CO-OP health plans: patients' interests first

11 Consumer Operated and Oriented Plans have folded; will the rest remain viable?

By Louise Norris, healthinsurance.org contributor

October 31, 2015 - healthinsurance.org

In July 2015, HHS released financial and enrollment data for the 23 CO-OPs, as of December 2014.  The outlook based on the report was not particularly great: all but one of the CO-OPs operated at a loss in 2014, and 13 of the CO-OPs fell far short of their enrollment goals for 2014.  The audit called into question the CO-OPs¡¯ ability to repay the loans that they received from the federal government under the ACA.

Ten CO-OPs fold

As of October 2015, eleven of the previously-operational CO-OPs have closed or will do so at the end of the year:

In July, Louisiana Health Cooperative announced that it would cease operations as of the end of 2015.  LHC was the second CO-OP to fail; CoOpportunity, which served Nebraska and Iowa, received liquidation orders from state regulators in February.

At the end of August, the Nevada Health CO-OP announced they would also close at the end of 2015. And in September, New York officials announced that Health Republic of New York, the nation¡¯s largest CO-OP, would begin winding down operations immediately, and that individual Health Republic of NY policies would terminate at the end of 2015.

On October 1, 2015 the federal government notified health insurance carriers across the country that risk corridors payments from 2014 would only amount to 12.6 percent of the total owed to the carriers. The program is budget neutral as a result of the 2015 benefit and payment parameters released by HHS in March 2014. And the ¡°Cromnibus bill¡± that was passed at the end of 2014 eliminated the possibility of the risk corridors program being anything but budget neutral, despite the fact that HHS had said they would adjust the program as necessary going forward. But very few carriers had lower-than-expected claims in 2014. So the payments into the risk corridors program were far less than the amount owed to carriers – and the result is that the carriers essentially get an IOU for a total of $2.5 billion that may or may not be recouped with 2015 and 2016 risk corridors funding (risk corridors still have to be budget neutral in 2015 and 2016, so if there¡¯s a shortfall again, carriers would fall even further into the red).

Many health insurance carriers – particularly smaller, newer companies – are facing financial difficulties as a result of the risk corridors shortfall. CO-OPs are particularly vulnerable because they¡¯re all start-ups and tend to be relatively small. All of the CO-OPs that have announced closures since October 1 have attributed their failure to the risk corridor payment shortfall.

On October 9, Kentucky Health CO-OP announced that their risk corridors shortfall was simply too significant to overcome (they were supposed to receive $77 million, but were only going to get $9.7 million as a result of the shortfall). They will not offer plans for 2016, and their 2015 policies will terminate at the end of the year. This means about 51,000 people in Kentucky will have to shop for new coverage for 2016, as they will not be able to keep their Kentucky Health CO-OP plans.

And then on October 14, Tennessee regulators announced that Community Health Alliance would also close at the end of the year. CHA stopped enrolling new members in January 2015, but they had planned to sell policies during the 2016 open enrollment period, albeit with a 44.7 percent rate increase. Ultimately, the risk of the CO-OP¡¯s failure in 2016 was too great, and they will wind down operations by the end of the year instead.

Two days later, on October 16, Colorado Health OP was decertified from the exchange by the Colorado Division of Insurance, resulting in the CO-OP¡¯s demise; Colorado Health OP¡¯s 80,000 individual members will all need to transition to new carriers for 2016.

Almost immediately after that, Oregon¡¯s Health Republic Insurance, also a CO-OP, announced that it would not offer 2016 plans, and would wind down its operations by the end of 2015. Health Republic currently has 15,000 members.

On October 22, The South Carolina Department of Insurance announced that Consumers Choice would voluntarily wind down its operations by year-end, and would not sell plans for 2016. Consumers Choice was run by the same CEO – Jerry Burgess – as Community Health Alliance in Tennessee. 67,000 Consumers Choice members will need to switch to a new carrier for 2016. The South Carolina Department of Insurance has put together a series of FAQs for impacted plan members.

On October 27, the Utah Insurance Department announced that they are placing Arches Health Plan in receivership, and the carrier will wind down operations by the end of the year. Arches Health Plan garnered roughly a quarter of Utah¡¯s exchange market share in 2015, but those enrollees will need to switch to a new carrier for 2016.

On October 30, just two days before the start of the 2016 open enrollment period, the Arizona Department of Insurance announced that Meritus would cease selling and renewing coverage, and existing plans would terminate at the end of 2015. Healthcare.gov removed Meritus plans from the exchange website, and current enrollees – who comprise roughly a third of the private plan enrollees in the Arizona exchange – will need to obtain new coverage for 2016. Meritus was unique in that they allowed people to enroll off exchange year-round up until late-summer 2015. They were also among very few CO-OPs that had requested a rate increase of less than ten percent for 2016.

Is it all bad news?

