Medical Device Daily Washington Editor

WASHINGTON — The current round of healthcare reform bills on Capitol Hill all call for healthcare insurance cooperatives, or co-ops, as a point of access for those who do not get coverage at work. However, the cost containing power of co-ops was called into question during a Tuesday session hosted by the Hudson Institute (Washington), including at least one who generally is an advocate of the concept.

Session moderator Tevi Troy, PhD, of the Hudson Institute (Washington), formerly the deputy secretary at the Department of Health and Human Services under President George W. Bush, said of co-ops, "there's a lot of confusion about what they are." He remarked that some observers see them as "something out of a Maoist planning book" while others view them as being "like the Green Bay Packers" in reference to the football team's community ownership structure.

Robert Rosenberg, MD, of George Washington University (Washington), said his experience with a prepaid practice co-op led him to question such arrangements. He made the case that the question of whether co-ops are a viable alternative to a public option is "not the real question. The question is whether any structural changes" can be imposed on co-ops that will change the cost dynamic.

Rosenberg said that the co-op he led for a time, the Group Health Association (GHA; Washington), grew from 10,000 to 150,000 members over time and at one point employed 175 in-house physicians. However, GHA, despite having "a substantial nest egg ... finally collapsed and was sold to Humana."

"The reason for GHA's collapse are many and some are universal to co-ops," Rosenberg said. One of these is that "management was perhaps naïve" about enrollment dynamics, stating that the co-op had inadvertently put itself into a position of encouraging adverse selection due to its use of a high-option model, which is said to lead to adverse selection because it attracts those who are less healthy and hence more likely to use services. "The more it attracts high-risk people the more it costs," he pointed out.

Another issue for the co-op was its inner-city focus. This feature translated to an "inability to attract people from the suburbs" which might have helped compensate for the fact that inner city dwellers "are sicker than suburban populations," Rosenberg explained. He also noted that some groups within the subscriber base were nettlesome. "We could never keep everyone happy," he noted, "and professional unions are particularly difficult to bargain with."

As a small co-op, "we were in no position to bargain" with hospitals "for discounts," Rosenberg noted, a problem that piled onto the problem of limited reserves and limited access to capital markets. "It was difficult at best to get banks to understand the co-op model," he said of banks operating in and near the nation's capital.

Rosenberg explained that another problem was that because the co-op's doctors were salaried, they could not hire "super-specialists," who prefer fee-for-service payment. "Our primary care doctors were devoted to their patients," he said, but specialty care became expensive due to the use of outside physicians to treat patients who needed more than a primary care doctor could offer.

"The medical profession itself is so hooked on fee-for-service medicine that it would be very difficult to attract them" to co-ops even now, Rosenberg said of specialists. "The specialties are a business" and "are going to be very difficult to dislodge" from that business model. All this adds up to tough sledding for co-ops, he said, remarking that the big insurance companies are confident they can beat the co-ops because of the aforementioned factors.

Are co-ops the answer? "They're not an answer right now and won't be an answer for 10 years," Rosenberg concluded.

Edmund Haislmaier of the Heritage Foundation (Washington) said of healthcare reform legislation, "the process Congress has engaged in has degenerated to the point where they're trying to assemble a collection of bumper stickers that can win 60 votes in the Senate."

"While people typically think of a co-op as a collective endeavor," Haislmaier said, a more precise definition would distinguish co-ops from other collective models in that the former are "characterized by the members being simultaneously the owners and the customers."

Haislmaier mentioned dairy co-ops as an example, but as for health insurance "we really don't have this" due to a statutory conflict. The co-ops that do exist are generally organized under the tax code as a charitable organization, which has to "provide community benefit, and it may not be owned by somebody," including members, he said.

However, "if you're truly member owned, you're owned by the people" who enroll, "but since tax laws say you can't really own it," an inherent tension exists, Haislmaier observed, adding that there is no need for sweeping legal changes for the federal government to foster the formation of co-ops. Still, "they would have to be for-profit entities" in order to remove this stumbling block. A similar provision, which shows up in the IRS code as the 501(c)(14) entity, allows credit unions to operate for profit even as it provides benefits for members.

"If you had the right set of rules for the whole market, you might show a competitive advantage" for co-ops, Haislmaier said, but "it will have a disadvantage" in that "it will have less access to startup and expansion capital."

Joseph Antos, PhD, of the American Enterprise Institute (Washington), offered a few comments, including that "it's nice to have an issue that can bring the warring sides together. Liberals and conservatives both don't like co-ops," he said, with liberals seeing them as too weak and conservatives as a stealth approach to a single-payer system.

Advocates of co-ops "think they're going to get competition" and "better governance" by disposing of the profit motive, Antos observed skeptically. He also seconded a comment made by Rosenberg, saying that co-ops "want to pay doctors less ... except for primary care."

"Is the co-op a public plan in drag? It comes close," Antos asserted, noting that $6 billion in initial subsidies from the taxpayer is "a pretty big stake that will never have to be paid back." He also offered a skeptical view of budgetary scoring by the Congressional Budget Office. "One of the real secrets of health reform" is that future subsidies are not counted in that scoring.

Mark McCarty, 703-268-5690