On March 23, 2010, the Affordable Care Act (ACA), better known as ObamaCare, was signed into law.  By the end of 2013, millions of Americans had lost the healthcare plan they liked and were forced to accept health insurance plans with mandated benefits they did not need or want.  Their premiums increased by an average of 49 percent from 2013 to 2014.  In November 2014, the Obama administration released data that showed premium rates would go up again in 2015, by as much as 20 percent, for those purchasing insurance under ObamaCare unless they switched plans.

But wait, there’s more!  According to a September 2014 Bloomberg analysis, the total cost of designing and operating Healthcare.gov, the on-line federal marketplace, was at that time $2.1 billion.  The total cost for the entire ObamaCare healthcare reform package, including information technology related costs but excluding Medicaid expansion, was estimated at more than $73 billion.

After tens of billions of dollars were spent and ObamaCare caused a colossal churn in health insurance coverage, there was only a net increase in private insurance coverage of 893,000 individuals by 2014 out of the supposed 49 million without insurance in 2009, according to a Heritage Foundation study.  About 7.5 million, or 89 percent of the newly insured, are now covered under Medicaid, which as CAGW has previously noted in a January 2014 WasteWatcher article, is a terrible program.

While the federal government currently covers 100 percent of Medicaid expansion in the states, that funding will be reduced to 90 percent in 2020 and beyond, provided of course Washington does not cut its contribution sooner.  Since President Obama already offered reductions in Medicaid funding during the FY 2013 budget negotiations, states that accepted Medicaid expansion should be very concerned about explosive future expenses.

One would hope that no more damage can be done, but as ObamaCare limps along, other expensive problems are beginning to bubble up to the surface.  One program that is getting more scrutiny and raising great concern is the Consumer Operated and Oriented Plans (CO-OP), which have been created in 26 states.

Background

During the 2009 debate over ObamaCare, many Democrats called for a public option or government-run healthcare plan.  The House bill contained a government-run plan that would compete with private insurers in a national health insurance exchange.  The Senate bill did not contain a public option.  The political reality was that such an option was unlikely to become part of the final legislative package because all Republicans and more fiscally-conservative Democrats did not want a public option.

A political compromise was dreamed up by then-Senate Budget Committee Chairman Kent Conrad (D-N.D.).  In a June 2009 interview with Ezra Klein of The Washington Post, Sen. Conrad said he was asked by Senate leaders to do the following:

… come up with something to bridge the divide between those who are strong adherents to the public plan and those who are strongly opposed.  The co-op structure came to mind because it seems to fulfill at least some of the desires of both sides.  In terms of those who want a public option because they hope to have a competitive delivery model able to take on the private insurance companies, a co-op model has attraction.  And for those against a public option because they fear government control, the co-op structure has some appeal because it’s not government control.  Its membership control, and membership ownership.  Also the co-op model has proven very effective across many different models.  Ocean Spray in the cranberry business, and Land of Lakes in the dairy business, and Puget Sound in the health care business.

When then-Senate Finance Committee Chairman Max Baucus (D-Mont.) released an outline of his healthcare reform proposal in September 2009, it contained a provision to establish co-ops.  The second most senior Democrat on the committee, Senator Jay Rockefeller (D-W.Va.), responded by saying co-ops were a “ridiculous idea.”  Sen. Rockefeller, who preferred a government-run plan, said, “The proposed co-op model is untested and unsubstantiated – and should not be considered as a national model for health insurance.  Both the [United States Department of Agriculture] and the [Government Accountability Office] agree there is not sufficient analysis and data for health care co-ops, and the National Cooperative Business Association – the leading association for co-ops nationwide – believes that more research must be done before such a plan can be considered.”

Liberal commentator Paul Krugman agreed with Sen. Rockefeller’s assessment that a co-op was not a viable alternative to a public option in an August 2009 column.  He wrote that “the supposed alternative, nonprofit co-ops, is a sham.  That’s not just my opinion; it’s what the market says: stocks of health insurance companies soared on news that the Gang of Six senators trying to negotiate a bipartisan approach to health reform were dropping the public plan.  Clearly, investors believe that co-ops would offer little real competition to private insurers.”

In spite of the strong objections to co-ops, ObamaCare contained a provision that encouraged their creation and allowed them to compete with other insurers in the Exchanges.  The Kaiser Family Foundation summarized the CO-OP requirements found in Section 1322 of the ACA:

Create the Consumer Operated and Oriented Plan (CO-OP) program to foster the creation of non-profit, member-run health insurance companies in all 50 states and District of Columbia to offer qualified health plans.  To be eligible to receive funds, an organization must not be an existing health insurer or sponsored by a state or local government, substantially all of its activities must consist of the issuance of qualified health benefit plans in each state in which it is licensed, governance of the organization must be subject to a majority vote of its members, must operate with a strong consumer focus, and any profits must be used to lower premiums, improve benefits, or improve the quality of health care delivered to its members.

The Taxpayer-funded Loans Begin to Flow

In December 2011, the Centers for Medicare and Medicaid Services (CMS), the agency that oversees the implementation of ObamaCare, announced the final rule for establishing CO-OPs. By mid-February 2012, the loans began to be dispersed.  CO-OPs are required to pay back their federal start-up loans within five years and solvency loans within 15 years of each drawdown.  According to CMS, 23 CO-OPs received loans.  Some are located in one state, such as Arizona’s Meritus Health Partners, and others are regional, such as Iowa and Nebraska’s CoOportunity Health.