The risk corridor shortfall has been directly implicated in the failure of CO-OPs in Kentucky, Tennessee, Colorado, Oregon, South Carolina, and Utah. There is no way around the fact that such a significant financial blow is hard to overcome, particularly for carriers that were new to the market in 2014. Seven CO-OPs failed in October, but that doesn¡¯t mean all of the rest will follow suit. Rather, it means that those seven CO-OPs were in serious financial jeopardy as a result of the risk corridor shortfall and other factors, and state Insurance Commissioners made the difficult decision to shut them down prior to the start of open enrollment. It¡¯s much less complicated to wind down operations in an orderly fashion in the last couple months of a year than it is to have a carrier become financially insolvent mid-year. That, coupled with the late announcement regarding the risk corridors shortfall, explains the rash of CO-OP failures announced in October [it should be noted that it¡¯s not just CO-OPs feeling the pain from the risk corridor shortfall; in Wisconsin, Anthem is exiting the exchange market in three counties and scaling back operations in 34 other counties, partially as a result of the risk corridor shortfall. And in Wyoming, WINhealth has exited the individual market because of the risk corridor shortfall.]

But with eleven out of 23 CO-OPs going under, it¡¯s not surprising that the current mood is relatively pessimistic regarding the CO-OP model. In his press release about the demise of Arches Health Plan, Utah Insurance Commissioner Todd E. Kiser noted that ¡°It is regrettable that the co-op model has not worked across the country.¡± That doesn¡¯t bode well for the remaining 13 CO-OPs, but it does appear that all or most of them will survive into 2016 (if they were going to be shut down, their state Insurance Commissioners would almost certainly take that action before the start of open enrollment).

The fact that lawmakers decided at the end of 2014 to retroactively require the risk corridors program to be budget-neutral was a significant blow to the CO-OPs. The CO-OPs – along with the rest of the carriers – had set their premiums for 2014 (and by that time, for 2015 as well) with the expectation that risk corridors payments would mitigate losses if they experienced higher-than-expected claims. Clearly, that has not panned out, and it certainly puts the CO-OPs in a tough spot [to clarify, HHS said in 2013 that the risk corridor program would NOT be budget-neutral, and that federal funds would be used to make up any short-falls; carriers set their rates for 2014 based on that. But then in 2014, HHS announced in 2014 that they had made several adjustments to the risk corridor program, and that they projected ¡°that these changes, in combination with the changes to the reinsurance program finalized in this rule, will result in net payments that are budget neutral in 2014. We intend to implement this program in a budget neutral manner, and may make future adjustments, either upward or downward to this program (for example, as discussed below, we may modify the ceiling on allowable administrative costs) to the extent necessary to achieve this goal.¡± But this was after rates for 2014 were long-since locked in, and enrollment nearly complete. At the end of 2014, congress passed the Cromnibus Bill, requiring risk corridors to be budget neutral, with no wiggle room for HHS.]

We do have to keep in mind, however, that CMS knew from the get-go that some CO-OPs would fail. They expected at least a third of them to fail in the first 15 years, and that was long before the risk corridors program was retroactively changed to be budget neutral.

What are CO-OPs and how are they different?

Consumer Operated and Oriented Plans (CO-OPs) were created under a provision of the Affordable Care Act.  CO-OP plans were proposed by Senator Kent Conrad (D-ND) when the original  public plan option was jettisoned during the health care reform debate. Lawmakers added the CO-OP provision to the Affordable Care Act to placate Democrats who had pushed for a government-run, Medicare-for-all type of health insurance program.

At the time, progressives who preferred a public option derided CO-OPs as a poor alternative because they can¡¯t utilize the efficiencies of scale that would come with Medicare For All, nor do they have the market clout that a single payer system would have when negotiating reimbursement rates with providers.

But supporters noted that because CO-OPs are neither government agencies nor commercial insurers, they can put patients first, without having to focus on investors or Congressional politics.

Instead of paying shareholders, CO-OP profits are reinvested in the plan to lower premiums or improve benefits (in 2014, only one CO-OP, Maine Community Health Options, had revenue that exceeded claims and administrative expenses – but the reinvestment of profits is the plan for all CO-OPs, once they become profitable).  And customers¡¯ health insurance needs and concerns become a top priority because the CO-OP¡¯s customers/members elect their own board of directors. And a majority of these directors must themselves be members of the CO-OP.

CO-OPs are private, nonprofit, state-licensed health insurance carriers.  Their plans can be sold both inside and outside the health insurance exchanges, depending on the state, and can offer individual, small group, and large group plans.  But they¡¯re are limited to having no more than a third of their policies in the large group market (a more lucrative market than individual or small group).

Lawmakers had originally planned to provide $10 billion in grants to get the CO-OPs up and running in every state.  But insurance industry lobbyists and fiscal conservatives in Congress succeeded in reducing the total to $6 billion, and turning it into loans – with relatively short repayment schedules – instead of grants (and CO-OPs are not permitted to use federal loan money for marketing purposes).  Then, during budget negotiations in 2011, those loans were cut by another $2.2 billion.  And in 2012, during the fiscal cliff negotiations, CO-OP funding was reduced even further – and applications from 40 prospective CO-OPs were rejected.

