Last week, three cooperative health plans created under the Affordable Care Act — Consumers’ Choice Health Insurance in South Carolina, Arches Health Plan in Utah and Health Republic Insurance of New York — told their enrollees that they will close amid poor financial outlooks. On Tuesday, one more — Consumers Mutual Insurance of Michigan — announced it will shut down.
With those announcements, a total of 12 co-ops have closed or announced their imminent closure this year. Now just 11 of the original 23 not-for-profit plans remain in operation.
The question of solvency has been an ongoing concern for the co-ops, and for many stakeholders, the closures were not a shock. “People have been speculating for a long time that the co-ops would face this rash of closures … just knowing how underfunded they were,” Kelly Crowe, CEO of the National Alliance of State Health Co-Ops, told California Healthline.
Despite being anticipated, the closures could have big repercussions for consumers and the market as a whole.
Why Did They Close?
Earlier this year, an HHS Office of Inspector General audit found that 21 of the 23 original co-ops created under the ACA operated at a loss last year. Further, 13 co-ops fell short of enrollment goals. And while enrollment in the first half of this year increased twofold over the previous 12 months, the co-ops lost about $200 million in the first six months of this year.
Crowe noted that “there’s really not a common thread” among the co-ops that have closed — both enrollment and competition varied in each scenario. The main commonality is “the fact that they have been financially fragile from the start,” she said.
Crowe said that while startups in other industries are able to raise outside capital from investors or partners, “due to very restrictive language in the loan agreements, [the co-ops] have really not been able to access third party capital.”
In addition, Crowe said low risk adjustment payments released in July were unexpected. The risk adjustment program is designed to keep rates consistent by allowing insurers to increase their enrollee pools without concern of incurring higher medical costs or enrolling sicker consumers.
Meanwhile, several of the co-ops have cited insufficient risk corridor payments — additional funding to offset insurers’ losses of enrolling consumers with higher-than-expected health costs — as a reason for their closures. Crowe said that many of the co-ops “booked 100% of that receivable … with the blessing of their state regulators and with CMS’ promise that they intended to pay out in full.” But last month, CMS said the risk corridors program will provide just 12.6% — or about $362 million — of the $2.87 billion in payments that insurers had requested for 2014.
“These are not startup failures, but really closures due to unkept promises by the government,” Crowe said.
Former Sen. Kent Conrad (D-N.D.), said the co-ops were “sabotaged,” adding, “Those who wanted to kill them — largely Republicans and competing insurance companies — just step by step took actions to subvert them and to assure they would have an extraordinarily difficult time surviving.” For instance, the Republican-controlled Congress cut the co-ops’ initial funding from $6 billion to $2.4 billion.
However, some say the co-ops failed because they did not charge enough for health plans offered through the ACA’s exchanges. According to the Kaiser Family Foundation, in more than half of the counties where co-ops operated, they “offered one of the two least expensive midrange plans.”
Ed Haislmaier, a senior research fellow in health policy at the Heritage Foundation, wrote in Forbes that “the program was a Congressional exercise in not merely reinventing the wheel, but doing a bad job of it.”
Meanwhile, CMS COO Mandy Cohen on Tuesday told the House Ways and Means Subcommittee on Health that federal officials were not lax or negligent in supervising the co-ops. Cohen said, “Any start-up faces the inherent risks of building a business from the ground up,” adding, “As with any new set of business ventures, some co-ops have succeeded while others have encountered more challenges.”
Larger Implications of the Closures
“This risk corridor and risk adjustment problem is not just a co-op problem … the reasons these co-ops are closing are also affecting other small and high-growth health plans,” Crowe told California Healthline. She added, “We are seeing small health plans that have been around for 20 years being shut down or really financially at risk because of the way the risk corridors” are calculated.
Meanwhile, the closure of the co-ops could limit consumers’ choices — in some cases, to one carrier.
For example, in the wake of Arches’ closure in Utah, 23 of 29 counties in the state will have just one health insurance carrier to choose from. “That is just one data point, and there are plenty more across the co-ops where in many cases the co-op is the only other alternative plan,” Crowe said, adding, “That’s terrible because that was the whole reason the co-ops were created was to create competition and choice and alternatives. The consumer is going to be the loser in that sense.”
What Stakeholders Say Needs To Change
Crowe said there is “a whole laundry list of things” that stakeholders would like to see change.
First, Crowe said CMS should relax the loan agreement language around co-ops’ access to outside capital. She noted, “We believe they can do this without congressional input.”
Second, Crowe said flaws in the risk adjuster formula need to be addressed. In fact, NASHCO is releasing a paper this week on changes the group would like to see in regards to risk adjuster payments.
Finally, she said stakeholders would like to see modifications made “on some of the payback terms on the startup loans.”
This week, HHS Secretary Sylvia Mathews Burwell told reporters that federal officials are “continuing to examine what, if any, options we have” to address the closures.
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