Let A Thousand Co-ops Bloom...With A Little Careful Congressional Cultivation

Might "co-operatives" be a tool for increasing access to more affordable health coverage for small businesses and individuals?

That's a relatively new component of the health care reform debate, particularly as ideas regarding a "public option" health plan have begun to lose their luster due to fears of enhanced government involvement and the threat of significant costs.

Keeping in mind once again that very few details regarding any element of health insurance reform legislation are at all clear, here's what we know about the deliberations regarding co-operatives.

Essentially, proponents see co-ops as non-profit, member-owned organizations which would self-insure for the health coverage provided to members, and which would have the ability to negotiate reimbursement rates directly with providers. The government would somehow assist start-up co-ops with some initial capital to enable them to establish necessary reserves. After that, they'd supposedly be required to satnd on their own through their premium income.

Opponents say that co-ops would be highly unlikely to make much of a difference in reducing or controlling health care costs for many years. It would take a long time for co-ops to develop the market power to be able to negotiate with providers from a position of strength, unless they're able to offer reimbursement rates roughly equivalent to Medicare (and idea hospitals and doctors hate). And unless they're exempted from many of the regulations which make small group and individual health insurance inefficient and costly to administer (an idea insurers hate), they'd have to operate just as inefficiently as insurance companies do, so they'd probably be unable to compete based on administrative efficiency.

There are also concerns that there aren't many good examples of successful health care co-ops to serve as role models of good performance over the long haul.

At the same time, organizations ranging from mutual insurance companies to chambers of commerce to health systems are jockeying for definitions of what a co-op is that will suit their current operations, and enable them to conduct business as usual.

What should a co-op look like? Let's take a look back to s simpler time...

Health insurance companies didn't exist in any form till the 1930's, when the first Blue Cross Blue Shield plans were established. Before then, most people's "health coverage" was either paid for directly, or was covered through "benevolent organizations." These groups were organized around affinity groups: whether by church groups, ethnic organizations, or community service organizations, they were membership organizations consisting of people with some degree of common interest. Every member would pay a small amount of money in monthly assessments, and the societies would help to cover the health expenses of any members, should they require help.

Blue Cross Blue Shield plans had their roots in such organizations. They consolidated these efforts by providing administrative services to individuals and employers who wished to establish a "pool" of funds to help pay the hospital and physician bills of their members, and often operated as not-for-profit "mutuals," owned by their members, who voted to elect the plans' leadership and make other important decisions.

For quite awhile, my COSE alma mater was one of the largest and most successful health insurance purchasing co-operatives in the country. At one time it covered over 200,000 small business owners, employees, and family members throughout Northern Ohio. The COSE health plan was run by an independent Board, made up of members, which negotiated directly with insurers to develop plans which would operate in the members' best interests. COSE accepted no revenue from its insurers; costs were paid through member dues, and through fees paid by members who participated in the health plans. Because the group was so large, the fees charged to members were extremely modest: $12 per company and $1 per employee per month.

Our results over many years were impressive. For 15 years straight, participation in COSE grew by a net of 1000 member companies (6000 employees) per year. Members participating in the COSE health plan saved an average of 30% on their health insurance premiums. And for more than 10 consecutive years, members rates of increase in health premiums were less than 10% per year; in some years, members' rates didn't increase at all.

And this was in the small group and individual market. The average COSE member company had 6 employees, and many groups had 2 employees or fewer.

Unfortunately, COSE's recent history hasn't been so rosy. Bad management and governance is one reason. Another is that the organization decided a number of years ago to use the health plan as a source of revenue, which removed any incentive to keep prices low for members.

But another reason for the COSE health plan's failure to grow, or contain costs, is that, in the last round of federal health insurance reform legislation, insurers were successful in developing regulations which severely undercut the ability of membership organizations to negotiate volume discounts on rates or administrative costs with insurers. In addition, many states codified rules which established "group coverage" as applying only to employer groups, not to large purchasing groups. These same rules specifically disqualified sole proprietorships from eligibility for group coverage.

