Senator Conrad's co-op health insurance proposal

Senator Kent Conrad (D-ND), Chairman of the Budget Committee and a member of the Finance Committee, has floated an idea he is trying to position as a compromise between those who want a government-run “public option” and those who oppose it.Senator Conrad’s theme is to facilitate the creation of “non-profit, non-government” health plans, but in which the government sets certain standards. The public expression of his idea is sufficiently vague that everyone can hear what they want to hear. Senate Finance Committee Chairman Max Baucus (D-MT) has said that he supports the idea.

As I understand it, Senator Conrad’s proposal would have the government create a new entity with a federal charter.Taxpayers would provide a few billion dollars to that entity. While this entity would be called the COOP, the acronym does not stand for “cooperative,” and the entity would not be a cooperative. The purpose of this new national organization would instead be to help form nonprofit health plans in each state. The key concept is that this new organization would have the authority to approve a nonprofit health plan to operate in a state, even if that State’s insurance commissioner said no. (As I understand it, the Conrad proposal dances around explicitly stating this ultimate hammer as bluntly as I have, probably in hopes of avoiding the wrath of the State insurance commissioners, who are often quite powerful.) In addition, this new entity could provide seed capital to new nonprofit health plans. The COOP would be a national chartering and financing organization.

The President would pick, subject to Senate confirmation, the people who run that new entity, but it would be a private nonprofit organization. This allows Sen. Conrad to say that it is “non-profit, non-government,” but the taxpayers are providing the initial capital, the government would set certain rules for this new entity, and the government is picking management.Under these conditions, the legal structure is largely irrelevant. It looks, walks, and quacks like a Government Duck.

In creating a new national insurance chartering entity, Senator Conrad is attacking a legitimate problem here, albeit with a solution that I oppose. When government mandates that health plans cover certain diseases, providers, or treatments, that causes premiums to increase. When government mandates that health plans charge everyone the same premium regardless of their age or health status, that also causes premiums to rise for most people. Many state legislatures and state insurance commissioners have gone hog-wild on insurance mandates. It is politically popular to mandate that a health plan must cover disease X, or not exclude person Y. These mandates accumulate, resulting in high premiums and all their knock-on effects:lower wages for those with health insurance, more uninsured people, and higher costs for government plans that must also comply with the mandates.

By giving this new entity the authority to bypass the State insurance regime for new nonprofit plans, Senator Conrad would create a new market for nonprofit plans with lower premium costs. So far, that’s good, but the Conrad plan then runs into three problems:

  • If it’s OK to bypass state insurance mandates for these new nonprofit plans, why isn’t it also OK to do so for all those Americans who now get their health insurance from a for-profit insurance company? The Conrad plan appears to create a distinct market advantage for one legal structure of health plan. Ultimately, what we should care about are the people who buy health insurance, not the legal or governance structure of the firm offering it to them. It would be unfair to the more than 100 million Americans who now get their insurance from a for-profit firm to say, “You can get lower premiums if you leave your health plan, because Congress thinks that nonprofit plans are somehow morally superior to for-profit plans.” Remember that nonprofit organizations make profits, they just distribute them differently. Where a for-profit firm distributes its profits to its owners, a nonprofit firm distributes them to some combination of its employees, customers, and whoever provided the startup capital.
  • Sen. Conrad’s colleagues on his Left want to change his idea. Rather than having the new entity be an alternate approval mechanism for new nonprofit health plans, Sen. Charles Schumer (D-NY) says the new entity should be a new national nonprofit health plan itself. This, of course, would be the public option, but with a non-governmental logo on the letterhead. The government would be financing the new entity, bearing the risk of unexpected payouts, determining premiums and benefits, and setting provider payment rates. The Schumer variant of the Conrad idea is the public option.
  • If you were willing to create an unlevel playing field that advantaged nonprofit plans, as Sen. Conrad suggests, then you run the risk that the government will show up a year or two from now with “just a few more rules” for the new entity to impose on plans. Since the new Conrad entity in effect becomes a new national health insurance chartering organization, every disease lobby group will immediately shift their focus to placing new requirements on the new entity. You will start to see an endless sequence of amendments to legislation, in the form of, “The new nonprofit chartering entity shall require that all chartered plans require coverage of ________________.” They’ll start with the diseases that affect kids and pregnant women, because those are the hardest to vote against. Alternatively, legislation could give the Executive Branch the power to set standards or goals for the chartering entity, the way that HUD sets low-income housing goals for Fannie Mae and Freddie Mac.

