States Can Lead in Health Care Cost-Cutting

Co-ops could change the economics of the industry.
September 10, 2009 AT 3:00 AM
Girard Miller
By Girard Miller  |  columnist
Girard Miller is the Public Money columnist for GOVERNING and a senior strategist at the PFM Group.

The health care buzzword inside the Washington, D.C., beltway last month was "cooperatives." Insiders were theorizing about how they could provide alternatives to a government-run "public option" versus the insurance industry's conventional coverage of health care. Because there is no federal monopoly, the co-op concept escapes the ideological debates that erupt when "nationalized" or "socialized" health care is discussed. But very few urban Americans actually know what a cooperative is or means.

Farmers understand cooperative grain elevators and marketing collectives. Typically they jointly own a big facility to attain economies of scale and share in the savings and market power they enjoy collectively. Sometimes they combine forces to sell their milk, butter and other products and gain pricing leverage. That's a producer's cooperative. In today's context, however, we are talking about a purchasers' cooperative.

Cooperatives should not be confused with other non-profit organizations. For example, Blue Cross and Blue Shield were organized originally as non-profit underwriters of health insurance. In fact, they remain a leading vendor of individual insurance policies as well as the group health policies -- the kind often purchased by state and local government employers.

In the context of health care reform, the "co-op" idea is that not-for-profit organizations would provide group purchasing on behalf of individual consumers and even employer groups. The key economic concept is that joint purchasing power is stronger than individuals' or small-group bargaining power. Economies of scale can be enjoyed when very large numbers of consumers are represented by a single agent acting as the buyer on their behalf. Private industry can't afford to walk away from the collective group if there is money still to be made.

Municipal officials are already familiar with joint purchasing. Smaller towns often piggyback on state and county purchasing departments to enjoy group discounts on products as diverse as police cars and copying machine paper. Some are even members of state-run health care cooperatives. For example, California's goliath CalPERS pension organization is also the state's single largest purchaser of health insurance on behalf of hundreds of thousands of public employees statewide. They do a commendable job of "bending the cost curve" by aggregating demand and eliminating the marketing costs that the providers and insurance companies would bear if they had to peddle individual contracts -- not to mention the hassles of bill collection and payment delinquencies. Municipalities learned long ago that they often get a better deal on health care coverage by purchasing voluntarily through CalPERS.

So here's how the states can help drive costs of health care lower for their individual citizens: by enabling statewide and even interstate cooperating health care purchasing arrangements on terms comparably favorable to their own employees' group plans. That doesn't mean that taxpayers should subsidize the costs of other residents, but it does mean that there is already a nucleus of marketing clout residing within many of the statewide employee benefits plans that can be leveraged to drive costs lower for everybody -- both the state and municipal governments as employers, as well as private individuals who do not work for government.

What I like most about this idea is that for once, individual citizens working in the private sector and retirees can benefit from some of the public-employee benefits that often are envied by private individuals and taxpayer groups. The private consumers should pay similar (but not identical) risk-based premiums on a group-wide basis, reflecting genuine actuarial differences to the extent allowed by law and the higher collection costs of billing individuals including deadbeats and hardship cases.

In these days of "pension envy" and "benefits apartheid," it would be really nice to see a program in which ordinary taxpayers could get a deal in the same price range as public employers pay for their workers. That might help heal the political rift that keeps widening between the two groups.

All it takes in many cases is state-specific legislation to extend group purchasing power for public-employee health care to state and regional cooperatives that also include individual citizens. In some cases, the existing organizational framework can service the private-sector members as well, as could be the case with an organization like CalPERS if it were given broader legal authority. In other cases, it may require a third-party entrepreneur to provide the systems and service infrastructure to make it all work, operating as a contractor for the non-profit organization.

As President Obama has repeatedly claimed, nobody needs to abandon their existing health care providers and insurers if they are happy with them. On the other hand, the efficiencies of group purchasing should be made available to all Americans, and this is where state and local governments can provide a valuable competitive benchmark. All insurance companies will have an opportunity to bid for the business at a producer level, and I'm willing to bet that their prices will be lower than they charge most individuals.

Each state needs to find its own path to optimum efficiency. No subsidies, please, just honest cost-sharing from economies of scale and collective bargaining power. This is a wonderful opportunity for creative federalism to flourish. As they said in Sparta, "Let the Games begin."

In this week's companion column, Girard Miller addresses the potential opportunities for Medicare reform and its impact on state and local government health care costs.