Co-Ops vs. Big Insurance: David vs. Goliath?

After I recently commented on HealthBeat Blog about co-ops, one of their readers posted the following:

A.J.

With your 30 years of experience, do you have any suggestions of ways to compete with the big boys, that is not government funded? Co-ops are intended to be member owned and member run (the government is not supposed to be a member). They also are intended to be the David that changed Goliath's way of doing business.

Here's my response:

The best way to compete is one that's worked for major clients of mine for the past 15 years: Eliminate the managed care middleman and contract directly with medical providers.

This approach, not co-ops, is the real David vs. Goliath. It calls for exceptionally bold and confident CEOs (who've historically stayed uninvolved in matters related to health benefits within their own companies) to leave their big carrier and contract directly with doctors and hospitals.

If you go to my corporate website ajlester. com, you'll find case studies of companies that have successfully developed their own direct networks. In doing so, they've regained the control over their health care plan operations and finances that most employers have relinquished to managed care companies.

For self-insured employers (the majority of larger companies are self-insured), medical claims are paid by the insurance company using the employer's funds according to the contracted terms and and reimbursements of the managed care network's provider agreements. The employer has zero input or control over these agreements, and little, if any influence over how the claims are paid. Blue Cross, United, Aetna, Cigna, and others never release details of their agreements with providers, so it's impossible for employers to know whether they're fair or the actual amount of the middleman "skim." All the employer knows is that plan costs keep rising every year.

In the direct contracting model, claims are paid from the employer's funds, but they're processed by independent Third Party Administrators (TPAs) according to the contractual terms and reimbursements negotiated directly between the employer and the medical providers. This pure "buyer-seller" relationship is unencumbered by the managed care middleman's profit motives and need for total control.

The idea behind co-ops is a good one, but unless the largest employers, who are now clients of and held hostage by the Big Insurance carriers, are willing to leave those carriers and get behind the co-ops, the whole idea will fail.

The giant managed care companies have been so effective as middlemen that most employers and providers believe there's no really credible alternative. The middlemen have created a fallacy that passes as a virtually unassailable form of conventional wisdom among employers. It goes something like this: "If Blue Cross (or United, Aetna, etc.) with their size and millions of members can't handle this, no one can." Consequently, otherwise business-savvy employers and medical providers summarily dismiss the idea of directly contracting with each other. They remain hostages of Big Insurance.

My concern is that this prevailing belief will carry over into any consideration of co-ops as a viable alternative. In any given market, co-ops will have to go in and compete with a middleman-created business model that's brainwashed employers and providers into thinking there's no other way to do business.

Over the years, I've found some success at overcoming that brainwashing whenever we've approached providers with the idea of contracting directly with employers in their own community. If the employer is committed to the approach, most providers jump at the opportunity for a direct agreement. Although it's almost always perceived as a good business decision for providers to make, sometimes its biggest attraction is that it is NOT a conventional commercial PPO network agreement. At those times, in that situation, the direct employer/provider agreement is the only respite from the managed care "hostage" situation that most employers or providers will ever experience.