Financial health shaky at many Obamacare insurance co-ops
By Amy Goldstein
The Washington Post, October 10, 2015
A new breed of health insurers created under the Affordable Care Act — representing one of the government’s most innovative attempts in decades to foster better coverage — is on shaky financial ground in many of the 23 states where the plans began.
The nonprofit health plans were envisioned as a consumer-friendly counterweight to for-profit insurers, a way to provide more competition, greater consumer choice and better coverage in markets typically dominated by big commercial carriers. The government allocated billions of dollars in loans for them.
But in recent months, nearly half of the unorthodox start-ups have been told by federal regulators that their finances, enrollment or business model need to shape up.
The Centers for Medicare and Medicaid Services (CMS), which oversees the health-care law, recently sent warning letters to 11 of the “co-ops,” as they’re known. The agency placed them on “enhanced oversight” or required them to produce a plan of “corrective action,” or both, according to federal figures not previously made public. Several have been notified in the past two weeks.
Amid this increased monitoring, one co-op has folded, stranding its members, and four others are preparing to close in late December. They include the Nevada Health Co-Op, which was initially among a top tier that federal officials had regarded as best poised to succeed.
The birth and quick death of these co-ops illustrate the program’s fragility. When the ACA was enacted in 2010, the Consumer Operated and Oriented Plans were a compromise to appease congressional liberals who had wanted a new public insurance program for Americans unable to get health benefits at work.
Yet the co-ops’ struggle of late also reflects regulators’ shifting posture. In moves that could affect coverage for hundreds of thousands of people, CMS has gone from nurturing to getting tough.
The first plan to collapse served people in Iowa and Nebraska; it folded in February after being taken over by state insurance regulators. In July, Louisiana’s co-op revealed it was shutting down. Then late last month in New York state, the nation’s largest co-op toppled, startling insurance industry and health policy analysts who thought it was too big for the government to let fail.
The latest announcement came Friday, when the Kentucky Health Cooperative, serving about 51,000 customers, said that it, too, will close Dec. 31 because of poor finances.
The co-op disappearances are disrupting coverage for nearly 400,000 customers across five states, according to the most recent publicly available enrollment figures.
The program has been under siege from the start, including from the insurance industry. Before the law’s passage, government grants to help them get going were switched to loans. None of that money could go for advertising — a wounding rule for new insurers that needed to attract customers. Moreover, the amount available was cut from $10 billion to $6 billion and then later, as part of the administration’s budget deals with congressional Republicans, to $2.4 billion. Federal health officials abandoned plans for a co-op in every state.
At the time, some health policy experts warned that the constraints would make it difficult for some co-ops to thrive.
In August, federal officials delayed another type of assistance intended to help cushion the risk of covering the previously uninsured. This temporary “risk corridor” money was cut last week to a small fraction of what many co-ops had been banking on. The Kentucky co-op blamed its demise on its cut — from an expected $77 million to less than $10 million.
By Don McCanne, MD
During the crafting of the Affordable Care Act (ACA), there was strong support for including the option of selecting a government-run insurance program in the insurance exchanges. This “public option” was first emasculated so that it would not be an effective competitor to the private insurance firms, and then it was totally eliminated from ACA by political chicanery. That led to support for including “Consumer Operated and Oriented Plans” (co-ops) – nonprofit insurers controlled by directors elected by the enrollees – as a substitute for the public option.
The private insurers were not through. Obviously they did not want competition from a nonprofit consumer-operated system that should have significantly lower expenses than do the private insurers. Insurers require capital – both for start-up expenses and for establishing reserves from which to pay claims. Although the original intent was to provide government grants to the co-ops, these were changed to government loans which the co-ops would have to pay back (not to mention that borrowing to fund reserves is a shell game – the net reserves are zero). Adding the burden of debt service onto the backs of these co-ops basically destroyed their competitive advantage, especially at a time that they were facing high start-up costs. Further, as an extra measure, the insurers had included in ACA a rule that prohibited the co-ops from advertising. Thus the insurers saw to it that the co-ops were placed at a competitive disadvantage.
And what help did the co-ops receive from the government? First the government cut way back on the funds that were made available as loans to satisfy capital requirements. When co-ops were successful in their enrollment efforts, the government did not make further loans available to satisfy increased reserve requirements (larger member rolls require greater reserves). Then the feds reneged on their requirement to pay the co-ops losses above the risk corridor (a form of reinsurance for excessive losses by the co-ops). Finally, the feds have become hard-nosed and have begun shutting down the co-ops because of failure to maintain adequate reserves. Surprise! How were they supposed to build reserves in a year with high start-up costs, high debt service, and increased reserve requirements because of greater than expected enrollment?
It is clear that HHS, from the beginning, has been in bed with the private insurers. This experience with the co-ops is not the only example of their effort to relieve the insurers of competition from government programs. They have been supporting the private Medicare Advantage (MA) plans through administrative manipulations that offset the required reductions in overpayments to these plans. Also, they are now greatly increasing Part B premiums for about one-third of Medicare beneficiaries, especially for those with high incomes – a measure bound to diminish support for the traditional Medicare program, chasing irked beneficiaries into the private MA plans.
This unfortunate outcome for the co-ops was not exactly unanticipated. It was inevitable based on the design features dictated by the private insurers (see our Quote of the Day of July 18, 2011). What is particularly sad is that our own government has not been a reliable partner with our citizens and their organizations. They have gotten into bed with the private insurers instead.
Single payer would fix this, but we would need new public administrators.