It’s not clear which of these outcomes is worse. I think everyone is familiar with the arguments against a pure public option.They apply equally to the Schumer variant of Senator Conrad’s idea.

A two-tiered structure, in which nonprofit health plans have a market advantage over for-profit plans, would be hugely disruptive. Individuals and employers would have a tremendous incentive to dump their current health plan in favor of a new one chartered by this new entity. To the extent that employers made this choice on behalf of their employees, it would conflict further with the President’s commitment that you can keep the plan you have now.

I fear that, like the public option, the Conrad option would crowd out private health insurance. Government would provide low-cost capital. Government would impose rules to suit the Congressional or Executive Branch whims of the moment. The ability to bypass state insurance commissioners would mean these new nonprofit plans, regulated by the new entity, would crowd out the existing market of private plans.

If you believe that replacing our current market mix of for-profit and nonprofit health plans with the government is a good thing, then go for the public option.

If you believe that we should replace our current mix of health plans with nonprofit plans regulated by this new entity, and you believe that the government will relinquish control of these new plans in a few years as Sen. Conrad suggests, then go with the Conrad option.

Please don’t misconstrue this as me defending the for-profit health plan that you may dislike. I am instead arguing that, whatever your view of today’s private health insurance market and private for-profit plans, more government involvement as proposed by Senators Conrad or Schumer will make things worse.

(photo credit: Wikipedia)

I escaped Washington, DC and now teach at Stanford's Graduate School of Business.

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22 comments on “Senator Conrad's co-op health insurance proposal
  1. Mary M says:

    “I fear that, like the public option, the Conrad option would crowd out private health insurance. Government would provide low-cost capital. Government would impose rules to suit the Congressional or Executive Branch whims of the moment.

    This is one reason why I am baffled by the focus by Democrats on a public option. When government has that much control over something as personal as health and treatment, especially in Kennedy Dodd that gives great power to HHS, what happens when the political pendulum shifts as it always does? Would Democrats be as keen to support government run health care when Republicans have control and vice versa? Are candidates going to run with platforms that restrict or expand abortion services for example. Unfortunately, Idon’t think it takes very much imagination to think of numerous ways our health care will become a political hot potato.

  2. “While this entity would be called the COOP, the acronym does not stand for “cooperative,” and the entity would not be a cooperative.”

    So we’re to believe that the choice of acronym was just the wildest coincidence? When even the NAME of something is a lie, how much faith can you have in any of the rest?

  3. Friday’s Daily News…

    THE DAILY NEWS ObamaCare Sticker Shock – Wall Street Journal Editorial Senator Conrad’s Co-Op Health Insurance Proposal – Keith Hennessey, KH How Obama Could Lose Health Fight – Allen & Vandehei, Politico Paul Krugman’s Liquidity Claptrap – Alan R…

  4. Evinx says:

    The problem with pols (including many Republican pols) is that they always look for political solutions to problems. They think they know better and have no comprehension nor appreciation for how markets allocate scarce resources. Govt run or govt mandated makes little difference. How can they ignore Amtrak, the Post Office, Fannie + Freddie, etc.? Can you imagine what would happen if the government ran the shoe business?

  5. Ian Duncan says:

    How is a non-profit, non-government, regulated health plan any different than a Blue Cross Blue Shield plan? Or a provider Owned plan? Or Kaiser, for that matter??

    These things exist – they have their advantages and disadvantages (particularly in the case of provider-owned plans) but this has been done before.

