Cooperatives' Record Is Up For Debate: Some Herald Them as Cure for Health Care; Others Question Their Power, Costs

Sen. Kent Conrad (D-N.D.) discusses the health-care bill on Capitol Hill earlier this month. Conrad says co-ops could provide insurers with needed competition.
Sen. Kent Conrad (D-N.D.) discusses the health-care bill on Capitol Hill earlier this month. Conrad says co-ops could provide insurers with needed competition. (By Melina Mara -- The Washington Post)
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By Steven Mufson
Washington Post Staff Writer
Thursday, August 27, 2009

Sen. Kent Conrad (D-N.D.), a pivotal lawmaker in the health-care debate, wants to deliver coverage to the uninsured by starting up new cooperatives modeled on rural electric cooperatives that were founded during the Great Depression.

But rural electric cooperatives have a mixed track record, experts say. They brought electricity to millions of rural Americans who lacked it in the 1930s and today serve about 14 percent of Americans. But after 75 years, the rural electric cooperatives still rely heavily on federal credit subsidies, have weak balance sheets and, some studies suggest, operate less efficiently than privately-owned utilities.

Over the past three years, some rural electric cooperatives have also come under criticism for excessive payments to executives and for pushing forward with new coal-fired power plants at a time when many people concerned with climate change want to slow down or halt such plants. Yet they remain politically powerful through the National Rural Electric Cooperative Association.

Rep. Jim Cooper (D-Tenn.), a critic of rural electric cooperatives, agrees with Conrad that health-care cooperatives could help provide coverage for the roughly 47 million uninsured Americans. "I want everybody covered and I want it to be affordable," Cooper said. "Co-ops could do that. They are a time-honored mechanism for almost all of rural America. . . . They're kind of an interesting third way, halfway between the public and private sector."

But he warns that the new cooperatives would require close regulation to avoid many of the problems he says afflict rural electric co-ops. "You still have to watch co-ops like a hawk," he said. He said that rural electric cooperatives "became too big for their britches" and "indistinguishable from for-profit firms except that they love government subsidies." In an article in the Harvard Journal on Regulation last year, Cooper argued that rural electric co-ops "turned away from their historic role" and had taken on "deeply troubling anti-consumer behaviors."

Serving Rural Needs

Rural electric cooperatives -- nonprofit organizations owned by their customers -- date back to 1935, when President Franklin D. Roosevelt created the Rural Electrification Administration to bring power to poor and remote farm areas. Rural poverty at the time was captured in the 1939 book of photos by Walker Evans and text by James Agee titled "Let Us Now Praise Famous Men," which Agee opens by describing writing by the light of a coal-oil lamp.

Today, electric lines reach into virtually every household in America, and many of the once-rural areas served by cooperatives have become part of sprawling urban areas, such as Dallas-Fort Worth or Northern Virginia.

Yet they still rely on cheap, subsidized financing from the Rural Utilities Service, part of the Agriculture Department, which provides direct loans and loan guarantees. Co-ops also get financing from the National Rural Utilities Cooperative Finance Corp., a cooperative bank that in turn relies on billions of dollars of low-cost financing from the federal government and the Federal Agricultural Mortgage Corp., a government-sponsored enterprise commonly known as Farmer Mac.

On June 11, Farmer Mac chief executive Michael A. Gerber said in congressional testimony that Farmer Mac had lent the CFC $1.8 billion and that it planned to boost that figure by another $1 billion. He said Farmer Mac planned to pool the loans, turn them into securities, provide guarantees of timely payment and sell them to investors.

"A co-op by definition has several major advantages over private tax-paying corporations," said Ken Glozer, a former Office of Management and Budget official and president of a consulting firm called OMB Professionals. "They don't pay taxes, they borrow all their money from the U.S. government because they because can't raise capital, and they are political as hell because they depend on the government. Over time they will seek and get untold favors that a private company won't be able to get."

Glozer added that cooperatives are "quasi-federal agencies."

Debating the Model

Conrad argues that co-ops can be effective, citing the success of the model at Land O'Lakes, Ace Hardware and Group Health, a health-care co-op with 600,000 members in Washington state, as well as the rural electric co-ops. In a recent opinion piece published in USA Today, he said that co-ops would be "a public-interest alternative, but consumer-controlled and not government-run."

But others have reached different conclusions. In his article on rural co-ops last year, Cooper said: "Co-ops in some regions of the country have been doing a particularly poor job of protecting member interests."

Robert D. Reischauer, president of the Urban Institute and former director of the Congressional Budget Office, said rural electric cooperatives aren't a good model for health insurance regardless of their track record.

"Those were providing a service where no private enterprise wanted to operate because the population density was too low and the capital costs were too high," he said. "And what we're talking about is trying to create a viable insurer that would operate in metropolitan areas and rural areas and suburban areas."

Reischauer added that a firm capable of providing effective health insurance needs to be big, because that would bring economies of scale in administration and market power necessary to bargain with health-care providers. Rural electric cooperatives, by contrast, tend to be local. There are around 800 rural electric cooperatives nationwide, including 16 in Conrad's home state of North Dakota.

"What you want is something that is big and nimble at the same time," Reischauer said.


© 2009 The Washington Post Company

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