In April, 2015 Citizens Against Government Waste examined Consumer Operated and Oriented Plans (CO-OPs), created under the Affordable Care Act (ACA) or Obamacare.  They were established as an alternative or compromise to placate several Democratic Senators who wanted to adopt a government-run, or single payer, option for healthcare reform.  The theory was that the nonprofit and member-owned CO-OPs would provide real competition to big healthcare insurance companies.  But like most provisions of Obamacare, they have not worked as intended.

Twenty-three CO-OPs were created, three of which provided healthcare coverage in neighboring states. (Vermont attempted to start a CO-OP but was denied a license from the state to provide health insurance.)  To date, nine CO-OPs have either closed their doors or will do so by the end of the year, leaving thousands of people scrambling for new health insurance. 

Co-Opportunity Health, covering Iowa and Nebraska, was taken over by the Iowa insurance commissioner at the end of 2014 and had its assets liquidated three months later.  Colorado HealthOP, Kentucky’s Health Cooperative, Louisiana’s Health Cooperative, Nevada’s Health CO-OP, New York’s Health Republic Insurance of New York, Oregon’s Health Republic, South Carolina's Consumers' Choice Health Plan, and Tennessee’s Community Health Alliance will close their doors at the end of the year.

The total amount of loans these nine failed CO-OPs were awarded from federal taxpayers is approximately $983 million or 41 percent of the $2.4 billion appropriated to all 23 CO-OPs.  More than likely, taxpayers will end up footing the tab for these losing ventures.  Even worse, insurance analysts expect most of the remaining CO-OPs to fail.

The CO-OPs were doomed from the start.  The Obamacare statute and subsequent regulations were over-prescriptive and hurt the CO-OPs’ ability to succeed and obtain private funding.  Perhaps the Centers for Medicare and Medicaid Services (CMS) should have paid more attention to a comment to their proposed regulations that they addressed in the final regulations.  The commenter, who opposed the implementation of the CO-OP program, pointed out that failure was highly likely for the non-profit start-ups because pre-existing insurance issuers, which had the best prospects to repay the loans, were forbidden to participate.

While CMS recognized that the CO-OPs would face challenges, particularly in a highly concentrated health insurance market, the agency argued that is the case for any business.  CMS assured the commenter that the CO-OP program offers loans to “responsibly capitalize new, private, consumer-oriented issuers by increasing the availability of adequate reserve funding and boosting the ability of CO-OPs to compete in a brand new, broader insurance marketplace.  Insurance markets will change and expand considerably in 2014 with the implementation of Exchanges.”  In other words: nothing to be concerned about here, move on.  The CO-OPs would receive taxpayer-funded loans and the administration’s blind faith that Obamacare would create a Utopian health system was all that was needed for them to be successful.

One of the many problems impeding the CO-OP’s potential success was the availability to them of limited, if any, actuarial data, making it difficult to determine what to charge for their premiums.  They had no history on who would purchase a health insurance plan from them.  Furthermore, the law forbids the “participation of issuers, related entities, or the predecessors of either, in the CO–OP program.”  According to the CO-OP regulations, a health insurance issuer that was in existence on July 16, 2009 could not run a CO-OP.  The regulations also state that positions on the board that are designated for individuals with specialized expertise or experience, such as health insurance, must not constitute a majority of the board, even if they are members of the CO-OP.  In other words, it was amateur hour at the CO-OPs.

CO-OPs were also forbidden from using their start-up funds to explicitly market their plans, a rule that would make it difficult for any company, never mind a start-up health insurance company in an existing competitive market, to attract new customers.  No doubt this nonsensical idea came from a prevailing thought process among big-government advocates that healthcare companies spend too much money promoting their products.  The law also required the CO-OPs to only go after the individual and small group market, rather than the large employer market, which is much more lucrative.  The law also made it difficult to obtain funding from equity markets or venture capital.

Another problem for the CO-OPs occurred when President Obama came around to keeping part of his promise, “if you like your healthcare plan, you can keep your plan” by unilaterally changing the law and allowing some people to keep their plan for a few more years.  As a result, there was little incentive to shop for something new and likely much more expensive.  These newly “grandmothered” healthcare plans, which were in existence on October 1, 2013, were not required to adopt the Obamacare mandatory 10 essential benefits, such as paying for maternity and pediatric care even if the customer did not require them.  These plans can extend through 2016, provided the customer’s state allows it and the insurer decides to issue them.

Lower than expected enrollments also played a part in the demise for many CO-OPs.  A July 2015 Health and Human Services Office of the Inspector General (IG) report found that 13 of the 23 CO-OPs, or 56 percent, had lower than expected enrollments by the end of 2014.  However, while the New York CO-OP’s projected enrollment for the end of 2014 was 30,864 customers, its enrollment was 155,402 or 504 percent greater than expected.  And the New York CO-OP did have, according to an April 2015 Government Accountability (GAO) report, premiums that were the least expensive among all the state’s rating areas.  In other words, too many sick people and not enough healthy ones signed up in order to make the numbers work.

The July IG report showed that Arizona’s CO-OP reached only 4 percent of its projected enrollment, but according to the April GAO report, its premiums were among the highest in the state’s seven rating areas compared to other insurers in 2014.  (The enrollment number is in dispute.  Supposedly the enrollment has soared from 869 in 2014 to 56,000 in 2015.  The CO-OP said that it had lowered premiums for 2015.)

The IG and GAO reports showed that Kentucky’s CO-OP beat its enrollment forecast for 2014 by 183 percent and its premiums generally tended to be among the least expensive of other insurers.  However, in several rating areas, the CO-OP’s premiums were also among the most expensive.