But as millions of dollars in federal loans were being released, healthcare experts were beginning to point out problems with the CO-OPs.  Manhattan Institute Senior Fellow Avik Roy wrote in a May 2012 Forbes article that “ObamaCare, according to the White House, will waste over $3 billion on faulty loans to state-sponsored health insurers called CO-OPs.  It’s bad enough that taxpayer funds are going down the tubes.  But internal documents show that the administration isn’t particularly bothered by it.”  Roy went on to say:

For one thing, the plans are prohibited from using the loans for marketing purposes.  So there isn’t an easy way for the plans to make consumers aware of them.  The plans are prohibited from working with insurers already in operation, hence limiting their ability to gain from the experience of existing market players.  The plans will have to enroll members and contract with providers – but unless they are able to enroll a good mix of healthy and sick people, they’ll pay out more in claims than they take in premiums: the classic problem of adverse selection.  Since healthy people have plenty of options already, it’s sick people who will be most likely to sign up for the CO-OP plans.

A February 2013 Health Affairs article pointed out numerous challenges facing the CO-OPs within a relatively short time frame, such as obtaining enough private financial support to be viable, hiring competent personnel, establishing provider networks, undertaking marketing initiatives, and acquiring actuarial capability.  The article noted, “Many analysts are enthusiastic about the potential for CO-OPs to bring competition and choice to the market.  Others question whether the federal loan initiative has been a wise use of taxpayer dollars, since many CO-OPs will be at a disadvantage competing against well-established insurance companies and may fail.”

A July 2013 Department of Health and Human Services Office of Inspector General (OIG) audit found that CO-OPs had “limited private monetary support.”  The OIG noted that “[p]rivate support is one of the three selection factors that the ACA specifies will have priority in the selection process.”  The OIG stated that most of the CO-OPS they reviewed “reported estimated startup expenditures in their applications that exceeded the total startup funding ultimately provided by CMS.  If unforeseen circumstances (such as limited enrollment) or barriers (such as uncertainty about operations of State-based or federally facilitated marketplaces or a State’s denial of insurance licensure) impede CO-OPs from becoming operational, there is a risk that CO-OPs could exhaust all startup loan funding before they are fully operational or before they earn sufficient operating income to be self-supporting.  This may affect the CO-OP program in the long term.”

Congress, concerned about the viability of CO-OPs from the start, enacted a series of laws, including the 2012 American Taxpayer Relief Act, in an effort to help protect taxpayers from huge losses by cutting funding to the CO-OP program.

More Costly Trouble Ahead

Sure enough, the predictions that CO-OPs would have problems are coming to fruition.  CoOportunity, the Iowa-Nebraska CO-OP, has already collapsed and is out of business, in spite of the fact its founders had extensive health insurance experience.  In a February 16, 2015 New York Times article, Abby Goodnough stated that the CO-OP’s “success apparently helped doom it.  CoOportunity’s many customers needed more medical care than expected, according to Nick Gerhart, Iowa’s insurance commissioner, and it had priced its plans to low.”  Covering more sick people than healthy people and charging low premiums is not an example of success in insurance coverage; it is just the opposite.

CoOportunity received $145.3 million in federal loans, including $32.7 million in additional solvency loans from CMS.  In July 2014, the Iowa CO-OP told CMS it was in a precarious financial situation and requested additional funds.  Amazingly, Iowa Insurance Commissioner Nick Gerhart approved a rate increase in October 2014 allowing CoOportunity to proceed.  CMS denied the request for additional funding in December, and Commissioner Gerhart took over the CO-OP.  In January 2015, he asked a court to liquidate the program.  CoOportunity lost $163 million in 2014, and an additional $4.6 million in January, 2015.

The Iowa Life & Health Insurance Guaranty Association, which is funded by Iowans’ health insurance premium dollars, will step in to provide insurance coverage to CoOportunity members until their policies expire.  They are all scrambling to find new insurance.

The commissioner expects the federal government to shell out more money to pay off CoOportunity’s debt, but that seems highly questionable given CMS’s refusal to provide money directly to CoOportunity last year and Congress’s cuts in funding to the whole CO-OP program. Regardless of how the debt is paid off, taxpayers and policy holders will be paying the bill.  

Iowa’s CO-OP may be the first to implode, but it will likely not be the last.  By the end of 2014, CMS had furnished approximately $2.5 billion in loans for CO-OPs.  According to A.M. Best, an insurance rating firm, all but one CO-OP reported operating losses in 2014. 

According to a February 2015 data brief written by University of Pennsylvania Professor of Health Care Management, and Insurance and Risk Management Scott Harrington, “[The CoOportunity] experience highlights the need for close monitoring and oversight of CO-OP pricing and enrollment growth going forward, including whether and when it could become desirable for managers and regulators to restrict additional enrollment that could threaten a CO-OPs viability.”  The university’s Leonard Davis Institute of Health Economics Associate Director Janet Weiner noted that Harrington calculated the ratio to premiums of three categories of expenses: medical claims, claim adjustment, and general administrative.  The bottom line of the report:  “The ‘combined ratio,’ across all plans, is 116.8%, which corresponds to an underwriting loss of about $17 per $100 of premiums.”

The CO-OP program was one of many “carrots” used to entice sufficient Democratic support to pass ObamaCare.  In the end, it will be just another expensive, failed concept that will reiterate the obvious: the government has no business running the healthcare insurance business.