A Few Notes on Cooperatives

June 15, 2009 at 1:50 pm (By Maxwell James)

Amba brought up Kent Conrad’s alternative to the so-called “public option” in healthcare reform, which is to have the government charter a large healthcare insurance co-operative that might compete with the private insurance market. Having read a few articles now, I think the most helpful thing I can do is offer a few resources and clarifications as to what this would actually mean.

First, it is essential to understand that at root, a cooperative is an alternative approach to financing a business. Every business is financed through some combination of equity and debt, with the equity provided by the owners  and the debt provided by lenders. Lenders receive regular interest payments in return for their financing of the business; in the case of bankruptcy, they also usually get their money back before equity holders do (and therefore get more of it back)*. Owners have a right to the residual profits of the company, i.e. profits after all interest and taxes have been paid. They also can exert control over the company’s decisions through shareholder vote, with each owner enjoying a vote in proportion to his or her shares.

In a cooperative, every owner receives one vote regardless of how many shares they own. This is the core difference between cooperatives and other business forms, and it leads to many other differences. First, it generally leads to a much more equitable distribution of ownership shares, as there is no incentive to purchase more than the minimum number. Second, it means that a co-op is generally going to have less financing than an equivalent private or public enterprise, because a) wealthy investors who could invest more in a co-op have no reason to do so, and b) co-op shares cannot be traded to increase their value through speculation, as that would inevitably erode the one person – one vote rule at the heart of the model.

A corollary implication is that to be viable, co-ops need to make up in numbers what they lack in dollars. So even a very small co-op, such as the one where I used to work ($7 million in annual revenues), will have a large number of shareholders (in that case, over 3000). This means that that their products have to have broad appeal and that they have to be built on business models that are clearly understandable to most people (i.e., meet the Warren Buffet test). Hence, co-ops tend to focus mostly on providing highly essential and universally desired products or services, such as agricultural goods, electricity, banking, or healthcare insurance.

The main criticism of the cooperative model is that it doesn’t facilitate growth, because it offers no incentives for wealthy investors to pony up. Which is true, but it’s worth noting that there are some pretty large co-ops around the world. The main argument in favor of the co-op model is that it is more democratic than other models; the barriers to investing in a co-op are very, very low, and compared to other models the level of shareholder involvement tends to be fairly broad. But that can be overstated: most co-ops see voter participation levels between 10-20 percent, which is about on par with public companies.**

Now, one way that a co-op can scale up on the level of a large corporate entity is through government intervention, which is what the Conrad proposal would accomplish. I would expect this to be the main point of contention coming from conservatives over the co-op, if it indeed turns out to be the compromise of choice. The numbers I’ve seen floated around for this year’s healthcare reform bill have been around $600 billion or so; that would constitute some pretty significant seed funding for any organization. I am skeptical whether such an entity could even be fairly called a co-op.

If denied such levels of funding the organization could be troubled by adverse selection problems, with the people most eager for membership being those people whose healthcare would probably cost the most. If that is the case, the co-op could find itself unable to actually compete on cost – supposedly its entire reason for being. It’s worth noting that in many ways this co-op idea resembles Obama’s campaign proposal of a public option without mandated use.

Finally, it has frequently been argued that the “public option” would amount to single-payer by stealth, especially if it were funded by said $600 billion or so. Well, a “co-op option” could potentially amount to the same thing if it were large and competitive enough; in fact, Canada’s system of single-payer health insurance very much grew out of the efforts of a number of large, regional co-operatives there (PDF). The northern Italian province of Emilia-Romagna – once a Communist bastion and still very Leftist – has a local economy dominated by cooperatives, including many social service cooperatives. Interestingly, in recent years it has also been one of the economically robust regions in all of Europe, although I don’t know how the recent downturn has changed things there.

* Unless, of course, they are forced by intrusive government to give up their claim, as was recently the case with some of Chrysler’s debtholders.

** My own argument for the co-op model is this: it gives people of limited means a very low-risk investment option that can actually provide very good returns, especially if they are committed to actually using the service or product being financed.

7 Comments

  1. Randy said,

    Interesting idea. We’ve tried “co-ops” in a number of forms already, I think. Many of the original Blue Cross plans, for example. Large HMO’s such as Kaiser. In areas it serves on the West Coast, Kaiser is said to cover around 30% of all insureds. For over a century, almost all of the largest life & health insurers in the United States were mutual organizations owned by the policyholders (Prudential, MetLife, New York Life, John Hancock, Mass Mutual, etc.). Prudential was once the largest underwriter of individual health policies in the country. They lost a fortune in the process and eventually stopped writing new business in the ’80’s. (They demutualized in the ’90’s IIRC.)

