Senator Kent Conrad, Democrat of North Dakota is pushing the health insurance cooperative, so what is a co-op anyway and can it compete with for profit insurance and lower costs?

First we have to understand that there are two kinds of insurance co-ops, there is the health insurance purchasing co-op and there is the health insurance provider co-op.

The Insurance Purchasing Co-Op
The purchasing co- op is not an insurance provider, it is what it is, a bargaining group  who wrangles with  insurance companies to buy insurance from an exchange. The exchange being the already established insurance companies. The catch here is that the 1300 insurance companies that exist are regionally entrenched, some control huge shares of the market in their region. For example: The major insurance companies market share  by state if over 40%:

[1] Blue Cross Blue Shield  : Al  71%, AR 56%, DE 59%,DC/No.Va 69% ,ID  58%,IA 66%, IL 47%,LA 42%,MA 47%, MN 53%,MS 47%,MT 59%,NE 54%, NC 50%,ND 51%,OR 43%,PA 63%,RI 56%,SC 44%,SD 56%,TN 43%,VT 44%,WV 43%,WA 51%.

Now look at Blue Cross' share in these states,  CO 0%,CT 0%,GA 0%,IN 0%,KY 0%,ME 0%,,NV 0%,NH 0%, OH 0%,VA 0%,WI 0%.

Dont worry the states where  Blue Cross is small or 0% are picked up by others

[2] Wellpoint : CT 57%,GA 43%,IN 46%,KY 46%,ME 70%, NH 66%.MO 36%,VA 57%
[3] The other players: United Health Group,Aetna,and Cigna

It is easier to look at the chart Share chart   from this article  Health Affairs

What this shows is the problem facing an insurance purchasing co-op, there is going to be a the lack of choice and competition in their region which is dominated by a these large entities. Actually these figures are much higher now because this study was in 2003.Now add to that a  mandate which will most likely be added in the finished bill and you can see that the insurance purchasing co-op becomes a windfall of new customers and money for the entrenched insurance companies, with a large portion of the money for premiums coming from tax dollars.These co-ops have no chance of even getting a foothold on this turf. What about the other type co-op?

The Health Insurance Provider Co-Op

The basic idea of the health insurance provider co-op  is that you get a group of consumers together and start a company to provide everyone in the group with  insurance. In the 1930,s and 1940,s  we had a few of them subsidized  by the Farm Security Administration .There were 600,000 people in the Midwest who were insured through them. In 1947 the Farm Security Administration withdrew support and in short order the co-ops collapsed. Two have survived, Group Health Cooperative of Washington and Health Partners in Minnesota. They've basically become like other insurance companies.

The true health insurance provider co-op  is one that would  function as an insurer themselves. The dilemma is that it's really really difficult to start up an insurance company from scratch. You can't just get a bunch of people together and say, "We're going to start an insurance co-op."  You would have to develop your own network  by finding doctors and hospitals and then negotiate contracts. Most are already locked up by the dominant insurers. They're certainly not going to give  a tiny co-op  a better deal. That is assuming they'll deal with you at all. The alternative would be to rent a network, but you're basically buying your product from your competitor. There's no way you'll get a good deal there, either.

You need to establish a brand identity, figure out how to handle claims, develop actuarial expertise, establish reserves, meet state licensing requirements and solvency requirements. The thought that you'll have a few businessmen get together and set up a co-op that will compete with Aetna or Cigna is just dreaming. It's not going to happen.

Who knows? Maybe some consumers might put together a co-op that would survive. But the idea that co-ops will provide competition in the private market that would have effect on cost is an illusion. The insurance giants see co-ops as a minor inconvenience, like nats on an elephants behind.

The public option is the only thing with the strength to break the strangle hold big insurance holds on the American people. If you had a public plan that could use Medicare rates, the infrastructure would already be there, and the network would already be there. Providers could always opt out, as they do today.It could compete with for profit health insurance.

Why people believe the public option will destroy the private insurance market makes no sense.In Germany and Australia, they have competition of public plans and private plans. In fact, what has happened is that the market stabilizes, the public plan provides things some people want, and private plans provide things other people want. What you end up with eventually is a market in which people get what they want.

The Congressional Budget Office predicted in its analysis of the House bill that about two-thirds of people who had the option would go for private market and one-third for public. The vast majority -- about 160 million -- would stay in employer-covered plans, because the exchange wouldn't be available to them. Probably some people will go with the public option because it's cheaper. Others may think private insurance will offer more care or broader coverage.

The market will sort itself out, in Germany 50 percent of people go public, and 50 percent private. About the only thing the co-ops may have the strength to do is make it through the Senate so we can get  this thing moving again, after which the full Congress and not six Senators will decide what to keep and what to scrap.