Can Health Insurance Co-ops Survive?
September 21, 2015 - Pew Charitable Trusts
By Michael Ollove
Consumer-run health insurance cooperatives, created under the Affordable Care
Act to stimulate competition and lower prices for health insurance, faltered
almost from the start.
In just the last two months, health insurance cooperatives in Louisiana and
Nevada announced they were going belly up at the end of the year. They followed
another, operating in Nebraska and Iowa, which had been ordered by a state court
to liquidate.
Meanwhile, the inspector general of the U.S. Department of Health and Human
Services (HHS) reported in July that 21 of the 23 co-ops created under the
ACA had ended 2014, their first year of operation, with net losses, and 13 had
failed to meet their enrollment goals. A recent Politico analysis found
that co-ops had lost about $200 million in the first six months of this
year.
The nonprofit co-ops, or gconsumer operated and oriented plans,h created by
medical professionals, business groups and others, were intended to give
consumers shopping on the new health insurance exchanges an alternative to plans
from traditional commercial carriers, such as Blue Cross Blue Shield, Cigna and
Kaiser Permanente. The goal was to increase competition and lower premiums for
everyone on the exchanges, where individuals and small businesses can shop for
health insurance. To get started, the federal government leant them more than $2
billion at low-interest rates.
Before the recent failures, there had been 22 co-ops with a million members
operating in 23 states, according to the National Alliance of State Health
Co-ops. But insurance experts expect even more to fail because they arenft able
to collect enough in premiums to cover their membersf claims.
The failures are forcing policyholders in four states to find new insurance
plans. And, at a time of consolidation in the commercial insurance industry, the
failures are heightening concern about declining competition and the prospect of
higher premiums.
Health care experts insist, however, that itfs way too soon to declare that
co-ops are doomed. Even in the face of disadvantages that hamstrung co-ops from
their inception, including strict rules on how they could spend the loan money
and what services they were required to provide, some seem to be financially
stable. This suggests that they will remain a potent alternative in some areas
if they can keep their premiums competitive and provide wide networks of medical
providers—particularly in places where consumers want something other than a
large, commercial enterprise.
gThey were all starting from scratch and thatfs a very difficult way to come
into the market in any industry,h said Deborah Chollet, a senior fellow at
Mathematica, a policy research organization. gEven so, in some regions in the
right conditions, I think they can do quite well.h
In fact, after shaky performances in 2014, co-ops have showed some strength.
In 2015, co-ops operated in 36 of 73 regions examined by the Urban Institute (up from 26 regions the previous year). In
22 regions, co-ops offered the best prices in the market.
Born of Compromise
Health insurance co-ops were the result of compromises—grudging
compromises—as the ACA was being crafted. As the prospect for a single,
government-run health plan collapsed during congressional debate in 2009 and
2010, proponents were eager to provide consumers with an alternative to
commercial insurers. Over the objections of the insurance industry, advocates
seized on the membership-run, nonprofit co-ops, which, their supporters said,
would be focused on meeting the needs of their enrollees, and not the corporate
interests of their management and shareholders.
An early proposal would have made $10 billion in federal grants available to
help launch co-ops in all 50 states. That amount was eventually reduced to $2.4
billion and came in the form of loans, rather than grants; all 23 co-ops took
federal loans as they began operations.
According to critics, the law included obstacles to obtaining outside
financing and inflexible pay-back requirements for the federal debt. It also
restricted the way loan money could be used, including a prohibition on using
the funds for advertising. gIf youfre an upstart with no name recognition, and
yet you canft use any loan money for marketing purposes, well that hamstrings
you from the beginning,h said Kelly Crowe, CEO of the co-op alliance.
Provider Networks from Scratch
A decision by the Obama administration also allowed people to remain in
health plans that existed before the ACA but did not comply with all of the
lawfs requirements. That provision, Crowe said, meant that startups such as the
co-ops would likely be left with more policyholders with unknown health
histories, a potential problem in an industry where profitability rests on the
ability to accurately weigh risk.
