Obamacare Expected to Deform Insurance Cooperatives

Published August 23, 2011

One aspect of President Obama’s health care law which has received little notice is its effect on health insurance cooperatives, budgeting $4 billion in grants for the redesign of these nonprofit entities. As more details about the redesign of these cooperatives emerge, it now appears the products they will have to offer may be very unattractive to consumers and insurers.

According to Ed Haislmaier, a senior research fellow at The Heritage Foundation, the provisions associated with cooperatives are ill-formed artifacts of the unusual legislative process used to pass the law.

“This was created by someone who had no idea what they were doing and probably didn’t realize they were reinventing something, trying to design a cooperative insurance company as if this were a new idea,” Haislmaier said. “They were floundering around trying to give cover to moderate Democratic Senators to vote for this law. Instead of just treating nonprofit mutual health insurers the way you treat credit unions, which is they have their own tax exemption, this was an attempt to achieve a political solution.”

Never Designed to Exist

Haislmaier maintains the provisions were inserted to get the vote of a particular legislator but were never really designed to exist in practice.

“The problem with the Act’s seeming reinvention of health insurance cooperatives is that it doesn’t do it very well,” Haislmaier said, “If you are a policy holder with Northwestern Mutual or State Farm, you have a property right. But Obamacare does goofy things to these cooperatives. They are supposed to be consumer-focused and consumer-driven, but the law doesn’t explicitly say that the governance has to be by the members, which is what a mutual company does.”

Haislmaier notes that while the law endorses $4 billion in grant money to reform these co-ops, the funding comes with “bizarre restrictions” on who can operate them.

“According to the law, you can’t have anyone in the cooperatives from the insurance industry,” Haislmaier said. “How are you going to run an insurance company without people from the insurance industry?”

Focused on Government, Not Community

John Graham, director of health care studies at the Pacific Research Institute, says Obamacare will “deform” the insurance cooperatives.

“These mutual insurers, organized as cooperatives, evolved organically many decades ago to serve the needs of their communities,” Graham said. “The problem with this $4 billion in funding is that it will deform the co-ops—you’re going to have co-ops that are focused on the needs of the federal government and not the needs of their local communities.”

Haislmaier maintains the reform was conducted by people ignorant of the market effects.

According to Grace-Marie Turner, president of the Galen Institute, it is unlikely the president would sign any law fixing the cooperative process.

“President Obama considers every part to be sacrosanct, and he’s worried that anything that they change is going to start the whole thing unraveling,” Turner said. “So it’s very difficult, even if there are obvious problem areas that need reform.”