  6. Ian Duncan says:

    Another significant issue for this plan: would it be subject to the same capital and reserve rules that apply to private plans? Private plans hold about 25% of a year’s premium (at least) in reserves against unpaid claims; they also are required to hold risk-based capital (generally about another 25% of premiums) against fluctuations. Theoretically a government backed body would be like FNMA, and have recourse to Treasury so not to be required to hold these reserves is a significant advantage for the Government plan. And don’t hold your breath that Congress will require that the government owned plan will observe the same rules.

    Obviously the cost of capital is somehting that private plans have to include in their rates, so they will have (another) rate disadvantage.

  7. Dennis Elliott says:

    If it’s not a problem to roll the states in this, why not use the feds to set up a VERY basic set of nationwide standards, allow companies to sell nationwide under those basic standards, and allow companies to also set up a la carte policies. One who can’t afford the moon would buy a basic policy that fulfills the basic national standards and as one moves up and down the income quintiles (as all studies indicate happens) he can select from the shelf any plan that fits his needs and abilities. It would seem that one of the basic standards should be this portability. I could envisage that some would be too poor to be able to buy ANY policy and could countenance a federal and/or state subsidy (though I, would require that everyone pays something). Under no circumstances would I agree to let illegal/undocumented/anchor baby aliens to get government subsidized insurance. Pre-existing problems could (and I guess are) covered under medicaid for the poor. I have sympathy for those above the poverty level with pre-existing and potentially bankrupting problems, but have no good notion of what to offer to help. I believe everyone with any even minimal ability to pay should be required to man up and pay at least something (That”s also my stand on taxes. Pay something. No “negative” taxes. If you collect “negative” taxes you are already likely getting a return on other fed. programs).

    I know this is simplistic, but it fills my basic requirements as a taxpayer. Everything else I’ve seen, including Conrad’s proposals has the government too deep in my pockets. I can give and take some on specifics, but I think there is a lot that can be done in terms of cost simply by getting government out of the road.

  8. JGsez says:

    State insurance regulations are horrific. As an acting controller for 40+ employees from 1992-1998, I tried to develop the perfect plan. This was the time of HMOs and our monthly employee cost went from 250/month to 165/month for a wide open free choice indemnity plan. Are you kidding? Obviously someone was trying to kill the HMO approach or compete with the pricing – the media blitz started soon after. Now the flaw with the HMOs was there was no penalty or cost for failure, i.e. not keeping people healthy. No problem – we, being management, would pay 100% for an annual physical for every employee! Just add it to the annual cost – then about 200 to 250 per physical. That would implement the key principle of HMO. Could not be done. Seems it violated all kinds of rules. So government, albeit at the state level, is all over your insurance and hospital choices.

    I think local health care is like education. The more involved the local citizens, the better the outcome. Let the people know which hospitals are lousy, (doctors also), and the marketplace will soon fix many of the problems. Might as well rate the Insurance companies for the same reason. But you can start here.
    You should also read Dr. Atul Gawande article about health care in the New Yorker.
    This is long so I will summarize: The amount paid does not correlate to best care. Nor does the type of health organization. It is people that make the difference.

  9. The Trojan Co-Op…

    The Wall Street Journal’s John Fund provides this much needed warning ($) to any Republican who may be getting “seduced” by the new “co-op” health care idea that one Senate Democrat is proposing. The Trojan Co-op Republicans are in danger of being…

  10. C A Fellers says:

    Insurance buying pools already exisit, like the National Business Association. The savings in premium costs comes from pooling every increasing numbers of members across the country. There are others. These pools work well — when the governement stays out of their business. Therefore the new COOP idea is really not needed. The pools that exist just need to be publicized and touted for their innovation.

