Government Bailouts Business Strategy for Obamacare Health Insurance Co-ops

The insolvent Iowa-based health insurance cooperative, CoOportunity Health, had to be taken over in December by Iowa insurance regulators.  Iowa and Nebraska’s Guarantee Associations — and state and federal taxpayers — are now on the hook for millions in claims the insurer could not pay.

CoOportunity Health wasn’t a traditional health insurer.  Rather, it was a taxpayer-funded, non-profit health insurance cooperative (co-op) established under the Affordable Care Act (ACA). The co-op program is plagued by numerous flaws. When co-ops were established, they had no customers and no historical actuarial data to assist in setting plan premiums.  Startup funds and cash reserves were mostly borrowed from taxpayers. According to industry data only one of the 23 co-ops was profitable last year (a 24th co-op located in Vermont failed before it even got off the ground). While some of the remaining co-ops are losing money because of small size, others appear to have the strategy of losing money to gain market-share at taxpayers’ expense.

Prior to its first open enrollment, chief operating officer (COO) Cliff Gold told the Lincoln, Nebraska Journal Star that ‘CoOportunity would be a market disruptor,’ and ‘we’re nonprofit, we have absolutely no profit motive.’ Apparently Gold’s comments were meant to be taken literally; CoOportunity lost around $163 million in 2014 — its first year selling health insurance.  An attorney hired to help liquidate the firm says doctors/hospitals are still owed some $100 million.  Unfortunately for Gold, even nonprofit health insurers need to earn a profit to avoid bankruptcy. The Iowa Insurance regulators shuttered the failing insurer once it became clear CoOportunity would not receive another government emergency solvency loan and its anticipated $126 million risk corridor (bad-risk) bailout would be reduced by about half.

Sicker-than-average Iowa and Nebraska residents flocked to the CoOportunity’s generous benefits. It offered large provider networks and rich benefit packagesall for a low premium. This sounds great if you’re an Iowa or Nebraska resident with chronic conditions.  But it’s not so good for taxpayers who have to bailout the losses. CoOportunity didn’t just suffer adverse selection — a situation where it attracted costlier-than-average members. It played a game of chicken with other insurers, when it purposely designed plans and set premiums it knew would disrupt the market.  Indeed, The Wall Street Journal referred to it as Fannie Med, in reference to Fannie Mae, the infamous government-supported mortgage insurer whose risky investment strategy contributed to the financial crisis that tanked the U.S. economy.

CoOportunity Health failed spectacularly less than a year after it began offering coverage to the public.  It went broke defaulting on $145 million in taxpayer loans and still owes enormous sums to doctors and hospitals — perhaps $100 million by one estimate.  Due to its low premiums, large network and rich benefit package, CoOportunity Health quickly enrolled nearly 10 times its projected first year enrollment — swelling to nearly 115,000 people at one point. It would have been prudent for CoOportunity to charge actuarially sound premiums and to grow more conservatively considering its lack of reserves and the risks involved. But instead, CoOportunity Health executives pursued a risky strategy of a market disruptor; selling comprehensive coverage well below its cost — shafting taxpayers with its losses.

How much should CoOportunity have charged? That’s for an actuary to figure out. A back-of-the-envelope calculation suggests CoOportunity should have charged at least $100 per month (per member) or more than what it charged ($163,000,000 loss in 2014 / 115,000 members =$1,417).  Of course, had it charged more it could not have grown as quickly. Then again, if you’re losing money on each customer, you cannot expect to make it up on volume!

There were numerous reasons why members’ first-year claims were high. Exchange enrollees were far less healthy than the average residents. Some were uninsured, while others switched from more costly risk-rated health plans. Healthy individuals in Iowa were allowed to keep their pre-ACA (risk-rated) plans until 2016. Thus, individuals paying higher premiums — reflecting poor health status — were most likely to seek new coverage in the exchange. CoOportunity executives undoubtedly expected significant first-year loses.  A former insurance commissioner and a BlueCross executive were among the top management. Indeed, more established insurers knew this population would be expensive to insure and many decided against selling exchange plans in 2014.

