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Remember the Co-Ops? Overlooked Plan Raises Questions

Progressives didn’t want them. Conservatives called it a Trojan horse proposal. Policy wonks scoffed that they’d never be workable.

But two years after Sen. Kent Conrad (D-N.D.) floated “health cooperatives” as a replacement for the public option — roiling the nation’s health reform debate in the process — CMS in July finally unveiled its $3.8 billion CO-OP program.

Given all the handwringing in 2009, what’s Capitol Hill’s reaction today? Nary a peep.

To be fair, the co-op announcement — like nearly everything in D.C. last month — was overshadowed by congressional deficit negotiations. Co-ops also don’t inspire the same political reaction as they once did. The furor over Conrad’s proposal receded as the reform debate progressed, and elements of health reform like the individual mandate and the Independent Payment Advisory Board draw critics’ scrutiny today.

Amid the muted reception, CMS has touted the CO-OP program as a necessary reform to boost competition and strengthen “the voices of consumers in the health care market.”

Yet in the actual marketplace, it’s hard to find many cheerleaders for co-ops. Instead, policy experts and industry insiders’ take generally ranges from cautious optimism to deep pessimism.

“If I was on Congress’ new ‘Super Committee’ looking at deficit reduction, [the CO-OP program] is the first $3.8 billion that I would take back,” health care consultant Bob Laszewski told California Healthline.

Rural Tradition May Have Sparked Model

While Conrad may have conceived co-ops as a political fix, the model enjoys a proud tradition in the U.S. marketplace, and not just in health care. Tim Jost, a law professor at Washington & Lee University, points out that he’s a member of three co-ops in rural Virginia — a credit union, a grocery store and electricity provider — and shops at a fourth.

The model is “big out in rural America,” Jost told California Healthline, and widespread in the Midwest, which may have inspired Conrad, as North Dakota’s senior senator. Further west, about 10 million Californians are members of the state’s own slew of co-operatives, from agriculture to medical marijuana.

Rural patients, with their slew of chronic health issues and limited access to care, could disproportionately benefit from co-ops. Back in March, the California Medical Association noted that co-ops “will be attractive” to many Golden State physicians and patients, partly because co-ops “may be the only entities truly interested in insuring and serving their local rural residents.”

But converting a political idea into an operational program often results in unexpected hurdles — and co-ops face their share of complications.

Funding Details Assume Some Failures

For starters, the CO-OP program is essentially written to support about one new co-op per state; CMS officials project that the $3.8 billion pool can fund 57 plans. For an initiative designed to encourage innovation, this limits the actual range of models and has puzzled some experts.

Meanwhile, CMS’ plan to disperse funds also acknowledges that more than one-third of the co-ops may fail in the next 15 years. The agency has set aside $600 million in loans for start-up costs and $3.2 billion to help the plans stay solvent, but estimates a 40% default rate for the planning loans and a 35% default rate for the solvency loans.

To ensure that only the most promising would-be plans get federal funding, Richard Popper, director of the Office of Insurance Programs at CMS, said that co-ops will qualify for start-up loans if CMS determines that they have a high probability of becoming financially viable.

Steve Larsen, who heads CMS’ Center for Consumer Information and Insurance Oversight, noted that initial loans are expected to be repaid in five years — a very quick turnaround, Laszewski points out, for start-up firms that are entering a competitive market.

Challenge of Entering a Mature Market …

Laszewski has been deeply critical of the reform law’s CO-OP provision since it was first introduced and the new program details only add to his skepticism. “The deck is stacked against anyone who tries to do this,” he warned. “They’re going to be competing against players with enormous capital, management advantages” and are required to serve the riskiest population — individual customers and small businesses — he added.

Despite the hurdles, CMS and co-op advocates say that there’s widespread interest in the model. Groups in at least fifteen states are moving forward with plans to apply for co-ops, according to the chair of the National Alliance of State Health Co-Ops, which could ultimately insure millions of Americans.

Laszewski — who heads Health Plan and Strategy Associates, a consulting firm — instead thinks that the CO-OP program will have one major beneficiary: the health care consulting industry.

Consultants will be happy to help altruistic groups seeking start-up support, he warned, but at the end of the day “they’re like the guy who drilled the oil well: whether or not they struck oil, they always made money.”

Another cautionary note: No one’s tried to launch co-ops on this scale in decades.

Jost noted that advocates of the CO-OP program tend to cite prominent cooperatives, like Group Health, but their successes doesn’t reveal much about prospects for the new co-ops.

“Forty years ago, a co-op didn’t have to build a provider network,” Jost explained. The dominant models were based on “indemnity and fee-for-service payments,” he added, making it tough to draw comparisons to today’s consolidated, highly managed market.

… but Opportunity To Vary Prices, Options

Still, every individual state’s market is different, and some aren’t that competitive. For example, residents of Maine can pick between just a handful of less-than-attractive health insurance plans, according to Jost. In that scenario, residents could welcome an alternative — any alternative.

The co-ops also must be not-for-profit, which could allow them to underprice the premium rates offered by commercial plans that need to make a profit, Jost added.

That’s exactly what a Maryland-based group called The Evergreen Project is hoping to do. “We actually think we can bring [premium prices] … under Aetna and Coventry,” one of the prospective co-op’s founders told Kaiser Health News.

A would-be Montana co-op also is recruiting prospective board members with “extensive experience” in the insurance industry.

Looking Ahead

For a plan that critics warned would lead to a takeover of health care, co-ops may actually need to be nurtured along. Other reform-inspired initiatives to help consumers have underwhelmed.

