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24 Little CO-OPs

by Mark J. Meade

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The Consumer Operated and Oriented Plan program story all started with the passage of the Affordable Care Act’s Section 1322, CO-OP program, which was “to foster the creation of qualified nonprofit health insurance issuers to offer qualified health plans in the individual and small group markets in the States in which the issuers are licensed to offer such plans.”

The intent of this section of the act was a recognition of the fact that competition in the health insurance market was a strong factor in holding down costs.

At one of the early D.C. meetings of the CO-OP Advisory Board in January of 2011 several health insurance experts laid out criteria and warnings about the perils of market entry for health plans, that in hindsight appeared to have been generally ignored by many.

Key among these caveats were the need for advice and assistance from health insurance executives and others with experience in running successful health plans, the need for prudent use of funds and efficient organizations that had limited overhead. People with health insurance experience told the organizers that new plans need be concerned with solvency and the ability to meet insurance industry regulatory requirements, and the need to set realistic goals.

(Related: ACA Risk-Adjustment Program Chokes Remaining ACA CO-OPs)  

In the process that followed, several state plans were set up, vetted and received funding. From the rules and guidelines established, distrust of all things insurance industry, was apparent. This was somewhat correctly derived from the few bad actors in the industry and a media that had for many years played up the Bad HMO meme to the hilt.

The result was a reluctance on the part of many of the CO-OPs to limit their use of people and practices from the insurance industry as well as a degree of hostility from that same industry who saw the new upstarts as rivals who were getting federal money to compete against them. Add to this a series of restrictions on the use of funds for areas critical to success such as marketing and the ability to raise additional capital and these new entities were off to a bad start.

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The first major mistake made by several of the early failed CO-OPs was one I have seen so many times in my professional career that I have developed a name for it. I call it the “W.C. Fields Marketing Strategy,” after a film short by the comedian, where he sells two cent stamps for penny, explaining that what he loses on each sale he makes up in volume. This approach was used, perhaps unknowingly, by several CO-OPs which led to rapid growth, but lacking additional capital or reserves, resulted in failure to meet their state’s Risk Based Capital requirements and in some cases even worse not being able to meet their Incurred Claims liabilities which led to the closure of the plans and their remaining assets being turned over to conservators for the settlement of debts.

Further misfortune fell to others when Exchange enrollment systems were faulty and in some cases complete disasters, severely limiting the CO-OPs ability to gain membership needed to cover overhead and costs. These failures along with an extremely convoluted enrollment process continued for some time not only hurting the CO-OPs but the whole Exchange market as well.

Like the biblical plagues of old their problems didn’t end there. Many were hit by the risk stabilization programs that were established to help them. Designed by highly intelligent people they were to function correctly in a perfect world but as we all know the world is never perfect. The risk rdjustment program, was to measure the level of enrolled risk a plan had and then transfer funds from plans with lower scored risk to those plans who’s risk scores were higher. This resulted in many newer and smaller plans having to pay the bigger plans a considerable portion of their premium revenue. The program did not take into account that large plans had more data on their populations and better systems for recording it than new plans with new enrollees who had no claims history to score. Other elements were failure of the Cost Sharing Reduction program to have authorizes funding which continues to date.

These failures are tragic in many ways, as tens of thousands of people have been stripped of access to health plans of their choosing while competition has been greatly curtailed, not only from the loss of the CO-OP plans, but other smaller regional plans that have been hurt by many of the same dysfunctional programs. Good people tried to provide health care and failed for many reasons, mostly not their fault, so we shouldn’t blame them but a system that was flawed from the start.

The answer put forward by many has been to pour more money into the programs, which is palliative at best. The multitude of short comes in these programs and the health care sector in general are ignored as if more money will fix everything. Anyone who has ever had a boat knows that you can only bailout for so long, you most plug the holes if you are to keep it afloat.

— Read Firm Places $10.5 Million Bet on Affordable Care Act Suit on ThinkAdvisor.

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