A not-so-new idea has emerged in the health care reform debate: health insurance co-operatives.  The idea is to let groups or consumers form nonprofit co-operatives for the purposes of selling health insurance.

Of course, no one was talking about health insurance co-ops until the push for the government-run insurance plan, referred to at the “public plan,” hit the skids with a lot of pushback from virtually every Republican and several moderate Democrats.  So a search for a “third way” emerged among the more moderate Democrats as a way to placate all sides.

For co-op proponents, a non-negotiable is they must be nonprofits.  They take this position because of the Left’s general animosity to profit-making entities — especially when it comes to health care.  But one of the least discussed elements in the current reform debate is that there are lots of nonprofits in the health care system, including hospitals and health insurers.  And no one has shown that nonprofit hospitals and insurers provide their services for less.  Indeed, some nonprofits will charge more than many for-profits.

Second, Congress needs to know that states and organizations have had the power to create co-ops for years.  In fact, many currently exist.  And they compete with for-profit insurers.  There are, for example, a number of nonprofit associations around the country that offer health coverage as part of their membership benefits.  And far from encouraging these organizations — which are often subject to fewer health insurance regulations that other insurers, and therefore cost less money — states often do their best to limit these associations. 

Third, if the goal is to try to bypass the for-profit health insurers, setting up co-ops won’t necessarily achieve that goal.  That’s because when an association or co-op is going to start offering health insurance, it needs reserves … lots of them.  Some insured could join the plan and be diagnosed with cancer within a few weeks.  So the co-op needs a large pool of money to draw on in case it has unexpectedly high claims.  Insurers have to do exactly that when they open their doors.  They have to find the money to put in reserves so they can pay claims with the very first policy they sell.  That capital comes with a cost—a cost that start-up co-ops can’t avoid.

As a result of the need for financial reserves, most associations and co-ops contract with an existing health insurer to underwrite the policies.  In other words, a nonprofit co-op may very well be — and usually is — relying on a for-profit insurer to bear the financial risk.  Just the things this new co-op idea is trying to avoid. 

Of course, the government could provide the seed money for the co-op — it will need to be several million dollars — or perhaps promise to cover the co-op in case of a catastrophic loss.  But that doesn’t escape the cost of risk; it’s just that taxpayers, rather than an insurer and its stockholders, are underwriting the risk.

Finally, the nonprofit co-op will still have administrative costs.  It will still have to process claims, and it will learn pretty quickly that a percentage of claims will be bogus.  It will also have to fight fraudulent claims, and spend more administrative money to do it. 

In other words, in short order the vaunted nonprofit co-op will be acting exactly like a health insurer. 

Merrill Matthews. Ph.D., is executive director of the Council for Affordable Health Insurance and a resident scholar with the Institute for Policy Innovation.