Tough Going for Health Co-ops
By REED ABELSON
SEPT. 15, 2015 - New York Times
Late last month, the Nevada Health Co-op became the third casualty among 23
insurance start-ups created under the federal health care law to inject
competition for coverage in certain parts of the country.
Set up as nonprofits with consumer-led boards, the co-ops were designed to
provide affordable insurance coverage to individuals and small businesses. They
were intended under the law to offer alternatives . and hopefully cheaper prices
. to the plans sold by large established insurance companies in some regions.
But as the new co-ops begin failing just a year into the effort to remake the
health care industry with more competition and lower costs, the marketplace is
proving hostile to newcomers trying to break into an industry dominated by
powerfully entrenched businesses.
Faced with these conditions, the federal government has promised to
consider ways of helping them to get a firmer foothold, but some insurance
experts doubt that government changes will be enough to prevent more failures.
gThis is not a market for the faint of heart,h said Sabrina Corlette, a law
professor at Georgetown University.
The co-opsf problems are compounded by moves among the industryfs
biggest companies, like Anthem and Aetna, which plan to buy their rivals to
become even bigger. That raises the specter of even less competition in the
marketplace and less room for smaller players to make a dent. Congress is
holding hearings on the proposed mergersf potential for raising insurance costs,
and regulators are expected to scrutinize the deals closely.
The latest co-op to retreat was Nevadafs, where the chief executive, Pam
Egan, informed customers that the co-op would stop selling policies next year,
pointing to high medical costs and glimited opportunities for new investment.h
Co-ops in Iowa and Louisiana have also dropped out, and many others
appear to be scrambling to have enough money to cover claims as well as enroll
new customers as they enter their third year.
gWefre seeing what people in the industry could have said many times all
along: Itfs hard to start a new insurance company that is competitive,h said Mark
A. Hall, a health policy professor at Wake Forest University.
These new carriers may have been hobbled from the beginning, some policy
experts say, because the federal law that allowed them to sprout may not have
first made the field level. For example, the federal loans granted to co-ops to get
established are typically far below the capital needed to weather the uncertainty
of the first years and be able to attract enough members to be successful.
On top of that, the federal loans are accompanied by a tangle of regulations
that make it hard to attract outside money that would ensure a strong footing as
they expand.
gYou normally donft get a lot of start-up activity in the health insurance
market because of the incredible barriers to entry,h said Mark E. Rust, a lawyer in
Chicago with Barnes & Thornburg.
Federal officials insist the rules are fair. All insurers have benefited from the
governmentfs program to help pay for the most costly patients, said Kevin J.
Counihan, the chief executive of the federal marketplace. gThe program is not
biased against small issuers,h he said.
But even for-profit companies trying to join the health insurance business
under the federal law are finding it a daunting environment.
Only two for-profit companies that were not already health insurers have
entered the state marketplaces so far: Oscar, a New York-based upstart with a
Silicon Valley flair and plans to take on California and Texas in 2016, and
ZoomPlus, which just received approval to sell policies in Oregon.
gItfs really difficult to build this business,h said Joshua Kushner, the 30-yearold
co-founder of Oscar, which expected to lose money. In a regulatory filing, it
estimated it had lost about $27.5 million last year, roughly half of its 2014
revenue.
The company has raised about $350 million, including a new infusion of
$32.5 million from Google Capital, the investment arm of the search giant. Oscar
has attracted more than 40,000 customers in New York and New Jersey who can
use the website to easily look at their medical records and book appointments.
Customers also have unlimited access to nurses or doctors via telephone.
By way of contrast, ZoomPlus, which began as a collection of urgent care
centers, bills itself as a gKaiser 4.0,h according to one of its founders, Dr. David
Sanders. One of the powerful players that ZoomPlus is competing against in
Oregon is Kaiser Permanente, the California H.M.O. with its own doctors and
hospitals serving more than 10 million customers over all.
ZoomPlusfs goal is to combine a delivery system, currently 26 clinics across
Portland and in nearby Vancouver, Wash., with a health plan and some of the
same technological and consumer appeal as Oscar. Members can chat via video
about their heart conditions, for example.
In addition to the co-op failures, there have been other notable departures.
