Whats going on with the closing Co-ops?

Nasty, Brutish and Short posted a link to a good article and raises a good question about why are so many Co-ops closing right before the 2016 open enrollment period is beginning:

The Colorado Division of Insurance is decertifying the state’s largest nonprofit health co-op because of concerns that it might not be able to pay all of its claims next year.

The decision means more than 82,000 members will now have to shop for new insurance during open enrollment.

The DOI took action after Colorado HealthOP learned it would receive considerably less money than expected from a federal risk-based reimbursement program known as “risk corridor.”

Charles Gaba does a really good job of explaining what is happening with the smaller and newer insurers. They are getting kicked hard by the Cromibus provision that held the risk corridors had to be revenue neutral.

in other words, the “losers” are owed about $2.9 billion for 2014 losses, but there’s only about $360 million available to pay them, or around 12.6 cents on the dollar….

The “Cromnibus” bill, as you may recall, was passed at the last minute in December 2014 as a way of keeping the federal government open for awhile. One of the ugly parts included, insisted upon by the House Republicans, was a provision specific to the ACA’s risk corridor program which prevented the federal government from covering the difference if “winners” came up short. Instead, they were reduced to crossing theif fingers and hoping that payments in would be higher, making it a moot point.

Unfortunately, that didn’t happen. They only had $362 million come in, but owe $2.87 billion. The U.S. federal government is basically having to dole out “I.O.U.” cards for the $2.5 billion difference, promising to pay the balancenext year or the year after…if 2015 and/or 2016 end up resulting in net “profits” for the program.

As you can imagine, this isn’t going over too well.

In 2013 when co-ops were making their intermediate term budgets, they were counting on federal risk corridor money to cover any losses that they had.  Those losses could be intentional losses as they priced low to buy market share in the first few years to cover the infrastructure and start up costs of a new insurance company.  The losses could also be unintentional if they were covering more sick people than they projected.  More likely, the losses were a combination of the two.

So as 2014 wound down, the co-ops were counting on large payments from the risk corridor program.  At that time, they could book the risk corridor payment as a hard asset at 100% of face value minus any time discount.  The federal government is a good entity to have owing an insurer money as the feds pay.  That hard asset would be easily transformed into liquid cash or as short term collateral.

State regulators have a mission to make sure there is no chance in hell of an insurance company going bust with outstanding claims unpayable.  The state regulators rely on very large cash and capital reserves to make sure that in a three or four sigma event, the insurance company is still able to pay off all claims incurred up until the drop-dead date.  Mayhew Insurance routinely carries four to  six months of cash or near cash as the go out of business bankruptcy reserve.  The Blues and other larger carriers can get away with a little less proportional cash as their size smooths fluctuations better than a medium sized insurer.  Smaller insurers whose risk pools are not too deep need more cash on hand to cover the unexpected.

Up until the Cromnibus, the risk corridor payments were seen as near cash and counted as high quality reserves.  However the Cromnibus applied a large but unknown discount to those claims on Federal payments.  That means the state regulators started to worry that in oh-shit scenarios, the smaller insurers could not pay off all incurred claims.  And once state regulators start to worry, they shut down insurers that they worry about.

 






33 replies
  1. 1
    David Fud says:

    This seems to have been a success for the Republicans in drawing some blood from Obamacare. Richard Mayhew, would you take it that way, or is there something to be said for the state regulators to shut them down due to lack of federal payments?

  2. 2
    Fred Fnord says:

    Hurt Obamacare, get rid of some filthy commie pinko coops, and reduce competition as much as possible. What’s for a Republican not to like here?

  3. 3
    I'mNotSureWhoIWantToBeYet says:

    Thanks for the explanation.

    A sensible legislature could fix things like this, and even prevent such policies from being included in the first place.

    We’ve got to fight for it.

    Cheers,
    Scott.
    (Who is hoping for a sensible result in the Virginia elections in two weeks, but is not exceedingly confident that that will be the case.)

  4. 4
    Sean Parnell says:

    This makes it sound like the insurers were doing just fine, or at least on the path to being just fine, if only those darn regulators hadn’t panicked when they discounted the value of insurers reserves. I’ve been following the story for a while and it’s clear that wasn’t the case (although the reduction in risk corridor money didn’t help). The CO-OPs seriously underpriced their policies, and even though they (for the most part) tended to draw a healthier mix still managed to lose money hand over fist. It’s not an accident that with the exception of Maine, the CO-OPs that had the most enrollment success (meaning larger risk pools) are the ones that are failing. Simply put, this program never stood a chance because it was based on the false premise that if you could just get profit out of the equation and had insurers run “for the people” then premiums would come down. Turns out the reason BC/BS, Aetna, United Healthcare, etc. charge the premiums they charge is because it’s more expensive to offer health coverage than the folks criticizing them for their premiums understand.

