Nonprofit Consumer Operated and Oriented Plan Organizations (CO-OPs)

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Affordable Care Act (ACA) >> ACA Repeal >> Components of ACA Not Working Well >> Health Exchanges >> Nonprofit Consumer Operated and Oriented Plan Organizations (CO-OPs)  (last updated 12.11.16)

Overview

The CO-OPs were introduced during the creation of the ACA as a compromise with lawmakers who wanted to offer a so-called “public plan” (similar to Medicare but open to all ages).
Although the ACA originally included $6 billion in start-up loans for the program, budget cuts trimmed this to $2.4 billion in loans to 24 nonprofit cooperatives designed to compete with private insurers. CO-OPs enrolled 400,000 in 2014 and more than 1 million by the end of 2015 open enrollment. However, as 12.8.16, 19 CO-OPs serving 20 states had failed and more are financially troubled. These failures caused approximately 940,753 members to lose CO-OP coverage. It is now uncertain how much in federal loan funds will be lost due to these failed CO-OPs or how much competition on the Exchanges will be impeded by their exit.

Background

CO-OPs were a political compromise that arose as a consequence of opposition to a public option (a publicly run insurance plan similar to Medicare but open to all ages). “But some mod­er­ate Demo­crats, as well as nearly all con­ser­vat­ives, op­posed it [the public option] as too much gov­ern­ment in­ter­ven­tion in­to the health in­sur­ance mar­ket. Ad­di­tion­ally, the in­sur­ance lobby and med­ic­al pro­viders said it could drive down pro­vider-re­im­burse­ment levels, caus­ing doc­tors and hos­pit­als to charge private in­surers more and, in turn, for­cing private in­surers to raise premi­ums.”  In rur­al states, co-ops had a re­cord of suc­cess in oth­er sec­tors. Consequently, “the co-ops were cham­pioned by rur­al sen­at­ors such as former Sen. Kent Con­rad, a Demo­crat from North Dakota, and Re­pub­lic­an Sen. Chuck Grass­ley of Iowa, who was then rank­ing mem­ber of the Fin­ance Com­mit­tee.”
The program was originally funded at $6 billion, but according to the National Journal, “$6 bil­lion turned out to be too at­tract­ive as an off­set for oth­er le­gis­la­tion, and it was ne­go­ti­ated away long be­fore the ACA mar­ket­places were up and run­ning. In 2011 and 2012, ap­pro­pri­ations bills passed un­der Re­pub­lic­an House lead­er­ship re­duced the fund­ing level to $3.4 bil­lion. At the end of 2012, CO-OP fund­ing was chopped once again un­der the Amer­ic­an Tax­pay­er Re­lief Act; in 2013, an­oth­er $13 mil­lion was lost to se­quester, and CMS ended up award­ing only $2.4 bil­lion in loans to co-ops. When funding was eliminated entirely under the fiscal cliff law in January 2013, it did not stop the efforts in the 24 states where CO-OPs already had been approved for start-up loans. However, the bill eliminated all new start-up loans, even for efforts that were in the planning and proposal stages.
According to National Journal (11.24.15), Senator Orrin Hatch (R, UT) had warned of CO-OP problems in late 2013. Both Democrats and Republicans share blame for not taking action to address CO-OP problems once it became clear they were struggling. “Demo­crats don’t want to touch their fa­vor­ite-yet-fail­ing law, Re­pub­lic­ans say. And Re­pub­lic­ans turn up their noses at any­thing that might im­prove Obama­care, des­per­ate to prove it doesn’t work, Demo­crats counter.”

Overall Performance

Overview

  • CO-OPs enrolled 400,000 in 2014 and more than 1 million by the end of 2015 open enrollment.
  • However, 22 of 23 CO-OPs lost money in 2014 and only 9 of 23 reached their enrollment targets that year.
  • As of 12.8.16, 19 CO-OPs serving 20 states had failed, including one in Vermont that never got off the ground (9.13), Iowa/Nebraska (12.14), Louisiana (7.15), Nevada (8.15), New York (9.15), Kentucky (10.15), Tennessee (10.15), Oregon’s two CO-OPs (10.15 and 7.16), Colorado (10.15), South Carolina (10.15), Utah (10.15), Arizona (10.15), Michigan (11.15), Ohio (5.16), Connecticut (7.16), Illinois (7.16), New Hampshire (9.16), New Jersey (9.16) and Maryland (12.16) (dates shown are dates announced; effective dates in some cases are weeks or months later: see details at Impact by State regarding reasons for failure).
  • These failures caused approximately 940,753 members to lose CO-OP coverage. The House Subcommittee on Oversight and Investigations reports that $1.23 billion in federal funds may not be paid back (details below under Failed CO-OPs).
  • According to the Free Beacon (7.16.16), “Kevin Counihan, a top official for the Centers for Medicare and Medicaid services, told lawmakers on Wednesday that of the seven co-ops that are still in operation, six have been placed on corrective action plans. Co-ops are flagged for these plans when the agency has identified issues with the co-ops finances, operations, compliance or management processes. The official was asked how many of the co-ops that are still in operation are profitable and he could not say. “Profitability very much can depend on the month,” Counihan said.”