Ultimately, the Centers for Medicare and Medicaid (CMS) awarded about $2.4 billion in loans to 23 CO-OPs across the country (there were 24 CO-OPs, but Vermont Health CO-OP never became operational.  CMS retracted their loan in September 2013 – before the exchanges opened for the first open enrollment – because there were doubts that the program could be viable with Vermont¡¯s impending switch to single-payer healthcare in 2017; ironically, Vermont pulled the plug on their single payer vision in late 2014).

Are the CO-OPs successful?

What about the CO-OPs that struggled with enrollment in 2014?

In some states where CO-OPs failed to hit their 2014 enrollment goals, part of the problem can be attributed to the significant technological hurdles experienced by state-run exchanges; if the exchanges weren¡¯t working properly, enrollment in all exchange-based health plans was hampered.  This is particularly true in Nevada, Maryland, Massachusetts, and Oregon.

And some CO-OPs that had low enrollment in 2014 have improved significantly in 2015:

Enrollment growth on its own is obviously not a guarantee that a CO-OP will be successful in the long run.  Indeed, excessive growth is one of the factors that led to CoOpportunity¡¯s demise; in New York, South Carolina and Kentucky, the CO-OPs all exceeded enrollment expectations in 2014 but ultimately ended up closing at the end of 2015.  However, the growth in 2015 among CO-OPs that struggled with enrollment in 2014 is a reminder that a slow start doesn¡¯t necessarily mean that a new carrier is doomed.

CMS recognizes that, in a competitive marketplace,  CO-OPs will face challenges. The agency acknowledges that more than one-third of the CO-OPs may fail in the first 15 years. It has set aside $600 million in loans for start-up costs and $3.2 billion to help the plans stay solvent, and estimates a 40 percent default rate for the planning loans and a 35 percent default rate for the solvency loans. We¡¯re currently at a 48 percent failure rate, after nearly two years of operations

23 21 19 18 17 15 14 13 12 CO-OPs offering plans in 25 22 20 19 18 17 16 15 14 states

As of early 2015, there were 22 CO-OPs operating in 23 states.  With the announcement that CO-OPs are closing in Louisiana, Nevada, New York, Kentucky, Tennessee, Colorado, Oregon, South Carolina, Utah, and Arizona, we¡¯re left with 12 CO-OPs operating in 14 states (Oregon still has another CO-OP remaining).  It is unclear whether more CO-OPs will fold as time goes by; certainly most of them have struggled financially thus far.  But they have been popular with consumers, and have positioned themselves to gain market share: In 2015, CO-OPs have the lowest cost silver plans in all or most areas of nine states:  Colorado, Illinois, Arizona, Connecticut, Idaho, Maine, Maryland, New Mexico, and New Jersey (in only two of those states – Colorado and Arizona – have the CO-OPs failed thus far).

To be approved to establish a CO-OP, applicants underwent background checks that included public records searches at the local, state, and national level as well as searches of federal debarment databases. Loan recipients are subject to strict monitoring, audits, and reporting requirements for the length of the loan repayment period plus 10 years.

Focus on cost savings and reinvested profits

How do CO-OPs increase cost efficiencies?

Will the remaining CO-OPs survive?

It¡¯s too soon to tell.  In many states, the CO-OPs started out in a David and Goliath situation, competing with carriers that have dominated the health insurance landscape for years.  There are certainly some very promising signs from some CO-OPs, and they will likely succeed.  But even among the CO-OPs that struggled early on, long-term sustainability is possible.  Premiums that carriers – including CO-OPs – set for 2014 and 2015 were little more than educated guesses from actuaries, since there was very little in the way of actual claims data on which to rely (there was no data at all when the 2014 rates were being set, and only a couple months of early data available when 2015 rates were being set).  Once the CO-OPs had more than a year of claims history in the books, they were able to be much more accurate in pricing their policies for 2016.

CO-OP supporters had hoped that the new carriers would disrupt existing markets, driving down premiums and shaking up the market share among commercial insurers.  Although CO-OPs struggled financially in their first year, average premiums market-wide were lower in both 2014 and 2015 in states that have CO-OPs than in states without CO-OPs.  And enrollment in CO-OPs increased at a much faster pace than overall enrollment growth (across all carriers) from 2014 to 2015.

CMS acknowledged from the start that not all of the CO-OPs would be likely to succeed – just as a crop of new for-profit health insurance carriers wouldn¡¯t all be expected to succeed.  But over the next few years, CO-OPs will have an opportunity to refine their business models, reinvest any profits they make, and grow their enrollment – especially as grandmothered plans come to an end over the next two years, increasing the number of people who need to purchase ACA-compliant plans.

The retention of grandmothered plan has benefited health plans that were already in place prior to 2014, since enrollees on grandmothered plans had to go through underwriting to obtain their coverage; on the other hand, new insurers like CO-OPs have had to contend with a population that¡¯s less healthy than expected, partly because people with grandmothered plans have not yet transitioned to ACA-compliant plans.  In short, it¡¯s too soon to know how the CO-OPs will fare.  Will more of them collapse over the next few years?  Probably.  But some of them are likely to succeed and become integral parts of the health insurance landscape.