Assurant Health, a for-profit insurer that tried an aggressive entry into the
individual insurance market last year, stopped selling coverage altogether. Even
one of the most popular new plans in Minnesota, offered in 2014 by a
collaboration of local hospitals and doctors, no longer covers people through the
state marketplace.
The McKinsey Center for U.S. Health System Reform counted dropouts
among insurance carriers that were selling insurance to individuals for the first
time (rather than group coverage to small businesses or large employers). It
found that eight carriers had dropped out of nine states so far.
gWe would view this overall marketplace as evolving,h said Patrick Finn, a
McKinsey partner in Detroit.
McKinsey counts a carrier every time it opens in a state. Thus, if a single
carrier offers policies in three states, McKinsey counts it as three carriers, not
one. Using that methodology, a new analysis by McKinsey found the number of
carriers offering insurance to individuals for the first time reached 75 in 2014,
and 35 more carriers joined over the last two years to date.
Some are health systems that have decided to offer a health plan for the first
time, while others represent a push by a Medicaid plan to expand offerings.
There is widespread agreement that the business is problematic for
companies that are not familiar with how to price plans and work with hospitals
and doctors.
Ms. Corlette, the Georgetown researcher, says a marketfs dominant player,
typically a Blue Cross plan, enjoys significant advantages because it has large
sums of capital and existing relationships with hospitals and doctors.
Experienced companies are better able to nail down lower prices than new
competitors.
As a result, some new players emphasize that it may take several years to
become successful. North Shore-Long Island Jewish Health System, a large New
York system that will be changing its name next year to Northwell Health, began
selling coverage under its insurance arm, CareConnect, and has enrolled 28,000
customers to date. The plan has not yet gturned the corner,h said North Shore
L.I.J.fs chief executive, Michael J. Dowling.
The new players have particular challenges facing the established players.
gIn Maryland, wefre the only new carrier in 25 years,h said Dr. Peter L.
Beilenson, the chief executive of Evergreen Health, a co-op in Maryland whose
major competitor is a large Blue Cross plan.
gItfs hard to get membership if the rates are similar,h said Dr. Beilenson,
adding that some co-ops may have priced their policies low to attract customers,
but then might not be able to cover their costs.
In Maryland, the prospects for Evergreenfs success appeared dismal at the
troubled launch in 2014 of the statefs exchange.
CareFirst, the Blue Cross plan, initially had among the lowest rates, but has
raised them in the last two years. That makes Evergreenfs plans more
competitive. Evergreen, which has 22,500 customers, expects to roughly double
in size by the end of next year. gWefre the relatively nimble and agile tortoise,h Dr.
Beilenson said.
The major hurdle for many of the co-ops is to find more capital, especially as
they increase in size, which means they must set aside even more money to meet
state rules on having sufficient funds to cover medical costs. gAt the end of the
day, thatfs the issue,h said Dr. Martin Hickey, chairman of the National Alliance
of State Health Co-ops.
CoOportunity, a co-op in Iowa, had enrolled 120,000 members there and in
neighboring Nebraska, but was shut down by Iowafs regulator. The co-op had
potentially promising talks with a local health system and private banks, but was
unable to secure financing. The co-ops say federal officials have been slow to
outline ways that would make it easier for them to find outside sources of money.
But they also point to the programs the federal government put in place to
protect insurers from excessive losses if they enroll too many customers with
expensive medical conditions. Under one program, insurers with healthier
members must make payments to insurers covering sicker customers. And some
small insurers are finding themselves with large bills, even before some of the
other programs compensate them. In one case, a small insurer in Alabama, with
just 1,100 members last year, is paying the dominant Blue Cross plan $1.5
million.
The smaller players argue it is harder for them to find and document
customers with serious illnesses. Someone with H.I.V., for example, may not need
a checkup that would provide proof of the diagnosis.
Federal officials say they have made it easier for the co-ops to convert some
of their loans into more favorable types. They have also convened an advisory
group of insurers to discuss how the rules under the law might be improved, but
the co-ops argue that the discussions to date have focused solely on narrow
technical issues.
But Mr. Counihan of the government marketplace emphasized that some of
the challenges facing the co-ops and other new players were not unique. gAny
start-up, irrespective of the business, is tough,h he said.
A version of this article appears in print on September 16, 2015, on page B1 of the New York edition
with the headline: Tough Going for Health Co-ops.