There are, as of 12.8.16, five remaining CO-OPS serving seven states:

Enrollment

Overall Experience 

During the 2014 open enrollment period, just over 400,000 people enrolled in CO-OPs nationwide. That climbed to over a million by the end of the 2015 open enrollment period. (Healthinsurance.org, 10.16.15)

Most Co-ops Did Not Reach Enrollment Targets in 2014

  • 2015 DHHS Audit. A DHHS Office of Inspector General audit (July 2015) showed that member enrollment for 13 of the 23 CO-OPs that provided health insurance in 2014 was considerably lower than the CO-OPs’ initial annual projections, with actual enrollment as a percentage of projected enrollment ranging from 4 to 60% (Table 1).
  • In 2014, thirteen co-ops fell far short of their enrollment projections, and nine met or exceeded them. New York enrolled 155,400 people, more than five times what it had projected. But co-ops in Arizona, Illinois and Massachusetts only hit 4 percent of their enrollment targets (Associated Press, 7.30.15).

Major Reasons for Enrollment Underperformance

The DHHS audit showed that CO-OPs experienced lower-than-projected enrollment for a variety of reasons, including:

  • Marketplace technical difficulties—When the marketplaces opened, many experienced Web site crashes, long wait times, and failures to accurately capture all information submitted by consumers.
  • Delays in obtaining required licenses—One CO-OP obtained its license to sell insurance a few days before the start of the open enrollment period, and its health insurance plans were not available on the marketplace.
  • CO-OP management changes—Several CO-OPs experienced management changes, which affected their ability to adequately market and sell health plans to consumers.
  • High-priced health insurance plans—Several CO-OPs priced their health insurance plans higher than other health insurers with more name-brand recognition and therefore, according to CO-OP officials, failed to attract customers.

Finances

Profitability

  • 2016 Prospects.
    • According to HealthInsurance.org (7.1.16), “By the spring of 2016, things were starting to look up, at least for a handful of CO-OPs. At least three CO-OPs had a profitable first quarter of 2016: Evergreen Health CO-OP in Maryland, New Mexico Health Connections, and Minuteman Health in Massachusetts and New Hampshire. All three of those CO-OPs lost at least two million dollars in the first quarter of 2015, so ending the first quarter of 2016 in the black was a significant year-over-year improvement. And although Community Health Options (Maine and New Hampshire) ceased enrollment in December 2016 in an effort to stem losses, their net income in the early months of 2016 has been higher than projected, and the reports from the Maine Bureau of Insurance have been positive about the CO-OP’s performance.”
    • Based on experiences in Maine (the only CO-OP to make a profit in 2014), Illinois, Ohio, Montana and Wisconsin, ACA enrollment expert Charles Gaba concludes: “By my count, that’s at least one CO-OP doing well and 4 more which are at least doing well enough to tough it out for the 2016 season” (ACA Signups, 10.23.15)
      • However, on 12.10.15, Maine’s CO-OP reported it would suspend 2016 enrollment due to financial losses. “Maine’s Community Health Options lost more than $17 million in the first nine months of this year, after making $10.9 million in the same period last year. A spokesman said higher-than-expected medical costs have hurt the cooperative… Maine’s Community Health Options booked about $217 million in medical costs through the first nine months of this year, as its enrollment approached 71,000 people. Its costs so far this year are 72 percent higher than what the insurer recorded all of last year.
      • In addition, Ohio’s InHealth was ordered to be liquidated on 5.26.16.

