Are health co-ops the cure?

WASHINGTON —

As prospects fade for a public, or government-run option as part of health-care reform, key senators are considering another model to create competition for private insurers: member-owned, nonprofit health cooperatives.

Sen. Kent Conrad, D-N.D., the chief advocate for including cooperatives in reform legislation, has cited examples as disparate as the Land O'Lakes dairy concern, rural electricity cooperatives and Ace Hardware.

But so far, cooperatives have been defined in the health-care debate primarily in terms of what they are not: They would not be run by the government.

But there are significant challenges, experts say.

Cooperatives would face potentially greater difficulty getting off the ground and obtaining discounted rates from doctors and hospitals, observers say.

"It's very difficult to start up a new insurance company and break into markets where insurers are very established," said Paul Ginsburg, president of the Center for Studying Health System Change. "I don't see how they're going to obtain a large enough market share ... to make a difference."

At least two major health-care organizations could serve as models for Congress: HealthPartners in Minnesota and Group Health Cooperative, based in Seattle. They employ physicians and own health-care facilities, giving them greater power to control the delivery of care.

Started 62 years ago, Group Health provides coverage and care to more than 580,000 people in Washington and northern Idaho. It employs about 9,000 people.

Group Health spokeswoman Katie McCarthy said the co-op is not the largest in the country — HealthPartners in Minnesota is bigger — but Group Health has been cited as a model because its integrated system as both an insurer and provider has proved successful.

Group Health is able to focus on prevention and care because doctors are paid with a salary and aren't focused on getting fees for services, McCarthy said. That allows for longer doctor appointment times of 30 minutes and for services such as nurses calling patients suffering chronic conditions.

The cooperative's history has not always been smooth — financial problems in 2002 led to clinic closures and staff cutbacks, and there have been strikes as well. But unlike many co-ops, Group Health has survived over the long term.

Conrad's Web site says the government would offer startup money, perhaps $6 billion, in loans and grants to help doctors, hospitals, businesses and other groups form nonprofit cooperative networks to provide health care and coverage.

The co-ops could be formed at the national, state or local level. Proponents say that a health co-op might need 25,000 members to be financially viable — and at least 500,000 members to negotiate effectively with doctors, hospitals and other health-care providers.

Health-care cooperatives could inject competition in some insurance markets across the country, economists and health-policy experts said. But they would need time to buy sophisticated information technology and to negotiate contracts with doctors, hospitals and other health-care providers.

A major question Congress would have to decide is whether the new cooperatives would be integrated medical systems, like HealthPartners and Group Health. Or, would they simply negotiate reimbursement contracts with health-care providers, as conventional insurers do?

According to Conrad's Web site, co-ops would contract with providers and act as insurers. That could make them more like mutual life-insurance companies, which are owned by their policyholders and are therefore somewhat insulated from the pressures and temptations of Wall Street.

Like the proposed public option, state or regional co-ops would be among the choices offered through a new regulated marketplace, in which eligible individuals could more easily comparison-shop for insurance.

However, co-ops would lack perhaps the main advantage of the public option: reimbursement rates for doctors and hospitals set by federal law, like those paid by Medicare, the program for older Americans. Federally determined reimbursement rates were central to the cost-saving promise of a government-run health plan and a potentially powerful competitive advantage. They were also a lightning rod for intense opposition from health-care providers and private insurers, who denounced the public option as a threat to their financial survival.

Co-ops would lack the ability to piggyback onto existing government institutions, like the ones that help administer Medicare.

As nonprofit enterprises, cooperatives would not have to worry about generating returns for shareholders. They could use that freedom to reduce members' premiums or put more money into improving care. HealthPartners aims for a 2 percent profit margin, said Mary Brainerd, the group's chief executive.

Being owned by members could make them more accountable to consumers, Brainerd said. Although HealthPartners is not owned by members, policyholders elect its board and candidates for board seats have run campaign ads on local cable television, Brainerd said.

"It's not a magic answer, but I think it has a lot of the incentives that you would want to see that are pro-consumer," she said.

How the co-ops would spring to life is an open question. As startups, they could have a hard time competing with insurers that already dominate local markets. It is possible that existing health-care organizations could try to convert themselves into co-ops.

Conrad's own state demonstrates the uncertainties surrounding cooperatives. Blue Cross Blue Shield of North Dakota dominates the state's private insurance market, collecting nearly 90 percent of premiums. As a nonprofit owned by its members, the company would hope to qualify as a co-op under federal legislation, said Paul von Ebers, its incoming president and chief executive.

Any new insurer in North Dakota probably would try to take members from the local Blue Cross plan, but that would not be easy to do.

Rep. Earl Pomeroy, D-N.D., said the proposal for cooperatives was "a very worthy idea."

"The market here is uncompetitive," said Pomeroy, a former state insurance commissioner. "A cooperative could provide an alternative source of insurance and some interesting competition for premium dollars. A co-op could operate at lower costs, in part because it would not need to pay its executives so generously as the local Blue Cross Blue Shield plan."

Von Ebers said Blue Cross Blue Shield of North Dakota was examining its compensation policies. "If we wiped out the top 10 salaries in the company, it would make almost no impact on health-insurance premiums," saidvon Ebers, who will be paid $500,000 a year, with incentives that could raise that to $750,000.

Hopes for co-ops also may be tempered by the experience of Iowa, home to Sen. Chuck Grassley, the senior Republican on the Finance Committee, which is trying to hash out a bipartisan health-care proposal.

In the 1990s, Iowa adopted a law to encourage the development of health-care co-ops. One was created, and it died within two years. Although the law is still on the books, the state does not have a co-op now, said Iowa Insurance Commissioner Susan Voss.

Seattle Times staff reporter Nick Perry contributed to this report, which also includes material from The New York Times