The Health Law's Co-op Program: A Political Device Or The Affordable Alternative Consumers Need?

Jan 25, 2011

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On Jan. 13,  the newly formed advisory board to the Consumer Operated and Oriented Plan Program met for the first time to consider how to make co-ops a viable coverage option for individuals and small businesses. They've got a tough job ahead of them, and there are considerable obstacles -- some posed by the legislation itself -- to turning this into a successful program. But there are reasons for tempered optimism.

Don't remember the co-ops? They were a late addition to the Senate health care bill, developed by Sen. Kent Conrad, D-N.D., during the reform debate, as an alternative to the public plan option supported by progressives but vehemently opposed by conservatives and most health industry stakeholders. Senate leaders recognized that including the public plan option in the final health reform bill put the fragile pro-reform coalition at risk, and tasked Conrad with devising an alternative.

As  Conrad said at the time: "The co-op structure came to mind because it seems to fulfill some of the desires of both sides. … [For] those who want a public option because they hope to have a competitive … model able to take on the private insurance companies, a co-op model has attraction.  And for those against a public option because they fear government control, the co-op structure has some appeal because it's not government control."

While the resulting proposal was a smart political device, put forward at a critical juncture to advance health care reform in the Senate, it remains to be seen whether it can be turned into something meaningful for consumers. If history is any guide, most of these plans will fail because they can't stay adequately capitalized or maintain sufficient membership growth. And if they prove to be successful, there's the risk of "Trojan Horses" -- plans that start out as member-driven non-profits but soon convert to business-as-usual commercial carriers.

Essentially the co-op provision requires the Department of Health and Human Services to pay up to $6 billion in grants and loans for the creation of state-licensed nonprofit health plans, beginning in 2013. The legislative outlines for the program are rather vague, with only a few real requirements designed to make them truly "consumer oriented,"such as:

-        They must be state-based nonprofits, and any profits generated must go to the benefit of members.

-        They must be governed by majority vote of members, and any governing documents must incorporate ethics and conflict-of-interest standards against insurance industry involvement.

-        HHS must, by regulation, ensure that the organization operates with a strong consumer focus.

-        Any entity that was an insurance company as of July 2009 is not eligible to participate.

In addition, the statute makes clear that there has to be a "level playing field" between co-ops and commercial carriers, meaning these new market entrants must abide by all the same rules and regulations that other plans do.

Unfortunately, the law forces these new plans to compete for market share with one hand tied behind their backs. Setting up a new health plan in any market is extremely difficult. In addition to the significant capitalization needs, plans have a chicken-and-egg problem. They need sufficient enrollees to entice providers to participate and make price concessions. But most people and businesses don't want to sign up for a plan unless it's got an adequate provider network. It's one reason why so many states are dominated by one or two big carriers, with little real competition.

Yet instead of giving co-ops every possible tool to succeed, the law does a number of things to hold them back, such as:

-        Prohibiting the plans from using any federal funds for marketing.

-        Requiring them  to pay back federal loans within five years and the grants within 15 years, which, for many plans, may not be sufficient time to generate the necessary revenue.

-        Limiting their business to the individual and small group markets, making it more difficult for them to generate critical mass through large employer groups.

-        Instructing the HHS secretary to ensure that the $6 billion for grants and loans is divided up so that at least one co-op will be located in each state. While this makes sense politically, it doesn't allow HHS to be strategic in its allocation of grants, ensuring that only the most promising plans have the capitalization they need to effectively compete.

Should we just write these co-ops off? Call them a political device that was perhaps useful at the time, but will, in the end, be a $6 billion boondoggle? Call me a Pollyanna but I'm not quite yet willing to do that.

First, an advisory board, comprised of experienced experts who know what it takes to get an insurance company off the ground and sustain it over time, has been assembled to guide HHS in writing regulations and setting parameters for the program. And, as they work on this task, there are successful models, such as Group Health of Puget Sound and Colorado Choice Health Plans, that they can look to for ideas. After all, it's possible that, with strong local support, competent leadership, and sufficient capitalization, theses examples can be replicated in at least some markets.

In addition, because they're starting from scratch, these new co-op plans may be able to be much more innovative with delivery systems and reimbursement strategies than their competitors. For example, they could be built as accountable care organizations or a network of medical homes.

At a minimum, it will take a serious and sustained effort to get co-ops off the ground and viable as an affordable alternative for consumers and small business owners. But, across the country, policymakers, business leaders and politicians of both parties are increasingly recognizing that many insurance markets are too highly concentrated. While there is wide divergence on solutions to this problem, co-ops could be an appealing middle-ground approach, leading to greater investment in their success.

Corlette, a research professor and director of health insurance studies at Georgetown University Health Policy Institute, testified Jan. 13 at the meeting of the HHS Advisory Board for Consumer Operated and Oriented Plan Program.