  5. 5
    boatboy_srq says:

    Fud’n’Fnord nailed it. The GOTea figured out how to weight ACA in favor of Big Healthcare. It will be interesting to hear how they spin this.

  6. 6
    japa21 says:

    The Co-op in Kentucky went through the same scenario and is dropping out of business for the same reason, extremely low risk corridor payment. That particular co-op had other issues as well, but they were starting to deal with those issues and if they had received even 50 cents on the dollar would have been able to manage it.

    It is unfortunate for those folks who had their insurance through the co-op but now will have to start from scratch in terms of looking for new insurance.

    The disgusting part of all this is that I am sure the GOP is gloating due to the co-ops going out of business and even more gloating over hospitals closing due to lack of payments they would have received if the Medicaid expansion had gone through in their states. The folks that are going without healthcare and dying are just collateral damage to them.

  7. 7
    MomSense says:

    Republicans can govern. It’s just that their vision of good governance is to screw ordinary people in order to give an advantage to special interests and big money.

    I really can’t stand them.

  8. 8
    ruemara says:

    I can’t take the constant disappointment from the craven stupidity of people who can’t understand that voting Republican takes away every good thing.

  9. 9
    FourTen says:

    Can we get a Star Wars thread? I want to complain about it.

  10. 10
    MomSense says:

    @ruemara:

    I KNOW!

    The worst part is that half the time they celebrate really bad things like this change to the risk corridors. I guarantee that if we lose Maine Community Health Options and see our premiums increase, I will hear about how Obamacare killed the co-op.

    I’ve had people tell me that they are glad that Congress isn’t doing anything and that every day they prevent government from working is a good day. Some of these same idiots complained about lost business when Acadia was shut down. And what is their genius alternative to our system of representative democracy?

  11. 11
    benw says:

    @FourTen: some of us talking SW in the morning OT.

    @ruemara: some people are stupid. Some are mean. Some are scared. And some openly want to go back to an America where minorities, women, and gays were second-class citizens and are willing to suffer (or watch others suffer) almost anything for it. The Venn diagram for those groups has a lot of overlap.

  12. 12
    Lee says:

    Holy shit.

    This is some epic level of stupid shit that Matthew Yglesias wrote over at Vox

    Did he have a deadline and number of lines to fill?

    Tell us something new about how Dems have gotten pwned at the state level.

  13. 13
    Goblue72 says:

    @Lee: How is anything he wrote incorrect?

    Or are you just mad because it’s true?

  14. 14

    @Sean Parnell:

    Since I live in a state that has a successful and thriving nonprofit system (Kaiser Permanente), I think it’s way premature to claim that the only possible way to run a healthcare system is to make it for-profit, particularly since every other industrialized country in the world has figured out how to do it. It may, however, be true that the startup costs are such that you either need government funding or a profit motive to get a hospital system built, and since we’re not willing to use government money on it, we’re stuck with for-profits.

    To me, that’s a sign that something is deeply wrong with the way our healthcare system works, not that every other industrialized country is somehow doing it wrong because they manage to do it without basing it on a for-profit system.

  15. 15
    Miss Bianca says:

    @Goblue72:

    Well, I know I’m mad because it’s true. I live in rural CO, faicing layoffs at work (so, goodbye health insurance, hello no coop!), and know that despite all the grousing about the one-party control of local politics, no one will vote for a Democrat here. Been thinking about running for town council as a Libertarian. Or an independent. or a socialist. Even as the latter I’d probably get more votes than as a Democrat.

  16. 16
    Xboxershorts says:

    This strikes me as a huge gift to the larger established health insurance carriers and a major impediment to startups.

  17. 17
    Goblue72 says:

    @Miss Bianca: Our party is weak, not strong. And it’s a really serious problem. They only need to luck into the Presidency to control it all.

    We need to hold the White House, take back both Houses of Congress, and even then, we got SCOTUS to deal with.

  18. 18
    Brachiator says:

    @FourTen:

    Can we get a Star Wars thread? I want to complain about it.

    You can only complain about a movie you have not seen (and has not been released yet) in a virtual thread.

