NCPA - National Center for Policy Analysis


August 20, 2009

There are hints that the Obama administration and Democratic congressional leadership might be willing to negotiate on the inclusion of a government health insurer as part of health care reform.  The most likely alternative proposal, which has been discussed by the Senate Finance Committee, is to establish some system of consumer cooperatives or "co-ops."

While details are sketchy, the basic idea is to subsidize the creation of nonprofit health insurers on a state or regional basis.  These supposedly would be run independent of the government and compete with traditional private health-insurance plans.

These government-authorized co-ops would serve no useful purpose.  And they would risk the same adverse consequences as a public plan, says Scott Harrington, a professor of health care management and insurance and risk management at the Wharton School of the University of Pennsylvania, and an adjunct scholar at the American Enterprise Institute:

  • Democrats' health insurance proposals already require private insurers to accept all applicants with no pre-existing condition exclusions, at premium rates that do not reflect health status and vary only within a narrow range based on age; these changes guarantee people access to health insurance at rates that would not price the ill or near-elderly out of the market -- without creating government-authorized co-ops.
  • Democrats' proposals expand eligibility for Medicaid and provide significant premium subsidies to buyers with incomes up to 300 percent or even 400 percent of the poverty level; these provisions would make insurance substantially more affordable for people with low-to-moderate income -- without creating government-authorized co-ops.
  • Government-authorized co-ops also are not necessary to provide consumers with nonprofit alternatives; nonprofit mutual insurance companies, most notably many Blue Cross and Blue Shield plans, already offer health insurance in many states (they are already the dominant insurer in some states).

Absent taxpayer subsidies or special rules, co-ops would not have any inherent advantage over private health insurers in establishing provider networks, negotiating with providers, and monitoring health care utilization and fraud.  Proposed co-ops instead would require billions of dollars of "start-up" subsidies, says Harrington.

More important, the creation of government-authorized co-ops would entail significant risk of ongoing subsidies by taxpayers (if not by private health-insurance buyers), of substantial private insurance crowd-out, and of eventual conversion to a government-run plan.  Like a proposed public plan, government-authorized co-ops would be backed implicitly if not explicitly by taxpayers, says Harrington.

Source: Scott Harrington, "Health Co-ops: Slow Road to Government Care," Wall Street Journal, August 20, 2009.

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