Why 5 New Nonprofit Health Insurance Cooperatives Failed to Thrive: The Federal Undermining of a Field of Nonprofits

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Abandoned Photochemical Factory / Jan Bommes

What explains the announced shutdowns this year of five of the nonprofit health insurance co-ops meant to provide competition for the private health insurers in the Affordable Care Act’s marketplace? The surprising recent ones were Health Republic Insurance Company in New York and the Kentucky Health Cooperative. The latter is a little shocking, since the Kentucky CO-OP had outperformed its rivals on the Kentucky exchange and enrolled 51,000 members. (The other shutdowns are the Louisiana Health Cooperative, Nevada Health Co-op, and CoOportunity Health, the latter covering Iowa and Nebraska.)

The nonprofit consumer-run health insurance cooperatives were all new start-ups at the beginning of the Affordable Care Act, competing against the dominant, established insurers that held largely oligopolistic if not monopolistic positions in many states. When the Obama administration collapsed on its plan to provide a “public option” to compete against the likes of Humana, Aetna, United Healthcare, and Cigna, it opted to support a number of health insurance coops that didn’t previously exist in the hope that the alternative products and costs they might offer would become a lower cost, higher quality competitive yardstick. While their offerings did produce changes in product lines, costs, and customer service among the big insurers, the CO-OPs (Consumer Oriented and Operated Plans) were challenged to function and survive as entirely new entities, challenging for-profit and mutual insurers that had decades of operations under their belts. Moreover, the start-up funding and governing rules of the CO-OPs under the ACA limited the flexibility of the CO-OPs in their marketing and products. Kentucky’s CO-OP, despite the structural obstacles, was one of the new nonprofit insurers that looked like it was doing reasonably well. The announcement that it would no longer be offering insurance coverage as of the end of December was unexpected and, for the future of the CO-OPs overall, troubling.

There are several competing analyses of why the Kentucky cooperative is going out of business, but most center on a specific aspect of the ACA program. Scott Harrington, the chair of the health care management department at the University of Pennsylvania’s Wharton School, attributes the problem of the Kentucky Health Cooperative and the burgeoning financial challenges facing the other existing CO-OPs to the decision of the Center for Medicare and Medicaid Services that the federal government will pay the cooperatives only 12.6 percent of their requests for 2014 risk corridor payments. The official explanation from the Kentucky Health Cooperative specifically cited the low risk corridor payment CMS offered, only $9.7 million of the $77 million it had sought and apparently expected, as the precipitating blow to its financial sustainability.

The Risk Corridors Program is one of the “three R’s” of the Affordable Care Act meant to help insurers absorb the costs of new enrollees who were likely to be previously uninsured or underinsured and probably more expensive due to larger and more volatile health needs (the other two are the Reinsurance Program and the Risk Adjustment Program). Under the Risk Corridors Program, insurers would receive a payment from the federal government if their operating losses exceeded a specific threshold. According to a CMS fact sheet, “An objective of risk corridors is to encourage health insurance competition by limiting the risk for insurers entering the exchange market during the early years of implementation.” All insurers entering the exchanges had some risk to handle, but it was doubled for start-up insurers like the CO-OPs, which were often appealing to people who were just now getting insurance they hadn’t been able to contemplate before. By funding only 12.6 percent of the risk corridor claims, the federal government has basically knocked some of the stuffing out of some of the financially fragile new CO-OPs.

The odd part of this story is that both Health Republic and Kentucky Health were among the strongest of the nearly two-dozen cooperatives. Harrington notes that Health Republic had signed up 155,000 enrollees, three times the number of Kentucky’s, and an increase of more than one-third compared to 2014. Distinctively, however, Health Republic had enrolled a largely healthier than average population, according to Harrington, meaning that it would probably have to pay into the risk corridor program as opposed to other companies which could anticipate  compensation due to their sicker than average enrollees. Health Republic would have had to have priced its offerings at a level that would allow it to pay into the corridor program, but to do that, it would have probably become uncompetitive on price in the New York state marketplace.

Harrington doesn’t seem to buy the argument of CO-OP supporters that the CO-OPs were hamstrung by restrictions on the uses of their federal loan dollars (prohibiting advertising and marketing) or the cutbacks on new moneys for expanding the CO-OPs into other states. He suggests that had the CO-OPs received federal loan funds to open up new operations in additional states, it would have led to the creation of additional financially fragile insurers. The advertising restriction, he suggests, was really the result of the CO-OP movement’s proponents themselves expressing their distaste for the heavy advertising budgets of the for-profit insurers. Had the federal government made substantially larger risk corridor payments, Harrington contends, it would have put the federal government in the position of supporting a “greater runway for co-ops to sell coverage at unsustainable prices.” He implies that larger risk corridor payments simply amount to a means to prop up uneconomic insurers through the use of taxpayer money.

Our analysis differs a bit from Harrington’s. The restriction on using the federal loan dollars for marketing was a substantial constraint on the ability of the CO-OPs to build markets of healthy as well as less healthy enrollees and educate them about preventative healthcare and the appropriate selection and use of insurance products. But the risk corridor issue is at the core of the survival of the CO-OPs, in that, as noted with the Iowa and Nebraska CO-OP that failed, many new people were using the coverage they had just acquired—and they needed to. But these higher utilization rates meant higher draws on the cooperatives’ revenues and reserves. The interim CEO of the Kentucky Health Cooperative, Glenn Jennings, put it this way in a statement explaining the shutdown:

Many of our members had never had health insurance before. What happens when people don’t have health insurance? They probably aren’t looking after their health and well-being. They’re probably not seeing providers. If they aren’t seeing providers, they might not be aware that they have chronic conditions. Or, they might be dealing with something that’s acute, but they didn’t have the out-of-pocket funds to get treatment. All this adds up to a lot of people with pent-up medical needs.