By September 2014 CoOportunity was hemorrhaging cash and needed an emergency solvency loan (i.e. a bailout). It received $33 million from the U.S. Department of Health and Human Services (HHS) — only to come back three months later begging the Obama Administration to bail it out again. HHS denied CoOportunity Health’s second request for a bailout. Yet, it did provide two other struggling health insurance cooperatives with emergency solvency loans. Wisconsin-based Common Ground Healthcare Cooperative received nearly $23 million more in emergency funds in December after having accepted more than $28 million three months earlier. The Kentucky Health Cooperative received a $65 million emergency solvency loan as open enrollment was beginning in the health insurance exchange.

All told, half a dozen state co-ops received $355 million in emergency solvency funding in the past four months of 2014. Other state co-ops receiving emergency funding included Connecticut ($48.4 million), Iowa ($32.7 million), Maine/New Hampshire ($67.6 million) and New York ($90.7 million).

CoOportunity also expected the Department of Health & Human Services (HHS) to divvy up some of the ACA’s risk adjustment funds, including $126 million in risk corridor funds collected from the fees and taxes on insurers to cover industry losses. However, the Omnibus spending bill passed in December limits the risk corridor funds HHS has to distribute. In addition, Congress has slashed funding for the co-op program by two-thirds over the past several years to reduce taxpayers’ losses ($2 billion down from $6 billion). By December, HHS had spent all its money for emergency solvency loans.  And it became clear that only about half of the $126 million CoOportunity expected to cover its losses would be forthcoming.  At that point state regulators had to pull the plug on the defunct insurer.

Taken together, these facts suggest CoOportunity executives purposely set rates low to gain market share — assuming taxpayers would bail-out their losses. The strategic plan was simple: 1) underprice premiums to gain market share; 2) Let taxpayers bailout the losses with emergency solvency loans and the risk-adjustment distributions; 3) increase premiums later once the dust settles.  This seems to be a common theme among health insurance co-ops. This type of activity should not have been allowed.  Most stakeholders — apparently including CoOportunity Health — expected taxpayers to bailout struggling co-ops indefinitely.  It’s now clear that is no longer going to happen.

The spectacular failure of CoOportunity Health was a wakeup call to other health insurance cooperatives, state insurance regulators, HHS and taxpayers. But it won’t be the last co-op that goes broke owing taxpayers large sums of money.  Going forward, state insurance regulators and other government regulatory bodies need to be on the lookout for co-ops that have strategic plans premised on losing taxpayers money while gaining market share — expecting taxpayers to bail out the insurer.  I suspect it will happen again and again until most of the co-op health insurers lose all their taxpayer financing and go bankrupt.

Comments (13)

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  1. I wonder what the executives’ personal plans were? It will be interesting to learn how much taxpayers’ money flowed through into their salaries and bonuses during the short and unhappy life of the co-op. Surely, they never expected the co-opes to actually succeed as businesses.

    • Devon Herrick says:

      Their 990s show they earned in the range of $250,000 or slightly higher. While that’s not a lot for a senior executive with an insurance company, a little coop with 10,000 enrollees could hardly justify paying more than that. However, CoOportunity actually enrolled between 110,000 and 120,000 people (not the 10,000 to 12,000 it initially planned). The executives probably expected it to last a few years longer than it did. Plus, if it’s covering 100,000 people, that would justify paying themselves $500,000 or maybe even $1 million annually with retirement contributions and bonuses.

      • Eric Potter MD says:

        For a startup, they should not have expected 500K or more regardless. Any entrepeneurial effort requires time to build up. 250K was probably too much at the beginning.

        Besides, given the obviously poor planning on their part, they definitely were paid more than they deserved. They should have to pay some back since the taxpayers are coughing up their share.

  2. Arnie Poutala says:

    Great report, Devon.

    Is there s single resource where we can find out how all of the coops in the US are performing that you used as a resource for your blog post? Specifically, I would like to know how the coop is performing that offers insurance to Portland, OR and vicinity. I believe they also serve southwest Washington.

    Thanks, Devon

  3. Big Truck Joe says:

    Apparently my wife is a non-profit too…absolutely NO profit motive.

  4. Bob Hertz says:

    Thanks for a terrific article.

    in MN a private for-profit company called Preferred One also dominated the market with low prices. When the state of MN did not grant them a 60% increase in year two, they exited the market immediately.

    This article should be read closely by anyone who assumes that competition alone will save health care. I feel kind of crummy to give credit to Bill Clinton and Ira Magaziner, but they did realize back in 1993 that competition in health insurance was not simple.

