans” and lower premiums. In other words, it’s the classic “chicken-or-egg” dilemma: without enough applicants, co-ops can’t offer affordable coverage and without affordable rates, co-ops can’t attract enrollees.

The co-ops that do survive, like the Group Health Cooperative in Washington State, lack the inherent advantages of a real public option, and operate like just another health insurer. It’s unlikely that state-based or regional co-op health plans would have the market clout or purchasing power to lower costs or improve the delivery of care. Without the advantage of size, the different state co-ops would not be able to negotiate significantly lower prices with providers (they would have to compete with private insurers) or change reimbursement practices. In sum, they would act like private insurers. (Conversely, a national public option that has access to Medicare’s provider base, can achieve greater efficiencies.)

At a recent Alliance for Health Care Reform event, health care economist Uwe Reinhardt facetiously recalled a “nightmare” in which member-owned and operated co-ops became for-profit companies. As he reminded his audience, “you are all too young, but I’m old enough to remember, there were such co-ops once, they were called Blue Cross. They were owned by the members and so on and so forth and most of them went for-profit.” Watch it:

Indeed, as Jonathan Cohn recalls in SICK: The Until Story of America’s Health Care Crisis And The People Who Pay The Price, the early Blue Cross co-op-like plans of the 1930s “pledged themselves to a public purpose: bringing health insurance to large numbers of people.” They based their premiums on “a community rate: every subscriber, regardless of age, sex, or medical condition, paid the same monthly amount…Many insurers also practiced some form of ‘guaranteed issue,’ giving coverage to anybody who agreed to pay their premiums.” This community model worked, as long as the insurer covered large groups of people, in which the healthy subsidized the costs of the sick.

By the 1950s, commercial insurers arrived on the scene. But unlike the Blues, “commercial insurers don’t have a mandate to serve the public good — or to fill hospital bends. Their goal was to make money. And the most obvious way to do that was to target groups of relatively healthy subscribers.” Rather than charging everyone the same premiums, private insurers “offered to insure these people at rates that more closely reflected their own health status, then adjusted rates year after year according to how that status changed. This method of pricing insurance, known as experience rating, allowed commercial insurers to undercut the prices the Blues were offering.”

Ultimately, as private insurers began to attract more and more healthy Americans and “enrollment in commercial insurance surged past enrollment in Blue Cross during the 1950s, the Blues finally began a slow retreat from their founding principles…By 1968, Odin Anderson, one of the country’s leading experts on health insurance, declared that “the community rate concept is, for all practical purposes, dead.”

As Cohn concludes, “except for the name and the logo, Blue Cross is a wholly different enterprise from what it was in the 1930s and the 1940s. In 1986, Congress took away the tax breaks for Blue Cross, following a finding by the IRS that the plans were no longer very different form their commercial counterparts. This prompted many of the plans to convert to for-profit status outright.”


REINHARDT: I must say, the idea of a public co-op, I can’t keep a straight face, when I hear it. And I’m a little jet lagged, but I had a dream when I woke up at three. I had this dream, a co-op was passed, great hoora, and these people were running these co-ops, and in the third year, they went to a big convention in Bermuda. And all the co-op guys were in Hushpupies and the other guys landed with their jets, and so on. And the co-op guys went before the public and said, ‘you know what, we can’t compete unless we have access to the capital market and we need to convert to for-profit. And why would I have such a weird dream? Well, you are all too young, but I’m old enough to remember, there were such co-ops once, they were called Blue Cross. They were owned by the members and so on and so forth and most of them went for-profit. So I think that’s what would happen with the co-ops.