The Commonwealth Fund Blog

Cooperative Health Care: The Way Forward?

June 22, 2009

Tags: health cooperatives Affordable Care Act

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By Karen Davis

Karen DavisAs part of the health reform debate, Senator Kent Conrad (D-ND) has proposed forming nonprofit cooperatives to provide health insurance coverage at low cost. While the details are still being fleshed out, an examination of the history of cooperative health care—which has often also featured an integrated care delivery system—reveals some important lessons that apply to the current policy discussion. The three major takeaways are:

  1. Local cooperative health organizations can and do provide top-quality integrated, coordinated care, but they have faced formidable obstacles in their formation, operation, and growth. 
  2. A national organization with authority to purchase health care at reasonable rates is integral to controlling costs successfully.
  3. Transforming health care delivery in the United States into a mission-driven, patient-centered, value-enhancing system of care will require incentives for physicians to practice in health care organizations that are accountable to patients and consumers, as well as disincentives for continuing our current fragmented fee-for-service system.

History of Health Cooperatives
According to sociologist and writer Paul Starr, the first health care cooperative was formed in 1929 by Dr. Michael Shadid in Elk City, Oklahoma—my home state. This pioneer faced immense obstacles, including opposition from the county medical society. Nonetheless, with the help of the populist Oklahoma Farmers’ Union, he succeeded in securing a loan to build a hospital and creating a prepaid insurance plan. Dr. Shadid’s philosophy was that the government’s role was to subsidize the poor’s enrollment fees. Consumers would manage the business operations, but doctors would remain in control of the professional aspects of care.

Dr. Shadid’s success inspired others to form regional health cooperatives that provide networks of health care plans and providers. Indeed, the two most successful modern examples of cooperative health systems are HealthPartners, based in the Twin Cities of Minnesota, and the Seattle-based Group Health Cooperative. Both of these consumer-governed health care organizations serve more than 500,000 members in a wide geographic region. Along with insurance, they directly provide health care services through a nonprofit integrated delivery system that owns its own hospitals and has its own dedicated multispecialty physician group providing integrated, coordinated care of high quality while making prudent use of resources. Although both organizations have encountered obstacles throughout their 50-plus-year histories—among them, the opposition of organized medicine and internal tensions between physicians and consumer-governed boards—they exist today as examples of health care organizations that deliver high-value care. New case studies of the two organizations, now available on the Commonwealth Fund Web site, offer insight into their strategies.

There is no question that these shining examples of cooperative health represent a model for the financing and delivery of health care, as do similar nonprofit—though not consumer-governed—integrated delivery systems, such as Geisinger Health System, Intermountain Healthcare, and Kaiser Permanente. The question is: What would it take to go from our current system of health care to a national delivery system that has the mission, values, capacity, and operational systems and strategies of these organizations?
The cooperative landscape is certainly littered with failures. Group Health Association in Washington, D.C., for example, failed in the early 1990s after intense conflicts between consumer-led management and the medical group. Another large cooperative, Group Health Inc. (GHI), in New York City, is preparing to convert to for-profit status. Surrounded by a marketplace that provides substantial rewards to for-profit insurance and fee-for-service care, these organizations have moved away from the original consumer-led governance structure and mission.

This cooperative health care experience—both successful and unsuccessful—underscores the difficulty of reconciling the public’s desire for low-cost, high-quality care with physicians’ desire for professional autonomy and control of health resources. It is also difficult to maintain the ideals of consumer-governed health care in the face of a marketplace that rewards volume over value. There are even legal obstacles, erected by those favoring the current marketplace incentives. In response to the development of cooperatives owned by their members/patients, a number of states enacted laws that make it illegal for a physician to be employed by a nonphysician, effectively precluding cooperative health plans.

The key to the success of cooperatives in other sectors of the economy has been the ability to leverage purchasing power to obtain lower rates—for electricity, as an example. Rural electricity cooperatives took root during the Great Depression following establishment of the Tennessee Valley Authority (TVA) Act in May 1933. This act authorized the TVA board to construct transmission lines to serve “farms and small villages that are not otherwise supplied with electricity at reasonable rates.” The idea of providing federal assistance to accomplish rural electrification gained ground rapidly when President Roosevelt took office in 1933 and launched his New Deal programs. On May 11, 1935, Roosevelt signed Executive Order No. 7037, establishing the Rural Electrification Administration (REA). A year later the Rural Electrification Act was passed, and the lending program that became the REA got under way.

