'Public Option' or Co-Op? Experts Sound Off Experts say past nonprofit co-ops could not compete with private insurers.

Aug. 18, 2009 -- Murmurs from the White House that the government-sponsored public insurance option could be negotiated or even dropped from President Obama's health care reform plan in favor of nonprofit cooperatives has left the medical community abuzz and the public a bit confused.

The talk started Saturday after Obama indicated during a town hall meeting in Colorado that publically funded health insurance was not the centerpiece of his reform plan but "only a sliver" of the solution. And on Sunday, Health and Human Services Secretary Kathleen Sebelius said that co-ops are being considered as an alternative way to fulfill the president's goal of creating more competition in the health insurance industry.

Many policy experts, however, don't see co-ops as a simple substitute for the public option.

"Starting up new co-ops across the country that would effectively compete with the mammoth insurers," said Timothy Jost, a health law expert and professor at the Washington and Lee University School of Law, "is like expecting people to start up electric companies in their garages to compete with the dominant regional power company."

"The public plan is not vital to covering the uninsured," Jost added, but he said using government money to subsidize the uninsured coverage through private insurers "would be like the federal government abandoning the post office and rather paying subsidies for everyone to use Fed Ex. Without any competition, anyone to keep them honest, insurance premiums will go through the roof, and with them the federal deficit."

While politicians are digesting the apparent new turn in the health care debate, doctors and public health experts have gone to great lengths to define the difference between a public option and a co-op and what it means for patients.

What is a 'Public Option'?

The "public option" is a proposal to create a new government insurance program similar to other government insurance programs such as Medicare, Medicaid or the Veterans health care system.

But instead of offering the insurance to a select group -- such as the elderly in Medicare, or poor families as in Medicaid -- the idea would be to offer the government insurance program to a wide swath of the public.

Critics of the public option say it would lead to government rationing of health care, a government takeover of health care that would compete unfairly with the private insurance market.

Losing the Public Option: What It Means

Health professionals' opinions about the massive health care reform proposal have varied widely across the country, especially on whether the bill would result in the government insurance plan negotiating lower pay for doctors.

"Without a public option, there will be no effective cost-control mechanism in the health care reform package," said Dr. Daniel Blumenthal, associate dean for Community Health at the Morehouse School of Medicine in Atlanta.

"Recall that we already pay over twice as much per capita for health care as people in any other developed country. Without cost control, health care reform will implode in a few years," added Blumenthal.

Paul Duncan, professor in the department of Health Services Research, Management and Policy at the University of Florida in Gainesville, agreed that the public option was a way to drive down costs, especially health insurance costs.

"The abject, 50-year failure of the private sector to contain costs and broaden the base of those covered has been so obvious, complete and certain for a half-century, that a 'reformed' system without a public option is almost certain to continue that failure," said Duncan.

But not all doctors agreed that Americans would lose out if the White House dropped the public insurance plan option.

"The public plan, I fear, has come to be viewed as a gimmick, one that would save money by paying lower prices to doctors and hospitals. Doctors and hospitals don't want that, and private insurers agree with them," said Alan Sager, professor of Health Policy and Management at the Boston University School of Public Health.

"The public plan in the House bill is already too weak to have much effect on costs, since it isn't an option for most of the privately insured population," said Joe White, the Luxenberg Family Professor of Public Policy at Case Western Reserve University.

Alternatively, White said an "all-payer rate-setting would provide savings for all the employer-sponsored insurance, so would have much greater immediate effects."

Yet doctors and public health experts also saw the potential loss of a public health insurance plan as a gain for health insurers more than anything else.

"Nobody will benefit from dropping the public option except for health insurance companies," said Blumenthal. "The fact that the public option is now on the chopping block is not a reflection of public opinion -- it is a reflection of the power of health insurance lobbyists."

Others say the public option for health insurance had so little potential to begin with that by dropping it, the nation would not really lose anything at all.

"Nothing will be lost. The public option would have been a nightmare to design and administer," said David Dranove, the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University.

Dranove, however, wasn't a fan of the alternative co-ops either. According to Dranove, state experiments with non-profit co-ops that would have been a testing ground for a federal option have failed to get off the ground.

"Every state has tried to run something akin to a nonprofit co-op, albeit usually with an emphasis on serving small business or high risk enrollees. Total enrollments nationwide are about 200,000,"said Dranove. "Enough said about their success."

What Is a Co-Op?

Essentially, a nonprofit insurance co-op is a company owned by its members -- the same people who are insured by the company.

Whereas private insurers must answer to the investors who own stock in the company whether the investors get their health insurance from the private company or not, a nonprofit co-op answers its members.

Few details have emerged about the nonprofit co-ops discussed in the Senate Finance Committee, but it is generally assumed that the government would spend the money to get the co-ops started and then turn them over to the members.

But for many doctors waiting to hear the end result of reform discussions, the devil is in the details.

"It's somewhat difficult to comment on the specifics of the 'co-op' option until we see the details. A critical issue will be whether the co-ops will be nationally based, state-based, or both," said Dr. Tim Carey, at the University of North Carolina in Chapel Hill.

Carey explained that state-based co-ops would have "local responsiveness," but would have a difficult time competing with large health insurers and would therefore be ineffective at driving down insurance costs.

"We do have a long history of co-ops in the U.S., but their role has been somewhat limited. Group Health Cooperative of Puget Sound is the most frequently cited example, and has a track record of community responsiveness, high quality care, and solvency," said Carey.

The Co-Op: A Healthy Alternative?

While a few, small, non-profit co-ops have been successful, many doctors worried that the country lacked funds to build a nonprofit system enough to compete with private health insurers.

"A lot depends on the details of how the coops are set up (federal, state or local level) and the regulatory environment that is created by the health reform legislation," said Pauline Vaillancourt Rosenau, a professor at the University of Texas Health Science Center School of Public Health in Houston.

"Obtaining start-up funds and building an infrastructure from scratch may be insurmountable obstacles," she said.

Even if the government did find the funds to set up co-ops, other doctors worried that the nonprofit co-ops would want to become private insurance companies like successful co-ops before them.

"We once had private nonprofit insurance cooperatives. They were called Blue Cross Blue Shield -- legally owned by their members and therefore coops really," said Uwe Reinhardt, a professor of Economics and Public Affairs at Princeton University.

"Most of them have gone for profit on the ground that, to compete with commercial insurers, they must have access to the public equity market. That's the ostensible rationale, which I found unconvincing. These entities are so cash rich that they hardly ever need to go to the equity market to sell equity in return for cash," he said.

Reinhardt predicted that if Congress sets up co-op insurers, in a few years "their executives will clamor to convert them to regular commercial insurers, like Aetna and WellPoint."

"One does not have to be a cynic to see that one coming," he said.

In the meantime, America is waiting for Congress to return from the August recess.

ABC News' Dan Childs contributed to this report.