  11. Linked to in the JUST THE FACTS, MAM Section at:

  12. […] Obama was not asked whether a public plan would be allowed to fail. He was not asked about the Senate bill that would allow a public plan to avoid state regulation. He was not asked about the Lewin Group […]

  13. […] Obama was not asked whether a public plan would be allowed to fail. He was not asked about the Senate bill that would allow a public plan to avoid state regulation. He was not asked about the Lewin Group […]

  14. […] Obama was not asked whether a public plan would be allowed to fail. He was not asked about the Senate bill that would allow a public plan to avoid state regulation. He was not asked about the Lewin Group […]

  15. […] And any “public option” that passes will unfairly compete with private insurers — bypassing the laws that apply to private insurers, sticking taxpayers with hidden administrative costs, pay […]

  16. […] Obama was not asked whether a public plan would be allowed to fail. He was not asked about the Senate bill that would allow a public plan to avoid state regulation. He was not asked about the Lewin Group […]

  17. […] with the private insurance market. Hmmm. Doesn’t this sound just like. .  . Well, yes. Keith Hennessy explains: A two-tiered structure, in which nonprofit health plans have a market advantage over […]

  18. Liz McCulloch says:

    Unless you are an individual purchasing a health insurance on the open market or on medicare AND assume that you insurance company/congress can make no changes to you current pan without your permission, YOU have absolutely NO ability to keep “the plan you have now”, you only have the ability to have the “plan your employer wants to provide today” and tomorrow it may be another plan. The choice is not an employee’s to make.

    You should know better than to even suggest otherwise.

  19. Jeffrey Williams says:


    1) Mandatory Health Savings Accounts for Americans that can afford them, combined with major medical coverage for catastrophic illness.
    2) Continue Medicaid for those that can't afford HSA's.

    Let's get a few things straight first and foremost. First, the very Congress that is proposing ANY changes to the healthcare system will not, themselves, be subject to such reform. They have their own health coverage system that is exempt. YES, EXEMPT according to the current reform on the table.

    The problem with the American mentality is entitlement. Americans feel they are entitled to things without working for them or paying for them. An example is Healthcare insurance. I treat people everyday who can't afford insurance. Yet, they spend $7-14 per day on cigarettes. Hmmm….
    My plan proposal of HSA's will provide Savings Accounts, YES, savings accounts for Americans and designate that money to be used for healthcare expenses only.

    Go to for more info on HSA's.

    From a physician's standpoint, one reason we have such high costs for healthcare is because of malpractice. We physicians practice defensive medicine on the whole. Not every person that comes into the stinking ER needs a CT scan. But I'd be darned if I'm the physician who's going to put my license on the line for not ordering it. One thing that needs to be addressed, therefore is malpractice reform by capping punitive damages, etc. Unfortunately, a portion of the SAME law-makers that are making law are there because of suing the medical community. And if not, I doubt they would bite the hand of their colleague to save the "wealthy" physician.

    No one talks about HSA's because the profit margin is low. BUT, if we could introduce the HSA's to a great majority of the American people and combine it with a Major Medical Policy (usually very affordable), we would re-introduce HEALTHY capitalism back into the healthcare market. This must be combined with reformed malpractice to work effectively.

    Hope someone reads this and at least takes the time to be open-minded to my ideas.

    Dr. Jeffrey Williams
    General Surgeon

    • Steve says:

      As an insurance broker who sells small biz health plans I can tell you that the private insurance market and small employer is implementing HSA high deducitble plans more every month. The math makes sense: In CA, a $500 ded plan with a $1500 family deductible with a $10,000 max 20% coinsurance out of pocket costs about $1300 month. Maximum copay exposure is thus $11,500 plus $15,500 premium = $27k year. An HSA high deductible plan for same family cost about $8400 year premium with $10,000 max family deductible which is a total exposure of $18,400. Unfortunately, most employees cannot afford the first $5k (10k for family) and would rather pay about 75% of the higher premium every month, than fund an HSA account. Why? Largely it is because most small business employees pre-judge a high deductible plan as worthless because it does not have first dollar benefits. I believe that only when health insurance is separated from employment will people take the time to educate themselves about health insurance plans and funding options. As long as Employers are involved in purchasing, it keeps the engine going i.e, the Insurers and agents profit as do the medical providers with a larger number of users. Unions were built on the promise of negotiation of rich benefits so they are naturally against this. Essentially then, our current system of employer based health insurance benefits so many people that it can only change gradually over time or in response to a calamity or legislation. Don't expect the last two.

  20. […] The bill does not contain a “public option.”  It instead contains a version of Senator Conrad’s co-op proposal. […]

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