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.

Comments

  1. Don Levit says:

    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

  2. Jim Sugden says:

    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.

  3. Speaking as a young, healthy person who buys an individual insurance policy, I would hardly call competition in Colorado “robust.” There are a few companies to deal with, especially Kaiser, Anthem, and Rocky Mountain, but their best individual plans are far inferior what you can get with group coverage. I’m used to group plans with copays less than $20, prescriptions for about $5, and 0% coinsurance for hospitalization.

    Go out and find the best individual plan on the market. It won’t even be close — the best you can find as a plan with high copays, outrageous coinsurance, and an out of pocket maximum that could still force many everyday people into medical bankruptcy.

    Personally, I’d prefer to buy insurance from the government. I’m very jealous of the coverage my parents get under Medicare. Just expand Medicare to people of any age and I’m happy. The “insurance” modal is categorically broken and without any identifiable advantages over a single-payer system.

  4. Ken,
    Thanks for your comment. You are correct in your description of the average benefits in the individual market versus the average benefits in the group market. Group plans are more likely to have lower deductibles and copays, along with more state mandated benefits. But that comes at a price. Group policies are dramatically more expensive than individual policies. With group policies, the employer typically pays a good chunk of the premium, so the employee might not be aware of the costs involved. But the total premiums for an average group policy are often double what the same family would pay for a policy they bought themselves on the individual/family market.

    While the coverage benefits on individual plans might not be as robust as those on group plans, I was referring to the competition among individual plans as robust. We have several big-name carriers in Colorado that compete for business (Anthem Blue Cross Blue Shield, United HealthOne, Aetna, Humana, Cigna, Assurant, Kaiser, just to name a few) and there are lots of options for a person shopping for their own insurance.

    I agree that it would be great if people under 65 could have the option to buy into Medicare, but I think that it’s going to be a while before anything like that becomes a reality.

  5. Ken,
    That is well said, and I agree with you about if there were medicare options for under 65 without being disabled, but right now there aren’t. And for the reality of what the options are right now, it’s a common misconception that the benefits are better for employer sponsored group coverage. You can get rich benefits like you talk about in the individual market, it’s just not a smart thing to do. The reason is that you’re just paying more.

    For most age groups, once you start going below a $2,000 deductible (per person), you start paying more in premium than you’ll possibly save in deductible. When you’re buying your own insurance, why would you guarantee that you pay an extra $1,200/year in premium to possibly save $1,000 in deductible? (for example)

    Employers, on the other hand, have more to consider when making the decision of what type of plan to get. Employers think about attracting employees from competitor companies. So they can say, “yeah, you’ll have a low copay, low deductible, etc” What the employee typically doesn’t realize is how much it’s costing them. If you could get a raise equal to the amount the employer is paying for that gold plated coverage, you could get your own individual plan with similar benefits and have extra for groceries. And, for the employer, it’s a write off. So they have even less of an incentive to get a smart plan.

    Show me the plan description form from your employer sponsored coverage with a statement of the total cost (what they pay + what you pay) and I can probably show you individual plans for 1/2 the price.

    Take that even further and don’t waste your money on that type of coverage. Instead, get an HSA qualified plan (since you’re a “young, healthy person”) and start putting away extra money for retirement that can also be used for medical expenses if you happen to need it.

  6. Don Levit says:

    Jay:
    What you are recommending makes a lot of sense.
    The most expensive write-offs to the government is health care expenses, far surpassing number 2, the home interest deduction.
    What is this telling us?
    That retirement deductions are even further down the line.
    Your recommending that he get his own individual policy and pocket the difference is a wise suggestion.
    I wonder how the Colorado Department of Insurance would view that transaction?
    In Texas, the TDI would consider that dynamic to be a separate ERISA plan, in which many complications would ensue.
    Don Levit

  7. Don,
    Yeah, the DOI would actually frown on a company saying specifically “Instead of the insurance, here is a raise. Go use it to buy insurance”. I meant it more as an if, and not a recommendation to try to ask the employer. The department of insurance requires employers in Colorado providing insurance to be providing it through a group plan (without getting into details about ERISA plans, etc). It helps to keep some healthy people into the guarantee issue pool, where they might be more inclined to get an individual policy instead.

    It’s important to point out the problem that the employer sponsored plans have created as well. They’ve changed the perception of what health insurance really is. I talk to people coming off group plans that tell me there’s no point to having insurance if it’s got a $2,000+ deductible because they would rarely ever spend that much on health care in a year.

  8. Don Levit says:

    Jay:
    It really is sad that people perceive “large” deductibles as being so disadvantageous.
    If people are not willing to spend more out of pocket on the front end, which is relatively easy, would they be willing to lead healthy lifestyles, which is much harder?
    Don Levit

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