Major Reasons for Financial Losses

  • Low Enrollment. See earlier discussion.
  • Higher-than-Expected Medical Claims. Medical claims expenses that exceeded the income from premiums contributed to the losses. Nineteen co-ops had medical claims that exceeded premiums. The reasons included higher-than-expected enrollment of people with expensive health problems, lower-than-expected enrollment of younger people, and inaccurate pricing of premiums (Associated Press, 7.30.15).
    • Insurance industry expert Robert Laszewski said (12.10.15) that small co-ops probably don’t want to spend more than 85 percent of their premiums on claims. Aside from paying claims, insurers need to collect enough revenue to run their business. Eight of the 10 surviving co-ops reviewed by The Associated Press on 12.10.15 were spending 89 percent or more of their premium income on medical costs
  • Some Federal Loans May Not be Repaid. Such loans purportedly were only made to private, nonprofit entities that demonstrate a high probability of financial viability. However, according to DHHS Office of Inspector General, “The low enrollments and net losses might limit the ability of some CO-OPs to repay startup and solvency loans and to remain viable and sustainable. Although CMS recently placed four CO-OPs on enhanced oversight or corrective action plans and two CO-OPs on low-enrollment warning notifications, CMS had not established guidance or criteria to assess whether a CO-OP was viable or sustainable” (July 2015 audit).
  • High Administrative Costs. The AP used data from the DHHS audit to calculate per-enrollee administrative costs for the co-ops in 2014. It ranged from a high of nearly $10,900 per member in Massachusetts to $430 in Kentucky. Fourteen CO-OPs had administrative costs of more than $1,000 per member. The audit found that the Massachusetts co-op collected $2.9 million in premiums, and spent $18.5 million on administration.” (Associated Press, 7.30.15)
  • Poor Federal Oversight.
    • 12 Obamacare Insurance CO-OPs Fold After Getting $1.2 Bil from Govt. “The CO-OPs ultimately racked up a breath-taking $376 million in losses in 2014 and more than $1 billion in losses in 2015 yet the cash kept flowing….’Even though HHS was aware of serious financial distress suffered by the CO-OPs in 2014, it failed to take any corrective action or enhance oversight for more than a year,’ the senate investigation found, confirming that the health agency ‘regularly received key financial information from the CO-OPs’ that clearly showed the failed insurers ‘experienced severe financial losses that quickly exceeded even the worst-case loss projections.’…’The financial toll of this failed experiment is much steeper than has been previously reported,’ according to this latest audit, which took nearly a year to be completed…In addition, the CO-OP’s debt to the U.S. government stands at over $1.2 billion. Prospects for repayment are dim.’” (Judicial Watch, 3.14.16)
  • Financial Mismanagement.
    • Executives Received Massive Salaries From Failed Obamacare Co-Ops. “Thirty-four top executives at 10 failed Obamacare co-ops were paid a whopping $8,211,384 in 2014, according to 990 tax forms obtained by The Daily Caller News Foundation. New York had the highest total, having paid four of its employees an astounding total of $1,156,317, with Health Republic Insurance of New York CEO Debra Friedman taking in $427,632 and COO Nicholas Liguori making $316,411. Nevada Health Cooperative’s CEO had the highest salary of the year, receiving $428,001 in compensation for 2014. Arizona’s Compass Cooperative Mutual Health Network, Inc. also provided hefty salaries — its CEO Kathleen Oestreich was compensated $377,279, while its COO Jean Tkachyk made $351,807…During a hearing in November, Centers for Medicare and Medicaid Services Chief of Staff Mandy Cohen cited a shortage of funds as part of the problem as to why so many of them were failures.” (Daily Caller, 3.16.16)
    • Obamacare CO-OPs Hid Millions In Exec Pay, Consulting Fees. “On Tuesday, TheDCNF reported that 18 of the 23 operating non-profit co-ops paid their top executives salaries ranging from $263,000 to $587,000, according to 2013 IRS tax filings. Those figures appear to violate federal laws and regulations barring ‘excessive compensation’ for tax-funded enterprises… Bill Oemichen, a sitting member of the Federal Advisory Board on Co-ops set up by CMS, told a March 14, 2011, meeting of that panel that he feared unscrupulous co-op leaders and greedy consulting companies might seek ‘unjust enrichment’ during the early formative years of the Obamacare co-ops.” (Daily Caller, 7.5.15)
    • House Panel Says Obamacare CO-OP Improperly Diverted $25 Million. “A New York nonprofit improperly diverted $25 million meant to help establish three Obamacare health insurance co-ops to a wholly owned for-profit subsidiary, a congressional oversight committee said Wednesday. The Freelancers Union, which received $340 million in federal loans to set up co-ops in New York, New Jersey and Oregon, gave some of that cash to a for-profit entity called Independent Worker Services.” (Washington Examiner, 2.5.14)
    • Obamacare’s Louisiana CO-OP Riddled with Self-dealing, Conflicts of Interest. “Louisiana Health Cooperative’s then-Chief Executive Officer Terry Shilling signed a $4 million, four-year contract with a consulting firm last year in which he is a principal, according to documents obtained by the Washington Examiner…The Examiner also found that Louisiana Health Cooperative’s leadership ranks include seven of Shilling’s business associates, and the new co-op agreed to pay an additional $3.3 million annual fee to the consulting firm, which is registered in Georgia as Beam Partners. Besides Shilling, individuals from Beam fill three of Louisiana Health Cooperative’s director positions, two vice president slots and the chief financial officer. Eight of the top 11 co-op managers are from Beam. On top of the $4 million contract and $3.3 million annual consulting fee, Louisiana Health Cooperative also agree to an additional 20 percent ‘performance fee’ to be paid to Shilling’s firm.” (Washington Examiner, 8.21.13)
    • Obamacare CO-OPs are Focus of Four Federal Investigations. “Because co-ops are relatively untested vehicles for selling and managing health insurance programs, the U.S. Office of Management and Budget has predicted that as many as 43 percent of the new groups will go bankrupt within a few years. Investigators are focusing on the co-op program’s lack of transparency, high likelihood of multiple defaults, and recurring charges of political favoritism in the selection process for choosing funding recipients. One of the IG probes is focusing on the process used by the Obama administration to choose the 24 co-ops to be funded, which critics argue is flawed by favoritism. The IG’s Office of Audit Services, its largest division, is carrying out that investigation. The IG’s Office of Evaluation and Inspections is carrying out a second investigation. Auditors are determining whether the new startups will be able to avoid insolvency or default, a major worry among insurance experts.” (Washington Examiner, 6.13.13)

Improved Competition

  • Despite their often weak performance, CO-OPs appear in some instances to have improved competition. “In some areas, their presence allowed consumers to choose among three insurers, which many experts say is the lowest number needed to put downward pressure on prices” (New York Times 10.25.15)
    • Nevada will have four counties with only two choices, after the co-op and another insurer exited, and 10 counties with only a single choice: Anthem, according to Kaiser.
    • In Kentucky, where Kentucky Health Cooperative offered plans statewide and had 55,000 members this year, it would have been the third insurer offering plans in 59 of 120 counties for 2016, said Glenn Jennings, the co-op’s interim chief executive. Now people in those counties, which are mostly rural, will have just two choices.

