Cooperatives And The Colorado Health Insurance Market
The ever-changing face of the health care reform battle has started to show more of an inclination towards health insurance co-ops this week, as opposed to a public health insurance plan. It’s anyone’s guess what will eventually come of all this, but for now, co-ops are getting a second look.
In doing some research, I discovered that Colorado had a co-op, called the Colorado Health Insurance Purchasing Cooperative (CHIP) back in the 90s. It was formed in 1995, and only lasted a few years. Its members were large and small employers in Colorado, individuals were not allowed to join the co-op. Eventually, health insurance companies just started offering lower premiums directly to businesses, and by-passed the co-ops.
People who are familiar with co-ops (credit unions and electricity co-ops are good examples) tend to like them, and this idea is probably less of a lightening rod for political tension than a public health insurance plan. Although it has drawn plenty of criticism for being a weak answer to a big problem.
One of the criticisms of the private health insurance industry is that there isn’t much real competition. Proponents of the co-op idea believe that co-ops would increase competition and thus drive down costs. I’m sure that this is the case in some markets, but here in Colorado we have a pretty robust health insurance market, with lots of companies competing with each other. Initial underwriting can result in higher premiums based on a person’s medical history. But after that, future annual premium adjustments are based on claims history for everyone who has a particular policy, thus the risk is spread across a large population.
In the small group market in Colorado, HB 1355 took away the ability of health insurance carriers to adjust premiums based on the health of a group. So rates for small groups are determined without regard for each specific group’s medical history. Instead, all groups are rated the same, based on claims history for all of them combined. The small group market in Colorado includes many of the same carriers who offer individual health insurance here, and there are several options from which an employer can choose when shopping for a group plan.
Co-ops might very well be able to bring down costs by introducing an additional element of competition to the health insurance market. But premiums for small groups in Colorado are already determined based on aggregate claims, rather than individual histories, and annual premium adjustments for individual policies are also based on aggregate claims. The idea of individuals banding together to purchase health insurance as a group is often touted as a solution, but group health insurance is actually more expensive than individual insurance (because of the state mandates for group policies, such as maternity coverage, and because group health insurance is guaranteed issue while individual health insurance is medically underwritten). Co-ops might be a beneficial addition to the health insurance market, but I think that there are a lot of misconceptions that would need to be cleared up before any realistic dialog could take place around this issue.
Louise:
If the competition was based only on price for comparable benefits, for only the current year, your assessment of the value of coops is probably correct.
Like other not-for-profit insurers, such as 501(c)(9), a coop, which is a 501(c)(12) insurer, to fully earn its tax-exzempt designation, would have, basically 2 avenues:
1. Provide similar benefits for a substantial reduction in cost – the charitable designation.
2. Provide benefits which were not currently available commercially (even for a similar cost).
The second avenue provides much room for creativity and innovation, which the commercial insurers have not provided.
For example, a 501(c)(9) or 501(c)(12) insurer, could provide flexible premiums, similar to universal life coverage, which currently is not available commercially. While the benefits would be adjusted, up or down, the premiums could remain affordable – an option not currently available commercially.
Don Levit
Reading the transcript of the Channel 7 news item proved again to me that the media tends to start with a point of view and then interpret the information they receive in a way that supports it. Greedy insurers did not kill the Colorado co-op by undercutting its prices. The CHIP failed because it failed to live up to its promise; a promise that was based on a flawed assumption.
The CHIP was launched on the premise that as a non-profit co-operative, dedicated to consumers and not encumbered with making a profit, it could operate less expensively. It also promised to negotiate better rates from insurers by pooloing smalll employers. (Where have we heard that before?) They were naive and mistaken. Within a year or two, the carriers writng coverage in the CHIP realized that their claim experience in the CHIP was actually worse than the experience on their general block of business. The the CHIP began to unravel.
This came as no surprise to anyone who understood the concept of adverse selection. The CHIP allowed each employee of a group to select their own plan design and carrier from a menu of participating carriers and plans. The CHIP bundled these individual choices into a single employer billed group plan.
What ensued was garden variety adverse selection. Healthy applicants selected the leanest plans with the lowest premiums. Less healthy applicants chose the richesest plans with the broadest networks even at a higher cost. As carriers offering premium plans noticed that they were only attracting the sickest applicants, they began to withdraw from CHIP membership. Eventually, the plan tanked under it’s own flawed design despite that fact that for a period of time it offered brokers higher than market rate commissions. That’s how desparate they became for business.
The lesson for today’s reformers is that “good intentions” don’t amount to squat in the competitive marketplace. Claims drive premiums. If you set up a low cost buffet for consumers, you shouldn’t be surprised if they focus on the steak and shrimp and you can’t cover your costs.
Good luck to co-ops. Their going to need it.