The Affordable Care Act created a new kind of “cooperative” heralded by supporters of health reform. These Consumer Operated and Oriented Plans, chartered and regulated by the states, would compete with for-profit health-insurance companies and were meant to appease disgruntled advocates of a single-payer and “public option” model for the nation’s health-care system.
All but one of the co-ops are operating in the red. One already has been shut down, and others are in precarious financial condition. Chalk up another ObamaCare failure.
Generous federal loans helped 23 cooperatives to get up and running. They have enrolled more than a million people, according to the National Alliance of State Health Co-ops. Their supporters believed that consumer cooperatives, which must meet the same regulatory requirements as private insurers, would provide better benefits and lower prices than commercial carriers.
In practice, most co-ops have significantly underpriced premiums and grossly underestimated medical claims. Many seek significant premium increases for 2016: 58% for individual plans in Utah, 38% in Oregon and 25% in Kentucky, for example.
Iowa’s CoOportunity Health, which operated in both Iowa and Nebraska, was the first to confront the hard reality of insurance economics as medical claims far outpaced premium income. After the co-op burned through $145 million in federal loans, an Iowa state court in February ordered the organization to be liquidated.
At least 120,000 members were forced to quickly find coverage elsewhere. The Iowa Insurance Division had this helpful advice: “Your coverage with CoOportunity Health will stop, and claims will not be paid after cancellation. If you do not purchase replacement insurance, you may be penalized by the federal government.”
Meanwhile, Standard & Poor’s Ratings Services reported early this year that 10 co-ops had worse loss ratios than Iowa’s in the third quarter of 2014 resulting from a “high medical claims trend and not enough scale to offset administrative costs.” Citing Iowa’s experience, the report warned: “The solvency problems experienced by CoOportunity Health introduce questions about co-ops’ finances in general.”
A separate analysis by the insurance-rating agency A.M. Best expressed concerns “about the financial viability of several of these plans” as losses escalated throughout 2014. Other estimates based on quarterly financial statements filed with the National Association of Insurance Commissioners show co-ops as a whole reported net underwriting losses of $377 million in 2014. Only Maine’s Community Health Options has been operating in the black.
Congress has cut funding for co-ops three times—cuts all signed into law by President Obama—reducing appropriations from $6 billion to $2.4 billion. All the upfront money from the feds has been allocated mostly in the form of “solvency” loans. Most co-ops survive on what little remains unspent from those loans.
New York’s Health Republic Insurance received $265 million in federal loans and had the largest enrollment, with 155,000 members in 2014. Its premiums are significantly lower than established carriers in virtually every region of the state. But the co-op has applied for premium increases in 2016 of more than 14%, with some regions of the state as high as 30%. Industry actuaries believe that those raises will not be enough to offset high claims costs and the exhaustion of federal loan dollars.
Until recently, the Kentucky Health Cooperative had been considered one of the more successful co-ops, with 75% of enrollees in the state’s health exchange. It attracted consumers primarily by offering significantly lower premiums and running the risk of future insolvency.
Yet there are disturbing similarities between this cooperative and the one that failed in Iowa. Kentucky Health Cooperative’s $147 million in taxpayer loans has been exhausted. To maintain a semblance of solvency, it is applying for a big premium increase of 25% for next year and banking on so-called risk-protection payments from other insurers.
The Affordable Care Act provided for risk-protection payments in which insurers with better pricing and higher profits are required to make payments to insurers with inaccurate pricing and bigger losses. Co-ops book these expected payments on their balance sheets as “assets.” But those risk payments are expected to be significantly lower, and they don’t solve the co-ops’ long-term problems.
Consumer Operated and Oriented Plans feed the agenda of progressives who disparage profit-driven commercial health-insurance carriers. But the co-ops are failing. Underpricing risks to gain market share and then counting on further bailouts from taxpayers is a losing business plan, and not much of a political strategy either.
Congress can exercise its oversight function by: 1) making sure that no additional federal dollars are wasted on this program; 2) investigating how $2.4 billion in taxpayer loans has been spent; and 3) determining who will be responsible for paying back the loans.
Posted on The Wall Street Journal, 6/23/15.