Operational Problems

  • CO-OPs Mostly Not Ready for Opening Day. “On their first venture into the real world of health care insurance, Obamacare’s 24 health care cooperative start-ups did not enjoy a banner first day… Sites were difficult to navigate and provided little understandable insurance information on topics like eligibility, costs and benefits. None of the co-ops offered evening or weekend customer service. Half did not identify their boards of directors. Even just finding the new co-ops online was a challenge, which was further complicated by the fact most of them are all but unknown in their states.” (Washington Examiner, 10.2.13)
  • Data Security. “On Wednesday Sherwood residents Lester and Nora Brock were surprised to learn that personal data entrusted with their health insurer, Oregon’s Health CO-OP, might be compromised. Even more surprising? They learned this not from a letter addressed to them, but from five different letters addressed to other people – each in separate envelopes delivered to the Brocks’ address… The breach comes as bad news for the upstart insurer. It’s operated as a consumer-owned operated nonprofit, one of two set up with the help of federal loans in Oregon in 2013.” (The Oregonian, 4.30.15)

Performance by State

Failed CO-OPs

As of 12.8.16, and including Vermont’s, 19 CO-OPs serving 20 states had failed (AZ, CO, CT, IA/NE, IL, KY, LA, MD, MI, NH, NJ, NV, NY, OH, OR (2), SC, TN, UT, VT), and more are financially troubled. These failures caused 940,753 members to lose CO-OP coverage. It is now uncertain how much in federal loan funds will be lost due to these failed CO-OPs or how much competition on the Exchanges will be impeded by their exit.

Failure Trends

  • CMS Expected One Third of CO-OPs to Fail. CMS expected at least a third of the CO-OPs to fail in the first 15 years. (Healthinsurance.org, 10.16.15).
  • More Failures Likely.
    • According to Politico (7.1.16), the CO-OP program may “collapse.” “That’s one looming possibility, based on risk-adjustment data posted by HHS on Thursday. All but one of the 10 remaining nonprofit startups were net losers in the risk-adjustment program for 2015 and will need to pay out nearly $150 million to their competitors. The biggest loser? Health Republic Insurance of New Jersey, which took a $46.3 million haircut. The financial blow could mean state regulators will force more plans out of business in the coming days, experts tell Pro’s Paul Demko.”
    • “Eight Consumer Operated and Oriented Plans have folded, but it’s too soon to write off the remaining CO-OPs’ viability” (Healthinsurance.org, 10.16.15).
    • ‘There will be more closures,’ said American Enterprise Institute resident fellow Thomas Miller, a health care expert. ‘The only question is when rather than whether.’” (Daily Caller, 10.15.15)
    • “Robert Moffit, a senior fellow at the Center for Health Policy Studies at The Heritage Foundation, said nearly all of the co-ops are in financial trouble, marking a ‘serious problem’ that he predicts will continue to push more of the insurers to close down.” (Liberal Logic 101, 9.29.15)
  • 11 CO-OPs on Verge of Failure. A Daily Caller News Investigation has found that “Federal officials have a secret list of 11 Obamacare health insurance co-ops they fear are on the verge of failure, but they refuse to disclose them to the public or to Congress.” The 11 unidentified co-ops appear to be still operating but are now on “enhanced oversight” by the federal Centers for Medicare and Medicaid, which manages the Obamacare program. The 11 received letters from CMS demanding that they take urgent actions to avoid closing. (Daily Caller, 10.19.15).
  • False Picture Provided in Balance Sheets. “Politico Pro has reported that state and federal regulators let some of the co-ops ‘reclassify certain loans as surplus, a move that financial analysts say will make the health plans’ balance sheets look better and potentially keep them from shutting down.’ In other words, to hide their debts and project false solvency—until they, too, go under.” (Adrian Smith, Wall Street Journal, 11.3.15).
  • Eight of Eleven Surviving Obamacare CO-OPs Facing Failure. “Eight of the 11 remaining Obamacare health insurance co-ops are in serious financial trouble and could collapse by the end of the year, Mandy Cohen, a top federal health official told Congress Thursday in testimony before a House oversight panel… Cohen stubbornly refused to disclose which of the remaining 11 are struggling, but conceded that eight now face either federal ‘enhanced oversight’ or are operating under a federal ‘corrective action plan.’… Cohen ominously hinted that many local hospitals, medical clinics and doctors may not be paid for services they delivered to co-op patients, because federal law requires that the government be first in line among creditors.” (Daily Caller, 2.25.16)
  • Most ACA Health Co-ops Still Facing Extra Government Oversight, CMS Says. “Cohen did not specify which co-ops are facing corrective action plans. But a source familiar with the co-ops’ finances said that only New Mexico Health Connections, Montana Health Cooperative and Massachusetts’ Minuteman Health Inc. are not currently subject to additional oversight. That means that the co-ops under corrective action plans are Wisconsin’s Common Ground Healthcare Cooperative, Maryland’s Evergreen Health Cooperative Inc., Freelancers Consumer Operated & Oriented Program of New Jersey Inc., HealthyCT Inc., Ohio’s Coordinated Health Mutual Inc., Illinois’ Land of Lincoln Mutual Health Insurance Co., Maine’s Community Health Options and Oregon’s Health CO-OP.” (SNL Risk and Regulation, 2.26.16)