Properly designed, co-ops can be a powerful tool in increasing the availability of affordable health coverage, AND in increasing competition among health insurers. But it'd have to be done right. Here's what Congress would need to do:

1)Specifically state that the formation of group purchasing arrangements is a matter of public interest;

2)Permit the formation of purchasing groups by non-profit affinity groups a) formed for purposes other than that of purchasing health coverage,and b) consisting of at least 5,000 insured lives (though 10,000 would be better, for the purposes of actuarial credibility);

3) Require that such groups' health plans be governed by a separate fiduciary Board of Trustees, not as a revenue source for the sponsoring organization;

4) Specifically enable co-ops to negotiate volume discounts on rates and administrative costs with insurers and providers on behalf of their members;

5) Specifically prohibit the formation of co-ops by insurers or by provider organizations, and;

6) Support the creation of a limited number of pilot projects at the federal, state and local levels to demonstrate how such groups might use the combination of large numbers, administrative efficiencies, and negotiating power to control the rise of health insurance premiums.

Developing co-ops could be a relatively simple matter, if Congress would remove the obstacles to the formation of such groups which it itself has imposed, with the encouragement of the insurance industry.

This would keep health insurance reform in the private sector, but give purchaser the ability to consolidate purchasing power as a response to the consolidation of power which has taken place among insurers and providers over the past decade.

Insurer Consolidation Pressures Providers And Consumers, Limits Competition

An interesting study by the American Medical Association looks at the effects of consolidation in the health insurance industry. It's principal focus is on consolidation's effects on physicians, but the study has interesting implications for health insurance purchasers, as well. You can download the study by clicking here...http://www.ama-assn.org/ama1/pub/upload/mm/368/compstudy_52006.pdf

The past decade has seen a huge wave of consolidation within the health insurance industry, which has given rise to a limited number of giant companies with considerable market presence. In 2000, the two largest insurers in the country, Aetna and UnitedHealthcare, had a total membership of 32 million insured lives. By 2007, following a wave of mergers, the two largest health insurers, Wellpoint and UnitedHealthcare, had 34 million and 32 million members each, respectively. Together, the two insurers "own" 36% of the national health insurance market.

Down to the local level, the effects of consolidation are even more dramatic. In 96% (295) of the MSA's surveyed, one insurer owns at least 30% of the combined HMO and PPO market. In 64% (200) MSA's, one insurer owns at least 50% market share. in 24% (74) MSA's one insurer has at least 70% market share. And in 5% (15) of MSA's one insurer has at least 90% market share.

Because the study was done by the AMA, the obvious focus of the study was to raise concerns about the effect that consolidation might have on the huge health plans' ability to contract with providers. The big guys have a lot of leverage in negotiating reimbursement rates, and in highly-concentrated markets, and in potentially failing to reach an agreement with these mega-insurers...on their terms...physicians fear that insurers can exercise their "monopsony power"...their purchasing power...to destroy a physician's practice.

This has led AMA to wonder why, of over 400 insurance company mergers since 1995, the U.S. Department of Justice has questioned only two.

That's certainly a legitimate concern, but it also raises another question: with giant insurers with huge market share exercising such power over provider contracting, why have consumers not benefited?

The presence of one or two very large insurers in a local community has had the effect of reducing competition among insurers for market share; in effect, a very small number of insurers in every town are passing business back and forth among themselves. Their purchasing power has in many cases given these insurers discounts on provider services which smaller competitors can't match.

The rise of these mega-plans has limited consumers' choices by limiting competition. Consolidation has enabled these plans to become very aggressive in negotiating with providers, but there's no evidence that this aggressiveness has created any benefits for purchasers. But there's plenty of evidence suggesting that the insurers, having squeezed hospitals and physicians, are enjoying significant profits for themselves and their shareholders.

If you look over the landscape...hospitals and health systems, physicians, pharmaceutical companies...the only segment of the health care system which has not undergone consolidation, or benefited from it, are the people who buy health coverage. In fact, federal and state legislation in the mid-90's actually reduced the ability of purchasers to consolidate into larger purchasing groups which might exercise a little counter-pressure on health plans to share the benefits of their purchasing power with their customers.

The inability of small businesses to form large group purchasing arrangements which could negotiate with insurers on behalf of their members appears to be one of the elements behind current legislative proposals to create large, non-profit "co-ops," which would have the charter to negotiate with insurers to push back against the rising cost of health insurance.

If it did nothing else, legislative action to reduce regulatory barriers to the formation of large health insurance purchasing co-operatives for small businesses and individuals would have great potential, over time, to re-introduce a measure of competition and administrative and marketing efficiency into the small group and individual health insurance markets. Without such measures, it's not likely that insurers will change their behavior.