    One sentence in this article is fascinating. Because the state of Iowa bent to conservative pressure and allowed older underwritten health plans to stay in force to 2016, the exchanges were left with a much sicker risk pool.

    As a result, it seems like everyone is worse off.

    When the issue of letting old plans survive was being discussed in 2013, I had some sympathy for the customers of the old plans. I felt distaste when states like California were very harsh about terminating old plans. However, the California regulators may have had a point.

    • Eric Potter MD says:

      This is not an example of competition failure. This is an example of poor business planning. Several health care co-ops that were in existence prior to ACA are doing just fine. Allowing people to “keep” their plans was part of the promise, not part of the problem.

      • Devon Herrick says:

        To your first point, I agree it wasn’t an example of competition failure. It was an example (in my opinion) of a firm gambling with taxpayer funds. In other words, if a private insurer wanted to gamble with investor funds and low-ball premiums to gain market share, we would call that competitive (i.e. nobody gets hurt but investors). But when a publically-subsidized insurer essentially loses money expecting taxpayers to bail it out, that becomes a problem. A competitive marketplace must be sustainable. When the government tries to make a market more competitive by subsidizing losses of firm underpricing premiums, few private firms could long survive that environment. Plus, I’m not a fan of governments increasing premium subsidies.

        You second point, I believe there were only two pre-ACA health insurance coops. They have been in business for decades, their business model look nothing like the PPACA coops. They fact there were only two suggests the business model didn’t have a competitive advantage. But I have no problem with voluntary associations coming together for a mutually beneficial purpose.

        Finally, I have a problem saying that letting people keep their old policies was a bad move. As you recall, the exchange was not working well. But, more importantly, economists don’t tend to like cross-subsidies. Telling people with risk-rated policies they have to drop their old plans and pay much more than their expected costs for new plans (so other people get a bargain) does not result in more competition. Rather, it changes insurers incentives in perverse ways.

        We at NCPA have always been supported the idea of risk-rating but with guaranteed renewability. As long as you’re continually insured, you cannot be turned away. But if you want to game remaining uninsured until age 55, you enter the risk pool at a higher cost.

        • In which other area of life would we allow the government the power to close down a service just because it did not fit with the government’s plan, even if it had shown no harm?

  5. Bob Hertz says:

    Actually I agree with you that the ACA cross subsidies
    were repellent. The premiums in the exchanges are what Obmaa wants to brag about, and so the older policyholders were dragooned into the new risk pool to help the numbers.

    This is extra painful now, for this reason.

    The old policyholders are in a closed risk pool, so their premiums are going up fast. The exchange policyholders are a sicker bunch without the old policyholders, so their premiums are going up also.

    No one wins accept the apologists for the ACA?

  6. Bob Hertz says:

    The following comments might be an “apples to oranges” comparison, but of some interest nonetheless.

    in Switzerland, Germany, Denmark, and several other nations, these co-ops would have received all the risk adjustment dollars they needed in order to stay in business. In those nations, stability of health insurers is valued. I do not believe that any insurer can lowball premiums to obtain market share. And the monies that are transferred to any insurer with bad risks are very substantial. I have read that the risk adjustment funds are 40% as large as the premiums paid.

    In America, our legislators are uncomfortable with risk adjustment funding that is barely a shadow of the above. This blog has criticized the $63 per person tax on large group plans, which again is a puny amount by international standards.

    Now I am not going to make value judgements, but let me ask this question. Is the American policy holder on the whole any better off for the competition that occurs in American health insurance? (a competition which used to focus on underwriting, and now focuses on networks and demographics?) Like the authors Porter and Teisberg, I am somewhat skeptical that this insurer competition really does us any good.

    Biographical note: I have been selling long term care insurance for a number of years. I have watched carriers come into and out of the market, competing vigorously and generally losing money. The average senior in this country would have been far better off if we had expanded Medicare to cover more of LTC and raised taxes to do this (as Germany did in the 1980’s.) This experience has left me very sour on the usefulness of free enterprise in some areas of insurance.

  7. Bob Hertz says:

    Good point, John.
    Medicare Advantage has guaranteed issue, no age rating, and no exclusion of pre- existing conditions — and yet insurers are not going broke at all. For many of them, Medicare Advantage is their most profitable product.
    I am not sure I know why. I would guess the main reason is that the insurers have rather modest financial exposure on any one person.
    In any event, insurers make more money interacting with socialized medicine than they ever made in pure free enterprise.