Most rural electrification is the product of locally owned rural electric cooperatives that got their start by borrowing funds from REA to build lines and provide service on a nonprofit basis. Today the REA is the Rural Utilities Service and is part of the U.S. Department of Agriculture. An important part of the history of electric cooperatives has been the development of power marketing agencies (PMAs). In 1937, the federal government established the first PMA, the Bonneville Power Administration. The government proceeded to form four more PMAs to market the power generated at 133 federal dams across the country. The federal law that governs PMAs gives preference in the sale of power at cost to public bodies and electric cooperatives. The availability of low-cost power to electric cooperatives has promoted economic development and has offset the cost of serving sparsely populated areas.

For cooperative health care to slow the growth in health care costs and achieve savings, a cooperative insurance organization would need the authority to purchase care on favorable terms. This might be accomplished by guaranteeing that the cooperative health plan can obtain the lowest price charged to the most favored customer. Today, commercial insurers dominate the market in most geographic areas, and, with the exception of three states, the two largest health insurance plans in each state account for 50 percent or more of all private insurance enrollment.

6-22-09 blog chart

These plans use their purchasing clout to obtain discounted rates in negotiations with local health care providers. In local markets where there are dominant health care providers, hospitals and other providers are able to push back and demand higher rates. But while multiple negotiations among multiple insurers and multiple providers consume significant administrative costs, the result is not a competitive market price applicable to all customers, but rather favorable rates for the most powerful participants in the negotiations.

Another way to leverage purchasing would be to have a national cooperative organization negotiate provider prices on behalf of all customers. This is the model used by Germany’s "sickness funds." These membership cooperatives, which have consumer boards, conduct negotiations with their regional counterpart provider organizations on behalf of all patients for standard health benefits. In the U.S., such a process could be entrusted to a national “Health Value Authority” and applied to all health plans participating in an insurance exchange. A nonprofit, consumer-driven entity acting in the public interest would then manage payment and delivery system reform, rather than leave such reforms to the market powers of insurers or providers in a given geographic area or to a political process influenced by special interests.

Transforming American Health Care
Two different strategies for revamping the health insurance system have now been proposed by members of Congress: a cooperative strategy and a public insurance plan. A cooperative health strategy could establish a national cooperative organization to transform insurance provision and support the development of local cooperative health care delivery systems. A national organization, such as a Health Value Authority, could provide a variety of supporting functions, such as making grants and loans to start local cooperative health care delivery systems and providing actuarial technical assistance and other needed support. Such a national organization could also be given the authority to negotiate provider payment rates and methods on behalf of all insurers—public and private—and eliminate the administrative waste now generated by thousands of individual-provider price negotiations. In addition, it could institute new methods of payment, changing the marketplace from one that competes on providing greater volume of services to one that rewards better outcomes for patients and more prudent use of resources. National authority might be needed to override state laws that restrict cooperative health care delivery systems or cooperative health insurance products.

This strategy would break new ground and lead to a health system that provides high-quality, high-value care. The role of insurance would be to pool risk broadly and restructure local competitive markets so as to align incentives with the provision of high-value care. The long history of establishing local cooperative health care delivery systems certainly raises awareness about how quickly such change could be effected. And the responsibilities, authority, and structure of a national Health Value Authority would require careful thought, time, and expertise to develop and implement.

The second option is to create a new public health insurance plan, offered by the U.S. Department of Health and Human Services (HHS), that adopts new value-based payment methods, builds on the current Medicare network of hospitals and physicians, and competes with private insurers within a national health insurance exchange. Even subject to the same rules as private insurers regarding benefits, coverage, and other standards, such a plan could offer a premium that is 15 to 25 percent lower than premiums now offered in the individual and small business market, depending upon whether providers are paid at Medicare levels or at some midpoint between commercial and Medicare levels.

HHS could also be given the authority to modify rates for individual services. This might involve reducing rates for overpriced services, which have contributed to the enormous growth in volume of services documented by the Dartmouth Atlas and, more recently, by Atul Gawande in his influential New Yorker article. Savings from reducing prices for overpriced services could be shared between the federal budget and a bonus pool for high-performing providers.

