400,000 Citizens To Lose Health Insurance (Again) Because Of Obamacare Co-Op Failures

The two largest state health insurance co-operatives created as part of a grand ObamaCare experiment have announced they are closing at the end of this year, joining others that have failed and even more that are insolvent and likely to fail.

The Kentucky Health Cooperative announced on Friday it is going out of business and will not enroll new members next year, leaving 51,000 members to find other coverage.  It had the second-largest co-op enrollment in the country, garnering 75% of people who enrolled in coverage through the state’s health exchange.

It joins Health Republic Insurance of New York—the largest health co-op with more than 150,000 members—which announced last month that it was folding.  That follows the declaration of insolvency by CoOportunity Health in Iowa and Nebraska and the failures of the Louisiana Health Cooperative and Nevada Health CO-OP.  A total of 400,000 citizens are being impacted—so far.

Kentucky’s co-op had been awarded $146.5 million in taxpayer loans, including $65 million in solvency funding as recently as November of 2014.  Premium increases of more than 20% for 2016 had been approved, and the co-op had been banking on risk-protection payments from other insurers to maintain a semblance of solvency.  It had asked for $77 million from the risk corridor program but just learned it was to receive only $9.7 million, according to interim CEO Glenn Jennings.

“Today’s news regarding the wind down of Kentucky Health Cooperative is a direct result of lower-than-promised risk corridor payments that were announced last week,” said Kelly Crowe, CEO of the National Alliance of State Health CO-OPs.

Senate Majority Leader Mitch McConnell of Kentucky thinks otherwise:  “Barely a week goes by that we don’t see another harmful consequence of this poorly conceived, badly executed law,” he said. “Despite repeated Obama administration bailout attempts, this is the latest in a string of broken promises with real consequences for the people of Kentucky who may now be losing the health insurance they had and liked twice within the last three years because of Obamacare’s failures.”

Kentucky’s co-op posted a “medical loss” ratio of 158% for 2014 – for every premium dollar it collected, it spent that dollar and an additional 58 cents on the cost of claims.  The co-op now had even less of a margin for error after exhausting its existing federal loan allocations.  That sort of performance was not sustainable for Kentucky or for the many other co-ops that are similarly challenged.

The Centers for Medicare and Medicaid Services (CMS), which oversees implementation of much of the health law, recently sent warning letters to 11 co-ops, placing them on “enhanced oversight.”

Clearly this ObamaCare experiment costing taxpayers $2.4 billion is failing. The co-ops were founded on the idealistic belief that community members could band together to create health insurance companies that would be member-driven, service-oriented, and would not have to answer to shareholders or turn a profit.

But the 23 co-ops that were created had significant start-up costs, no experiential data upon which to set premiums, generally had to pay extra to lease physician and hospital networks, and had few people in the companies and none on their boards with insurance experience.

Most priced premiums low to attract members and wound up attracting sicker patients. They were hoping they would get another influx of funds from shared risk payments to compensate. But CMS announced recently they will receive less than 13% of the payments they requested under the ACA’s risk corridor program.

The risk corridor program takes money from insurers faring better financially on the exchanges and gives it to insurers faring worse. Congress last year passed legislation, sponsored by Sen. Marco Rubio (R-FL), that forbade the Obama administration from drawing on other federal revenues to make up shortages.

All but one of the co-ops were operating in the red this year, as detailed in a recent paper by Tom Miller of the American Enterprise Institute and me, “ObamaCare Co-ops:  Cause Célèbre or Costly Conundrum?”

Standard & Poor’s observed that becoming a co-op “can be like learning to ride a bike without training wheels.”  Some co-ops launched with premium prices far below their competitors, gaining a significant market share, but they quickly saw their medical costs far outpace their premium revenue and reserves.

Others started more slowly with little enrollment, only to try to jump ahead of competitors with lower premiums in the second year.  The average premiums for co-op plans were lower than those for other issuers in more than half of the rating areas for states in which they participated in 2014, according to a report from the Government Accountability Office.

In our paper, we explain that the lower premiums did attract new customers, but the co-ops are burning through inadequate premium revenue and dwindling amounts of unspent loan funds to pay medical claims.

The administration is still trying to prop up some of the co-ops by allowing them to declare debt as assets.  According to Politico Pro, “CMS and state regulators have tried to ease financial pressures for at least five Obamacare co-ops by letting them reclassify certain loans as surplus, a move that financial analysts say will make the health plans’ balance sheets look better and potentially keep them from shutting down.” It explains:

The new nonprofit insurers, which were seeded with hundreds of millions of dollars in low-interest start-up loans, are required to pay that funding back to the federal government within five years. But according to a firm that analyzes insurers’ financial performance, five have received federal and state regulators’ permission to treat their start-up loans as capital rather than debt on their financial filings: New Mexico Health Connections, Colorado HealthOP, Health Republic Insurance of Oregon, Common Ground Healthcare Cooperative in Wisconsin, and Nevada Health CO-OP.

“The big game is to have the capitalization of these companies be solvent so that the insurance departments aren’t required or don’t feel compelled to step in,” said David Paul, a principal at Alirt Insurance Research, which flagged the five co-ops. “It is kind of dressing up these companies showing more capital than they really should hold.”

George Orwell would be pleased.

Posted on Forbes, October 10, 2015.


About the author

Grace-Marie Turner is president of the Galen Institute, a public policy research organization that she founded in 1995 to promote an informed debate over free-market ideas for health reform. Full biography