Co-ops vs. the Public Option – Same Flaws Hidden Behind a Friendlier Term

The Obama Administration has understood the fact that many Americans do not want a public insurance option. Although it is currently unclear as to whether or not the Administration will abandon the public option, the co-op solution that is gaining some support will extend the same problems that the current health care system has to more people. The only difference between co-ops and the public option is that the term “co-op” doesn’t have as negative of a connotation as “government run.” Once again, politics is put ahead of real solutions that will work.

The lawmakers’ rationale behind the co-op system is that the creation of private, not-for-profit insurance companies will serve as competition to for-profit private insurance companies in an effort to bring down the cost of insurance. This conclusion is illogical because profits are not the reason for the high cost of health insurance, and the following provides a better analysis:

The Misuse of Insurance

Over the years, health insurance has evolved into the key for getting access to health services as opposed to being a safeguard against catastrophe. Thousands of federal and state mandates exist that define coverage – from prescription drugs to hair transplants. When insurance companies are required to cover certain procedures and medications, the cost will rise. In addition, insurance coverage boosts the demand for services, but supply cannot grow at the same rate which also leads to higher costs.

The current system has the government defining the medical services that should be covered and mandates how insurance companies are able to charge for premiums. The community rating system establishes limits in charging different prices to different consumers which results in healthier people paying for those in poor health who require more care.

The co-op system focuses on getting people insured, when the focus should be on limiting the role health insurance plays in getting access to health care. Instead, co-ops will continue to boost the demand without addressing supply.

Three Percent Profit Margin vs. Not-for Profit

It has been established that the inception of co-ops will continue to stimulate demand for health services without addressing supply. Next, let’s examine the insurance companies’ profit margin. For-profit insurance companies average a 3.3 percent profit margin, and there are 85 industries that do better. (1) Ironically, the beverage/brewer industry is number one with a whopping 25.9 percent profit margin, yet there are no politicians complaining that we have a beverage crisis! Has there ever been a time where news reporters have interviewed families who cannot provide their children with a soda pop treat, or college kids complaining that the cost of a keg for their Friday night bash is killing their future?

Therefore, how can politicians blame profits when it is illogical to conclude that a 3.3 percent profit margin is driving up the cost of care? If co-ops serve their purpose, then they can reduce the cost of premiums by 3.3 percent. In addition, this cost reduction may not even be possible due to the supply/demand concern.

Public vs. Not-for Profit in “Capital” Terms

This is a concern that is currently being glossed over by lawmakers. If co-ops are to be established, then how will they be funded; and how much of a role will government funding play? Not-for-profit companies do not have the advantages that publicly traded companies have when it comes to raising capital. For example, not-for-profit companies cannot issue common stock or sell bonds in the open market to raise capital.

The issue of raising capital is a critical issue to address since start-up costs will be involved in the establishment of co-ops. There are federal and state laws that require insurers to hold reserves of up to one-third of premiums. If co-ops are to be established in every state, it is possible that the federal government will have to contribute billions of dollars just in start-up costs without even addressing future capital requirements. The result would be as economically catastrophic as a public option and still does not address the high costs of insurance.

The Fallacy of Profits at the Expense of Care

One talking point that liberal politicians cling to is the argument that profit or the incentive to make a profit comes at the expense of quality care. This argument may have some merit if the majority of the health care industry was for profit, and the for-profit sector had very high profit margins. However, the opposite is true. According to the American Hospital Association’s 2007 annual survey, about 15.2 percent of registered hospitals in the United States are for-profit. (2) In addition, for-profit hospitals are not faring much better than the insurance companies as their average profit margin is 3.6 percent. (1)

Another aspect of this argument to consider is that the need to control costs does not disappear with the incentive to make a profit, as funds and resources are limited. However, there might be a correlation between limited resources and removing the incentive to profit. Returning to the beverage industry example, it seems that the supply of beverages is ample and the product is affordable, yet this industry is the most profitable. Although the beverage industry and the health care industry are completely different, the point to be made is that the incentive to profit boots SUPPLY. The problem with rising health care costs leads back to the simple economic concept of supply and demand.

In conclusion, if the government lets the free market work, as opposed to attempting to stifle incentive, we will solve the problem of high costs.


(1) http://seekingalpha.com/article/155858-health-insurance-industry-s-profit-margins-rank-86?source=yahoo

(2) http://www.aha.org/aha/resource-center/Statistics-and-Studies/fast-facts.html