In the wake of the Supreme Court’s ruling upholding the IRS’ decision to provide health insurance subsidies through the federal exchanges, it’s important to analyze whether these subsidies are actually sustainable. When spent on the cooperative nonprofit insurers created by the Affordable Care Act, they are not.
In many states, those receiving subsidies for purchasing insurance on state exchanges may get coverage from Consumer Oriented and Operated Plans (CO-OPs). CO-OPs were set up as a sort of half-hearted replacement for the “public option” that many on the left insisted be included in Obamacare. The rationale was that, by creating nonprofit insurers to compete at the state level with Blue Cross and Blue Shield plans (some of whom have shed their nonprofit status in recent years), the cost of insurance would fall.
However, a new study by the Galen Institute’s Grace-Marie Turner and American Enterprise Institute’s Thomas P. Miller shows that CO-OP prices are rising fast and billions in taxpayer dollars have been wasted.
CO-OPs are nonprofit mutual insurers owned by their policyholders. CO-OP executives aim to balance premiums collected with losses paid, without having to return any profits to investors. They only sell their products on state or federal exchanges, meaning they are more likely to provide options to uninsured and more costly patients.
The Patient Protection and Affordable Care Act set up a $6 billion fund for CO-OPs to use toward startup costs and to make it through tough times. Thus far, $2.4 billion of that has been either granted or loaned. Among the somewhat unusual rules the CO-OPs must abide are regulations preventing any government, insurance company or insurance association employees from serving on any of their boards of directors.
Turner and Miller find that when CO-OPs entered a market, they tended to offer premiums well below the market price, hoping to attract customers. Iowa’s CoOportunity Health offered its platinum plan 7 percent lower than the average silver plan, 24 percent lower than the average gold plan and 41 percent lower than the only other platinum plan; CoOportunity gained 10 times more consumers than forecast.
In Tennessee, Community Health Alliance plans were 10 to 25 percent below commercial prices, allowing them to obtain 23 percent of the market in just two years. In Colorado, HealthOp offered the lowest-priced plans across the state and, by the end of the 2015 enrollment period, had racked up 40 percent of the exchange market.
What happend when a government-backed nonprofit charged priced well-below market indicators? The answer comes from a study conducted by Scott Harrington of the University of Pennsylvania’s Leonard David Institute of Health Economics:
The ratios to premiums of medical claims, claim adjustment expenses and general expenses for CO-Ops combined for the first three quarters of 2014 were 91.7 percent, 3.8 percent, and 21.3 percent, respectively, producing a total ratio of costs to premiums of 116.8 percent.
In other words, for every $100 CO-Ops collected in premiums, they paid out $117. In Kentucky, Health Cooperative posted a loss ratio of 158 percent in 2014. That means for every dollar collected the group spent $1.58, and that’s not even including expenses. Remember, a good portion of the money collected in premiums comes from the federal subsidies that were just upheld by the Supreme Court.
These groups have responded by raising rates. CHA asked Tennessee regulators to approve a 32.6 percent increase in premiums. In Kentucky, rates will increase either 20 percent or 25 percent, according to the federal exchange website.
Rate increases indicate that these nonprofits are making a turn in the direction of more sensible pricing, but in order to propel themselves, they are asking for bailouts. CO-OPs are seeking to tap Obamacare’s risk adjustment, reinsurance and risk corridors to make up for their losses.
Risk adjustment demands that insurance groups enrolling high-risk patients receive compensation from plans with relatively low-risk enrollees. Iowa’s CoOportunity Health reported $168 million in losses over the last 13 months of its operation, before it was liquidated in February. The burden for paying these loses falls on the Nebraska and Iowa Life and Health Guaranty Association, funded by the group of surviving insurers in the state. Clearly, a liquidated CoOpportunity probably will never pay back its full $145 million in federal loans
Obamacare also required each state to establish a transitional government-backed reinsurance program to provide compensation to insurers when a catastrophic illness or accident occurs. All health insurers have reinsurance coverage in exchange for a prescribed reinsurance fee, but CO-OPs are more likely to have patients requiring reinsurance.
Risk corridors allows the government to offset high losses by providing solvency funds. For the CO-OPs, these funds are supposed to come from profits earned by other CO-OPs. The problem is that, of the 23 CO-Ops, only one (Maine Community Health Options) was profitable in 2014. In total, the CO-OPs reported $613.9 million of underwriting losses.
HealthOp has been given $72 million in startup and solvency loans. New York’s Health Republic Insurance has received $90 million in federal solvency funds. On Nov. 10, 2014, the Kentucky Health Co-op received $65 million in solvency funds to expand its operation to West Virginia. The expansion has been delayed until 2016 and the money, it appears, has been spent to pay losses in Kentucky. The group also expects $257 million from competitors and reinsurance to make up for 2014 and 2015 losses.
Another key problem is that, in offering premiums well-below the market rate, the CO-OPs forced profitable insurers to take on more risk and lower premiums to remain competitive. So not only will the profitable and private companies be forced to bail out the CO-OPs, they have also taken on more risk than they are accustomed to. In the long run, rates for citizens buying both on and off state and federal exchanges will increase to pay for current losses.
In Vermont, the state’s insurance commissioner saw the problem coming and denied Vermont Health CO-OP a license. However, the $33 million in loans that the federal government granted the nonprofit has not been returned to the U.S. Treasury. Even when bad behavior was prevented by a smart commissioner, taxpayers have been robbed.
CO-OPs have swallowed large amounts of money as medicine for a disease with no cure. Congress should stop throwing good money after the bad.