Exchanges, Co-Ops and Cop-Outs on Health Care Reform

As the leading proposal out of the gate for health care reform in this session of Congress, the House bill (H.R. 3200, America's Affordable Health Choices Act) during this August recess stage is considered the most robust of the various proposals so far coming out of congressional committees. This act has an overall goal to "reform the insurance marketplace to ensure that everyone can purchase quality, affordable health insurance coverage". It would do so by creating a not-for-profit public option to compete with private insurers in an attempt to "keep them honest." The public option would be offered to individuals and small businesses through a National Health Insurance Exchange whereby people can comparison-shop among available plans. Most operational details as to how these exchanges would actually work are still unclear.

As we saw in a prior post, the public option has generated intense opposition from the insurance industry, other stakeholders in the medical-industrial complex, Republicans, Blue Dog Democrats, and conservative astroturf groups. Even in the House, where the public option has stronger support, it has been whittled down to at best a small program available perhaps to only 10 million uninsured and small businesses, hardly a big threat to the insurance industry. In the powerful Senate Finance Committee, the public option has been pushed off the table in an attempt to gain bipartisan support through a compromise -- creation of co-ops, a concept advanced by Senator Kent Conrad (D-N.D.). Even more nebulous operationally than exchanges, the idea is that people and small businesses would be able to buy co-op memberships through state insurance exchanges. These co-ops would be not-for-profit and would include members in their governance, thereby removing the perception among opponents of a "government-run" program. On the House side, a recent amendment to H.R. 3200 by the Energy and Commerce (E & C) Committee also called for establishment of member-run co-ops to provide coverage through the Exchange.

So do these sound like reasonable approaches to our health care problems? After all, co-ops sound as American as apple pie, and we have some good examples in such long-standing integrated health plans as Group Health Cooperative of Puget Sound.

Unfortunately, the main problem with these approaches is that they won't work. They will add to the complexity and bureaucracy of our fragmented system, cost more instead of less, and fail to reform the insurance marketplace. In fact, private insurers will find health reform, even if enacted along the lines of H.R. 3200, to be another bonanza assuring new revenue streams for years to come.

If enacted, exchanges and co-ops offering a small public option will only raise hopes for reform that will never come, and are therefore a cop-out for those shaping this year's reform attempt. Here are just some of the many reasons that health insurance exchanges are bound to fail:

• H. R. 3200 restricts access to coverage through the Exchange to individuals who are not enrolled in qualified or grandfathered employer or individual coverage, Medicare, or Medicaid (with some exceptions).
• The public option will not be implemented until 2013, or perhaps only until private plans have been shown not to save money (the so-called "trigger").
• Because of its relatively small market share, the public option will not have enough market clout to counteract the practices of private insurers, and will become the only option for sicker people with higher-cost care.
• There are almost no restraints on insurance premiums in any of the proposals; an amendment by the House E & C Committee limits premium increases to no more than 150 percent of the annual percentage increase in medical inflation, and provides exemptions if this would "limit a health plan's financial viability."
• In order to avoid competition, the insurance industry has successfully lobbied to prevent premiums for a public option to be much lower than those of private plans.
• There are no good examples yet of successful exchanges. California has 15 years' experience with an exchange, and it has been a failure. A July 2009 Issue Brief by the California HealthCare Foundation details its problems and demise. It was initially intended to "provide an easy to navigate single point of entry where people could go to choose among several health plans, reduce the cost of coverage (using three primary mechanisms: reduce administrative costs by achieving economies of scale, command lower prices, and foster market competition), and enhance portability of coverage." None of those objectives were achieved.

Instead, the California Exchange achieved few administrative efficiencies, lacked pricing power, and was burdened by adverse selection of sicker enrollees. Private insurers gamed the system and loaded up the Exchange with people with more expensive illnesses. Despite large start-up funding, the experiment was unsustainable, and was shut down in 2006.

If we would only pay attention to history, we would know that co-ops will fare no better than exchanges. Many co-ops were started during the 1930s in the years of the Great Depression, only to fail in most instances despite initial government subsidies. Most of these co-ops never reached sufficient size to either become financially viable or to counteract market problems. Only a few have succeeded over the years. An excellent example is Group Health Cooperative in Washington State, which today has some 600,000 members in an effective integrated health care system. But despite its reliance on salaried physicians in a large well-managed group practice, it still has to compete against its competitors and has almost as much trouble containing costs. Group Health today has only a 9 percent market share in Washington State. It has increased its premiums by an average of 12.3 percent a year since 2000 (four times the rate of inflation) (Link to Sack, K, Health co-op offers model for overhaul. New York Times, July 7, 2009: A1), and is raising its premiums in 2009 by 13 percent (compared with 17 percent by Regence BlueShield). (Link to Song, K.M. Health-plan costs soar for individuals. Seattle Times, July 9, 2009)

Proponents of co-ops today grossly underestimate the difficulty in setting up co-ops, both in terms of start-up costs and lead times in the best of cases. It took Group Health 62 years to reach an enrollment of 500,000, which many health analysts figure is the minimal viable size. As a champion of co-ops, Senator Conrad acknowledges that start-up funding would be high for co-ops, requiring some $4 billion, while others estimate $10 billion. (Ibid, Sack above)

So where does all this leave us in this summer of discontent over health care? Despite the vigorous efforts of the Administration and many members of Congress, exchanges and co-ops won't work. They won't make health insurance more affordable. They are a political compromise position in an effort to gain bipartisan support for a bad health care bill. Beyond not fixing the insurance problem, they won't contain runaway costs of health care. But that is the subject of the next post.

Adapted from Do Not Resuscitate: Why The Health Insurance Industry Is Dying, and How We Must Replace It, and The Cancer Generation: Baby Boomers Facing a Perfect Storm, with permission from the publisher, Common Courage Press.

John Geyman, M.D. is the author of
The Cancer Generation and Do Not Resuscitate: Why the Health Insurance Industry is Dying, and How We Must Replace It, 2008. With permission of the publisher, Common Courage Press

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