From an interview in the NYT blog by Anne Underwood of Timothy Stoltzfus Jost, a law professor at Washington and Lee University who has written extensively on health care policy, including the feasibility of establishing health insurance co-ops.
He says it better than I ever could so I'm going to let him.
Co-op Reality Check
So what we’re talking about are insurance co-ops that would function as insurers themselves.
A.
The argument I make is that it’s really hard to start an insurance company. You don’t just get a bunch of people together and say, "We’re going to start an insurance co-op." The biggest problem is coming up with a network. You have to find doctors and hospitals and negotiate contracts. Most are already locked up by the dominant insurers. They’re not going to give you — a tiny co-op — a better deal. That’s assuming they’ll deal with you at all. The alternative would be to rent a network, but you’re basically buying your product from your competitor. There’s no way you’ll get a good deal there, either.
Co-ops Bending the Curve?
Does it improve competition in any way?
A.
What you have in the United States now is concentration of insurance markets...The idea that there are 1,300 insurers and that we have access to all of them is like saying there are 10,000 produce stands in U.S. If there’s only one within 10 miles of where you live, that’s the one you have access to...Health insurance is very local. It’s very hard to break into an insurance market. The thought that you’ll have a few businessmen get together and set up a co-op that will compete with Aetna or Cigna is just dreaming. It’s not going to happen.
Killing Private Insurance Myth
Should we be worried that the public(option) plan will fare so well that we end up without private alternatives?
A.
In Germany and Australia, they have competition of public plans and private plans. In fact, what has happened is that the market stabilizes, the public plan provides things some people want, and private plans provide things other people want. What you end up with eventually is a market in which people get what they want.