24 Little CO-OPs

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.

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.