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Have something you want Kai to explain about the economy? Let us know!

Health co-ops’ struggles could bring higher costs

Dan Gorenstein Oct 20, 2015
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Shareholders in Humana and Aetna signed off on a $34 billion mega-merger Tuesday afternoon.

This deal and the one between Anthem and Cigna are raising questions whether there’s enough competition in the healthcare industry.

At the same time, from Oregon to New York, health insurance co-ops, which were designed to compete against the major insurers, are closing as fast as flop houses in a gentrifying neighborhood.

Harvard’s Katherine Swartz said too many of the 23 co-ops lack deep pockets to sustain multi-year losses, and sophisticated software that makes enrolling consumers easy.

But the third challenge may be the toughest problem to solve.

“You can negotiate lower reimbursement rates if you are an insurance company with a large market share,” she said.  “If you are a small start-up, you don’t have that market share clout.”

Northwestern Kellogg School of Business Professor Leemore Dafny said co-ops’ failures prove something that many observers have known for a long time: it’s exceedingly difficult to break into this business.

“If you would like a new insurer to succeed, we have to make more changes than what these co-ops represented,” she said.

That’s easy to say, Dafny acknowledged, but much harder to pull off.

She said co-ops could stick if someone stepped up to absorb their losses as they launch.

Admittedly, a long shot.

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Fall of the Berlin Wall
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