July has been rough for Obamacare’s non-profit co-op health plans. Four closed after running out of money — three in just one week. Just seven of the original 23 co-ops are still standing. Those seven all lost money last year — and may yet go out of business before the calendar turns to 2017.
All that failure has been pricey. Taxpayers are out $1.7 billion in federal loans that these co-ops will never pay back.
The co-ops stand out as perfect examples of how Obamacare’s idea of government-managed “competition” is doomed to fail.
Obamacare created 23 co-ops with the help of $2.4 billion in start-up loans and “solvency” grants. Taxpayers were told not to worry about the loans, because the government had carefully screened co-op applicants and picked those that showed a “high probability of financial viability.”
Consumers were promised that, because the co-ops didn’t have to answer to investors, they’d be more efficient and more focused on patients. And they’d provide a crucial source of competition for conventional for-profit insurers. As one of the co-ops put it, these were “plans for people, not for profit.”
Obamacare’s architects settled on these government-sponsored co-ops as a replacement for the government-run “public option,” which was cut from the law at the last minute to ensure that it could attract the votes to pass.
Right from the start, there were warning signs that the co-ops would collapse.
Vermont’s supposedly financially viable co-op failed before it even got started. Then, less than a year after opening for business, Iowa’s CoOpportunity Health closed. Despite getting $145 million in start-up loans and signing up tens of thousands of members in Iowa and neighboring Nebraska, the co-op had quickly burned through its cash.
A July 2015 report from the Department of Health and Human Service’s Inspector General warned that every single co-op except one was hemorrhaging money. More than half had net losses of at least $15 million in their first year. The IG also found that, despite those promises of price competition, many co-ops had set premiums higher than policies sold by commercial insurers.
A month later, Nevada’s co-op announced that it was going out of business. Seven more followed suit in October.
At the start of this year, half the co-ops had failed, taking with them more than $1 billion in taxpayer loans.
The bleeding has continued. Four more are going under this year and will close by year’s end. As happened last year, there could be a rash of closures this fall, before open enrollment starts. The co-ops that are still alive may decide that they can’t afford to stay in business another year.
All told, some 800,000 people have been forced to give up health plans they liked and look for another insurance carrier following the demise of their co-op. In some cases, they don’t have many other choices. On Connecticut’s insurance exchange, for example, there are just two insurers left following the failure of HealthyCT. Both are asking for double-digit premium increases next year.
Mismanagement, mis-pricing, low enrollment and high enrollment have all been blamed for the co-ops’ failure. The Daily Caller found that 18 of the 23 CO-OPs were paying top executives up to half a million dollars a year.
But Obamacare itself is responsible for the most recent co-op bankruptcies.
As part of its effort to “fix” the individual insurance market, Obamacare banned insurers from pricing coverage based on risk. Instead, they have to take all comers and charge each one no more than three times what they charge anyone else.
To make the math for this scheme work, Obamacare created a series of cross-subsidies called “risk adjustment.” Insurers who attracted less expensive, healthier-than-average enrollees were supposed to pay into a fund that would redistribute money to those who enrolled costlier, sicker-than-average patients.
Several co-ops ended up facing big “risk adjustment” bills — even though they were losing money. HealthyCT, for example, had to grapple with a $13.4 million bill, which immediately made the plan financially unstable. Oregon’s Health co-op — which lost $18 million last year — had hoped to get $5 million from the risk adjustment program. Instead, it received a $900,000 bill. Unsurprisingly, it’s closed up shop.
The Land of Lincoln co-op was told it owed almost $32 million. It can’t afford to pay that sum after losing nearly $91 million in 2015.
Health Republic of New Jersey paid $17.1 million last year into the risk-adjustment program. Minuteman Health owes $16.6 million. It says that debt could push its premiums in New Hampshire up by more than 40%.
Maryland’s Evergreen Health co-op, meanwhile, is suing the Obama administration over the $22 million the Obama administration wants it to fork over. It says the risk-adjustment scheme is “dangerously flawed.”
Maryland’s co-op is not the only one fighting the administration. Oregon’s Health Republic and Illinois’s Land of Lincoln have each filed lawsuits over Obamacare’s risk corridor program, which was to redistribute money from insurers with lower-than-expected claims to those with higher-than-expected claims. New Mexico’s Health Connections co-op is considering suing as well.
The failure of these co-ops is not an isolated problem within Obamacare. Their demise is symptomatic of Obamacare’s fundamental flaws.
President Obama and his allies believed they could centrally plan the private insurance market to suit their own ends. The CO-OPs are the most obvious indication that they were wrong.