Health co-ops seen minor risk to HMOs, for now

Supporters of the health care reform hold signs outside a health care town hall meeting with U.S. congressman Kendrick Meeks in Miami, Florida September 3, 2009.

NEW YORK (Reuters) - Health care cooperatives have won new prominence as a way the U.S. government may try to provide alternative insurance options for Americans as part of an overhaul of the nation's health system.

But large health insurance companies need not worry about the would-be competition as proposed in a bill from Senator Max Baucus last week, seen by many as the framework for health reform legislation moving forward.

Analysts said the proposal sets the stage for multiple regional co-ops that would likely lack the leverage in negotiating rates to strongly compete against established players.

The co-ops would enroll individuals and small groups, rather than large businesses, also limiting their sway. The bill further appears to avoid giving the co-ops any special pricing power for their plans, analysts said.

"I'm pessimistic that they'll make any difference," said Brian Biles, a former deputy assistant secretary at the U.S. Health and Human Services department and a health policy professor at George Washington University.

"I'm from Kansas, and I've known rural co-ops for my whole life," Biles said. "But they're not big industrial organizations that can compete with Blue Cross, with United (UNH.N) and Humana (HUM.N) that are multi-billion dollar operations."

The bill from Baucus, a Montana Democrat who chairs the powerful Senate Finance Committee, would authorize $6 billion to fund the nonprofit co-ops.

In assessing the Baucus bill, the Congressional Budget Office said the proposed co-ops "had very little effect on the estimates of total enrollment... because, as they are described in the specifications, they seem unlikely to establish a significant market presence in many areas of the country."

LESS DAUNTING

The non-profit co-ops are far less daunting for health insurers than competition from a national government plan, the controversial "public option" proposal included in a competing bill from U.S. House of Representative Democrats.

"If you want do something about the cost problem and you really want to change the competitive nature of the insurance market, you need a public plan," said Karen Davis, president of the Commonwealth Fund, a private foundation that advocates for better healthcare.

Co-ops that are run by their members have long been established in areas of agriculture, electricity and banking. Health co-ops emerged earlier this year as an alternative, and President Barack Obama has signaled an openness to co-ops if Congress cannot agree to back the government option.

Health reform is Obama's top legislative priority. He seeks to expand coverage to the 46 million uninsured Americans while restraining skyrocketing health costs.

The co-ops help make the reforms proposed in the Baucus bill "more market-oriented and less government-oriented," said Dan Mendelson, chief executive officer of Avalere Health, a research and strategic advisory firm.

But the Baucus bill is not the final product.

The concern for health insurers would be how the bill evolves once the Senate attempts to meld its reform legislation with the House version.

The Senate Finance Committee is set to weigh the Baucus bill and any potential changes on Tuesday.

ISSUE OF CLOUT

"The question ultimately is whether these co-ops are given strategic and competitive advantage by virtue of government power," Mendelson said. "I don't think that a local co-op that does not have special pricing power poses a terrible threat to an efficient, well-run health plan."

Baucus' $6 billion in start-up capital could let a plan offer coverage with rock-bottom premiums, posing a serious threat to insurers, said Leerink Swann analyst Jason Gurda.

"If that had gone toward a single plan, that's a decent amount of capital to get a good-sized, competitive company up and running," Gurda said. "But if it's going to be available as grants for a large number of companies around the country, how much is any one existing company going to get? Obviously going to be much, much less."

Gurda echoed several stock analysts in saying the co-ops appeared to pose "very little competitive threat" to publicly traded companies, which include WellPoint (WLP.N), Aetna (AET.N) and Cigna (CI.N).

In a recent report, Sanford Bernstein analyst Ana Gupte found that existing health co-ops in Minnesota and Washington held less than 10 percent and 6 percent market share "with pricing and premium growth not superior to that of key players within our for-profit and publicly traded coverage universe."

Some still see value in the co-op proposal. The co-ops could play the role of "gap filler," Mendelson said, by operating in rural and other areas where insurance companies do not. Davis said the Baucus plan could promote integrated care models that control costs without sacrificing quality.

But Biles and others do not foresee a major splash.

"In a country with 300 million people and a healthcare system of $2.7 trillion," Biles said, "it just doesn't seem plausible they will play a major role all across the country at any time."

(Reporting by Lewis Krauskopf; Editing by Tim Dobbyn)