And probably not a co-op.
Note: this post was originally written for Americans for Tax Reform. It has been posted here in advance and may be serialized later to the ATR blog.
The White House has started to hint that the public option may no longer be a required feature of health care reform. Yesterday, Obama’s Health and Human Services Secretary Kathleen Sebelius suggested that a “co-op” might be an acceptable alternative to a government run public plan. But what, exactly, is a co-op? And would a government run co-op be substantially different from the public option supported by most Democrats?
In general, a co-op is a company owned by its customers, or members. The members or owners of an insurance co-op would be its policy holders. Co-op advocates claim, somewhat speciously, that co-ops deliver superior care because policy holders will be co-owners of their policy (alongside the tens of thousands of other co-op members).
If co-ops are more efficient in delivering health care, why don’t they exist? They do, after a fashion. Michael Tanner of the Cato Foundation notes that successful insurers regarded as co-ops such as Seattle’s Group Health Cooperative, California’s PacAdvantage, and Minneapolis’s Health Partners, Inc. have existed for some time. Tanner concludes:
By all accounts the people insured through these co-ops are happy with their choice. But there is no evidence that they are significantly less expensive or more efficient than other insurers.
Why are Democrats excited about a co-op if its slightly different corporate organization yields an identical product? For one thing, they aren’t actually proposing a co-op. They’re offering a public plan and just calling it a co-op.
In particular, Senator Chuck Schumer, one of the key Finance Committee negotiators, has proposed a co-op that would be subsidized by a $10 billion start up fund and controlled by presidential appointees. Schumer has made it clear that he wants a government-run national alternative to the private market.
If a “co-op” is controlled by presidential appointees, it’s unclear in what sense it would actually be a co-op. It would be meaningless to claim that an insurance option was owned by its policy holders if it were in fact controlled by the government. Importantly, HHS Secretary Sebelius seems to have been endorsing Schumer’s version of the co-op, and not the more moderate version being discussed by others like Senator Kent Conrad. Co-ops are ok, she explained, as long as they are not private insurance companies (i.e. they are public government insurance companies):
That’s really the essential part, is you don’t turn over the whole new marketplace to private insurance companies and trust them to do the right thing. We need some choices, we need some competition.
A government controlled, subsidized, “co-op” national insurance option is not an alternative to the public plan – it is the public option. Despite rhetoric to the contrary, it would be a rigid, bureaucratic entity. The massive $10 billion subsidy would tilt the market in the co-op’s favor. Congress and the President would be invested in its success because of the politically appointed directorship. This makes further subsidies, perhaps glossed as temporary start-up funds, likely or inevitable.
As the Heritage Foundation has noted, the government sponsored enterprise (GSE) model has a long and dismal history. Smaller rural electricity cooperatives have remained subsidized for nearly 80 years. The larger GSEs Fannie Mae and Freddie Mac were able to drive many competitors from the housing finance market because they had the implicit backing of the Federal government. This guarantee became explicit when the government bailed out the failing firms after the housing market collapse – at a cost that may exceed $100 billion. Even if a government sponsored co-op were not explicitly subsidized past its start-up costs, it would still receive the same implicit subsidies that covered Fannie and Freddie.
Absent the direct government controls envisioned by Schumer and, apparently, Sebelius, explicit and implicit subsidies would still be a risk for any government-sponsored national “alternative” to the private market. The more moderate co-op proposals advanced by Senator Conrad and others on the Finance Committee suffer from these fatal flaws.
Heritage has laid out conditions under which co-ops could be created – if co-ops, and not a public government-run option were what Congress really wanted. As usual, increased health care choice requires less and not more government interference. Government cannot create options for consumers; it can only choose whether or not it wants to limit them. This reality may be upsetting to Schumer, Sebelius, et al. who undoubtedly want to be able to make something new for Americans. If the frustration grows unbearable, they can always look for a job in the private sector.