Delicate Arch Stormy Sunset – Arches National Park / Chase Lindberg

March 6, 2016; Utah Business

It’s an all-too-familiar story. Utah’s health insurance cooperative, Arches Health Plan, like the other 22 co-ops established in the wake of the Affordable Care Act, has faced daunting challenges since it was established a few years ago.

Arches was placed into receivership last October and is now, in effect, being administered by the Utah State Insurance Commission. Arches’ individual plans ceased on December 31, 2015; some group plans will continue until October 2016. Some employees of Arches are still working, but not talking to the media.

The Utah Business article sums up the problem of Arches succinctly:

Arches’ closure stems mainly from three contributing factors: the failure of the risk corridor due to a lack of federal budget assistance, adverse selection of the marketplace and transitional policies, and inability to raise more capital like a large insurance company could because of its nature as a co-op.

Each of the three contributing factors deserves a brief definition and explanation. Risk corridors were addressed in depth by NPQ in October when Oregon and Colorado’s co-ops were shut down. In short, the insurance market changed in unpredictable ways when the ACA was passed. Risk corridor payments were intended to help insurance companies cope with losses related to the changes. Funds came from a pool into which a share of insurance profits would be paid, with a backup federal guarantee. Two things happened: 1) insurance profits were lower than expected, reducing payments into the risk corridor pool; and 2) in 2014, Congress forbade the federal government to use funds outside the pool to be used in the risk corridor pool. The result was that, in 2014, risk corridor payments totaled only about 12.5 percent of insurance company losses.

“Adverse selection” is the tendency of the health insurance exchanges to attract new policyholders who are more likely to need long-term medical care, expensive medical procedures, or both. Insurance companies can no longer refuse to accept applicants with pre-existing conditions and are limited in how expensive policies can be, regardless of the medical needs of the insured. The hope was that more than enough younger, healthier people would also purchase insurance on the exchanges, thereby spreading the risk and costs among a much larger group of policyholders. This has not happened.

Finally, the health insurance cooperatives received loans from the federal government to finance start-up costs associated with building an insurance company from scratch. Loans need to be repaid, and, not surprisingly, federal loans owed by borrowers are paid before other obligations. When an already-weakened co-op seeks additional loans from banks and other investment markets, those entities look at the federal loans as a problem. If the co-op fails after receiving additional loans, the federal government is first in line to get at least some of the taxpayers’ money back, leaving other creditors unlikely to recover any of their money. In Utah’s case, Arches owes an $80 million federal loan.

One glimmer of hope for Utah’s state government and the remaining co-ops is a class action lawsuit filed by Oregon’s co-op. The suit seeks to compel the federal government to satisfy all risk corridor claims under the ACA. If successful, this could result in as much as $5 billion in payments to health insurance companies, including the co-ops. Even a negotiated settlement might force the federal government to forgive outstanding loans to the co-ops, allowing them to improve their balance sheets and make themselves more attractive to other lenders. The bad news is that solutions like these are too little and too late to help organizations like Arches Health Plan. As Utah Insurance Commissioner Todd Kiser says, “[The co-op design] was a wonderful dream. I wish it would have worked. It just didn’t.”—Michael Wyland