Impact of Failed CO-OPs

Lost Coverage

As of 12.8.16, these failures caused approximately 940,753 members to lose CO-OP coverage (AZ=59,000, CO=80,000, CT=40,000, IA/NE=120,000, IL (49,000), KY=51,000, LA=17,000, MI=28,000, NH (11,581), NJ=35,000, NV=21,300, NY=209.500, OH=22,000, OR=35,600, SC=67,000, TN=29,773, UT=56,000, VT=0, MD=9,000; details available at CO-OP Performance by State). According to Wall Street Journal (1.21.16), acting CMS administrator Andy Slavitt “said three-quarters of consumers who were covered by co-ops that failed have now been able to maintain coverage through new plans.”

Lost Federal Subsidies 

  • Loan Amounts. Excluding Vermont, the failed CO-OPs have received $1884.65 billion in federal loans that may not be paid back: AZ ($93.3 m.), CO ($72.3 m.) CT ($127.9 m.) IA ($145.3 m.), IL ($160.1 m.), KY ($146.5 m.), LA ($65.8 m.), MD ($65.45 m.), MI ($71 m.), NJ ($109 m.),  NV ($65.9 m.), NY (265.1 m.), OH ($129.2 m.), OR ($117.2 m.), SC ($87.6 m.), TN ($73.3 m.), and UT ($89.7 m.). Exact amounts of loans provided to each CO-OP are listed here.
  • Recovery Efforts. In 11.3.15 congressional testimony, Dr. Mandy Cohen, the chief operating officer at the Centers for Medicare and Medicaid Services, said the government would “use every tool available to recover taxpayer dollars” from the co-ops going out of business, but she declined to say how much she expected to recoup. According to Wall Street Journal (1.21.16), “Andy Slavitt, acting administrator at the Centers for Medicare and Medicaid Services, told a Senate committee that the agency is working with the Justice Department and taking legal actions to collect the federal moneys in some cases.”
    In March, 2016, Slavitt said “officials at the Centers for Medicare & Medicaid Services (CMS) are hoping lawsuits against Consumer Operated and Oriented Plan (CO-OP) vendors will help CMS recover some of the loan money at risk due to CO-OP failures.” At a hearing on the CO-OPs organized by the Senate Homeland Security and Governmental Affairs investigations subcommittee, Slavitt said the “CO-OPs have felt poorly served by some of their vendors.”
Loan Conversions

According to the Inspector General of HHS, CMS issued a memo to the CO-OPs, on July 9, 2015, providing guidance that would allow the CO-OPs to amend their startup loan agreements. According to the guidance, the amendments would allow CO-OPs to convert startup loans into surplus notes. A surplus note is a bondlike instrument issued to provide needed capital. Under the terms of a surplus note, CO-OPs were not required to make any repayment on the surplus note that could lead to financial distress or default. In accordance with National Association of Insurance Commissioners (NAIC) accounting principles, CO-OPs that converted their startup loans into surplus notes could record and report these loans as capital and surplus rather than as debt in financial filings with regulators. Surplus notes provide a source of capital for issuers that do not have access to traditional equity markets.
Allison Bell at Life Pro Health notes (8.16.16) that these conversions were largely ineffective in assisting CO-OPs to remain solvent and put fund recovery by CMS further down the priority list.

  • “When the federal Centers for Medicare & Medicaid Services (CMS) tried to help 12 struggling Consumer Oriented and Operated Plan carriers survive in 2015, it might have hurt its efforts to get cash out of their corpses.
    • One problem is that the one-time boost did little to keep CO-OPs from failing, officials say. Four of the 12 CO-OPs that went through startup loan conversions had shut down by Dec. 31, 2015, officials say. At least four more have shut down or are in the process of shutting down.
    • Another problem is that the conversions changed how CMS will rank when it tries to recover assets from the estates of the failed CO-OPs through insolvency proceedings, officials say. In Tempe, Arizona, for example, a state court recently issued an order that puts Meritus Health Partners, a CO-OP carrier, in a receivership process, under the supervision of the Arizona Department of Insurance. CMS ranked fourth in terms of priority before the loan-to-note conversion, and it now ranks 10th, officials say. In other states, the conversions put CMS two to seven steps lower on the priority ladder, officials say.”

Unpaid Liabilities

Half of the failed Obamacare health insurance co-ops are not covered by a 33-year-old guaranty program designed to protect consumers when an insurance company defaults, according to a Daily Caller News Foundation investigation (12.11.15).  The Guaranty Association program, an insurance program to protect consumers in the event of an insurance company default, was established in 1983. The program provides financial coverage to people who enroll in a health insurance program, and pays up to $500,000 in medical costs if an insurance company becomes insolvent.

According to The Daily Caller (12.11.15), Peter Gallanis, the president of the National Organization of Life & Health Insurance Guaranty Associations, which represents all state guaranty associations, told TheDCNF only one co-op so far has reached the liquidation stage where its assets and debts are estimated. “So far that’s only happened in the Co-Opportunity co-op case,” he told TheDCNF. Co-Opportunity Health, which served Iowa and Nebraska.

