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Will 2016 be the Last Year for ACA CO-OPs?

InHealth Mutual, Ohio’s federally subsidized health insurance CO-OP (Consumer Operated and Oriented Plan), fell into receivership in late May 2016, becoming the 13th ACA CO-OP to close out of the 22 that launched in 2013. The CO-OPs were originally designed as a patient-centered, non-profit alternative to traditional insurance plans, and the exact reason why so many have failed depends on who you ask. To some, the CO-OPs represent the difficulty of breaking into the health insurance industry, especially given inadequate government support, while to others, usually critics of the ACA in general, they are a classic example of a wasted government effort to try to intervene in a commercial market. Both views have some valid points, as the new organizations faced a multitude of challenges.

Of all the obstacles many CO-OPs encountered during their brief run, the most troublesome, unsurprisingly, was overall enrollment. Many enrollment problems could be attributed to the lack of experience among the CO-OPs, highlighting what some see as a major barrier to entry in the insurance market that prevents effective competition. Unlike existing insurers, the CO-OPs didn’t have access to past data on member price sensitivity, utilization patterns, and other information needed to create a viable pricing strategy. Most simply decided to offer plans with roughly the same premiums as their nearest competitor. As a result, enrollment figures among CO-OPs were wildly scattered. Minuteman Health, serving Massachusetts and New Hampshire, only reached four percent of its nearly 39,000 enrollment target, while Health Republic Insurance of New York hit more than 150,000 signups—over five times its projected amount. Overall, only four CO-OPs’ projections proved relatively accurate, and most achieved less than 40 percent of their goal. In addition, enrollees were often sicker than planners anticipated, a common problem among most exchange plans.

 

co-op-enrollment-at-year-end-2014Some volatility in CO-OPs’ first years was expected, and the ACA included stabilization measures known as the “three Rs” to help them stay afloat. The risk corridor program, designed as the most powerful of the three tools, allowed the government to directly offset CO-OPs’ losses from a reserve fund; the reinsurance program supported insurers with abnormally unhealthy members with higher costs; and the risk-adjustment plan distributed funds between high-performing and low-performing CO-OPs. Unfortunately for CO-OPs, funding for the programs was cut from $6 to $3 billion due to congressional resistance, and CO-OPs only received an average of 12.6 percent of what they requested under the risk-corridor option.

Many CO-OPs that had relied on the risk corridor to continue operations ended up closing before the end of 2015. Even so, some have suggested that more funding would not have saved certain CO-OPs anyway, as proposed in a March report written by the Republican staff from the Senate oversight panel subcommittee on investigations. The report claims that HHS ignored the concerns of a third-party analyst firm it hired to assess the business plans of CO-OPs during the approval process and continued to fund failing CO-OPs despite the unlikelihood that the government loans could ever be repaid. According to the report, Deloitte Consulting found that seven of 12 closed CO-OPs had defective enrollment strategies and ten had unrealistic budget and financial planning components.

Other policies governing the CO-OPs also played a role in their collapse. To meet regulatory requirements on tight deadlines, many CO-OPs outsourced key services that minimized their ability to control costs and operate effectively. According to a report from The Commonwealth Fund, the new CO-OPs tended to use existing provider networks, accessed through a fee, rather than build their own through contract negotiations, which was obviously difficult given that none had any existing members prior to the first year. While it gave them a network in the short term, CO-OPs had little to no direct control over care quality or costs and therefore little ability to affect claims. CO-OPs also had little time to develop their own infrastructure, leading many to outsource administrative services to third-party agencies, some of which were unprepared for the new regulatory environment and fully insured market. Federal guidelines also prohibited CO-OPs from using any funds for marketing purposes, which likely made it more difficult for some to meet their enrollment goals.

In response to concerns over the various restrictions, HHS issued new regulations in late May 2016 to improve CO-OP governance and operating flexibility. HHS relaxed its conflict-of-interest leadership policies, allowing certain government and insurer representatives, as well as non-CO-OP members, on their boards of directors. In terms of operational changes, CO-OPs that do not strictly adhere to original rules requiring no less than two thirds of their policies to cover individual and small group members will not have to immediately repay federal loans and must instead merely propose a plan to meet the ratio.

As of March 2016, HHS had placed 8 of the 11 (now likely 7 of the 10, given InHealth’s closure) existing CO-OPs on corrective action plans due to ongoing financial losses. But what can be said about the continued survival of the other three? HHS has not disclosed which specific CO-OPs were in trouble during a recent hearing, though two, HealthyCT and Evergreen Health Cooperative of Maryland, have been cautiously optimistic and announced they expect to turn a profit in 2016. Officials from each organization attribute their success to a diversified client base of individual, small-group, and large-group policies that has allowed them to minimize losses. Evergreen CEO Peter Beilenson said in a March interview that the CO-OP also pursued a conservative pricing strategy, avoiding the problems many CO-OPs faced when their low premiums couldn’t cover the cost of claims. The CO-OP even posted a small profit in Q1 2016. If their projections are accurate, it may be that the ACA CO-OP program won’t be considered a complete failure after all.

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