President Obama’s healthcare overhaul created 23 state-based insurance companies. So far, 12 of them have collapsed. Nine closed up shop this fall alone.
The reason? These government-backed insurers — known as Consumer Operated and Oriented Plans — took their “nonprofit” status a bit too seriously and went bankrupt.
The CO-OP scheme is proving to be one of the most misguided parts of the entire Obamacare project. Insurers have lost billions of taxpayer dollars and left more than 740,000 people scrambling to find health coverage. And the situation will only grow worse.
Obamacare established CO-OPs to provide exchange enrollees with low-cost insurance. The idea was that CO-OPs — unconcerned with maximizing profits — would offer exceptionally cheap plans and put competitive pressure on insurers to lower their prices.
Things haven’t exactly gone according to plan.
The problem is that these CO-OPs have been taking in less money in premiums than they’re paying out in benefits. Over the first half of this year, Obamacare’s CO-OPs lost nearly $200 million — despite $2.4 billion in loans from the federal government. Today, all but one of the 23 CO-OPs have lost money.
The mounting financial pressure has forced many to simply shut down.
A few weeks ago, the Kentucky Health Cooperative collapsed. At the time, it had the second highest enrollment among all the CO-OPs in the country and had enrolled 75 percent of the patients on Kentucky’s exchange. But it was running a “medical loss” ratio of 158 percent, meaning that it was paying out $1.58 for every dollar it received in premiums.
Despite receiving $146.5 million in taxpayer-financed loans, the Kentucky Health Cooperative was deep in the red.
Likewise, Iowa’s CoOportunity Heath liquidated in January and forced its 120,000 enrollees to find new coverage. Colorado HealthOP and Oregon’s Health Republic, which together covered nearly 100,000 people, have also recently gone under.
The government was supposed to provide a financial backstop for the CO-OPs. Obamacare empowered federal authorities to reimburse CO-OPs for their losses. However, officials ultimately decided that they would only cover about 12 percent of claims, so the CO-OPs have been left to eat 88 cents out of every dollar in losses.
But the failure of the CO-OP system isn’t surprising.
Several states have rejected the system because of cash flow issues. Vermont denied licensing for a proposed CO-OP because its managers did “not show sufficient evidence that it will be able to sustain solvency, repay its federal loans and gain enrollment.”
As the CO-OPs have collapsed, the traditional insurance industry has rapidly consolidated. The top three national insurers — Anthem, Aetna, and UnitedHealth — have all been on acquisition sprees, buying up smaller competitors like Cigna and Humana. And their rolls have swelled as CO-OP patients come back onto the private insurance market.
This consolidation has been expedited by the expansive array of new controls on pricing and benefits that Obamacare places on insurers. Large firms are best situated to handle this burden. They have the resources and technical expertise to appropriately adjust their offerings. Small and mid-sized insurers don’t. So, in order to survive, they’ve been selling themselves to larger operations.
The Obamacare CO-OP system is a failure, especially for patients. And it’s costing American taxpayers billions of dollars — and counting.
Sally C. Pipes is President, CEO, and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. Her latest book is The Cure for Obamacare (Encounter 2013). Her next book, The Way Out of Obamacare (Encounter), will be released in December.