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The CO-OP failure should be a lesson for a Medicare public option

September 8, 2020

Topics: Quote of the Day

By Phil Galewitz and Kaiser Health News
Fortune, September 6, 2020

New Mexico Health Connections’ decision to close at year’s end will leave just three of the 23 nonprofit health insurance co-ops that sprung from the Affordable Care Act.

Lauded as a way to boost competition among insurers and hold down prices on the Obamacare exchanges, the co-ops had more than 1 million people enrolled in 26 states at their peak in 2015. Today, they cover about 128,000 people, just 1% of the 11 million Obamacare enrollees who get coverage through the exchanges.

The nonprofit organizations were a last-minute addition to the 2010 health law to satisfy Democratic lawmakers who had failed to secure a public option health plan — one set up and run by the government — on the marketplaces. Congress provided $2 billion in startup loans. But nearly all the co-ops struggled to compete with established carriers, which already had more money and recognized brands.


CO-OP Health Plans under the Affordable Care Act

From the Comment by Don McCanne, M.D.
PNHP, Quote of the Day, July 2011

The proposed rule has now been released for the establishment of CO-OPs under the Affordable Care Act. The CO-OPs are private, nonprofit organizations that sell insurance, like HMOs and PPOs, under the same rules as the other private insurers.

These are new organizations, and, as such, require a new infusion of capital to meet the reserve requirements for future claims.

Private, for-profit insurers have the capability of establishing start-up costs and solvency reserves by selling shares of stock. Since the CO-OPs are nonprofit, they don’t have this resource to tap. Recognizing this, the Affordable Care Act included provisions for government loans for start-up costs and other loans for solvency (reserve funds for future claims). It is important to understand that these are not grants but are loans that must be repaid, with interest, within five years for start-up loans and fifteen years for solvency loans.

Think about that. The CO-OPs are required to compete with the private insurers under the same terms, while having the additional requirement of paying back these loans. Since their only revenue source is premiums for the insurance they are selling, these loan costs that their competitors don’t have will have to be recovered through higher premiums. Under these terms, how could they possibly compete with the private insurers?

There are many other issues. How long would it take to establish a critical threshold of enrolling enough members to create a viable entity? Since it is likely that the CO-OPs would be subject to adverse selection (enrolling a larger share of patients with greater health care needs), there would be further upward pressure on their premiums (death spiral) since current risk adjustment tools do not recover the full excess losses (as if health care is a “loss”).

It’s too bad. CO-OPs should have offered us the opportunity to establish altruistic health care organizations. Instead, the politicians bent over backwards not only to keep the government out of these programs, but also to protect the private insurers’ marketplace by being sure that the CO-OPs were not allowed a fair playing field by saddling them with insurmountable debt.

We needed a seat at the table.


There is very little difference between the co-ops and the “public option”

By Kip Sullivan, J.D.
PNHP, September 29, 2009

Advocates of a “public option” have been extremely critical of the health insurance cooperatives proposed by Sen. Kent Conrad last June and incorporated in the draft legislation released by Senate Finance Committee Chairman Max Baucus on September 16 (2009). “Option” advocates claim the co-ops either will not survive or will be so small they will be unable to force the insurance industry to lower its premiums. This is legitimate criticism.

But “option” advocates should level the same criticism against the “option.” The “option” is no more likely to survive and thrive than the co-op program. A comparison of the legislation that would create “option” programs with the provisions in the Baucus bill that would create co-ops indicates there is only one reason to be less pessimistic about the “option,” namely, the “option” legislation requires that someone (the Secretary of the Department of Health and Human Services) attempt to get the “option” program going. There is no similar requirement for the co-op program.

Rockefeller, Dean, Hacker and their colleagues in the “option” movement are doing a great job of leveling legitimate criticism against the co-op proposal. Their criticisms are aimed squarely at the question of how the co-ops will get started and whether they will ever grow large enough to take substantial market share away from the insurance industry. But they adamantly refuse to level the same criticism at the “option.” They should tell us why. I doubt they will do that. I doubt it because there is no rational explanation for this double standard. And no one likes to admit to behaving irrationally.