Maine Community Health Options, the only CO-OP with a positive net income at the end of 2014, was able to beat its projected enrollment of 15,486 in 2014 with an enrollment of 39,742, or 257 percent greater than expected.  Its premiums were among the least expensive generally compared to other insurers in the state.  However, the state’s Area 1 ratings premiums ranged from the least expensive to most expensive for silver plans and had the most expensive premiums for catastrophic and bronze plans.  Area 1 includes Cumberland, Sagadahoc, and York Counties, about 60 percent of the state’s population.

These figures all demonstrate that health insurance is a complicated business and for the government to throw $2.4 billion to create new, nonprofit insurance companies was fool-hardy at best.

Many of the failing CO-OPs are blaming reduced funding for their demise.  Although the ACA originally provided $6 billion for the CO-OPs in 2010, members of Congress on both sides of the political aisle were concerned about the viability of CO-OPs from the start.  A series of laws, including the 2012 American Taxpayer Relief Act, were enacted in an effort to help protect taxpayers from huge losses by cutting funding to the CO-OP program.  In addition, Republicans also demanded and were successful in requiring that risk corridor payments, an unlimited bailout program for insurers that would be paid for by taxpayers, be budget neutral in the 2015 “CRomnibus” spending bill.  The risk corridor program is due to expire in 2016; it is one of three risk-spreading mechanisms contained in ACA.

Because of the action Congress took regarding risk corridors, issuers were told by CMS on October 1 they will only receive 12.6 percent, which amounts to $362 million, of the $2.87 billion they had asked for to cover their 2014 losses.  Soon after CMS announced it would be cutting risk corridor payments to cover losses to CO-OPs, Inside Health Policy reported that Colorado HealthOP Chief Executive Officer Julia Hutchins said, “Our business model works.  It’s the vagaries of politics that are broken and threaten to place an unnecessary burden on the backs of Colorado consumers.  Colorado HealthOP has fulfilled its responsibility; now it is time for Congress to step up and fulfill theirs.”  In other words, Congress should give the CO-OPs (and all insurers) even more money to cover their losses.

But according to the July IG report, Colorado’s CO-OP was in the hole by $23 million at the end of 2014, before the cuts were made.  The IG stated, “the low enrollments and net losses might limit the ability of some CO-OPs to repay start-up 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” (emphasis added).

That last line surely caught the attention of the House Ways and Means Oversight Subcommittee Chairman Peter Roskam (R-Ill.) and Health Subcommittee Chairman Kevin Brady (R-Texas).  In a September 30, 2015 joint letter to CMS Acting Administrator Andrew Slavitt, the chairmen, along with Rep. Adrian Smith (R-Neb.), asked what criteria CMS uses to determine the financial solvency of CO-OPs and if the agency has instituted any additional requirements since the July IG report was released.

The letter also asked how the agency is working with state insurance regulators to identify and correct underperforming CO-OPs, what steps it will undertake to collect the funds owed taxpayers should a CO-OP appear unlikely to repay its loans, and a complete list of terms and conditions for all CO-OP recipients.  That last question is important because according to a Pew Charitable Trust September 21 article on the failing CO-OPs, National Alliance of State Health CO-OPs (NASHCO) CEO Kelly Crowe said the failing CO-OPs, state insurance regulators, and the federal government are negotiating the outcome of unpaid loans and how to make “requirements less onerous for the remaining CO-OPs.”  NASHCO was created soon after the passage of ACA, but may not be around much longer if the CO-OPs continue to disintegrate.

In an apparent effort to “save” failing CO-OPs, CMS Center for Consumer information and Insurance Oversight CO-OP Division Director Kelly O’Brien sent a letter informing the CO-Ops that they could “request that surplus notes be applied to … start-up loans.  Applying surplus notes to the start-up loans will enable CO-OP borrowers to record those loans as assets in financial filings with regulators.  The start-up loans will be subject to commensurate terms of subordination, interest accrual, and repayment.”

In other words, the CO-OP loans would now become assets.  This is akin to a homeowner claiming that the liability of their mortgage loan had somehow become an asset.  

In an October 9, 2015 article in Politico Pro, David Paul, a principal at Alirt Insurance Research, said, “The big game is to have the capitalization of these companies be solvent so that the insurance departments aren’t required or don’t feel compelled to step in.  It is kind of dressing up these companies showing more capital than they really should hold.”

Indeed, these questionable and somewhat unprecedented accounting procedures to move some money around and keep some CO-OPs afloat by making their finances looks better on paper than they really are will not change the eventual demise of the CO-OPs.  To date, five CO-Ops, Colorado HealthOP, New Mexico Health Connections, Nevada Health Co-op, Health Republic Insurance of Oregon, and Common Ground Healthcare Cooperative in Wisconsin, have taken advantage of this loophole.  Yet only two of those five, the New Mexico and Wisconsin CO-OPs, have not announced they are closing their doors.

Proponents of the ACA may blame Congress for the rapidly failing CO-OPs, but as pointed out in an October 22, 2013 article in The Washington Post, the White House agreed the CO-OPs were too risky to keep pouring money into them by offering them up “as a potential savings in April 2011 budget negotiations with Republicans.” 

According to the IG, CMS expected that the CO-OPs would have significant losses during the start-up period, but that was an understatement.  The IG found that 19, or 83 percent of the 23 CO-OPs, “had exceeded their 2014 calendar year projected losses” and that 21 of the 23 CO-OPs, or 91 percent, had incurred net losses, totaling more than $382 million.

Congress was wise to limit taxpayers’ liability for another failed Obamacare promise.