President Barack Obama’s desire for government-run health insurance, aka the “public option,” is threatening to kill health care reform. Now some Senators are floating a “compromise” plan that would create cooperative plans as an alternative to a government-run public plan. True co-ops have a long and proud tradition in many sectors of the U.S. economy, including health care. But the plan currently being floated in the Senate takes the co-op concept in the wrong direction. The Washington Post reports:

In its place, the draft circulated yesterday outlines a co-op approach modeled after rural electricity and telecom providers, subject to government oversight and funded with federal seed money.

Federal funding and regulation are a recipe for health care co-op disaster. Heritage fellows Edmund Haislmaier, Dennis Smith, and Nina Owcharenko explain:

Senator Charles Schumer (D-NY), a supporter of a public plan, introduced his key principles on a co-op system that go in the wrong direction and would end up with a federally run public plan in all but name. He states that a co-op must be national in scope, it must secure significant federal start-up funding, and it must be run by federal officials appointed by the President.

here are “co-op” models that are the wrong way to provide health care and should be unacceptable to lawmakers, such as Senator Schumer’s thinly veiled public plan version. Simply calling some form of a government-sponsored enterprise (GSE) a “cooperative,” for instance, would be only another type of public plan in disguise.

One need look no further than Fannie Mae and Freddie Mac to see how GSEs can distort the market and leave taxpayers with huge liabilities. Decades of market distortions generated by their implicit government backing, compounded by the effects of repeated political meddling by Congress, put those GSEs at the very epicenter of the mortgage market collapse that triggered the current financial crisis and recession. Furthermore, that GSE approach has now saddled American taxpayers with hundreds of billions of dollars in liabilities for just Fannie and Freddie alone–not counting the additional costs of the follow-on effects that their market-distorting practices produced in the rest of the financial system.

If Senators believe co-ops are the right way to reform health care, then they need to get the government out of the way of their creation. Haislmaier, et al, again:

Some argue that federal involvement is necessary to organize, regulate, and “jumpstart” co-ops financially in the health sector. However, what is actually needed to allow health co-ops to flourish is for the federal government to remove barriers in the marketplace–most importantly itself.

If Congress wants to provide Americans access to health co-ops, it would need to make it possible for an institution to combine tax-exempt (non-profit) status with mutual insurance status, something health plans cannot do today. Congress should allow mutual health insurance companies to form based on the credit union model. Under this model, Congress would simply grant non-profit status to mutual insurance companies, justified by the “member benefit” they provide.

Very likely, with this form of health care arrangement possible, various non-profit memberships and other organizations might link with a health co-op to make coverage available. State farm bureaus or consortia of churches, for instance, could establish such co-op health insurance.

In addition to these steps, addressing the tax treatment of health plan benefits in the individual tax code would help spur co-ops. If families could receive the same tax relief for joining a co-op–or any other free-standing health plan–as for enrolling in an employer-sponsored plan, there would be new options for the uninsured or underinsured.