While co-ops were once proposed as a possible alternative to the public option, the idea failed to gain public traction outside of the offices of Sen. Kent Conrad (D-ND) and Rep. Mike Ross (D-AR). Yet, like some sort of legislative vestigial organ, the Consumer Operated and Oriented Plan (CO-OP) was never removed from the final legislation.

The CO-OP Advisory Board held its first public meeting yesterday, with prepared testimony from several important experts. While informative, nothing in the testimonies leads me to doubt either my original conclusion or the CBO’s conclusion that this CO-OP program is unlikely result in many new viable non-profit insurance companies.

Much of the testimony demonstrates that the viability of the CO-OP programs was extremely crippled by the design of the law, which almost assures they can’t be a serious challenge to the current major insurers. For example, they can’t get real help from HHS, they can’t use their purchasing councils for maximum effect, and they are restricted from advertising. From Sara Collins, of the Commonwealth Fund (PDF):

The private purchasing councils are one potential vehicle by which cooperatives might gain purchasing leverage in provider negotiations. But the law precludes the councils from “setting payment rates” for health care facilities or providers that are participating in health insurance coverage provided by the plans. But it is unclear whether the purchasing councils might be allowed to negotiate provider rates. States  might want to consider requiring providers to give health cooperatives the lowest  prices they give to other private insurers.

And Paul Hazen, President of the National Cooperative Business Association, stressed the huge problem (PDF) the co-ops would have due to the marking restriction:

Restriction on marketing will hinder economic viability

The Act states that any entity receiving funds via the CO-OP program may not use those funds  for “marketing.”  Although not defined in the Act, the term generally refers to the promotion, distribution and selling of a product or service, including market research and advertising.  It is difficult to comprehend why the federal government would place such restrictions on these entities.  How, for example, will the Maryland Nonprofit Health Insurance Co-op enroll the 50,000 people it requires to be a viable business unless it is able to market its services?

NCBA suggests that the Advisory Board clarify this restriction and create a very narrow definition of this provision that would allow CO-OP participants to compete effectively and gain economic viability.

This is quite a chicken and egg problem. The larger an insurer is, the better rates the get. But if you can’t advertise, you can’t get members nor can you get rates low enough to offer low premiums to attract members.

Missing the “Land Rush”

Retired insurance actuary John Bertko stressed the important of timing (pdf): “the CO-OP plan must also be completely prepared to open its doors on January 1, 2014 to not miss the 2014 “land rush” for newly insured membership.”

The issue of not missing this land rush extends beyond the CO-OP. We know from both behavioral science and examples in Switzerland (PDF) that people have a strong status quo basis in insurance ownership. After people select a new insurance plan on the exchange in 2014 they are likely to stick with it even if it eventually turnouts not to be the best deal.

Being up and running by 2014 is critical for the success of any possible CO-OP plan and also for any potent state-based programs such as the possible public plan, Sustinet in Connecticut. The issue of lock-in after the initial land rush period is why it is so important for Sen. Ron Wyden (D-OR) and Sen. Scott Brown (R-MA) to move up the start date for the state waiver for innovation from 2017 to 2014 if they actually want the states to have a chance to serve as laboratories for innovation.