What Happened to State Health Insurance Co-Ops?

More than half of the 23 state health insurance co-ops set up by the Affordable Care Act have closed in the last year, including Colorado's. In 2015, more than one million Americans had obtained coverage through one of the 23 co-ops. The closures of 12 of the co-ops affect more than 500,000 policyholders.

The Colorado Division of Insurance (DOI) closed Colorado HealthOP Inc. on Oct. 16 because of fears of financial sustainability. HealthOP has since filed suit against DOI. The closure means that almost 83,000 HealthOP members, including 2,900 people insured through small businesses, will lose their coverage when their policies end. These Coloradans now have to purchase different coverage for next year in the current open enrollment period that runs until Jan. 31, 2016.

The 12 failed co-ops -- serving Arizona, Colorado, Kentucky, Louisiana, Michigan, Nevada, New York, Oregon, South Carolina, Tennessee, Utah, and Iowa and Nebraska together -- have closed due to a variety of reasons, including low enrollment, higher-than-expected enrollment, low premium pricing and uncompetitive pricing. But the failings were exacerbated by a lack of congressional and federal commitment after the project had been initiated.

Co-ops were created as new nonprofit insurance companies, owned and operated by members, to promote competition and increase consumer choice. Prior to the first co-ops, competition in the individual health insurance market was minimal in many states. In 27 states, one insurance carrier controlled more than 50 percent of the individual insurance market in 2013. In Rhode Island and Alabama, one carrier controlled more than 90 percent of the market. In Maryland, the Evergreen Health Insurance Cooperative was the first new commercial insurer to enter that state's market in more than 25 years. In addition, the merging and consolidation of large insurance companies promised to reduce competition even more in the future.

As nonprofit companies, the co-ops aimed to keep rates lower, expand the number and quality of plans offered and help to protect consumers from aggressive pricing by for-profit insurers. In return, their startup and initial operating costs would be temporarily funded through federal grants and loans. According to one study, if co-ops held rates down by 2 to 5 percent, taxpayers were projected to see savings of $7 billion to $17 billion over 10 years.

To some degree, co-ops were able to achieve that goal in their first two years of operation. In 2014, states with co-ops had average silver plan rates -- or plans that were the benchmark for insurance companies to set their rates -- that were 8 percent lower than states without co-ops. For states with federal exchanges, the average premium in 2015 was 13 percent higher in non-co-op states.

But market uncertainty was the real issue facing both co-ops and established insurance companies. The 2014 insurance market created as a result of the Affordable Care Act was fundamentally different than in previous years. New federal and state insurance exchanges were created, coverage was guaranteed, historical rating factors were eliminated, medical loss ratios were imposed and rate increases had to be reviewed and approved in advance. But even more importantly, tens of millions of previously uninsured Americans entered the market. No one knew what this new insurance market would be like, and real uncertainty existed about how insurance companies would attract young and healthy enrollees while at the same time covering the claims of a larger share of unhealthy new policyholders that had previously been excluded.

Although all insurance companies felt these concerns, co-ops were at a greater disadvantage. Co-ops were startups with no infrastructure, provider networks, enrollment, claims history or existing rate structure. Rates in 2014 had to be set on actuarial projections alone, and 2015 rate filings had to be developed from only a few months of "actual" claims history at best. If co-ops set prices too low, they would attract a disproportionately unhealthy risk pool, looking for cheap insurance to cover high-cost illness. If rates were set too high, established carriers would out-compete them, and the resulting low enrollment would ensure failure.

Big insurance companies could better manage that risk. For those companies, losses could be absorbed by other lines of business or could be covered by large existing operating reserves. For the brand new co-ops built on short-term federal loans, pricing decisions and enrollment challenges were a critical dividing line between success and failure.

Co-ops also encountered other roadblocks. Congress cut co-op loan funding from $6 billion to $3.4 billion and then down to $2.4 billion. The Office of Management and Budget capped individual co-op loans to prevent co-ops from achieving more than 5 percent of market share. In the 2012 fiscal cliff deal, Congress rescinded the remaining lending authority and prohibited the Department of Health and Human Services (HHS) from authorizing any additional co-ops.

HHS also put regulatory provisions in place that required co-ops to meet higher insurance reserve requirements than other insurers. Co-ops were prohibited from offering necessary terms to outside investors to solicit private capital investment. They were also prohibited from limiting enrollment during state and federal exchange open enrollment periods. For some co-ops with low enrollment, additional funding or capital investment was limited or unavailable. For co-ops with high enrollment numbers and budget shortfalls, they had to keep on taking new clients.

Congress clearly realized some of the challenges that the new co-ops and the health insurance industry as a whole would face. As a result, the Affordable Care Act included a permanent risk adjustment program and temporary federal reinsurance and risk corridor provisions that would last for three years. These programs were designed to mitigate the risk for insurance companies. Risk corridors are pools that are funded by charges on profitable insurance companies and used to help cover losses incurred by insurance companies until the market stabilized. They were particularly critical for brand new co-ops and small insurance carriers.

By 2014, the risk adjustment programs and the risk corridors in particular came under attack from opponents of the Affordable Care Act. These programs were characterized as bailouts for insurance companies. In the 2015 spending deal, House Republicans required that the risk corridor program be classified as "revenue neutral." Under this deal, the Centers for Medicare and Medicaid Services (CMS) could only use insurer contributions to pay for the risk corridor payments that it owed, and CMS was expressly forbidden from drawing on any other funding source.

That created a multibillion-dollar shortfall at a point where co-ops expected and needed that assistance the most. Insurers submitted claims for $2.87 billion in risk corridor funding while remaining insurers only contributed $362 million in risk corridor contributions. As a result, insurers (including the co-ops) only received 12.6 percent of the funding assistance that they were originally owed.

To make matters worse, CMS announced the amount available through the risk corridors on Oct. 1 -- only one month before the beginning of the current open enrollment period, leaving little time available to plug the shortfall. At least six of the 12 co-ops that closed cited this as the main reason for their closure.

The surest way to guarantee that taxpayers and policyholders would lose their investment is to cut off a three-year contract in its second year. Some of the co-ops that closed would likely have succeeded if the risk corridor commitment had been kept and if roadblocks had been removed.

The remaining 11 co-ops still cover more than 400,000 Americans, and Congress and the administration need to seriously address the problem. To begin with, regulations not specified in the Affordable Care Act that limit co-ops' ability to raise private capital to meet their solvency needs should be amended or repealed.

Risk-adjustment formulas applied by CMS that are skewed toward established carriers should be amended to create a more level playing field. The shortfall in risk corridor funding must be resolved to ensure that stabilization funds critical for smaller carriers are received. Specifically, remaining solvency capital and risk corridor payments should be redistributed (when feasible) from closing co-ops to those that are still in operation. Finally, priority should be given to insurers that need those funds to meet risk-based capital requirements.