Another problem the co-ops faced was the need to create comprehensive
provider networks from scratch. A number of them chose to rent provider networks
from competitors, incurring additional costs. But for co-ops, raising premiums
is fraught with danger. An HHS report found that price was the deciding factor
for two-thirds of those picking policies on health insurance exchanges.
John Holahan, a co-author of the Urban Institute report, put the dilemma
facing co-ops this way: gIf you donft price aggressively youfll get no market
share, but if you price too low, you wonft be able to pay back your loan.h
And co-ops have little margin for error. Elizabeth Carpenter, a vice
president with Avalere, another policy research firm, said that because of their
smallness and regionalism, co-ops that suffer losses in one state canft turn
elsewhere to offset that damage.
Early Failures
Together, the three failed co-ops at one time enrolled about 150,000 people,
and borrowed $277 million from the federal government.
The CEO of the Nevada Health Co-op, Pam Egan, told the Las Vegas Review
Journal the finances simply didnft work. Claims were too high, enrollment
was too low. (Egan did not return a call from Stateline.)
In Iowa and Nebraska, state officials urged policyholders to switch to
different carriers. In Louisiana and Nevada, the co-ops said they planned to
honor policies through the end of the year, when open enrollment arrives and
policyholders can switch to other companies.
gMembers who are forced to find new coverage could be looking at a
significantly higher premium and also a different network of providers,h said
Chollet, the Mathematica researcher. More broadly, she said, gLess
competition is expected to produce higher costs and higher prices. So failure of
a co-op is at best a missed opportunity to create or maintain competition.h
Meanwhile, the failing co-ops, their state insurance offices and the federal
government are negotiating the outcome of unpaid federal loans. And the co-ops
group and HHS are discussing ways to make the requirements less onerous for the
remaining co-ops, Crowe said.
Last week, the business-oriented Council for Affordable Health Coverage and
the Galen Institute, a conservative research organization, asked Congress to look into the loan program, suggesting that the
failures would become a further burden for taxpayers and that the co-ops
actually could result in higher premiums. gWe are concerned that the CO-OP
program has been implemented in ways that make taxpayers liable for far more
costs than originally planned or budgeted,h the heads of the two organizations
wrote to high-ranking members of several House committees. gWe are even more
concerned that the CO-OP program has been used to undermine plan competition in
states in ways that ultimately drive up health costs.h
Encouraging Signs
Despite the obstacles, some co-ops seem to be competing well with heavyweight
commercial companies and even growing.
- The Kentucky Health Cooperative picked up three-quarters of the statefs
health exchange enrollment in its first year.
- Health Republic Insurance of New York said it enrolled nearly 20 percent
of the New York health exchange market in each of its first two years and now
has over 200,000 members, far exceeding its own projections of just 30,000. It
has the biggest share of the exchange market serving businesses. On the other
hand, the co-op finished its second year $77 million in debt, suggesting that
premiums still didnft cover the costs of claims and debt service.
- Colorado HealthOp raised its exchange market share from 13 percent the
first year to nearly 40 percent the next, the biggest piece of the market for
any insurer on the exchange. It may not hold that position in 2016, when it
plans to raise premiums by 22 percent.
- In Maine, Community Health Options said it enrolled almost 37,000 people
in its first year, which represented 83 percent of the exchange market. The
success spurred the co-op into expanding into New Hampshire in its second
year. It now has 72,000 members in the two states, according to its CEO, Kevin
Lewis, and the co-op is showing positive revenue.
Chollet of Mathematica points to Community Health Options as an example of
how the particular circumstances in a given market can create opportunities for
co-ops. Few health insurers were active in the Maine market, which was dominated
by Anthem Blue Cross, even though the companyfs reputation had suffered over its
involvement in a now extinct health plan created for the uninsured in Maine.
gMaine was a place that there wasnft a lot of competition and I think people
were hungry for an alternative and happy to give a co-op a try,h Chollet
said.