Jost on Cooperatives

By Frank Pasquale
In Health Reform
June 15, 2009
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Timothy S. Jost, Washington Lee University of Law

Timothy S. Jost, Washington Lee University of Law

In the last post, I introduced Timothy S. Jost and his case for a public insurance plan option. Jost has also recently addressed the new “middle ground” between a public option and the status quo: cooperatives. I’m honored to print his analysis below on our blog.

Are Cooperatives a Reasonable Alternative to a Public Plan?
by Timothy S. Jost

First, a word about history. We have tried cooperatives before. During the 1930s and 1940s, the heyday of the cooperative movement in the United States, the Farm Security Administration encouraged the development of health cooperatives. At one point, 600,000 mainly low-income rural Americans belonged to health cooperatives. The movement failed. The cooperatives were small and undercapitalized. Physicians opposed the cooperative movement and boycotted cooperatives. When the FSA removed support in 1947, the movement collapsed. Only the Group Health Cooperative of Puget Sound survived. Over time, moreover, even Group Health, though nominally a cooperative, has become indistinguishable from commercial insurers–it underwrites based on health status, pays high executive salaries, and accumulates large surpluses rather than lower its rates.

The Blue Cross/Blue Shield movement, which also began in the 1930s, shared some of the characteristics of cooperatives. Although the Blue Cross plans were initiated and long-dominated by the hospitals and the Blue Shield plans by physicians, they did have a goal of community service. The plans were established under special state legislation independent from commercial plans. They were non-profit and, in many states, exempt from premium taxes. They were exempt from reserve requirements in some states because they were service-benefit rather than indemnity plans and because the hospitals and physicians stood behind the plans. They were exempt from federal income tax until the 1980s. In turn, they initially offered community-rated plans and offered services to the community, such as health fairs. In some states their premiums were regulated and they were generally regarded as the insurer of last resort for the individual market.

Over time, however, the Blues lost their focus on community service and began to look more and more like their competitors. They abandoned community rating (which, realistically, they could not maintain when faced with competition from experience-rated commercial plans) and began to impose underwriting and cost-sharing requirements indistinguishable from the private plans. Although providers lost control of the Blue plans, the plans never took a leadership role in bargaining aggressively with providers, despite their market dominance in many states. Many of the largest Blue plans became for-profit, and those that remain non-profit are largely indistinguishable from commercial insurers. Although the national Blue Cross/Blue Shield association offers some coordination services to local plans, it has not resisted the move of Blue plans away from a community-service toward a for-profit orientation. Lacking a national focus on public service, state and regional plans have become indistinguishable from their commercial competitors.

Blue plans are not the only non-profit insurers that survive. Many church and fraternal organizations have their own non-profit plans. Although these plans often try to serve their communities, they usually have a small presence and little bargaining power in most communities in which they operate; tend to insure individuals and small groups, the most costly market; are often the victims of adverse selection; usually underwrite much like commercial plans; and tend to offer low value, high cost-sharing policies. They are not a model on which to build national reform. Mutual insurers are also in theory owned by their members. They also, however, are indistinguishable from for-profit insurers in most states.

What can we learn from this history? First, health care cooperatives are, in fact, an American response to health care reform. Cooperatives and non-profit insurers were there before for-profit commercial insurers entered the health insurance business, and we could try to revive the idea again.

But why would state or locally-run cooperatives be any more successful now than they were when we tried them before?

First, it is hard to imagine how they would get underway. Capitalization and critical size were problems before and would likely be problems again. Senator Conrad’s recent draft suggests that members of the coops would elect their boards, and that the coops would then obtain state licensure as mutual insurers, meeting state standards for solvency and reinsurance (with the help of federal seed money). But there is a chicken and egg problem here. Until the coops had members they could not have a board. Until they had a board, how would they meet licensure requirements? The state coops, moreover, would, under Conrad’s proposal be supervised by a national board, but the national board would be elected by the state coops. Again, the state coops would presumably not be able to get underway until the national board provided policy guidance, but the national board could not get underway until the state coops were formed to elect it. None of this makes sense.

Second, there is every reason to believe that small, state run coops would fail like their predecessors did in the 1930s and 1940s. Unless they reached the critical mass necessary to bargain effectively with providers, to accumulate reserves, and to compete with national private insurance plans, they would be doomed to failure. Even if they managed to succeed here and there, they would contribute nothing to a national effort to control costs, drive value, and make affordable care accessible.

Third, if state-run coops in fact, against all odds, became large, successful competitors for insurance business, what would keep them from following the course of the Blue and mutual plans before them? Without strong Congressional direction and a unifying national leadership, what could keep them focused on cost control, quality improvement, transparency, and service rather than simply becoming indistinguishable from their commercial competitors? How would they drive the delivery system change we need?

Fourth, how does setting up cooperatives on a state-by-state basis drive national health care reform? Each state currently can set up cooperatives if it wishes to, but none have done so. Why would states suddenly embrace this concept? And what assurance do we have that they would pursue anything like a common strategy? To approach this issue on a state-by-state basis is simply to surrender on national health care reform. A federal fallback plan to be implemented in the future is also unlikely to work. HIPAA contained a federal fallback plan for states that failed to implement reforms in the individual market, but it was poorly implemented and eventually abandoned. To revert to a state-by-state approach is to surrender on national health care reform.

