Another ObamaCare provision is falling on its face, but this is one that hardly anyone even knew existed.
Part of the law called for the creation of “Consumer Operated and Oriented Plans” (CO-OPs). The law originally appropriated $6 billion to set up these plans in all 50 states. It created an entirely new section of the Internal Revenue Code (Sect 501-C-29) to allow this new type of member-operated organization to be tax-exempt. They were intended to be sort of like the “public option” the Democrats wanted to compete with private insurance plans.
It was a pretty dumb idea in the first place, made even worse by the way the legislation was written. The Urban Institute published an “interim assessment” of the program back in August that ticked off all the problems it is having. One example is this:
The law also prohibits using the loan funding for marketing or “propaganda.”
So the law’s authors equate marketing with “propaganda.” And they expect these plans to succeed without doing any marketing.
The law also prohibits any “insurance industry involvement and interference,” and it also prohibits HHS from being involved in provider negotiations or pricing of services. And the plans are prohibited from being sponsored by any state or local government or from having any representative of government on their boards. So where is any expertise going to come from? The law’s authors seem to think starting an insurance company from scratch is as easy as organizing an Occupy Wall Street demonstration.
The law requires that “substantially all” of a plan’s activities be in the individual and small group markets, so that precludes farm bureaus, labor organizations, or other existing organization who might be sympathetic to the goals of the plan.
HHS has issued a “funding opportunity announcement” (FOA) that specifies that applications for funding must include, according to the Urban Institute paper:
a feasibility study, a detailed business plan, a detailed budget with narrative and a timeline for meeting various milestones, including the necessary state regulatory approvals.
It goes on to explain:
A feasibility study must be supported by an actuarial analysis and is concerned with the likelihood of success. It must describe “the target market, products to be offered, regulatory schemes, market impact, financial solvency, economic viability, State solvency requirements and other regulations and other key factors.” It should also include “pro forma financial statements with sensitivity testing for alternative enrollment scenarios.” The business plan should describe the management team, target market, competing plans, targeted potential subscribers, the process used for pricing products, contracting strategy, proposed methods for provider payment, and plans for use of integrated care models. Budgetary matters, strategies for obtaining enrollment and plans for becoming operational (financial management system, information technology, staffing plans) must also be included.
All of this, just to apply for funding. Wow!
Congress reduced the program’s funding from $6 billion to $3.8 billion in the April, 2011 budget agreement. So we will be “saving” $2.2 billion, and only wasting $3.8 billion on a program that can never work. But that $3.8 billion will end up in somebody’s pocket, so I suppose it qualifies as “stimulus.”
Heck Greg, with 3.8 billion up for grabs maybe we should start our own sca……I er… mean plan. It sounds like all we have to do is make outselves look good on paper, so we hire some lawyers to put together the bull—t that bureacratic morons want to see (a reasonable investment), and then rock and roll. We pay ourselves some Solyndra type salaries and bonuses, and tell everyone how sorry we are a couple of years later when the whole thing craters and gets exposed. I mean hey…we tried, right? I’m gonna go browse through my Conde Nast Traveller magazine.
Great post.
This program is hugely wasteful.
I hope they completely defund it.
A wasteful program indeed.
The Society of Actuaries did an extensive study of the co-ops. I forget the details, but the take-away (for me) was that they had limited chance of financial success. Among the biggest issues is the applicable solvency standards. Risk-based capital requirements require 100 basis points or so of (after-tax) gains each year just to fund the increasing capital needs due to healthcare trend. (I know that this is very pointy-headed actuarial stuff, but next time someone tells you that the 200 basis points or so that the average plan makes PRE-TAX is excessive, keep in mind the need to fund this after-tax risk- based capital requirement. Which, by the way, is what we require well-managed plans to do so that we the tax-payers don’t have to.)
I dont think that the guidance available at the time made clear whether plans would be subject to the regular capital requirements that other state-regulated plans have to meet. To give them a pass obviously creates a massively unfair advantage in terms of their pricing; in addition it createes (another) opportunity for the type of one-sided financial risk management that sank mortgages (private profits/socialized losses). At the end of the day as these organizations go belly-up, as they undoubtedly will, it will fall to the tax-payers to pay claims and providers.
Ian,
Do you think any will become operational?
Thanks for the good post as always Greg. It gave me a soap-box for one of my recurring themes, the overlooked cost that solvency requirements pose on the ill-gotten gains of insurance companies. No wonder so many payers want to go self-insured, where there is no solvency requirement.
I dont think the model is viable, for a number of reasons that we dont have space to go into here. That said, I was the actuary to (and on the board of) a start-up insurance company in New York that has proven viable. But New York is an almost unique case, because there is no pre-existing allowed and community rating. This company was able to take advantage of this, plus some smart marketing directed at a specific niche. In these circumstances the model may be replicable but the number of lives covered is unlikely to be large.