Consumer/Taxpayer Liability

Some critics suggest “consumers will be on the hook for any unpaid claims left behind by failed insurers.” According to National Journal (11.24.15), “The more than 110,000 Iow­ans and Neb­raskans re­ceiv­ing in­sur­ance through CoOppor­tun­ity were not only the first to fall, but also were among those who fell hard­est. The co-pays and de­duct­ibles they’d been pay­ing in­to did not trans­fer, and con­sumers had to start over again with new plans.”  Reportedly, the Iowa and Nebraska Life and Health Insurance Guaranty Associations, funded by insurers in the states, have begun paying more than $80 million to cover outstanding claims to providers which CoOportunity Health was unable to pay in its insolvency. But that simply means the losses end up being shifted to innocent subscribers in non-CO-OP plans and/or taxpayers (depending on how the guarantee fund is financed).

Health Care Provider Liability
  • According to Edward Morrissey, “Health care providers could get stuck with unpaid bills in a half dozen states where co-op plans have collapsed,” reports Politico Pro’s Paul Demko. “That’s because there’s no financial backstop in those states if the failed nonprofit startups backed by Obamacare loans run out of money before paying off all of their medical claims.” The failure of the co-op Health Republic Insurance of New York left $165 million in unpaid bills, and a survey showed 64 percent of New York providers waiting for payment. Had a private-sector insurer defaulted in a similar manner, these providers would have been compensated from a guaranty fund set up by the industry.
  • According to The Daily Caller (12.11.15):
    • survey of doctors conducted last month by the Medical Society of New York found that 28 percent of doctors treating Health Republic patients were owed up to $25,000. Twenty percent of doctors were owed up to $100,000 or more by the co-op [which is not covered by the state’s guaranty fund, as noted above].
    • The unpaid losses for New York hospitals could quickly mount into hundreds of millions or even $1 billion dollars. Mount Kisco Medical Group, for example, is trying to collect millions in unpaid medical claims from Health Republic, according to a report in the Poughkeepsie Journal.
  • Docs, Hospitals May Go Unpaid in Obamacare CO-OP Flops. “Federal health officials are seeking to deny medical reimbursements to doctors and hospitals that have served patients insured by failed Obamacare health insurance co-ops, according to a Daily Caller News Foundation investigation. Instead, the Centers for Medicare and Medicaid Services (CMS) are insisting it, not medical providers, has the first right to any remaining funds as 12 of the 24 co-ops go through the liquidation process.” (Daily Caller, 3.9.16)
  • Crain’s New York reports that (4.25.16) “After months of uncertainty surrounding Health Republic Insurance of New York’s liquidation process, new court documents released April 22 provide clarity on what creditors can expect to receive. That is a welcome development for doctors and other providers who say are owed more than $200 million. DFS previously noted that a provider should be able to receive a portion of their claims. But it’s now clear vendors and brokers are out of luck… Vullo stated that DFS and the Centers for Medicare and Medicaid Services, the federal agency that oversees Health Republic, became aware in June 2015 of ‘certain financial and other reporting errors’ in the insurer’s annual report after the company was audited by accounting firm BDO. CMS’ claim on those funds is subordinate to claims payments, the ordinary and necessary expenses the Health Republic incurred in carrying out its day-to-day activities, and ‘maintenance of required reserve funds,’ Vullo wrote in court papers.”

Reduced Competition

According to National Journal (11.24.15), “Co-ops were some­what more likely to fail where they had been one of the two low­est-cost sil­ver plans, in at least half of the states. All but one of the states us­ing Health­care.gov in which a co-op has closed also have bench­mark premi­um rate in­creases in 2016 that are high­er than av­er­age.” According to New York Times (10.25.15), “At a time when the industry is experiencing a wave of consolidation, with giants like Anthem and Aetna planning to buy their smaller rivals, the vanishing co-ops will leave some consumers with fewer choices — and potentially higher prices.”

Reduced Risk-sharing for Remaining Carriers

Bloomberg Business reports (1.6.16) that “UnitedHealth Group Inc., the largest U.S. health insurer, said its rates for Obamacare plans in New York may be too low because the failure of a competing insurer last year might lead to shortfalls in payments designed to stabilize Obamacare markets…UnitedHealth’s rates were set anticipating risk-sharing payments designed to stabilize the new insurance markets, William Golden, the company’s northeast region chief executive officer, said Wednesday at a state Senate round table in Albany…With its failure, Health Republic won’t be able to pay into the risk-adjustment program, reducing the funds available to UnitedHealth and other plans in the state.”

Reasons for CO-OP Failures

CO-OPs failed for a variety of reasons, some related to inherent limitations of CO-OPs (lack of experience) or their own behavior (pricing too low), while others related to the flawed design of the ACA (lack of access to private capital, lack of diversification, possibly flawed risk adjustment formula). Risk corridor payments were only 12.6% of the amounts billed by insurers that incurred losses, but there is disagreement whether the responsibility for this lies with Congress (which capped such payments to make them revenue neutral) or the design of the law (which intended risk corridor payments to be revenue neutral).