What Would Make the Cooperative Concept Work?

In fact the cooperative idea in itself is promising. The proposed cooperatives look much like the social insurance funds of Germany and of other central European states. Those funds are governed by their members and do a comparatively good job of keeping health care costs in check. But they operate in a strong framework of national laws and under the guidance of national leadership.

The only viable strategy is Senator Conrad’s Option 2–-a federal charter to license and regulate a national non-profit coop, with coop governance prescribed by Congress. Leadership could initially be appointed as directed by Congress to represent consumer, labor, and small business interests, and thereafter be elected by the membership. The federal government could provide seed funding to assure initial solvency, but thereafter the coop could be self-supporting. It would be financed through premiums, and compete on a level playing field with private insurers (although some account would have to be taken of the fact that private insurers, no matter what underwriting rules were imposed, would still dump high-risk insureds into the coop). Some administrative functions could be delegated to the regional level, much as Medicare Advantage or drug plans are administered at the regional level. Regional councils could also be elected by members, who could have a role in selecting the national board and an influence on national policy.

A national cooperative could perhaps compete effectively with national private insurers. It could perhaps bargain effectively with providers, including global pharmaceutical firms and national hospital chains. It is possible that it could drive creative national quality initiatives and provide national data on health care use. It would not be government-run insurance, the great fear of the American right. But it could perhaps provide a national solution for a national problem. It will not happen on its own, however. It will only work with concerted and probably long-lasting support from the federal government.

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13 Responses to “Jost on Cooperatives”

  1. LostSoul says:

    The reason healthcare is expensive is because they cost a lot to begin with. Solution: 1. flood the market with abundent supply (read: free education & guaranteed employment for Doctors, Nurses) and 2. Legislate cap on malpractice compensation. Any other way to control cost will result in patients who most need care getting poorer care.

  2. […] prospects of nonprofit co-ops and often alludes to this country’s history with such companies. He cites the failure of so many healthcare co-ops that were founded in the 1930s and 1940s. Although these co-ops were initially sponsored by the FSA, these co-ops tended to be too small and […]

  3. Hyscience says:

    Are Healthcare Cooperatives a Reasonable Alternative to a Public Plan?…

    The short answer is no, they’ve been tried before and failed. But as you read Frank Pasquale’s June 15, 2009 article at Health Reform Watch, note, as The Patriot Room suggests, the reasons for the failings, see how Congress and Obama can mandate indu…

  4. […] was one big dead end. Private Insurance companies killed the co-ops using adverse selection. This history lesson is from Timothy Jost from Seton Hall University School of Law, Health Law & Policy Program. […]

  5. […] Private Insurance Companies cherry-picked the healthy and left the co-ops with the ill. Let’s be clear about what’s at stake here. Between the disaster of private insurance and the hope for a government-funded plan a third option seems problematic. Firstly, the notion that state-level customer health co-ops can negotiate better rates from the major insurance companies is dubious. Secondly, how will co-ops provide insurance for those who cannot pay, unless there is federal funding. Several experts have made this very clear. For example: […]

  6. […] facts. So let’s join Kenneth Jost, a law professor at Washington & Lee Law School, on a trip down co-op memory lane: We have tried cooperatives before. During the 1930s and 1940s, the heyday of the cooperative […]

  7. […] Those with a more skeptical constitution might note that the Gang of Six represent less than 3% of the US population — a rather slender thread of popular support for whatever solution these striving solons support. Yet they don’t even appear to be acting in their own constituents’ interests. It turns out that a majority of the gang of six–Senators Baucus, Snowe, Conrad, and Grassley–hail from states with extraordinarily concentrated health insurance markets. As Catherine Arnst of Businessweek reports, “such market concentration has become a potent argument for supporters of a public insurer,” which would especially benefit consumers in those states. Yet that’s exactly what the Gang of Six has immediately taken off the table in reform talks: Already, the group of six has tossed aside the idea of a government-run insurance plan that would compete with private insurers, which the president supports but Republicans said was a deal-breaker. Instead, they are proposing a network of private, nonprofit cooperatives. […]

  8. […] cooperative plan, he might be well served to read these posts by Professors Timothy S. Jost, “Jost on Cooperatives,” and Tim Greaney, “Market Entry by Health Care Cooperatives: Neither Quick nor Easy. […]

  9. […] Jost and Tim Greaney in previous posts here and here have raised important concerns about cooperatives.  Cooperatives, as they point out, are […]

  10. […] balloon out of control, follow the Baucus path toward subsidizing private insurers (along with a a fig-leaf “co-op”) to continue their present […]

  11. KDonnoley says:

    NO NO NO! Insurance cooperatives only protect the insurance companies and their profits. They will leave us with the same horrible healthcare system we have today where people don’t have access to the healthCARE they need, nor can they afford it.

  12. Jost on Cooperatives : HEALTH REFORM WATCH…

    Professor Timothy S. Jost on Health Insurance Cooperatives…

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