The Affordable Care Act created a new kind of “cooperative” health insurance arrangement heralded by supporters of health reform. 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.
The idealism has quickly faded. After receiving hundreds of millions of dollars in government start-up loans, most co-ops are surviving now on what remains of more than $2 billion in federal “solvency loans” and on the promise of future “shared risk” payments that are likely to produce only a fraction of the revenue co-ops have booked.
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 the Government Accountability Office.[i]
The lower premiums did attract new customers, but the co-ops now are burning through inadequate premium revenue and dwindling amounts of unspent loan funds to pay medical claims.
This paper will take a deeper look at co-ops in Iowa, Kentucky, Tennessee, and other states that reveal their precarious financial condition.
Iowa’s CoOportunity Health shows the peril. The co-op set off alarm bells when it was liquidated in January 2015, forcing 120,000 people to find new sources for health insurance. But this is not an isolated example of serious problems with this experiment. Co-ops in 10 other states had even worse loss ratios in the third quarter of 2014 than Iowa did, regulatory filings show.
The Kentucky Health Cooperative deserves special attention because it has the second highest enrollment of any of the remaining co-ops. Until recently, Kentucky had been considered one of the more successful co-ops, capturing 75% of enrollees in state-run health insurance exchange enrollment. But there are disturbing similarities between its numbers and the failed Iowa co-op.
Kentucky has been awarded $146.5 million in taxpayer loans, including $65 million in solvency funding in November of 2014. Most of these funds have been exhausted, and now the co-op is banking on risk corridor payments.
It would be considered insolvent if not for an additional receivable of $76 million in risk-corridor payments it expects this summer to maintain a semblance of solvency. The availability of further solvency loan funding has all but disappeared, and the risk corridor program payments are expected to shrink for 2015 and then disappear after the 2016 exchange plan year.
Kentucky’s co-op posted a “medical loss” ratio of 158 percent 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 has even less of a margin for error after exhausting its existing federal loan allocations. This sort of performance will not be sustainable for Kentucky or for other co-ops that are similarly challenged.
In Tennessee, the Community Health Alliance co-op went through a boom-bust cycle. Its enrollment rapidly expanded in the latest enrollment cycle after it offered the lowest premiums in many areas of the state. But it suddenly had to freeze enrollment in January 2015 after its enrollment surged from just 1% of the market in 2014 to 25% mid-way through 2015 enrollment period.
Regulators grew concerned that the co-op was gaining a larger market share than it could support. The Tennessee co-op learned that lowering premium prices substantially to expand enrollment only produced larger losses. Its latest move was to ask regulators to approve an average 23% premium increase for 2016.
As this paper will show, the co-ops are trying different tactics to outrun their losses, but the tactics resemble a family in financial trouble taking out additional credit cards to pay daily bills. The idealistic co-op experiment is not turning out as supporters had hoped.