Payment rates under the public health insurance plan could also be made available to private plans, with the same carrots and sticks for physicians to participate in the network. Competition between a public plan and private plans featuring a level playing field for provider payment could achieve significant economies both initially and over time, yielding up to $3 trillion in health system savings between 2010 and 2020.

Under such reform, most providers would continue to experience rising revenues, albeit at a slower rate. Covering the uninsured generates new revenues for providers and improved benefits reduce bad debts. If a public plan paid providers at a point midway between Medicare and commercial rates, physician revenue would grow on average at an annual rate of 4.3 percent over the 2010–2020 period and hospital revenue would grow at an annual rate of 5.3 percent—well within the growth rate promised by an industry coalition in a letter to President Obama.

A People-Centered, Value-Enhancing Health System
As President Lincoln emphasized in his Gettysburg Address, the U.S. is guided by the philosophy of “government of the people, by the people, and for the people.” What is needed in health care is a similar philosophy: a health system that is truly for the people. Redesigning health care so that it puts people front and center and ensures that care is patient-centered, accessible, and coordinated should be the fundamental goals of health reform.

Ultimately, it is the public that pays for health care, whether through the direct costs of premiums and health services, forgone wages from rising premiums in employer-sponsored health plans, or higher taxes to support Medicare, Medicaid, and other public health programs. Health reform needs to ensure accountability and value for the resources that are entrusted to health care organizations and providers for the care of patients.

Two choices have been put on the table—a cooperative health care system designed and governed by consumers, and a public health insurance plan designed and offered by government acting in the public interest. Both could work if they are given sufficient authority to act in the public interest. Adopting a new cooperative health system would be difficult, and its long-term impact and sustainability would be uncertain. Still, both alternatives embrace a philosophy of people-centered health care and both are worthy of debate and consideration. Incorporating elements of both into health reform may well point the way forward.

Post Comment Read or Post Comments

Craig Robinson, MPH of Cabin Creek Health Systems says:
June 28, 2009

We hear lately that a health reform package that covers all services is too costly and so phase-in coverage. Perhaps the co-op model of primary care as currently practiced by CHCs provides a way to extend at least basic medical home (MH) services to all. Here is what it could look like:

All uninsured people would be offered MH coverage. The total cost of the plan for services and administration would be $50 per month. Employers required to pay an average of $25 per mth per employee. Individuals pay according to ability. A government subsidy covers the difference.

A federal Health Value Authority is responsible for administering the federal funds and promoting quality and transparency. In the states there are consumer-directed HVAs to contract with providers, manage enrollment and support QI.

Access - Members of the plan would select a MH among the participating primary care providers. The MHs provide primary care services including preventive, acute and chronic disease care, primary mental health care, OP lab and plain, film X-ray, 24-hour telephone access, and care coordination. The plan does not cover hospital, Rx, or specialist services. Any PCP practice that agrees to the set of services and reporting can participate.

Controlling cost - Participating PCPs will receive a monthly capitation payment for all MH services. The amount of the capitation will vary with the services offered by the PCP and may be augmented for good performance. Total utilization is tracked. Public preventive programs such as FP, BCCSP, and Rx Assist will continue.

Prevention and Quality – The MH is an effective strategy for preventing and controlling health problems. Care coordination could be provided in the practices or by the HVAs.

Such a plan would cost the federal government about $300 per year per person or $14 billion to cover all uninsured. The CF could put together a task force to describe and promote the plan. Universal MH coverage paves the way for comprehensive coverage.

George Isham, MD, MS of HealthPartners says:
June 26, 2009

In her Commonwealth Fund blog “Cooperative Health Care: The Way Forward?” Karen Davis is on target in calling for reform that is people-centered and rewards value rather than volume. She’s also right in saying lawmakers should consider applying principles from the cooperative movement to offer consumers health care that is consumer-governed and non-profit.

But we should be wary of a health plan, cooperative or insurance exchange run by the federal government if it is based on the current Medicare payment model. Here’s why: Medicare pays high performing states like Minnesota about $850/month/per patient for the same number of health services as patients in Miami, which gets $1,230 per month. It might be worth it if patients got better care, but that’s not the case. In some cases the care is actually worse according to solid research from Dartmouth.

If the goal is to provide coverage for all Americans and to reduce health care costs, we need to fix the Medicare payment system to reward value. Medicare now pays providers based on sheer volume of procedures whether they improve health or are necessary. There is substantial political opposition because many of the high paying states like Florida, California and New York have significant political clout and they stand to lose money.