It should have been no surprise at all, given the conditions facing the uninsured prior to the advent of the ACA. As noted by the Kaiser Family Foundation, “People without insurance coverage have worse access to care than people who are insured. Over a quarter of uninsured adults in 2014 (27 percent) went without needed medical care due to cost. Studies repeatedly demonstrate that the uninsured are less likely than those with insurance to receive preventive care and services for major health conditions and chronic diseases.” Of course it happened; previously uninsured people got insurance through the CO-OPs and then began using their new insurance to get the healthcare treatment they had neglected or put off before. Particularly for the cooperatives like CoOportunity and Kentucky Health that had great success in reaching rural populations, where access to affordable healthcare is generally limited and inadequate for lower income people in general, they were bound to be hit with high rates of utilization and their attendant costs.

Why would the CMS shift from a “nurturing” posture to “getting tough” on the CO-OPs, as characterized by Amy Goldstein in the Washington Post? It doesn’t make sense unless it is “an optical response” of the Obama administration to fend off Republican attacks against the ACA. Perhaps the Obama administration, never particularly in love with the nonprofit cooperative insurers and not as antagonistic to the for-profit and mutual insurers than it might have appeared, is willing to sacrifice the CO-OPs under the guise of appearing fiscally tougher than the Republican critiques suggest. If the CO-OPs go under, the impacts will not just be the loss of responsive insurance products that these nonprofits introduced into the markets, but potentially higher insurance premium costs; on average, premiums in the states in which CO-OPs are competing are about nine percent lower than in the states with no CO-OPs. Moreover, in states with CO-OPs such as New York when Health Republic could still be counted in the game, the competitive dynamic was improved, with New York shifting from “moderately concentrated” in 2012 to “unconcentrated” in 2014 with seven insurers at five percent or more of the insurance market, according to the Kaiser Family Foundation. While the federal policy on risk corridor payments and other structural disincentives drive out the small, start-up health insurance cooperatives, the private sector insurance behemoths are getting bigger, as Aetna is merging with Humana and Anthem is buying Cigna. Moreover, these private insurers can diversify their products and choose their markets (the exchanges are tiny percentages of their business) while the CO-OPs are limited to the exchange markets and cannot mitigate the losses they would incur from less healthy enrollees in the markets with profitable non-exchange products such as MediCare Advantage.

Because of compromises and poor legislative vision, the Affordable Care Act contains some rickety moving parts, not the least of which is having to prop up new nonprofit insurers to compete with mammoth corporations because the federal government couldn’t get its act together to offer a government alternative, much less a single-payer system. During the Democratic presidential candidates debate the other night, Bernie Sanders bemoaned “that when you look around the world, you see every other major country providing health care to all people as a right, except the United States.” There wouldn’t be a question of risk corridor payments for different insurers if the federal government were delivering healthcare as a right to everyone.

In many ways, the CO-OPs have been valiant entrepreneurs trying to deliver insurance coverage to the millions of Americans who needed insurance but couldn’t afford it through the private marketplace. The founders of these start-up CO-OPs took on the big boys in the insurance markets, challenging the core power of the health insurance sector, compared to the often kitschy and inconsequential business lines celebrated in the self-congratulatory world of social enterprise. The Obama administration and Congress have in the end generated a structure of providing health insurance coverage to some Americans, but still not all. Other than Sanders and O’Malley, the Democratic presidential candidates were reluctant to propose expansion of ACA coverage much less broach the idea of government-guaranteed health coverage for everyone. That may indicate the continuing influence of the insurance and pharmaceutical companies that throw around their influence in the political arena through unfettered electoral contributions and expensive lobbying expenditures. As nonprofits, the CO-OPs cannot do the same.

Hamstrung  by government regulations that put nonprofit players at a clear structural disadvantage against for-profits, the CO-OPs merited the support and intervention of national nonprofit leadership organizations, which should have complained about the built-in unfair treatment of these small nonprofit start-ups. Now that five CO-OPs have succumbed to structural impediments that were built into the law and exacerbated by the CMS decision on risk corridor payments, the nation’s nonprofit leadership organizations should be outraged, protesting yet another example of the unfair and biased treatment of nonprofits in their ability to compete with mammoth corporate competitors.

This is an example of mistreatment of nonprofits that resembles the Obama administration’s original proposal for tax subsidies for the health insurance costs of small businesses, initially leaving out nonprofit employers as even eligible for the subsidies, and then providing nonprofit employers subsidies but at a lower rate than the subsidies afforded to for-profit small employers. When nonprofit leadership organizations complain about state and federal reimbursement delays to nonprofit vendors, they are implicitly (and sometimes explicitly) pointing out that for-profit vendors have access to resources to withstand delayed payments that most nonprofits do not. The federal knife through the competitive survivability of nonprofit health insurance cooperatives is yet another example of policy that works against the success of nonprofits. The silence of nonprofit leaders on the news about the CO-OPs is deafening.—Rick Cohen