By Don McCanne, M.D.

The CO-OPs were only one of the multitude of defects in the Affordable care Act that we pointed out before it was enacted (and continuously since). As we stated nearly a decade ago, the CO-OPs were doomed from the beginning. Although some in the policy community had insisted that we could still make them work, the fact that only 128,000 individuals in the entire nation are insured by these programs is confirmation that they were and are an abject failure.

Since the two major presidential candidates both oppose single payer Medicare for All, the only substantial policy proposal, beyond tweaking, that remains under consideration is the public option – a version of Medicare that competes in the marketplace with private insurance plans. Much has been written about the inadequacies of such a proposal, but this is not new. Kip Sullivan warned us a decade ago that from a policy perspective, there was very little difference between the CO-OPs and the public option. Although there are many variables in design that might be considered as legislation is drafted, there is absolutely no question that the public option will not lead to a universal, single payer model of Medicare for All, as some in the policy community would hope.

In 2016, a resolution was introduced in the Senate calling for building on the Affordable Care Act by the addition of a public health insurance option. My comment at that time (2016):

This week an intensive campaign is being initiated in support of a “public option” – offering the choice of a public, nonprofit insurance plan which competes with private health plans. Our enthusiasm should be tempered.

Following are a couple of points to keep in mind, especially when you hear promises that the public option is a giant step towards single payer: 

  • A public option will be only one more player in our costly, fragmented system of funding health care. It alone will bring us none of the important features of a single payer system such as efficiency, equity, systemic cost savings, and universality. The profoundly wasteful administrative complexity will remain.
  • Previous efforts by Congress, heavily influenced by the insurance industry, to design a public option led to a highly flawed model that would prevent the “unfair” competitive advantage that a government program would otherwise have over the private insurance industry. This same insurance industry influence is precisely why the co-op models authorized by ACA are now failing. And there is absolutely no reason to believe that the insurance industry might change its tune now.
  • The public option has been characterized as a Medicare buy-in. But Medicare is an equitably funded social insurance program covering everyone who is eligible, whereas the public option would be just another individual plan in a market of private plans, likely with higher premiums because of adverse selection.
  • If a public option were to be enacted some believe that it would be only a matter of time before everyone would want in once it demonstrates its superiority, and then we would have a de facto single payer system. You need look only at the experience with the conspiracy between Congress and the private insurance industry in the establishment of the private Medicare Advantage plans that compete with traditional Medicare. Congress has given the private plans an unfair advantage so Medicare beneficiaries are moving from the public program to the private plans in ever greater numbers – the exact opposite of what the public option supporters visualize.
  • The Affordable Care Act drew support of much of the progressive community as it seemed to them to be the only politically feasible approach at the time. Thus the clamor for comprehensive reform died down. We are hearing again that single payer is not feasible, but the public option is. When the public option is enacted, it will be mislabeled as single payer, and then it will be exposed for the miserable failure that it will be because it was designed by the private insurance industry to fail (like the co-ops). The single payer concept will have been tarnished, and it could be decades before our nation would recover and be ready for reform that really works. In the meantime, millions would have gone broke, suffered, and died merely because we didn’t think single payer was feasible.

Many look to Jacob Hacker for inspiration on enacting and implementing a public option. But he has identified the greatest barrier to moving forward. In a recent Vox article, he wrote, “Private plans lobbied aggressively against the public option in 2009 on the grounds that it would amount to unfair competition. But insurers don’t want a level playing field; they want the field tilted in their favor.”

Now see if you can find a Congress that doesn’t tilt the field in favor of the private insurers. Not even on the horizon.


Do not let up in your advocacy for the single payer model of an improved Medicare for All.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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