When negotiators wrapped up their fiscal cliff negotiations, among the quiet casualties were insurance co-ops, which had been hailed during the long Obamacare debate as an alternative to giant insurance companies.

While trade and business pubs covered the co-ops’ demise, the mainstream media hardly noticed. The Washington Post and a few outlets in states like Montana, Kansas, and New Hampshire, where pending applications won’t go forward, picked up the story.

What a contrast to the press barrage surrounding the so-called public option during debate on the Affordable Care Act in 2009-2010! Back then many former single-payer advocates, progressives, and just plain ordinary folks who were angry at insurers and our fractured healthcare system believed that nonprofit co-ops— with boards composed of public representatives, and no imperative to placate the gods of Wall Street—might give the big boys a run for their money, by selling consumer-friendly, cheaper, and more comprehensive insurance. So as sort of a consolation prize when the public option went down in flames, Congress set aside $6 billion to develop the co-op alternative. In the last couple of years the feds approved applications for 24 co-ops, and those organizations expect to be offering policies in the new state exchanges on Oct. 1.

It seems, though, that the big insurers weren’t eager for more co-ops to get started, says John Morrison, Montana’s former insurance commissioner, now president of a new trade association, the National Alliance of State Health Cooperatives. In the final fiscal cliff deal, Congressional negotiators killed funding for the development of 40 more co-ops whose applications were pending. One in West Virginia, for example, was ready and waiting to become official a few days after the new year began. It will not go forward.

“I don’t know anyone in the co-op world or at HHS who says they had the slightest inkling this was going to happen,” Morrison said. “The deal was made in the dark of night, with no notice to stakeholders.” With no funding, it’s unlikely that new co-ops will emerge—in effect leaving Aetna, Cigna, UnitedHealthcare, and WellPoint running the show.

Déjà vu, huh? Insurance companies lobbied super hard against the public option, which it saw as a mighty threat to its business. After months of indecision and vacillation, the politicians announced there would be no public option—only these co-ops instead. They were never expected to gain a whole lot of traction, Morrison said. Still, supporters argued co-ops could help small businesses buy insurance in noncompetitive markets in rural areas.

The Affordable Care Act called for $6 billion in federal loans to cover co-ops’ start-up costs and help them meet state regulations to maintain solvency. In 2011 Congress cut that amount to $3.4 billion in budget reauthorizations. Republicans questioned whether the co-ops could repay their loans. But was there more to the story? Morrison said $3.4 billion was still enough money to get the co-ops off the ground, and he maintains that the insurers got worried about competition from them, especially since some regulatory decisions, as co-ops were being developed, did not go their way.

Junking the co-ops “was not about money,” Morrison said. “It was about stopping the spread of co-ops.” Killing all the funding certainly does that.

Some consumer advocates have argued that the co-ops were crippled from the start. Even for those that do begin operating, their days may be numbered.”The co-ops were set up to fail,” one advocate told me. They cannot use federal money to market their policies. Without advertising and marketing campaigns how are shoppers to learn about their policies? Perhaps that was the point.

Morrison explained that, yes, the co-ops can’t advertise their products like big carriers can, but they can use federal money for public education. “The CEO of a co-op can speak at the Rotary Club,” he said. It’s hard see how one speech, or even two or three, will be enough to spread the word and bring in revenue to keep the doors open and repay the federal loan.

TAGS: , , ,

Trudy Lieberman is a fellow at the Center for Advancing Health and a longtime contributing editor to the Columbia Journalism Review. She is the lead writer for The Second Opinion, CJR’s healthcare desk, which is part of our United States Project on the coverage of politics and policy. Follow her on Twitter @Trudy_Lieberman.