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Are all Co-ops Really Doomed to Fail?
Are all Co-ops Really Doomed to Fail?
Intended to serve as alternatives to the policies offered by for-profit insurers, the nonprofit health insurance co-ops created under the Affordable Care Act have been failing at an alarming rate.
Republicans have had the opportunity to speak out and say “I told you so” while Democrats have claimed their partisan rivals doomed the co-ops from the get-go by gutting necessary funding. As the story plays out in the media, however, the perspective of the co-ops themselves has largely been drowned out by the partisan finger-pointing, which begs the question: Why exactly are these organizations failing, and can anything be done to right the ship?
Peter Beilenson, MD, CEO of Evergreen Health—Maryland’s only non-profit health insurance cooperative—uses the Wile E. Coyote and Road Runner cartoon to reveal his view of why the co-ops have found themselves stuck between a rock and a hard place.
When Wile E. Coyote falls off a cliff, he’s stuck in a chasm with a wall on both sides. In the realm of the co-op, one wall is enrollment numbers. “If you don’t have enough enrollment,” Dr Beilenson says, “you can’t cover your administrative costs and you go under.”
Co-ops are also up against a barrier when they don’t have enough solvency money. Going above certain enrollment figures is impossible without additional funds because then there aren’t enough reserves to be able to play in the game. Meanwhile, the Centers for Medicare & Medicaid Services (CMS) has made it very difficult to raise additional capital. So you’re stuck in this chasm as a minor player without the ability to expand, Dr Beilenson says.
FINANCIAL FAILURES
To understand the precarious position co-ops have found themselves in, Dr Beilenson says it’s necessary to look at the 3 “R”s of the Affordable Care Act (ACA): reinsurance, risk adjustment, and risk corridor.
Reinsurance is an initial measure put into place that will go away. It provides funding to issuers that incur high claims costs for enrollees in order to deal with some of the potential unknowns during the early years.
Risk adjustment transfers funds from lower risk plans to higher risk plans. The idea behind it was to prevent some of the big carriers from picking off all the healthy customers, while the new, smaller carriers wound up with all the expensive patients, Dr Beilenson says, which would lead to significant financial distress. It’s been problematic for the co-ops, he contends, because the formula is skewed in favor of the larger insurers that pre-existed along with their ability to capture the codes of their patients.
The co-ops that went out of business, in general, grabbed the individual market with aggressive pricing while hoping that the backstop of the risk adjustment would help them to pay for the high-cost users, he points out. They wound up with a lot of pent-up demand patients, a lot of sick patients, and a lot of claims going out, but then weren’t paid by the risk adjustment score as expected. In fact, almost all of the co-ops wound up paying out instead of receiving payment, even though they tended to have sicker patients, notes Dr Beilenson, which put them at risk financially.
The last of the 3 Rs to consider is the risk corridor, intended to limit issuer losses (and gains). Because federal legislative action required the risk corridor to be budget neutral, it actually paid out at 12.5% of the amount initially expected by the co-ops. The most recent group of co-op failures, which occurred in quick succession, was ultimately due to this figure coming out shortly before this year’s open enrollment started, Dr Beilenson said.
SECRET TO SUCCESS
If so many of the co-ops have gone belly up, what can be learned from those that have managed to remain in the game? Part of the complexity in answering that question stems from the fact that each organization is impacted by a variety of factors unique to its own setting.
“Each co-op in the country is different,” notes Cynthia Jay, chief marketing officer with the Health Republic Insurance of New Jersey, “and each operates in a unique environment. Financial and market conditions can vary significantly.”
Many of the co-ops have reportedly been relying on payments of tens of millions of dollars from the risk corridor program that will not become available in their entirety, she adds. Health Republic Insurance of New Jersey did not rely on these payments for financial infusion because of the ongoing discussions as to whether those funds would ultimately be available. Instead, it has been able to make decisions from its inception around many of the factors thought to be viable in the marketplace, including pricing and growth strategy.
“Also, for Open Enrollment 2015, based on our lower enrollment for 2014, we refined our strategy,” Ms Jay continues. “We executed a more robust marketing campaign, aggressively built relationships with the broker community to raise awareness of our brand and plans, and adjusted our pricing. As is true with all co-ops, we did not have claims history or much other information for the first year of the implementation of the ACA. We became more in tune with our competitive environment during that year, adjusted pricing accordingly, and introduced 2 new plans, while still remaining actuarially sound.”
Evergreen’s success has been part luck, part skill, according to Dr Beilenson. “On the luck side, which we originally thought was bad luck, was when the Maryland exchange crashed,” he says. “We only got 450 individuals from the exchange in the entire first year, and all of them came in open enrollment.”
It became apparent in a hurry that it would be difficult to survive with only 450 members, so Maryland’s Evergreen Health Cooperative quickly switched to small group sales and were up to 12,000 by the end of last year, with a figure of around 30,000 expected by the end of the current year. Large groups have been added as well. “Our strategy for success, if you will, is a diversified book of business, pricing appropriately—we did not underprice, we priced appropriately—and slow but sure growth,” Dr Beilenson says.
“It’s a hard business, it’s a low profit margin and very cash intensive startup,” he adds, because whether you have 2 enrollees or 2 million enrollees, a chief medical officer is necessary, for example, along with counsel and the staffing needed to design forms and filings and rates. Because of this, he says, it is unreasonable to expect a profit in the first 2 or 3 years.
LOOKING AHEAD
When Dr Beilenson recently testified before congress on this issue, he told them that there are 3 things that ought to occur. “The risk corridor has to be paid in full,” he says. “That doesn’t help the co-ops that went out of business, but it will help the co-ops still operating.”
“The risk adjustment formula has got to change,” he adds. “The ability to chase codes is much harder for a small co-op.” To draw a comparison, Dr Beilenson explains that Evergreen Health Cooperative has 60 employees total and 1 in particular who focuses on codes, whereas UnitedHealthcare has 1 division of 250 employees who are solely going after risk adjustment patients for their enrollees. “So the ability to capture codes, which is how you build your risk adjustment score, grossly favors the larger carriers,” he says.
“Third, and most likely, is the ability to raise additional capital,” Dr Beilenson adds. Solid reserves are needed in order to run an insurance company, and as an insurance company grows, the reserve amounts have to as well. “CMS gave away all of the remaining solvency funds, most of it to some of the ones that were in deep danger of going out of business and ended up going out anyway,” he explains. “There’s no new solvency money, and congress is clearly not going to appropriate anything more.” CMS has put up huge barriers, Dr Beilenson says, which are not required by the ACA. “At the congressional hearing there was bipartisan support for CMS to loosen up or make more flexible the rules for obtaining additional capital by the co-ops,” he says, “and that is crucial for the co-ops to go forward.” These 3 steps would not require any new acts of Congress or any new congressional appropriations.
“In reality I think co-ops are an important addition,” Dr Beilenson says, pointing out that they are a market competitor that has helped dampen the rise in premiums in the states that have introduced them. Beyond that market competition, he says the innovation and disruption they bring to the industry is a healthy addition as well.
Ms Jay, too, notes that the co-ops were established to invoke a competitive health insurance environment in many states that may have been lacking competition. “Co-ops definitely have a place because we are customer-centric, quality- and innovation-focused,” she says, “and have helped keep rates affordable in many states.”