Lack of Experience

  • Laszewski, Robert. The insurance industry expert argues (10.26.15) that “Co-ops were new start-ups lacking lots of covered people forcing them to have to go to providers and ask for deep discounts like the big established carriers but with no comparable market share.”
    He further notes: “Co-ops were new start-ups with little or no proprietary information about the risk pools and businesses they were entering, while the big carriers had lots of data and experienced actuaries and managers.”
  • Sarich, John.  He writes (12.4.15) that the CO-OPs couldn’t compete with more experienced carriers who had already tightened their company margins and other efficiencies. “So as a result, the co-ops couldn’t compete with the low costs of the more experienced organizations. The new nonprofits stepped into a playing field where they were competing against companies that have been around for 70 or 80 years, and they couldn’t make their pricing competitive with the big guys.”

CO-OP Plans Priced Too Low

  • 2013. “New York’s Health Republic nonprofit health insurance co-op can offer cheaper policies and undercut its commercial rivals, thanks to ‘luxurious’ federal subsidies. Daniel T. McGowan, Health Republic’s former president and CEO, attributed the low rates to ‘a very luxurious kind of backing’ from the federal government. That backing is a $174 million tax-free loan from the U.S. Department of Health and Human Services that ‘doesn’t have to start being paid back until I believe 2018 or 2019. So we have about a four- to six-year period to try to turn things around,’ he said.” (Washington Examiner, 11.19.13)
  • 2014. “The co-op states have 8.4 percent lower premiums on average than the non-co-op states, across the marketplace” (Kaiser Health News, 4.2.14).
  • 2015. “As consumer-governed start-ups, the co-ops tried to sell some of the lowest-cost plans that would put downward pressure on prices. They offered one of the two least expensive midrange plans in more than half the counties where they operated this year, according to the Kaiser Family Foundation, especially in rural areas that have historically suffered from a lack of competition and high prices” (New York Times 10.25.15).
  • Expert Opinion. Insurance industry expert Robert Laszewski concludes: “Sure sounds like these co-ops just weren’t charging enough.”  As well, the 2015 DHHS audit found that inaccurate pricing of premiums was one factor explaining why all but one CO-OP lost money in 2014.

Lack of Access to Private Capital

“While most private insurers have enough reserves or access to funds to continue to operate, state regulators shut down some of the co-ops because of solvency concerns”  (New York Times 10.25.15). “Co-ops were limited to only the capital the government gave them and could not raise more money in the public markets or merge with a bigger more established player when they got into trouble.” (Robert Laszewski, 10.26.15).

  • Lack of CMS Flexibility. The biggest hurdle in the future relies on a CMS decision, Peter Beilenson, founder and CEO of Evergreen Health, a Baltimore-based CO-OP, says. Currently, the Centers for Medicare and Medicaid Services forbids CO-OPs from accepting outside capital under loan agreements forged when the CO-OPs first began. However, those loans are no longer given…’If you want us to grow and be successful, you have got to allow us to get additional capital,’ he adds. ‘That’s why we are in discussions with CMS, and a lot of pressure is being put on CMS.’” (Employee Benefit Advisor, 10.22.15)
  • CO-OPs Prohibited from Marketing. “The co-ops’ federal loans carried restrictions like not being able to use the funds for marketing that made their odds of surviving steeper than most” (New York Times 10.25.15).
  • CO-OPs Prohibited From Merging. “Ms. Crowe and others say the co-ops’ overseer, the Centers for Medicare and Medicaid Services, has also stymied their quest to find other sources of money. They have even sought solutions like teaming up with another nonprofit. “We’ve not seen any shift in the willingness of C.M.S. to consider or approve any model,” she said of the agency” (New York Times 10.25.15).

Lack of Diversification

Insurance industry expert Robert Laszewski notes: “Co-ops could only sell individual and small group policies–the most problematic part of the health insurance business–and went up against established health plans with well-diversified market portfolios.”

Lack of Federal Funds

When they were originally envisioned, co-ops were to have been given $10 billion in Federal grants, but that figure ultimately became only $2.4 billion in loans. In addition, the “3R” program–reinsurance, risk corridors, risk adjustment–was expected to serve as a safety net for co-ops that had members with extremely high claims costs (reinsurance), unexpected claims losses (risk corridors) or a bad selection of risks (risk adjustment). But as explained in the next section, the risk corridor program ultimately paid out $2.5 billion less than CMS had led insurers to believe would be available.

Low Risk Corridor Payments

In electing to shut down in mid-October, the Health Republic CO-OP in Oregon made the decision after CMS decided that it would only pay 12.6% of what insures billed the government under the “risk corridors” program for 2014. This would cost the Oregon CO-OP more than $20 million. The plan offered sample language for those upset with this decision to use in letters to their congressional delegation: “Congress passed the Affordable Care Act and called on new, smaller regional health plans like Health Republic Insurance to take on big risks by covering previously uninsured people. Congress knew there were risks. That’s why they set up a federal program to protect new health plans. They promised to pay these health plans for helping people get insurance. Now the Feds are backing out on their promise and owe billions to smaller competitive health plans across the country.” (MedCityNews, 10.16.15).

