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 in