How many more ACA cooperative insurers will go out of business? At least some are going to be hard pressed.
In the wake of CoOportunity Health's liquidation in Iowa and Nebraska, insurers from Aetna to the Blues are wondering if the rest of the 22 federally-supported co-ops will remain as a new breed of competitors.
"We believe that the recent failure in Iowa and Nebraska is a precedent kind of transaction," said Aetna CEO Mark Bertolini recently. CoOportunity, he argued, "probably is not the first and also not the last of these co-ops to have issues."
A new analysis of co-ops' vital signs lends some evidence to Bertolini's hunch, although a few co-ops are on a path to financial sustainability, including one in a New England state where Aetna has so far sat out the new individual market.
State data on co-ops for the first three quarters of 2014 show "substantial variation" in enrollment, pricing and underwriting results, according to a Robert Wood Johnson Foundation study by Scott Harrington, chair of the healthcare management department at the University of Pennsylvania's Wharton School.
The results -- marked by "very high" cost ratios -- reinforce the "formidable actuarial, operational and financial challenges" facing co-ops and the expectation that some will "not become financially viable," Harrington wrote.
For the first three quarters of 2014, co-ops on average had a total premium-to-cost ratio of 116.8 percent. Those kinds of expenses are to be expected, given the nature of starting a new insurer. But the threshold will not be sustainable in the long-term. That 116 percent ratio translates into an underwriting loss of about $17 per $100 of premiums, including estimated risk adjustment and risk corridor payments.
Among all the co-ops, only one has turned a profit and achieved a combined medical and expense ratio of under 100 percent -- Maine Community Health Options, which saw the fifth largest enrollment of co-ops nationwide, with 40,00 new members.
Founded in 2012 by the state primary care association, Maine Community Health Options had 90.8 percent combined ratio and a 70.5 percent medical claims ratio through the third quarter of 2014, while attracting about 80 percent of exchange enrollment in a state dominated by Anthem Blue and Cross Blue Shield and with a presence by Harvard Pilgrim and Aetna.
Among the other co-ops with the largest enrollment, CoOportunity had the highest combined expense ratio at 114.5 percent (with a medical cost ratio of 100 percent), followed by Kentucky Health Cooperative at 112.8 percent. The other two had expense ratios coming in at less than 110 percent: Consumers' Choice in South Carolina and Health Republic of New York, which enrolled 140,00 members, the most of any co-op.
CoOportunity and the other fast-growing co-ops had premiums that were largely priced to sell, if not always the cheapest. After the first open enrollment, Harrington found, there was a "clear tendency for co-ops with higher-than-average 2014 rates to reduce 2015 rates, while the three co-ops with the largest 2014 enrollment and relatively low 2014 rates each raised 2015 rates by more than 10 percent."
"CoOportunity Health's insolvency highlights those challenges and the potential consequences of rapid growth in conjunction with unfavorable claims experience, despite protection provided by the risk adjustment, reinsurance, and risk corridor programs," Harrington argued.
To foster competition, a risk of failure
The Affordable Care Act authorized $6 billion in funding for co-ops, most of it in low-interest loans, similar to the 1973 Health Maintenance Organization Act, which devoted $375 million ($1.9 billion today) in federal grants and loans to support HMOs.
"Co-ops were created to inject more competition into the market, and it will be important to figure out whether that is happening, even in cases where co-ops themselves may fail," said Kathy Hempstead, director of insurance at the Robert Wood Johnson Foundation.
The ACA required HHS to fund at least one co-op in every state. But in 2011, Congress reduced the $6 billion pool to $3.4 billion and two years later, in the "fiscal cliff" resolution, pared total co-op funding down to $2.4 billion.
The country ended up with 23 co-ops selling in 23 states, including two co-ops in Oregon and CoOportunity selling in two states. A would-be co-op in Vermont was denied licensure after state regulators found evidence of financial mismanagement and conflicts of interest by the co-op's sponsor, a local brokerage and asset management firm.
The first two years of operation, leading up to and during open enrollment, brought co-ops a number of unforeseen challenges, especially the Obama Administration's last minute decision to let states to renew pre-ACA plans and delays in disbursement of 2014's risk adjustment and risk corridor payments until mid-year 2015. Both of those factors contributed to CoOportunity's significant number of high-risk membership and its low cash reserves.
According to Harrington's study, about one-third of the co-ops are expecting recoveries from the risk adjustment program and another third are expecting payments from the risk corridors program, to the tune of $164 million in total. Almost a quarter of the total risk adjustment and risk corridor pools are due to CoOportunity Health; its not clear if they will be collected or used to pay off expenses in the liquidation.
While competitive threat posed by co-ops has so far been modest, the demise of a co-op that grew fast, like CoOportunity Health, can have ripple effects in the market and impact established insurers.
With Iowa's dominant insurer Wellmark Blue Cross and Blue Shield sitting out the first few years of new public exchange market, Aetna's Coventry was CoOportuity's main rival in the state exchange and to some extent in the off-exchange group market. Since CoOportunity was taken into liquidation, its members have to find other plans, and may be turning to Coventry in Iowa -- bringing an unexpected influx of membership.
"We want to make sure that first and foremost customers are not left out and lurch on this," Aetna CEO Bertolini said. "But secondly, that we obviously have the right kind of products in the marketplace."
Are other co-ops on the brink of demise as well?
While Community Health Alliance in Tennessee had enrollment frozen as a preventive measure by the state, there do not appear to be any co-ops with an imminent risk of collapse, according to a report by Standard & Poor's.
"Not all co-ops will go the way of CoOportunity Health,"said Standard & Poor's credit analyst Deep Banerjee. "Some may have capital or liquidity issues, but most seem to have adequate liquidity at least to survive the near term,"
"In the long term when rational pricing in the market returns, some of co-ops likely will continue to struggle against the more-entrenched players unless the co-ops can build positive brand recognition, contract well-negotiated provider networks, and gain financial stability."
2014 Co-op premiums compared and 2015 premium changes
Source: Robert Wood Johnson Foundation.