Carl McDonald of Oppenheimer was kind enough to give us permission to reprint portions of his research note on the health insurance co-op proposal from Sen. Kent Conrad (D-ND). As you can see, McDonald is as skeptical as we are.
It feels like pretty much everyone is suffering from health reform fatigue these days, with new topics coming up seemingly every day, with most of them discarded before the next news cycle starts. One idea that has had some staying power, at least for a couple of days, is the concept of health insurance cooperatives suggested by Senator Kent Conrad (D-ND). The health cooperative idea was put forth as a way to reach a compromise between those seeking a government run health care plan and Republicans who are adamantly opposed to the idea.
As the co-ops are currently described, we think they would be a big positive for the managed care group, but it seems to us that they would be destined to fail from the moment of creation. But because that seems so obvious, if the health co-ops do make it into the final Senate Finance Committee bill, there would likely have to be some pretty significant adjustments to the concept to give them any chance of success.
As things currently stand, the cooperative idea seems to revolve around the idea of small employers coming together to form a non-profit cooperative health insurance plan. The co-ops would receive some amount of government assistance to get started, but would not receive any additional financing, and would be run by the members of the cooperative, rather than by the government. The co-ops would be subject to the same standards as private insurers, providing a coverage option for individuals and employers with fewer than 10 lives.
Here are a couple of things to think about. The small employers that form these co-ops are really going to run the health insurance operation. We’re not sure they’d have a real good understanding of how to predict medical cost trends and how to underwrite and price premiums appropriately.
Second, there is the issue of how the benefit plans would be established. One of the issues in the small group market today is that minimum benefits are established on a state by state basis, and states love to add mandates of things that have to be covered by insurers. So if the minimum benefits are being decided on a state level by each legislature, we’re going to end up with a long list of benefits that have to be covered, and a very expensive policy.
Third, how would the payment rate to providers be established? The initial language seems to be that the cooperatives would have to negotiate with providers, but providers would have very little reason to deal with them, since the co-ops have no volume or leverage.
Fourth, how would these cooperatives do anything to control costs? There would be no infrastructure to do case, medical, and disease management.
Fifth, how would the cooperatives be regulated? One of the issues that has come up in the past is that whenever these type of co-ops or purchasing pools are set up, people employed at companies with a younger, healthier workforce join together, but won’t let in older and sicker members. That way, they can keep their health care costs low, but it doesn’t do much to help older and sicker employees.
Putting all this together, the SG&A ratio on these co-ops plans would be astronomical. The membership base would be small, and the cost of building out all the required infrastructure like claims payment shops, call centers, and underwriting, pricing, and actuarial expertise would be prohibitively expensive. Not to mention the lack of experience the people running these co-ops would have with the health insurance business. It’s kind of a complicated operation, and not exactly like running your local milk cooperative.
There are a couple of modifications that could be made to give the co-ops a greater chance of viability. One would be requiring providers to negotiate with the co-ops, and requiring them to offer a price at least as favorable as what the provider gives its best customer. Another would be allowing the co-op to outsource all its back office functions to an existing insurer, or to simply use an existing insurer in something like an ASO arrangement. But it’s hard to see how Democrats would view a co-op in this structure as a good alternative to a government run plan.
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