Cooperatives Being Pushed as an Alternative to a Government Plan

By David S. Hilzenrath and Alec MacGillis
Washington Post Staff Writers
Tuesday, August 18, 2009

As prospects fade for a public, or government-run, option as part of health-care reform, key senators are considering another model to create competition for private insurers: member-owned, nonprofit health cooperatives.

Sen. Kent Conrad (D-N.D.), the chief advocate for including cooperatives in reform legislation, has cited examples as disparate as the Land O'Lakes dairy concern, rural electricity cooperatives and Ace Hardware.

But so far, cooperatives have been defined in the health-care debate primarily in terms of what they are not: They would not be run by the government.

That may make the cooperatives more politically palatable to conservatives, as well as to some Democrats such as Conrad, who fear that the public option may be a bridge too far. But it also presents new challenges: Cooperatives would face potentially greater difficulty getting off the ground and obtaining discounted rates from doctors and hospitals, observers say.

"It's very difficult to start up a new insurance company and break into markets where insurers are very established," said Paul B. Ginsburg, president of the Center for Studying Health System Change. "I don't see how they're going to obtain a large enough market share . . . to make a difference."

Karen Davis, president of the Commonwealth Fund, a foundation focused on health care and social policy research, said co-ops may not enroll enough people to negotiate favorable rates with health-care providers.

Dennis G. Smith, a senior fellow at the Heritage Foundation, a conservative policy research group, said he cannot yet tell whether co-ops would amount to government-run health plans by another name.

There are at least two major health-care organizations that could serve as models for Congress: HealthPartners in Minnesota and Group Health Cooperative, based in Seattle. They employ physicians and own health-care facilities, giving them greater power to control the delivery of care.

A major question Congress would have to decide is whether the new cooperatives would be integrated medical systems, like HealthPartners and Group Health. Or, would they simply negotiate reimbursement contracts with health-care providers, as conventional insurers do?

According to Conrad's Web site, co-ops would contract with providers and act as insurers. That could make them more like mutual life insurance companies, which are owned by their policyholders and are therefore somewhat insulated from the pressures and temptations of Wall Street.

Like the proposed public option, state or regional co-ops would be among the choices offered through a new regulated marketplace, in which eligible individuals could more easily comparison-shop for insurance.

However, co-ops would lack perhaps the main advantage of the public option: reimbursement rates for doctors and hospitals set by federal law, like those paid by Medicare, the program for older Americans. Federally determined reimbursement rates were central to the cost-saving promise of a government-run health plan and a potentially powerful competitive advantage. They were also a lightning rod for intense opposition from health-care providers and private insurers, who denounced the public option as a threat to their financial survival.

Co-ops would lack the ability to piggyback onto existing government institutions, like the ones that help administer Medicare.

President Obama championed a government-run health plan as a way to generate competition for private insurers and keep them honest, but the administration over the weekend signaled that it is willing to accept reform legislation without a public option.

As nonprofit enterprises, cooperatives would not have to worry about generating returns for shareholders. They could use that freedom to reduce members' premiums or put more money into improving care. HealthPartners aims for a 2 percent profit margin, said Mary Brainerd, the group's chief executive.

Being owned by members could make them more accountable to consumers, Brainerd said. Although HealthPartners is not owned by members, policyholders elect its board, and candidates for board seats have run campaign ads on local cable television, Brainerd said.

"It's not a magic answer, but I think it has a lot of the incentives that you would want to see that are pro-consumer," she said.

How the co-ops would spring to life is an open question. As start-ups, they could have a hard time competing with insurers that already dominate local markets. It is possible that existing health care organizations could try to convert themselves into co-ops.

There is a danger that co-ops could someday try to turn themselves into something else. Many non-profit health-care institutions, including CareFirst in the Washington area, have tried to convert themselves into for-profit corporations listed on the stock markets. CareFirst's attempt foundered amid criticism that it would generate huge financial windfalls for the company's executives and convert years of tax advantages into private gain.

Most Blue Cross and Blue Shield plans have a history as consumer cooperatives in the sense that they were nonprofit and owned by their members, said Mark V. Pauly, professor of health-care management at the University of Pennsylvania's Wharton School.

"The history here is that they did bargain aggressively with hospitals because they often had (and still have) the largest market share of any private insurer. But there is little evidence that they held down spending growth, and a lot of evidence that they were captured by their professional management and not really controlled by consumers or by the public," Pauly said by e-mail.

Conrad envisions the co-ops receiving seed money from the government.

"The hard reality is, the reason I was asked to see if I could come up with [an alternative] is that the public option does not have enough support in the Senate to pass," Conrad said in a recent interview. "It's an alternative that would accomplish much of what's appealing [in the public option] and not have the fierce opposition of virtually every Republican and some Democrats."

It remains to be seen whether the co-op alternative would win any support for the legislation in Congress.

Sen. John D. Rockefeller IV (D-W.Va.), a leading proponent of the public option, isn't sold on Conrad's substitute.

"The co-op approach is very weak," he said in a recent interview.

Apparently, the proposed health co-ops would differ from another form of co-operative, the real estate version. Unlike, say, Manhattan's exclusive co-ops, whose boards decide who can move into the building, health co-ops would have to admit anyone willing to pay the premium, according to Conrad's Web site.

View all comments that have been posted about this article.

© 2009 The Washington Post Company