Rather than focus on which states get more or less money, policymakers should consider implementing a payment program that rewards value no matter where it is delivered. Some proposals include a value index, accountable care organizations and cooperative pilots.

Yes we need increased access to care. But building on the current public plan would bankrupt the nation if it continues to reward volume of services. Let’s start by reforming payment to reward doctors and hospitals for providing quality care. That will lay a solid foundation for a system that covers every American.

Michael Kitchell of McFarland Clinic says:
June 25, 2009

As a rural physician in Iowa, I favor the co-op proposal. There are two major reasons for this: 1) Medicare severely underpays rural physicians, and 2) Center for Medicare Services (CMS) has not shown that it is capable of effective payment reform.

Medicare pays physicians in rural states much less due to Geographic Practice Cost Index (GPCI) adjustments. One example is technical fees for imaging studies in rural areas are paid 60-70% less than in California. In rural areas we lose money on x-rays and many other services for Medicare.

Surveys of practice expenses by Medical Economics have shown that rural physicians actually have higher expenses at $250,000, compared to urban and inner city practices at $210,000 and $180,000 respectively. This is primarily due to higher numbers of patients seen per doctor in rural areas. CMS on the other hand has never done a practice expense survey in 17 years of GPCIs, but instead uses indirect data with proxies of apartment rent and only four wage categories to determine “practice expense” adjustments.

Private insurers fortunately pay physicians more in Iowa, but cost shifting can only go so far, and if a public option expanded the number of Medicare patients and reduced the numbers of privately insured, obviously physicians would have difficulty staying in practice.

CMS has not shown that it is capable of paying for high quality cost-effective care. Private insurers have done a better job of paying for value. Our clinic has participated for three years in a pay for performance program that has shown better outcomes for our patients and high satisfaction of our physicians.

Collaboration, and better Medicare not only pays physicians in rural America less for our work, practice expenses, and e-prescribing, Medicare geographically devalues our quality payments.

PQRI is an ineffective attempt at paying for quality. There are many problems with PQRI, but my major complaint is that some of the highest quality physicians in our clinic failed to achieve the bonus due to methodological problems, and they have had such poor feedback they are no longer participating in PQRI. There are better ways to promote and reward quality and value in healthcare.

The Commonwealth Fund knows that Iowa’s health care providers’ quality and efficiency are among the highest in the nation. We are still waiting for CMS to recognize and reward the value of our care.

I favor co-ops for these two major reasons.

Paul Nelson of Family Health Care, P.C. says:
June 22, 2009

In 2007, the World Health Organization ranked our country as 36th worst out of the world's 43 developed countries for its maternal mortality rate. I am aware that 10% of our nation's citizens use 70% of our nation's resources devoted to health care. As the wealthiest nation per citizen of the world, we spend in excess of 30% more per person per year than the other developed countries of the world. Can there be any doubt that efficiency is the "elephant in the closet?" As a primary physician in the same community at nearly the same location for almost 34 years (5 weeks from now), I view the last 20 years as a time when the complexity of high quality health care has outstripped our ability to manage it efficiently as well as effectively. Certainly, there is a need to solve the substantial problems related to resource allocation for the benefit of every citizen. However, new forms of health care reimbursement are highly unlikely to substantially change the efficiency of our health care system. I have witnessed the seven-year cycle of change since I began my first clinical rotation in 1967 at the old Douglas County Hospital here in Omaha. So far, nothing has occured in our nation's commitment to health care that would build on the combined expertise of the medical schools, public health departments, regional health systems, our layered system of legislative responsibilities, and individual primary physicians for the single purpose of providing available, accessible, effective and efficient health care to all citizens.

Every day I witness a continuing array of actions that undermine the spetacular expertise of specialists and nurses because collaboration, translucency or trust were not part of the basis for a patient's health care. On this the first day of your Blog, I ask The Commonwealth Fund to channel your resources for the sole purpose of creating a basis for health care reform that is fundamently based on collaboration, translucency and trust. I am not sure that increasingly sophisticated funding processes will have the capacity to represent these values. Given the complexity of our nation, the federal reallocation of our nation's resources as a means for health care reform is unlikely to build the capacity for offering justly equitable health care to all citizens.