Another COOP Bites the Dust!
It was just announce that yet another health insurance COOP has failed. The Louisiana Health Cooperative will be closing its doors at the end of the year. I have followed the Obamacare health insurance cooperatives, officially known as Consumer Operated and Oriented Health Plans (COOPs), since their inception. They were intended to function as a so-called “public plan option” in Obamacare. And they are not doing well!
A recent Office of Inspector General report found “enrollment and profitability was lower than projections” and 21 of 23 had net losses last year. Oddly, CoOportunity Health (Iowa/Nebraska) was not included in that total because its data was not available at year end when the OIG collected information for its analysis. But CoOportunity was liquidated in January 2015 so that brings the total losing money to 22 of 23. Last May I wrote about the colossal failure of the largest COOP, CoOportunity Health in Iowa. A 24th COOP in Vermont failed to get off the ground and was disbanded in 2013.
Proponents of COOPs believed they would function like nonprofit, enrollee-owned mutual insurance companies that would do what for-profit insurers supposedly refused to do — put the needs of people ahead of profits. Supposedly, for-profit insurers have high overhead, high marketing costs, bloated executive salaries, shareholders that require profits, and other costs which supporters believed COOPs would instead use towards enrollee medical care. However, that theory was far from the reality.
An analysis by the Washington Examiner identified self-dealing and conflicts of interest among the management team of the failed Louisiana COOP. For example, the COOP had signed a four year contract to pay consulting fees of $7.3 million to a firm owned by the CEO. Several of his board members and three-quarters of top management team were also affiliated with the consulting firm he owned. That’s how it sometimes works in the nonprofit world when there are no shareholders to police the activities of top management. In this case neither were there donors to demand accountability on how their funds were used. This appears like little more than an opportunist looting taxpayers’ money! Profits (if they existed) and equity were syphoned off in the form of lucrative (unnecessary) consulting fees and sweetheart deals unavailable to other consulting firm, who might want to compete for the business.
People who don’t actually understand how health insurance really works naïvely believed that health insurance COOPs would out-compete for-profit insurers because they supposedly did not have a profit motive. As an aside, for those people who think the profit motive is incompatible with health care, keep in mind that every organization has to earn a profit in order to grow. That includes nonprofit organizations. As COOPs have illustrated, those that fail to make a profit go out of business sooner or later.
Many supporters of the Patient Protection and Affordable Care Act wanted a public plan option to compete with the private insurers offering insurance in the state and federal health exchanges. To placate these progressives, the ACA created a type of nonprofit health insurance cooperative that would borrow funds from the government for start-up costs and solvency reserves. The government has invested approximately $2.4 billion to date.
The COOP program is plagued by numerous flaws. When COOPs were established, they had no customers and no historical actuarial data to assist in setting plan premiums. Startup funds and cash reserves were borrowed from the government. As I said in testimony before the House Committee on Oversight and Government Reform, (Subcommittee on Energy Policy, Health Care and Entitlements and the Subcommittee on Economic Growth, Job Creation and Regulatory Affairs), COOP’s purpose was a political one; they didn’t have a competitive advantage. As the remaining COOPs fail, I suspect it will become apparent that many others have self-dealing, insider conflicts.
Source: Town Hall; Another Health Insurance COOP Bites the Dust!
The COOP’s provided a valuable public service in proving that estimating actuarial risk isn’t so easy. As I understand it, the medical loss ratios for some of these plans exceeded 120% while the reinsurance and risk corridor provisions of the ACA will disappear after 2016. Moreover, technology and scale are becoming increasingly important in the health insurance industry for everything from managing data to negotiating contracts with providers, especially large hospital systems. As a taxpayer, I think that loan losses of as much as the $2.4 billion of federal loans provided for startup capital and reserve adequacy is a small price to pay for this real world experience. I guess the publicly traded profit seeking insurers aren’t so bad after all.
Another benefit of this exercise is to illustrate that the lack of a profit motive does not magically lead to benevolence on the part of insurers. For profit companies have to answer to shareholders and customers. A nonprofit COOP that borrowed federal start-up funds and whose customers are heavily subsidized is accountable to nobody.
The Louisiana COOP was started by a consulting firm entrepreneur who funneled federal startup funds to his consulting firm. The CEO apparently brought over staff from the consulting firm, and then paid them using the COOPs federal start-up funds. Nothing wrong with that. But why bring employees from the consulting firm to work at the COOP and then pay the consulting firm for developing health plans? Doesn’t this appear like the CEO was putting his consulting firm employees on the COOP payroll and then billing the COOP for their services at consulting fee rates?
But, then again, who is going to complain? Not shareholders. Not bondholders. Maybe customers, but they’re probably sick and are the ones you want to get rid of anyway.
I suspect this COOP’s goal was to stay afloat long enough to syphon off money to the consulting firm. Maybe they never expected to last. But if they could draw down capital for a few years it could make the consulting firm some significant income before the COOP went bust. I guess it was harder to keep the COOP running than they anticipated. A good parasite knows better than to kill its host.
The ugly history of COOP plsns reminds me of some internet research that I did a few years ago.
I was intrigued by the idea of a public option.
So I spent about 6 hours trying to find any concrete data on what a public option plan would charge, would it receive any federal subsidies, would it be guaranteed issue, et al
I found nothing online, and I mean nothing.
I am not an academic, so maybe there were some special papers on the subject. But nothing I could find!
My concern about the public option when it was being debated was that the government couldn’t be trusted to let it compete on a level playing field with private insurers even if it started out that way. The legislation would probably call for it to just pay Medicare reimbursement rates rather than negotiate rates with providers like private insurers have to do. If it started to flounder, it would be easy for politicians to supplement its premium revenue to the extent necessary to allow it to undersell private insurers. Then, as the public option steadily gained market share, we would wind up with single payer over time. That’s what the liberals, including President Obama, wanted from the start. Fortunately, the public option didn’t make it through the political process and that’s a good thing, in my opinion.
There was also an ignorant assumption in what I read that if the public option plans just paid Medicare rates, they would have lower premiums and thus become more popular.
Real health insurance pricing is a very complex mix of demographics, aging curves, incidence of large claims, reinsurance, where unused premiums are invested, etc etc.
In 2009 the Lewin Group did an analysis of the public plan option. It assumed the public plan would pay Medicare rates+5%. Premiums would be 20% to 25% lower than private insurance. By the third year, Lewin estimated that about 114 million would have dropped their private health insurance, while 123 million would have joined the public plan for its low premiums.
At the time most free-market policy guys believed that if private insurers lost 114 million enrollees, what was left of the private market would cease to exist for all practical purposes.
It would be like Britain, Australia and New Zealand, where only rich executives could afford private insurance.
The public plan option, along with Medicaid and Medicare, would become the deface single-payer with a combined 250 million enrollees.
Despite the low premiums, Lewin believed that 25 million people would remain uninsured.
I’m told that the Lewin Group, even though it’s owned by UnitedHealth Group, has long been biased in favor of a single payer health insurance system.
I think it’s interesting that it only took a year of real-life experience to change these novices’ tune from “high profit” to “high medical cost”.