  • CMS Expected Risk Corridor Payments to be Risk Neutral.  However, in January 2014, Aaron Albright, a spokesman for the Centers for Medicare and Medicaid Services, asserted: “The temporary risk corridor provision in the Affordable Care Act is an important protection for consumers and insurers as millions of Americans transition to a new coverage in a brand new marketplace. The policy, modeled on the risk corridor provision in Part D that was supported on a bipartisan basis, was estimated to be budget neutral, and we intend to implement it as designed.”
  • The Risk Corridor Payment Cap Mirrored the Law’s Design. Insurance industry expert Robert Laszewski points out that when Congress later capped what could be spent on the Obamacare risk corridor reinsurance provision for health plans losing money at the level of what was paid into the program by health plans making money, it merely reinforced the design and intention that risk corridor payments be budget neutral. The fact that capped risk corridor payments turned out to be only 12.6% of the amount needed to bail out plans in trouble implies in Laszewski’s view that “the health plans, including these co-ops that lost money in Obamacare, lost it at a rate eight times greater than the relatively few health plans that made money under Obamacare, a difference of $2.5 billion!
  • CO-OPs Claim to Have Been Misled.  “Even after Congress demanded changes to the [risk corridor] program, the co-ops say they were reassured that they would be paid more of what they were due. “We were blindsided,” said Julia Hutchins, the chief executive of Colorado HealthOP” (New York Times, 10.25.15). According to Morning Consult, “In July [2015], CMS told state insurance commissioners that the risk corridor program would be able to cover a sufficient amount of the $2.87 billion that the insurers had requested in federal payments. But in October, CMS backtracked, saying it would actually only be able to cover $362 million, a scant 12.6 percent of the amount that was originally promised. CMS says the shortfall occurred because more insurers lost money on the exchanges in 2014 than expected. For co-ops that were counting on those payments to stay afloat, the lower-than-expected government funding was the beginning of the end.”

Possibly Flawed Risk Adjustment Formula

The National Alliance of State Health Co-ops, a trade group for the co-ops “wants changes to a federal formula known as risk adjustment, which takes money from plans with healthier and younger enrollees and gives it to plans with older and sicker customers to spread out financial pressures on insurers. The health co-ops and smaller insurers say the formula, along with another health law program that aims to offset insurers’ financial losses, is putting them out of business. “The formula is flawed,” Dr. Hickey said. “We may try to get an injunction for an independent outside examination to see if the risk adjustment formula is in fact stabilizing the insurance market. If it continues without changes, it’s going to wipe us all out” (Wall Street Journal, 10.17.15).

Proposed Remedies

Pending Federal Legislation

Rep. Adrian Smith (R. NY) introduced H.R. 954 to exempt consumers who purchased coverage under a terminated qualified health plan funded through the co-op program from having to pay individual-mandate penalties through the end of the calendar year or, for plans that fold in the final quarter of the year, through the end of the next calendar year.

Administrative Action

Obama Administration Works to Fix Health Insurance Co-Ops. “Co-op officials have said they suffered financially, in part because the law restricted their ability to acquire capital or solicit private-capital investment. The administration will soon release guidance aimed at helping co-ops to attract capital or merger partners, Mr. Slavitt told the Senate Finance Committee…The committee’s chairman, Sen. Orrin Hatch (R., Utah), said the co-op program was poorly designed and there were inadequate safeguards to protect taxpayer money. He also questioned the co-ops accounting practices, specifically whether loans were recorded as assets. ‘CMS has encouraged the co-ops to cook the books,’ Mr. Hatch said…The agency will hold a March meeting with co-op leaders and others involved regarding a formula that spreads out risk among insurers.” (Wall Street Journal, 1.21.16)

Federal Litigation

  • Oregon Insurer Files $5 Billion Class-action Suit Against Feds Over Subsidies. “Health Republic Insurance Company of Oregon, a Lake Oswego-based insurer that is phasing down its operations, on Wednesday filed a $5 billion class action lawsuit on behalf of insurers it says were shorted by the federal government under an Obamacare program. The lawsuit, filed in the United States Court of Federal Claims, focuses on a program that was intended to offset insurer losses in the early years of the implementation of the Patient Protection and Affordable Care Act. Instead, payments to insurers under the ‘risk corridor’ program amounted to 12.6 percent of the amount expected for 2014, and are expected to be similarly low for 2015…Because it is a class-action, other insurers could benefit from the lawsuit, such as Moda Health, the once-dominant Oregon firm that was recently the subject of state intervention to ensure continued solvency. Health Republic was one of 23 federally backed startups set up to increase competition in selected markets. Last fall it announced that as a result of not receiving the federal funds expected, it would wind down operations in an orderly manner rather risk insolvency later and leave members and providers in a jam.” (Portland Tribune, 2.24.16)
  • Obamacare Insurers Could Get Billions From Controversial Government Fund. “A $5 billion lawsuit filed by a nonprofit insurer against the Obama administration for a program implemented under Obamacare is raising questions about the use of a fund available for settlements with the government and whether Congress can, and should, intervene. According to legal experts, if the Obama administration decided to settle its class action lawsuit with Health Republic Insurance of Oregon, one of 23 co-ops started under Obamacare, and other insurers for all or part of the $5 billion it’s seeking, the money would come from the Judgment Fund, an indefinite appropriation created by Congress and administered by the Department of Treasury… ‘the court is going to have to award a judgment since the administration, under the direction of Congress, is violating the law,’ Timothy Jost, a law professor at Washington and Lee University School of Law, told The Daily Signal of the lawsuit.” (Daily Signal, 3.16.16)

Analysis and Resources