For example, the government’s new pre-existing condition plans have been non-starters despite high hopes. As of May 31, less than 25,000 U.S. residents had enrolled in PCIPs, well below initial projections that the plans would attract 375,000 people within their first year.

The CO-OP program is clearly different from the high-risk pool initiative, but it, too, may require lower expectations to succeed.

Most importantly, “insurance markets sorely need competition,” Jost concluded, and he and others are waiting to see if co-ops can inject the necessary spark.

Here’s what else is making news in health care reform.

Effect on Business

  • State health insurance exchanges created by the federal health reform law could reduce unemployment and spur the economy by removing financial obstacles for prospective entrepreneurs. Many economists cite the lack of universal coverage as one reason the U.S. ranks behind many other economically advanced countries in terms of small-business and entrepreneurial startups. For the typical successful entrepreneur with a spouse, kids and a pre-existing condition, the prospect of leaving a job to start a business without adequate health insurance can “be a huge deterrent,” according to Robert Litan of the Brookings Institution. However, Litan noted that changes under the reform law — such as the state-run exchanges, for example — should be a net positive for entrepreneurship (Lawrence, Washington Post, 7/29).

Inside the Industry

  • On Monday, the HHS announced that it will adopt an Institute of Medicine panel’s recommendation that health plans starting next year provide no-cost coverage of certain women’s preventive health services, including contraception. Under the federal health reform law, plans that start on or after Aug. 1, 2012, are required to cover preventive services without copayments, co-insurance or deductibles (Pecquet, “Healthwatch,” The Hill, 8/1). HHS also released an amendment that allows religious entities that offer their own health plans to choose whether to cover contraceptive services (Rice, CNN, 8/1). HHS noted that the religious exemption applies to not-for-profit groups that have the inculcation of religious values as their purpose, primarily employ individuals who hold certain religious beliefs and primarily serve a population with those religious tenets (“Healthwatch,” The Hill, 8/1).

In the States

  • Last week, Ohio Secretary of State Jon Husted certified 426,998 signatures in support of a constitutional amendment opposing the individual mandate in the federal health reform law, allowing the measure to be placed on the Nov. 8 ballot (Geier, Columbus Dispatch, 7/27). Although the measure would alter Ohio’s Constitution to prohibit any federal, state or local law from forcing residents to participate in a health care system, it will apply only to laws that were implemented after health reform law’s enactment in March 2010, allowing residents to retain access to programs such as Medicare (AP/Washington Post, 7/26).
  • Florida Gov. Rick Scott (R) and the state Legislature’s Republican majority this year have rejected millions of dollars in grants available through the federal health reform law and refused to pursue grants for millions more. So far, the state has rejected overhaul funding for a number of initiatives, such as those that would shift patients in long-term care programs back into their homes and strengthen its regulations for health insurance premiums. The Legislature also did not apply for a share of the $27 million allocated under the law for health insurance consumer counseling initiatives. Scott and other state GOP leaders insist that the law creates programs or imposes new requirements that are unnecessary; too costly for taxpayers or the state to afford; or would clash with or duplicate existing state programs (Sack, New York Times, 7/31).

On the Hill

  • Last week, Sen. John Kerry (D-Mass.) and Rep. Pete Stark (D-Calif.) introduced legislation (S 1416, HR 2645) in the Senate and House that would require Medicare supplemental insurance plans, or Medigap policies, to meet the same medical-loss ratio standards as other health plans under the federal health reform law. The MLR rule requires private insurers to spend at least 80% of their premium dollars in the individual market, or 85% in the group market, on direct medical costs. If passed, the companion bills would require the plans to meet the standards beginning in 2014 (Zigmond, Modern Healthcare, 7/26).
  • Last week, two witnesses at a House Small Business subcommittee hearing delivered contrasting testimony on the effects of the federal health reform law on small businesses. Under the overhaul, employers with 50 or more full-time employees must offer affordable coverage or pay a $2,000 penalty per individual. Brian Vaughn, an owner of four Burger King franchises in Georgia who currently employs 59 full-time and 123 part-time employees, said he does not think he will be able to offer full-time jobs for much longer because it would be too costly to cover their full health care expenses. Meanwhile, Washington and Lee University Law Professor Timothy Jost said that although estimates vary on how health reform will affect employer-sponsored insurance, most studies have found that coverage rates largely will remain stable (Reichard, CQ HealthBeat, 7/28).

Rolling Out Reform

  • A notice published last week in the Federal Register indicated that CMS plans to create a Health Insurance Assistance Database to improve its ability to help consumers inquiring about provisions of the federal health reform law. According to the notice, CMS’ Center for Consumer Information and Insurance Oversight receives hundreds of inquiries from consumers about the reform law, creating an urgent need for a system that could collect, store and track consumer inquiry data to ensure that consumers’ coverage, health care and information needs are being met. The new database would include analyses of consumer inquiries and consumer reports of insurers’ activities. Such data could help CMS identify insurers’ patterns of practice and uncover possible noncompliance with the reform law, the notice said (Goedert, Health Data Management, 7/28).
  • Last week, health officials from various states at a symposium in Washington, D.C., acknowledged that there is more work to be done to develop the health insurance exchanges under the federal health reform law. Many states already have taken various steps — such as proposing or enacting legislation, and establishing governing board and advisory groups — to ensure that their exchanges are operational by the 2014 deadline (Mosquera, Government Health IT, 7/27). The government has issued a proposed regulation for the exchanges, but officials say they expect states to move forward with their own efforts as additional guidelines are released (Reuters, 7/27).

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