We explored the health insurance CO-OPs that were created under the Affordable Care Act in a blog post earlier this year. There were 23 in 26 states at the beginning of 2015 and, as of October 16, eight had ceased operations, according to Employee Benefit News, and will not sell plans for 2016 on the public exchanges. The Commonwealth Fund reports that the CO-OPs received $2.44 billion in public funds and enrolled 500,000 people collectively.
Why Are CO-OPs Failing?
In a statement on their website, the National Alliance of State Health CO-OPs (NASHCO) attributes the closures to the CMS decision to pay 12.6% of the 2014 risk corridor. The statement goes on to mention lower ACA enrollment projections, consolidation of the health insurance market, and unexpected risk adjustment obligations as additional factors in the closure of CO-OPs in Tennessee, Colorado, and Oregon.
The failure of nearly one-third of CO-OPs “reflects a combination of factors: low pricing and higher utilization than expected against those prices; inability to leverage competitive prices from providers; greater than anticipated losses from risk adjustment; and most recently and acutely, much less payment than expected from risk corridors,” explains Katherine Hempstead, a director at the Robert Wood Johnson Foundation in Princeton, N.J., in Employee Benefit News.
What Are Risk Corridors?
In a brief called Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors, the Kaiser Family Foundation explains that risk corridors are a three-year program to “limit losses and gains beyond an allowable range” in the first three years of the ACA as people with pre-existing conditions enroll. HHS does this by charging Qualified Health Plans (QHPs) that have lower than expected claims and distributing the funds to QHPs that have higher than expected claims. The methodology allows for shortfalls in collections and government funding, stating “if risk corridors collections for a particular year are insufficient to make full risk corridors payments for that year, risk corridor payments for the year will be reduced pro rata to the extent of any shortfall.” For 2014, $362 million were collected from plans with expenses below their allowed rate and $2.87 billion was needed to pay all of the QHPs with expenses above the allowed rate leading to the 12.6% reimbursement rate. Many carriers have large receivables based on these calculations that they are not going to collect. For CO-OPs, with smaller budgets and less in reserves, an uncollectible receivable can be devastating.
Risk Adjustment Obligations and Other Regulations
The Kaiser Family Foundation brief explains that risk adjustment is a permanent program designed to protect against adverse selection and risk selection by “redistributing funds from plans with lower-risk enrollees to plans with higher-risk enrollees.” Payments are calculated based on actuarial risk scores. In some cases, CO-OPs were able to attract healthier people and became liable for large risk adjustment payments. The lower-than-anticipated risk corridor payments and restrictions on outside investment made these payments a larger problem for CO-OPs than for other insurers.
The Pew Trusts Stateline blog noted that CO-OPs had other restrictions to contend with:
- Obstacles to obtaining outside financing as a condition of the federal loan
- Inflexible pay-back requirements
- Parameters around how the borrowed funds could be spent, including prohibitions on advertising
- Limited opportunities for new investment
A Competitive Market: Lower Enrollment Projections and Increased Merger Activity
Original estimates from the White House and Congressional Budget Office expected as many as 20 million people purchasing health insurance on exchanges while the latest estimates are just 10 million. The Washington Post reports that some of the obstacles preventing people from enrolling are:
- The cost of plans even with government subsidies
- The value of current plans based on a year of usage
- The difficulty of reaching uninsured people – about half are young adults, more than one-third are minorities, and 80% have less than $1,000 in savings
Recent surveys of employers found that they view the mergers as a mixed blessing: better negotiating leverage will drive down provider cost for insurers ultimately lowering premiums but larger insurers will reduce competition ultimately increasing premiums.
CO-OP Failures As Part of the Bigger Picture
The CO-OP 30% failure rate is in line with the failure rate reported by the Bureau of Labor Statistics for health care and social assistance companies after two years. Health care and social assistance have been among the industries with the highest survival rates historically – across all industries the failure rate is 90%, according to Forbes magazine.
In fact, there aren’t many new entrants in the health insurance industry because of the barriers to entry. On September 15, 2015, the New York Times reported that “only two for-profit companies that were not already health insurers have entered the state marketplaces so far: Oscar, a New York-based upstart with a Silicon Valley flair and plans to take on California and Texas in 2016, and ZoomPlus, which just received approval to sell policies in Oregon.”
Health insurance is a complicated business made even more so by the changing regulatory environment. What impacts are you seeing in your top and bottom markets from risk corridors and risk adjustment obligations?