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The CO-OP problem

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Several of us in the industry have watched the new CO-OP movement with both hope and concern. 

Over the last few decades, the health insurance field has consolidated, mirroring the trend in other industris that “Bigger Is Better.” 

Those familiar with the process know that the bigger an organization gets, the further away it is from its users and customers and, after certain point, these entities take on the view that what’s good for their organization is good for its customers.

In truly competitive markets, this is a self-correcting lifecycle, as smaller more efficient organizations, better attuned to their customers, arise and cut down to size the behemoths returning the market to a more responsive and cost efficient level. Given the massive amounts of capital, technology and compliance issues insurance carriers face, this has become extremely difficult for start-ups.

As every economist knows, markets controlled by a small number of organizations have the ability to control prices. For nonbelievers, just look at the petroleum industry right now, where a single large producer has been able to shutdown competing producers so they might regain higher prices and market control. Health insurance is no different.

Stepping into this cost quagmire, the Government, in the form of the Patient Protection and Affordable Care Act (PPACA), established funds to spur competition by establishing not-for-profit CO-OPs — Consumer Operated and Oriented Plans — across the country.

From the very first meetings, the group assembled shared a vision of the future where the problems of the current market and its distance from its customers was addressed by making the customers partners in the process. Apparently, working under the assumption that all things insurance were inherently evil, they failed to hear the voices of those early professionals who warned of early exuberance and the difficult tasks ahead.

What happened next was a confluence of poorly thought-out regulations and requirements that has created unintended consequences, which have led to the early failure a number of CO-OPs and the impending doom of others.

Many of the new CO-OPs, replete with federal cash and looking for rapid growth, adopted what I call the W.C. Fields school of marketing. In one of his short films, Fields was asked how he could sell two cents stamps for a penny and explained what he lost on each sale he made up in volume.

While many of the CO-OP’s pricing wasn’t that bad, they ignored or, at least, downplayed, the potential consequences of factors such as anti-selection and the impact of the new rate review process on pricing within the overall market in an attempt to price under their competition and quickly gain market share.

The CO-OPs appeared to believe that other carriers would generate profits that the CO-OPs would then recoup through the risk-sharing provisions in the PPACA “3Rs” programs, including a risk corridors program that was supposed to use cash from thriving PPACA exchange plan issuers to help struggling exchange plan issuers, such as the CO-OPs.

Two developments eliminated that PPACA risk corridors program cushion.

The first was that the other carriers were pressured into lowering their own rates.

The second was that Congress changed the rules governing the risk corridors program and blocked it from getting cash from the Treasury.

But, those developments aside, the root of the CO-OPs’ problem is that, in many cases, the premium the CO-OPs generated was not enough to cover all outlays and establish the needed reserves.

What started as a good idea has, in many states, turned into disasters, not only for the failed CO-OPs but, more importantly, for the hundreds of thousands of CO-OP members who are now faced with finding new health care coverage.

The lesson that should be learned here is that the basic principles of insurance can only be ignored at your own peril. At some point the tap runs dry.

For the CO-OPs, that happened quickly.

See also:

CO-OP exec: ‘The long knives came out’ [With video]


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