DATE: 18 Aug. 2009
TO: My Political E-Mail List
SUBJECT: Co-ops Lack Leverage Unless Very Big
Health Insurance Purchasing Cooperatives
November 11, 2002
Author(s): Elliot K. Wicks
Summary [at end]
An analysis of the efforts to implement the purchasing cooperative model yields the following lessons:
1. The principal advantage that current co-ops offer to small employers is not lower premiums but the opportunity for individual employees to select different health plans from the variety the co-op offers.
2. In the future, co-ops might be able to offer more attractive prices, but that would depend on reaching “critical mass” size. To offer attractive prices, a co-op has to be able to realize administrative savings and/or have bargaining leverage with health plans. Both these conditions require that co-ops control significant market shares.
3. Achieving critical mass size is difficult. To persuade a number of health plans to participate and continue participating, a co-op must have a significant market share. But without the participation of a variety of highly reputable plans, it will be difficult for co-ops to attract the number of employers that would yield a significant market share. Furthermore, co-ops do not sell themselves.Without the support of health plans and insurance agents, small employers will not seek out co-op coverage. But health plans and agents have often been hostile or, at best, indifferent, to the co-op model.
4. Even if co-ops could offer lower premiums, they could not substantially reduce the number of uninsured because the premium reductions would not be big enough to induce large numbers of uninsured employers and uninsured workers to opt for coverage.
5. Co-ops cannot be the vehicle for pooling high-risk, low-risk, and medium-risk employers. If co-ops follow premium rating rules or rules for accepting applicants that are significantly more permissive than those that apply in the outside market, they will suffer from adverse selection and ultimately fail.
6. Co-ops are likely to become an important source of health coverage only if some significant change makes them the favored or perhaps the sole source of coverage for particular groups. This could happen, for example, if employers adopting a defined-benefits approach to health coverage channeled employees to co-ops, or if government offered co-ops as the source of coverage for individuals who receive certain kinds of subsidies. Without a change of this sort, purchasing cooperatives are unlikely to become a major feature on the health care landscape.
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