Co-ops, Exchanges, Gateways, and The Need For A Public Plan

In 2000 the General Accounting Office did a study [1] of health insurance purchasing cooperatives. This study should shed important light on the issue of insurance co-ops pushed by Senator Conrad and the problems of health insurance exchanges without a public option. The study found that:

Despite efforts to negotiate lower premiums, cooperatives have only been able to offer premiums that are comparable to those in the general small group market. The cooperatives we reviewed typically did not obtain overall premium reductions because (1) their market share provided insufficient leverage, (2) they could not produce administrative savings for insurers.

These purchasing co-ops may or may not be part of the co-op proposal promoted by Senator Conrad. (Note: Conrad has repeatedly refused to provide any concrete details for his co-ops idea.) The study makes it clear that collective purchasing co-ops will be useless at reducing premiums or controlling the spiraling cost.

The five purchasing co-ops that the GAO investigated work in a manner very similar to the state based health insurance exchanges that are likely to be a part of health care reform. Like the state based exchanges, they pool together health insurance purchases for small employers.

The California and the Florida co-ops at one time were both larger than many of the state based exchanges are projected to be. The CBO calculates that roughly 11% of the Americans will get health insurance from an exchange. The California co-op once had more members than that 11% that state exchanges are expected to enroll. While state based exchanges should give individuals and small businesses greater choice, they are unlikely to do anything to reduce premiums.

Another model of how new health insurance exchanges are likely to work is the Federal Employee Health Benefits Program. The FEHB is a health insurance exchange for federal employees. It does a great job of offering many choices but a terrible job at controlling cost. From 1985-2002 [2]the premiums in the FEHB program grew only 0.1% slower than the rest of the private insurance market. The FEHB does not include a public option.

Finally, there is the example of Massachusetts. They implemented reform that would be similar to what Baucus is proposing. It also created a new health care exchange for small businesses (called the Commonwealth Connector) which did not include a public option. Massachusetts' reform did a good job at reducing the number of uninsured, but failed to control the spiraling cost [3] of health insurance. Now Massachusetts is looking at some massive structural reforms to control cost.

There are only two “successful” health insurance companies which are co-ops, Group Health Cooperative in Washington and HealthPartner, Inc. in Minnesota. Conrad wants to replicate these instead of a public option. Even the National Cooperative Business Association admits [4] that competition drove most of the health insurance co-ops out of business or forced them to abandon the co-op structure. While Group Health Cooperative provides a good quality of care, its premiums are still spiraling out of control [5].

Whether it is the Federal Employee Exchange, Commonwealth Connector, gateways, or state based purchasing co-ops; efforts to pool individuals and small businesses in a single health insurance marketplace does not help control cost. State based exchanges should help provide individuals and small business employees with greater choice. But without a public plan or massive structural changes, they will do basically nothing to arrest the devastating increase in cost of health insurance.

Crossposted on The Walker Report [6]