ACA CO-OP Program Dwindles Further

August 23, 2016

In July, Illinois CO-OP the Land of Lincoln Mutual Health Insurance Co. was ordered to close by state regulators. The closing of Land of Lincoln comes in the wake of the closure of two other CO-OPs within the same month. 


The failure of the Illinois CO-OP means that out of the original 23 CO-OPs established by the Affordable Care Act (ACA), only seven still remain.  Only one year ago one million Americans were enrolled in CO-OPs but due to the closures, the number of CO-OP enrollees now stands at approximately 350,000 individuals.


The Consumer Operated and Oriented Plan (CO-OP) program was established by the ACA with the purpose of bringing qualified nonprofit health insurance issuers to individual and small group markets, in order to foster greater competition and choice in these markets. Since the CO-OP program was established in 2014, the Federal government has spent a total of $2.4 billion on the program and has spent roughly $1.7 billion of that investment on CO-OPs that have already failed. 


One of the primary reason the CO-OPs have been so wildly unsuccessful is related to the ACA‟s risk-corridor program. Most CO-OPs used the millions they received in Federal startup grants to enter the ACA marketplace exchanges at below-average premium rates, to try to penetrate the market against more well-known competition.


While most CO-OPs were able to secure robust enrollment, they often did so while running sizable negative margins. In many instances, those who were the least healthy in the CO-OPs markets chose these plans creating a dangerous combination of lower than average revenues and higher than average expenses. 


This unusual business model was originally deemed economically viable because these plans were told by federal authorities that if they incurred higher than average costs, their excessive losses would be covered by the ACA‟s risk-corridor program. The risk-corridor program was expected to stabilize ACA marketplaces by providing qualified health plans (QHPs) who had higher than average losses, with an end-of-year subsidy collected from those QHPs who had higher than average profits.


The risk-corridor program made sense in theory, but after it became budget-neutral as a result of subsequently-passed legislation, there was a massive shortfall in risk corridor payments. This undermined the financial projections of many CO-OPs and their youth meant that they did not have any capital reserves built up to weather such a storm.


Unfortunately, the money available from those health plans with “higher than average” profits were far smaller than those health plans with “higher than average” losses and the government was only able to provide a subsidy that covered roughly 12% of losses rather than the full coverage these plans were expecting. 


The few remaining CO-OPs that are not entirely defunct are attempting a myriad of solutions to avoid meeting the same fate as the other 16. Most of the solutions involve raising premiums, typically by over 10 percent. Other means of survival being tested by the few surviving CO-OPs include:

  • New Mexico Health Connection trying to raise money from investors using a newly granted authorization from the administration to do so; and, 
  • Maryland‟s Evergreen Health suing the federal government for millions of dollars they are being asked to pay under the ACA‟s risk-adjustment program.


The House Committee on Oversight and Government Reform Subcommittee on Health Care, Benefits, and Administrative Rules held a hearing on July 13, 2016 to discuss features of the ACA, including the many failures of the CO-OPs. Chairman of the Subcommittee Rep. Jim Jordan (R-OH-4) expressed his belief that every single CO-OP would fail. Kevin Counihan, CEO of the ACA marketplace, stated that six of the seven remaining functioning CO-OPs were on corrective action plans and asserted his belief that the CO-OPs did indeed produce more choice and add competition to the marketplace.

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