In lieu of a single payer national healthcare system run by the Federal Government some Congressional Democrats are proposing to establish national healthcare cooperatives owned by their policy holders instead. This has a nice ring to it and cooperatives represent a long standing tradition in the United States – people with a mutual interest getting together to pool resources for a mutual benefit and achieve common goals.
In fact cooperatives, or better yet – burial societies, go back to the early days of the republic when neighbors and co-workers got together to create money pots that were tapped when one of the participants died to pay burial expenses. This is how the savings and loan industry got started in early America as neighbors again pooled their money so each in turn could have funds available to build a home. Over the next two centuries these nascent financial institutions gradually grew into a major industry with its major players listed on the New York Stock Exchange before they all crashed and burned in the late 1980s.
The cooperative approach is also how the American insurance industry came to be. Starting in the 1790s, people with a common interest got together to pool dedicated funds to support ‘widows and orphans’ when one of the co-op’s members died prematurely. Like the mutual building associations, these nascent insurance pools quickly developed to cover all of life’s living and commercial risks eventually evolved into major financial institutions, albeit the early one’s had to occasionally call for more money through special assessments to maintain their solvency and continue to pay claims.
Eventually these emerging insurance companies were able to establish investment reserves and accumulate enough statistics on their ‘policy holders’ to formulate the actuarial science that we’re all familiar with today. This latter point was critical because by using actuarial science, insurance companies, especially those providing life and health insurance, could accurately calculate the probability of having to pay claims and when in the future it was likely that a claim would have to be paid. This enabled them to more precisely match policy premiums with their reserve requirements which made sure the cash would be available to pay a claim when it was likely to occur.
With the more precise match between revenue flows from policy premiums and expected claims payment dates based on actuarial statistics, insurance companies were able to compete with each other based on premium costs knowing how low they could cut premiums and still stay solvent. When they found that revenue from premiums, knowing their expected payout needs with an element of certainty, they could return the ‘excess’ to paying policy holders as dividends, or at least that’s the definition used by the life insurance industry when prospective agents take their state insurance qualifying exams.
One key point that we overlook is that most life and health insurance companies were legally mutual benefit companies up until the industry needed heavy infusions of capital in the 1980s. This meant that technically they were owned by their policy holders in direct proportion to one’s insurance coverage and that management was answerable to its policy holders just like publicly traded companies are answerable to their stockholders. Thus for most of their existence, companies like John Hancock, Metropolitan Life, New York Life, Massachusetts Mutual, etc. through to the various Blue Crosses and Blue Shields were in fact cooperatives until they went public to garner the cash needed to expand their businesses in the late 20th Century.
Another key point is that the development of the policy holder owned (cooperative) insurance company with its billions in assets was an evolutionary process that met the needs of Americans as they appeared. They were not ‘top-down’ aberrations created by the government to fulfill some utopian fantasies and this is where long standing American tradition diverges from what Congressional Democrats envision in their efforts to navigate around the issues generated by proposing ‘government option’ health insurance plans; ie: one purchases health insurance directly from the Federal Government just like the Japanese purchase retirement annuities directly from their government through the national postal savings plan.
In theory of course, these government created and mandated health insurance cooperatives would be owned and governed by their members – allegedly, thee and me, just like the long standing mutual benefit insurance companies the United States has had for decades. The question is, juxtaposed to over a century’s worth of capital accumulation and acquisition of necessary actuarial statistics of today’s health insurance industry, is how these government created cooperatives are going to operate.
First up is the issue of who’s going to fork over all the proprietary data that’s taken in some cases well over 100 years to collect? The Federal Government possesses massive data banks on its citizens, mostly from the collection of census data since 1800. However none of this data is actuarial for the purposes of insurance because the government doesn’t have to match premium income with the future payment of claims and remain solvent for generations. It just willy nilly pays out money.
Another significant question is how are these cooperatives created by legislative fiat going to be capitalized. The insurance industry has spent over a century going from ‘good buddy’ arrangements to becoming the capital intensive power-houses they are today. It will take years of premium payments by citizen owners above the necessary equilibrium level to maintain balance between revenue and future payouts before these government cooperatives are adequately capitalized to where they can function as self-sustaining bodies.
Plus they’re going to have to pay out money from the get-go as ‘policy holders’ incur medical expenses. They just can’t sit there and freeze policy payouts for a few years as they accumulate capital. Thus the taxpayers are going to have to make up the difference from inception which defeats the nature of a cooperative and make the cooperatives wards of the government forever. Since they’re likely to be wards of the government, the probability is that despite ostensible policy holder ownership, co-op boards of directors will probably be patronage babies subject to Congressional approval supervising a horde of government bureaucrats who’ll have no experience in the industry and thus no idea as to what the proper premium structure should be.
Given this, there will be no particular requirement for these pseudo co-ops to set policy premiums at least equal to their projected payouts; nor will they necessarily need to build up reserves and stand ready to contribute to bailing out failed competitors as required by various state insurance laws – meaning that their ‘policy premiums’ most likely will be whatever is politically expedient and private insurers, for profit or not, will probably always need to charge higher premium rates to remain solvent and thus lose out in the end. So at best, assuming the cooperative idea successfully makes its way into law, we’re looking at institutions that’ll replicate other government sponsored corporations like Fannie Mae and Freddie Mac, or at worse become another variant in the administration of nationalized healthcare – leaving individual Americans with no choice but to surrender their healthcare to the whims of government agencies.
