A new breed of health insurers created under the Affordable Care Act — representing one of the government’s most innovative attempts in decades to foster better coverage — is on shaky financial ground in many of the 23 states where the plans began.
The nonprofit health plans were envisioned as a consumer-friendly counterweight to for-profit insurers, a way to provide more competition, greater consumer choice and better coverage in markets typically dominated by big commercial carriers. The government allocated billions of dollars in loans for them.
But in recent months, nearly half of the unorthodox start-ups have been told by federal regulators that their finances, enrollment or business model need to shape up.
The Centers for Medicare and Medicaid Services (CMS), which oversees the health-care law, recently sent warning letters to 11 of the “co-ops,” as they’re known. The agency placed them on “enhanced oversight” or required them to produce a plan of “corrective action,” or both, according to federal figures not previously made public. Several have been notified in the past two weeks.
Amid this increased monitoring, one co-op has folded, stranding its members, and four others are preparing to close in late December. They include the Nevada Health Co-Op, which was initially among a top tier that federal officials had regarded as best poised to succeed.
CMS sent it a warning July 30. The four-page letter listed the plan’s shortcomings, pointed out the government’s power to rescind $65.9 million in loans it had provided early on and asked what the co-op was going to do about its problems.
Twenty-seven days later, the board of directors gave an answer: It was going out of business.
The birth and quick death of these co-ops illustrate the program’s fragility. When the ACA was enacted in 2010, the Consumer Operated and Oriented Plans were a compromise to appease congressional liberals who had wanted a new public insurance program for Americans unable to get health benefits at work.
Yet the co-ops’ struggle of late also reflects regulators’ shifting posture. In moves that could affect coverage for hundreds of thousands of people, CMS has gone from nurturing to getting tough.
The agency says the scrutiny is needed to help prop up faltering plans or, if that is not possible, to avoid abrupt shutdowns that would force consumers to buy new coverage mid-year.
Others disagree. “It’s kind of like the ACA is eating its young,” said Martin Hickey, chief executive of New Mexico’s co-op and board chairman of the co-ops’ national association. Hickey and other plans’ leaders, as well as some health policy experts, contend that the increased vigilance is largely what one called “an optical response,” a strategy to buffer the Obama administration from fresh criticism by Republicans, who have spent the past five years attacking the law.
The precariousness of many co-ops — and the government’s response — is drawing attention as doubts about other parts of the law subside. In June, the Supreme Court issued the second of two major rulings since 2012 that upheld core elements of the statute. And after a disastrous start two years ago because of a technological debacle, the ACA’s federal and state-run exchanges have become conduits to insurance for nearly 10 million people.
The co-ops, however, are among less prominent aspects of the law with less certain fates.
The first plan to collapse served people in Iowa and Nebraska; it folded in February after being taken over by state insurance regulators. In July, Louisiana’s co-op revealed it was shutting down. Then late last month in New York state, the nation’s largest co-op toppled, startling insurance industry and health policy analysts who thought it was too big for the government to let fail.
The latest announcement came Friday, when the Kentucky Health Cooperative, serving about 51,000 customers, said that it, too, will close Dec. 31 because of poor finances. “In plainest language, things have come up short of where they need to be,” the co-op’s leader said.
Federal health officials — usually loath to foreshadow bad news — have said more closure announcements may come before the Nov. 1 start of the third open-enrollment season for Americans to buy coverage through ACA insurance exchanges.
“The reality of this business is, it’s just tough,” said Kevin Counihan, CMS’s chief executive for the ACA marketplaces. “On balance, the co-ops are working. Are they working uniformly? No.”
The co-op disappearances are disrupting coverage for nearly 400,000 customers across five states, according to the most recent publicly available enrollment figures. But the ripple effects could be broader. Research has suggested that in the states in which they were created, insurance premiums were typically 9 percent lower than elsewhere in the country.
As co-ops shut down, their supporters say, the decreased competition probably will lead to higher rates in those states.
The program has been under siege from the start, including from the insurance industry. Before the law’s passage, government grants to help them get going were switched to loans. None of that money could go for advertising — a wounding rule for new insurers that needed to attract customers. Moreover, the amount available was cut from $10 billion to $6 billion and then later, as part of the administration’s budget deals with congressional Republicans, to $2.4 billion. Federal health officials abandoned plans for a co-op in every state.
At the time, some health policy experts warned that the constraints would make it difficult for some co-ops to thrive. Most of the plans predicted that they would not break even for their first few years.
The recent gyrations are those forecasts coming true. By June 30, all but one co-op had enrolled more people than at the end of 2014, according to data on file with the National Association of Insurance Commissioners. All but three continued to run financial losses, though. Some of the net losses were smaller than six months earlier, but for five co-ops they were worse. Nine had eroded capital.
The stresses have been magnified, Standard & Poor’s analyst Deep Banerjee and other experts say, by recent twists and turns in the way the health-care law is being carried out. These include an ACA “risk adjustment” program intended to balance out the finances of insurers in the exchanges that have sicker customers and those with healthier members. Its first year ended with 17 co-ops owing payments to other insurers.
In August, federal officials delayed another type of assistance intended to help cushion the risk of covering the previously uninsured. This temporary “risk corridor” money was cut last week to a small fraction of what many co-ops had been banking on. The Kentucky co-op blamed its demise on its cut — from an expected $77 million to less than $10 million.
The experience of the once-promising Nevada Health Co-Op, which is in court-approved receivership, demonstrates the growing pains of trying to break into the insurance market in the ACA era. An outgrowth of a large Culinary Union health plan for Las Vegas hotel and restaurant workers, the co-op was able to open with an existing stable of doctors, a built-in data system and expertise in managing care. The state’s high uninsured rate meant lots of people needed to get coverage.
Some insurance brokers were wary. “Why would I want to put my life into the hands of a rookie?” said Patrick Casale, who sells health insurance in Las Vegas.
Others promoted the co-op’s generally lower rates, health advocates and greater freedom for members to see preferred doctors. “That personal touch, rather than, ‘Here’s a 1-800 number,’ ” said Alberto Ochoa, who enrolled nearly 400 clients in the plan.
Even so, in part because of the plan’s own computer troubles, just half of the nearly 34,000 members expected were signed up during the first year. And by this past winter, state regulators began worrying about its finances, according to a source familiar with the state’s insurance industry. A senior federal official close to the program said that CMS asked the co-op for more financial data in May and paid a visit in June, followed by its July 30 letter.
That notice and the delayed risk-corridor payment “pushed the board to make some real hard decisions,” said an official highly familiar with the co-op who spoke on the condition of anonymity to discuss its internal deliberations. “The co-op was able to overcome hurdle after hurdle but could not see what the future held with CMS.”
Rudelene Rachiele, a 63-year-old breast cancer survivor in Henderson, Nev., worries about the consequences. She found the co-op easy to deal with when she needed to have her breast implants replaced and wonders whether another insurer will be as accommodating.
“I’m not happy,” Rachiele said. “I just don’t want to go through the hassle.”