Insurance co-ops were supposed to foster choice and competition, but they never had a chance

A few weeks ago Kevin Counihan, who runs Healthcare.gov, the federal shopping exchange for Obamacare policies, defended the 23 health insurance co-ops created under the Affordable Care Act. Recall that some high-minded members of Congress had succeeded in getting the co-ops, an insurance alternative to the big carriers, added to the legislation after insurers and the medical establishment killed off the public option in late 2009.

The idea was that those co-ops, locally managed and theoretically leaner with less bureaucracy, could offer cheaper coverage than Aetna, Cigna, or Blue Cross could. It didn’t quite work out that way. Of the 23 co-ops that actually began operations in 2013, only seven remain, and few observers are willing to bet they will be around for the long haul. “Their whole long-term survival is based on a lot of ifs,” says Adam Cancryn, who has done a stellar job covering the co-op saga for the financial news publication S&P Global Market Intelligence. Still, Counihan told the House Committee on Oversight and Government Reforms that the co-ops had spurred innovation within the health insurance marketplace and given consumers more opportunities, adding: “Because of these co-ops we’ve been able to give people more choice.”

Indeed insurance shoppers got more opportunities to buy cheaper coverage, and they had more choices — at least for awhile. But what good was more choice if the insurer closed its doors after a year or two and sent thousands of policyholders scrambling to find new coverage as some 50,000 people had to do last month when the Illinois co-op failed?

In some states like New York, the Obamacare co-op, Health Republic, offered policies with much lower premiums than other carriers. Crain’s New York Business reported “management deliberately set low premiums as a marketing ploy to attract customers.” In Iowa and Nebraska, the joint home of the first co-op to go under in late 2014, co-op officials also lured customers with low premiums and other enticements. They hooked older people, a group likely to be sicker and generate lots of claims, with platinum policies offering generous coverage. For younger people they offered three doctor visits, even for specialists, with no copays. These strategies were tough on the bottom line. The major advantage co-ops offered — cheaper coverage — became a major reason for their demise.

Whether the inherent contradiction the co-ops faced — the cheap premiums they needed to attract customers who cost a bundle to treat — would alone have mortally wounded them eventually is hard to say. “They had no chance,” says Washington, D.C. insurance consultant Robert Laszewski said.

As Politico health reporter Paul Demko put it: The Affordable Care Act was politically possible only because “it was built atop America’s private insurance system.” That meant it would work only “if insurers find Obamacare to be a desirable business” — that is, they don’t lose money and even make some. But the co-ops did lose money and gobs of it when sick people began to get the care the law promised. Other insurance carriers have lost money too. Demko reported that in a sample of 100 health plans across the country he examined, less than one-quarter hit the standard break-even point for insurers, and 40 percent had medical costs that exceeded the premiums they collected. UnitedHealth Group has left the market in most areas, and just last week Aetna has said it is also considering an exit as well.

It seems the co-ops as well as the big carriers have not been getting enough healthy people eligible for Obamacare policies to sign up and balance out all the sick people who can now get insurance. Sign-ups have fallen way short of the 75 percent of those eligible needed to reach a financially sustainable risk pool, says Washington, D.C. insurance consultant Robert Laszewski. Big insurers, though, have other lines of business to help cover their Obamacare losses, while the co-ops didn’t.

Whether the inherent contradiction the co-ops faced — the cheap premiums they needed to attract customers who cost a bundle to treat — would alone have mortally wounded them eventually is hard to say. “They had no chance,” Laszewski said. They were undercapitalized, had no claims data on which to base their premiums, and since they were new, without an established customer base, they had no clout to bargain for good discounts from doctors and hospitals — all negatives that no doubt contributed to their undoing.

But the co-ops’ hands were also tied from the get-go. Likely competitors with a distaste for competition and old political opponents of the public option in Congress were taking no chances. They threw up roadblocks from the beginning. Republican remarks at July’s House Oversight hearing were as disingenuous as Counihan’s were misleading. Committee Republicans railed against the co-ops and continued to point out how many of them had closed as if to prove how failed the concept was. But it was the Republicans and some Democrats who may have created that failure.

The co-ops initial funding was limited. Former North Dakota Sen. Kent Conrad, who championed the co-ops, wanted $10 billion in government grants to get them started. Instead they got only $6 billion in government loans, and the loan agreement prohibited the co-ops from using that money to advertise and market their policies. Not many insurance companies can survive very long without a marketing budget! They were also heavily restricted from raising outside capital.

Then came the fiscal axe in 2011 when Congress chopped federal funding to co-ops to $3.4 billion. Republicans questioned whether they could repay their loans. A couple years later they slashed their funding to $2.4 billion. In early 2013 as part of a deal to resolve the “fiscal cliff” debate, Congress dealt the co-ops another blow. It rescinded 90 percent of the uncommitted loan funds, which stopped development of 40 more co-ops whose applications were in the pipeline. As if that weren’t enough, in the budget bill for 2015, members of Congress led by Florida GOP Sen. Marco Rubio included a little-noticed provision that limited the government in what it could pay out to insurers that took on higher risk and more expensive customers by selling Obamacare policies. Last fall, the collective weight of those cuts sent many co-ops into their fatal tailspin.

Likely competitors with a distaste for competition and old political opponents of the public option in Congress were taking no chances. They threw up roadblocks from the beginning. 

The Democrats had a role in the debacle as well. A decision by the Obama administration to allow existing insurance customers to keep their older policies — at least until this fall — hurt the co-ops and other new market entrants. It kept healthier customers from joining the new exchange risk pools. But it solved a political problem for the Democrats then under fire from Republicans who charged that people could not keep the policies they liked, a big selling point for the ACA.

All of this probably suits the big insurance carriers, which won’t face the competition the co-ops could have provided. But they won’t have much competition either if only three carriers and some Blue Cross plans now dominant in several states are the only game in town. That assumes the Aetna-Humana and the Anthem-Cigna mergers take place. It’s hard to imagine we’ll enter an era of low-cost insurance.

So the next time you hear those laments about the lack of competition among insurance providers, just remember the sad tale of the Obamacare co-ops and how the government starved the beast. 

Veteran health care journalist Trudy Lieberman is Contributing Editor of the Center for Health Journalism Digital and a regular contributor to the Remaking Health Care blog.