  2. amba12 said,

    As you describe it, it doesn’t sound like a very promising idea. If government doesn’t fund it is won’t work, and if government does fund it it won’t really be a co-op. More of a co-opt. :(

  3. Maxwell said,

    Randy,

    Thanks for adding that – it’s an important part of the story that I neglected. I’ll try to get to the history of US mutuals and their decline in a future post.

    amba,

    I wouldn’t describe my viewpoint as negative – more cautious. As I say at the very end, co-ops can be very effective, low-risk investments for people of limited means, especially if they use the services provided. That is _very_ relevant when it comes to healthcare services.

  4. PatHMV said,

    Randy, a friend of mine was in Kaiser once. He hated it. There was only one pharmacy in town he could go to; if that was closed, he was out of luck until it opened again, and its hours weren’t the best in the world.

    That co-ops are better because they are more “democratic” is a very flawed argument, though the flaw a common one among a particular class of supporters of democracy. “Democracy” is not an end in itself, it is a means to an end. The end varies depending on what you’re talking about, of course. For a country, the end is relative freedom, peace, and prosperity. If a benign dictator could actually accomplish that, I’d have no problem with such a dictatorship (they never can, actually, but we’re speaking in the abstract here). For a business, the end is survival, providing a good enough service or product to its customers that it has a steady supply of funds which enables it to pay its workers and, probably, to expand.

    Me, I don’t see how a co-op can function effectively at the scales we’re talking about for national health care. It’s immaterial, at any rate, because the problem we have with health care is not one of governance problems, as I’ll explain in the next comment.

  5. PatHMV said,

    Here’s the thing about health care reform. I don’t see anybody in the national debate looking closely at the real costs, and the different types of costs. Administrative costs are only one portion of the high costs (and I think there are excessive administrative costs largely to comply with government mandates, to police against fraud, and to document defensive medicine practices to minimize the risk of lawsuits). The profits of the HMOs and insurers is also only one portion of the high costs… and those companies are exposed to a great deal of risk, so healthy profits in good times are not inappropriate.

    No, we have a problem because we consume a great deal of health care, and most folks today expect somebody else to pay for that care. No shuffling of corporate forms is going to resolve that problem, nor will moving the whole problem onto the government do so.

    It costs a lot to keep somebody in the hospital for the last week or two of their life, for example. Putting half the population on statins is also quite pricey. Smokers and the morbidly obese use a lot more health care dollars than the average guy, and there’s a lot of both in this country. Every day the “evil” big pharmaceutical companies invent (or put through the rigorous and expensive testing process) new drugs for previously untreatable conditions.

    To cut costs, we either have to find a way to make all of that massively more efficient (assembly line medicine) or we have to figure out how to decide who doesn’t get the best, most expensive types of care, and tell them: “sorry, you’re out of luck.”

    My preference is a largely capitalistic system (far more capitalistic and free market than the hodge-podge crap we have today), where individuals bear more of the costs of certain types of treatments and drugs, in order to let them decide where their own personal priorities lie.

    My favorite example is Lipitor. It is proven to reduce high cholesterol. It has not been shown to actually lower the risk of heart attack (the only real reason to be concerned about high cholesterol). If you get Lipitor for a $5 or $10 co-pay per month, or even no co-pay, then why not go on it? It costs almost nothing, so even if it doesn’t do much, it’s worth it. But if you had to pay the real cost of Lipitor, then you’d likely ask your doctor a LOT more questions about it and why he thinks you need it, and what its advantages are. And you might decide that you’d rather use that $80 or $100 per month on something entirely different.

  6. Randy said,

    Pat, where did your friend live at the time? In the western states, Kaiser’s pharmacies are located in the medical buildings. If someone needs a prescription after hours, it can usually be sent to a local pharmacy of their choice. Kaiser groups in the eastern United States operate on a different model. I have 20+ years of experience picking up Kaiser Rx’s for other family members and never encountered this problem. The care given to my dad for COPD was top-notch by any measure. When he had a heart attack, they sent him to the finest hospital (not a Kasier hospital) in the area – one with a national reputation for its heart specialization. My brother-in-law, also a Kaiser enrollee, is having a triple by-pass today. At Scripps in San Diego, again the #1 hospital in that region for such procedures.

    When my mom was stricken with the exceedingly rare Guillain-Barre Syndrome 2+ years ago, Kaiser once again provided outstanding care. Their rehabilitation center in Vallejo is considered one of the best in the country. Grad students in the field fight to get experience there. 40+ years ago, my great-uncle had his left lung removed at a Kaiser hospital. That was far from being a common or easy procedure at the time.

    While I personally have never been a member of Kaiser, much of my family has and their experiences have been positive.

  7. PatHMV said,

    He was in Pasadena at the time, Randy. I recall him being very unsatisfied with the whole experience. I’m certainly glad they provided your family with such good care.

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