Business Columns & Blogs

Bill Virgin: Co-op past faces a buyout future

Cooperatives play a big role in Washington business, or at least our image of it as something different and perhaps better than what goes on in the rest of the country.

One of the nation’s biggest credit unions — BECU, the former Boeing Employees — is based in Tukwila and is a formidable competitor to commercial banks for consumer financial services. Even with consolidation of smaller institutions and conversion of some to banks, credit unions still abound in the state.

In the outdoor-equipment retailing sector, Kent-based Recreational Equipment Inc. (REI) has become a nationally known chain.

Co-ops have long been a feature of the ag and food-processing industries. Darigold is a co-op. So is juice and applesauce maker Tree Top. So is cranberry processor Ocean Spray, which isn’t based in the state but has a plant in Washington.

The appeal of a cooperative is that members — be they customers or growers — can cut better deals for themselves financially by joining together, owning the company and having more say in how the company, even one as big as a national retailer, operates by retaining control within that group.

That last point is no small consideration in the fate of one of Washington’s oldest and best-known cooperatives, one that may soon be disappearing from the list — Group Health.

Kaiser Permanente, a nonprofit health insurer that operates its own network of hospitals, clinics and physicians, has announced a deal to acquire Group Health. The term “acquire” is an oddly applied one in this case, since the owners of Group Health, the cooperative’s members, aren’t getting financial value for that ownership stake. Instead Kaiser says it will pay $1.8 billion to establish the Group Health Community Foundation, a new nonprofit not to be confused with an existing Group Health Foundation.

The member/owners of Group Health don’t have a financial stake in the cooperative in the same way that member-growers of an ag cooperative contribute and pool their crops and divide the proceeds. For Group Health owners, the payout is having access to health care that costs less than what’s available through more conventional channels.

So they don’t get a payout from this deal, but they do get a vote, at least those registered to vote do. Group Health plans a special meeting for voting members for Jan. 30, followed by a mail vote through March 9. According to Group Health, members have to be registered at least 60 days before a special meeting to be eligible to vote.

How that vote turns out will depend on how members balance the sentimental attachment to the cooperative model against their perceptions of whether they’re getting something different and better from that model.

Looming over and weighing on that decision are the cold, harsh financial realities of the health care industry. Group Health says it needs to do something. “At our current size and scale in this competitive market, it’s tougher and tougher to move quickly and do everything our patients and teams need,” the cooperative says in a Q&A on its website. “These challenges are expected to become even harder as we move into the future — for example, rising drug costs and expensive upgrades to information technology, improvements to clinics and equipment that make it easier to provide the right care and services and attract more people. All of these are expected to become increasingly difficult for regional health care organizations. As health care changes dramatically, we are moving in front of it. This is where health care is going — strong, smaller systems joining larger organizations to support local care for members.”

Indeed that is where the industry is going, and the smaller and less strong the organization is, the greater the pressure to find an acquirer or merger partner. In this region, the health care industry is consolidating around a handful of increasingly large health care systems — MultiCare, Franciscan, Swedish, the University of Washington. Once there’s no one left to gobble up, the next step is likely to be more consolidation, of large local systems into even bigger regional interstate networks.

Financial pressures and the need to do something about a changing health care industry are nothing new for Group Health. As far back as the 1990s it proposed combinations with others, first with Virginia Mason, then with Kaiser Permanente. Neither panned out.

The cooperative also has been through layoffs, spending cuts and the sale of its Eastside hospital. According to its financial statements for 2014, premium revenue, operating gain (operating revenues minus expenses) and excess of revenues over expenses (roughly the bottom-line number) were all down from the prior year.

Group Health continues to experiment with health care delivery, with a deal with local drugstore chain Bartell to operate walk-in clinics, open to anyone. Then again, that’s no different from the other health care organizations that have set up doc-in-a-box networks affiliated with retailers.

Both Group Health and Kaiser Permanente were health care experiments to start with. Now it’s up to Group Health members to say whether they see enough differentiation and value in the cooperative model to keep the experiment going.

Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at