During the congressional deliberations that led to the Patient Protection and Affordable Care Act, strong support emerged for a government-run health plan to compete with private carriers. The "public option" failed but did create political space for the concept of consumer-owned, non-profit, health insurance co-operatives. The co-ops found their way into the ACA, but now, as a group, are in big trouble. Eight of the nation's 23 health co-ops are going out of business, and more may follow.
The Case for Health Co-ops Then-Sen. Kent Conrad championed health co-operatives during the healthcare reform debate. He saw them as health plans owned by local residents and businesses, modeled after the electrical co-ops in his home state of North Dakota. They would receive start-up money from the federal government but otherwise would compete against private carriers on a level playing field.
Co-op advocates hoped they would bring competition to markets dominated by too-few private carriers. Advocates also expected these non-profits to provide individual consumers and small businesses additional affordable health insurance choices. With focus on the first goal, health co-ops might be in a better place today. Unfortunately, too often they sprung up in states where competition was already strong.
The ACA set up a roughly $6 billion fund to help get "consumer-operated and -oriented plans" up and running. The long-term financial viability of health co-ops was to flow from premiums paid by those they insured and the "Three Rs"-programs established by the ACA "to assist insurers through the transition period, and to create a stable, competitive and fair market for health insurance." Specifically these were the ACA's reinsurance, risk adjustment and risk corridor programs.
It's Tough Being New
A (not so) funny thing happened on the way to the health co-ops' solvency. Starting a health insurance plan is difficult and failure always an option. (I know. I was executive vice president at start-up SeeChange Health, an insurer that failed last year.) New carriers, by definition, have no track record and no data concerning pricing, provider reimbursements, claim trends and the like. The first foray into the market is an educated guess. Worse, new plans usually have a small membership base. This provides little cushion against the impact of miscalculations or unwelcome surprises.
A new health plan launching in the midst of the industry's transition to a post-ACA world faced exponentially greater difficulties. In 2013, when most of the health co-ops launched, no one knew what the market would look like in 2014. Exchanges, metallic plan requirements, guarantee issue of individual coverage and more were all happening at once. Were employers going to stop offering coverage? How were competitors going to price their offerings? Would provider networks be broad or narrow? The questions were endless; the answers at the time scarce. In a speech during the lead-up to 2014, I described the situation as carriers "playing chicken on tractors without headlights in a dark cave while blindfolded -- at night."
This is the world into which ACA-seeded health co-ops were born. That they now face serious financial problems should surprise no one. They saw themselves as "low-cost alternatives" in their markets. If they were going to err in setting prices, it was not going to be by setting premiums too high.
Besides, if they priced too low, they were protected by the risk corridor program. As described by the Centers for Medicare & Medicaid Services, which manages the ACA's financial safety net, the "risk corridors program provides payments to insurance companies depending on how closely the premiums they charge cover their consumers' medical costs. Issuers whose premiums exceed claims and other costs by more than a certain amount pay into the program, and insurers whose claims exceed premiums by a certain amount receive payments for their shortfall."
The majority of the nation's health co-operatives saw claims exceeding premiums. With the co-ops on the "shortfall" side of the equation, the government was to come to their rescue like the proverbial cavalry with the money needed to keep them going.
Except the cavalry is a no-show. Too few carriers had too little claims surplus to cover the too large losses of too many health plans. Only 12.6 cents on the dollar due under the risk corridor program is expected to make it to plans on the shortfall side of the equation, the Centers for Medicare and Medicaid Services (CMS) announced on Oct. 1.
The Math Always Wins
Several of the health co-ops were in financial trouble before this news. Losing millions of dollars in expected relief doomed more. As of today, the dollars-and-cents have failed to add up for CoOportunity Health (the co-op in Iowa and Nebraska), the Kentucky Health Cooperative (which also served West Virginians), Louisiana Health Cooperative, Health Republic Insurance of New York, Health Republic Insurance of Oregon, the Nevada Health CO-OP, Community Health Alliance (a Tennessee co-op) and the Colorado HealthOP. Just to use the Colorado situation as an example, the Colorado HealthOp needed $16.2 million; it expects to receive $2 million.
Do these failures mean health insurance co-ops are a bad idea? Not necessarily. What they point to is that health co-ops may have been better off focusing on bringing competition to markets where there were too few plans, not joining a pack where there were enough. Even then, the collapse of the risk corridor program may have doomed them, but they'd have stood a better chance.
As noted above, Sen. Conrad modeled the health co-operatives on electrical co-ops found in some rural communities. Where too few customers make it unprofitable for traditional utilities to invest in the infrastructure required, consumers, seeking electricity, not profits, come together to extend the grid.
Those implementing the ACA should have followed this model. Instead of funding 23 health co-operatives, the administration should have offered seed money to fewer co-ops located where they would be the alternative in the market, not just another one. This may have allowed them to extend financial support long enough to at least partially offset the risk corridor shortfall. Then, just maybe, we could have avoided the "surprise" of failing health co-ops.