    In 2013 when co-ops were making their intermediate term budgets, they were counting on federal risk corridor money to cover any losses that they had. Those losses could be intentional losses as they priced low to buy market share in the first few years to cover the infrastructure and start up costs of a new insurance company. The losses could also be unintentional if they were covering more sick people than they projected. More likely, the losses were a combination of the two.

    I will have to read more of the stories about this when I have more time, but there seems to be a huge problem here if some co-ops knew that they could not be financially viable.

  19. 19
    Miss Bianca says:

    @Goblue72:

    Yeah, but the sad $64,000 question is, how do we dismantle the demonization of the Democrats that has led to one-party control in rural areas? Or how do we channel populist rage into liberal political action? I know I’m outraged by the BS I see going on, but apparently I’m not as outraged – or effective in my outrage – as the RWNJs. I don”t know the answer. I wish I did.

  20. 20
    Brachiator says:

    @Mnemosyne (tablet):

    Since I live in a state that has a successful and thriving nonprofit system (Kaiser Permanente), I think it’s way premature to claim that the only possible way to run a healthcare system is to make it for-profit, particularly since every other industrialized country in the world has figured out how to do it.

    Most industrialized countries have universal health care systems, but they are not necessarily all non-profit.

  21. 21
    goblue72 says:

    @Miss Bianca: I don’t know either. I only know that sticking our head in the sand doesn’t work – contrary to what the poster above suggested was “epic level of stupid.”

  22. 22
    Bokonn says:

    @Lee:

    Tell us something new about how Dems have gotten pwned at the state level.

    Some day, maybe 25 years from now, somebody will connect the dots and write a definitive study of how the Republicans set out to break the Democrats as an organization at the local, state and national levels during the mid 1990s. And a lot of it will likely focus on the money. The GOP erected a funding juggernaut that gave their candidates a huge advantage in most races. If you control the airwaves and the newspapers and the Internet, you can control the messaging and define the issues (and starve the Democrats of exposure, while beating them to death with attacks from all sides with PACs and independent groups).

    While building up their own infrastructure of funding bases and PACs, the GOP also took great pains to defund the Democrats, They aggressively demanded that donors chose their friends and that donors ONLY provide their campaign donations to the GOP … if they wanted any legislative action at all (and didn’t want to get punished).

    Some of that punishment that the GOP handed out was intense and remarkably focused. I was there. I experienced it personally.

    Once the GOP created those advantages, they have kept using them to maintain their electoral dominance. This was the underpinnings of Karl Rove’s talk about creating a “permanent Republican majority,” or Tom Delay’s talk about cutting the nuts off the Democrats for good, and letting them wander around as a neutered farm animal, to be ignored and pushed around as the GOP saw fit.

    And this is PRECISELY why Obama’s election and Obama’s methods represented such a threat. It is PRECISELY why the Kochs and other major donors have been pouring hundreds of millions of dollars into the GOP’s machine to try and keep its dominant position. Because they are scared of having all this reverse …

  23. 23
    Richard mayhew says:

    @Brachiator: they were viable if the law had not changed on them two years in.

  24. 24
    Brachiator says:

    @Richard mayhew:

    they were viable if the law had not changed on them two years in.

    Yeah. See that now (I think). Had to read the article (and will have to go back and read it again). Good material you linked to.

    In practical terms, are there good plans available to CO residents and others, and can they find out about them easily enough during the next sign up window?

  25. 25

    @Brachiator:

    I’d be curious to know which countries you’re thinking of. Many of them have aspects that are run by private insurance companies (such as Germany, Japan, and Switzerland) but I’ve always heard that those companies are tightly regulated and basic insurance is required to be nonprofit. They are allowed to make small, regulated profits on things like supplemental insurance, but not on the basic stuff that makes up universal healthcare.

  26. 26

    @Miss Bianca:

    I honestly wish I knew. We really need to break down the crabs in a bucket mentality that says that if X group is getting something, we need to stop them from getting it rather than extending it to everyone else. For some reason, a lot of people in rural and exurban areas seem to think everyone else is getting stuff they don’t have and, rather than demanding equal treatment, they want those other people to not get that stuff at all. It’s so weird to me that I just can’t comprehend it — wouldn’t it be better to get the government to improve rural healthcare rather than to make healthcare worse for everyone else just so you don’t feel bad about having crappy healthcare?

  27. 27
    Arclite says:

    Hawaii is going to close its ACA exchange and let the Feds run it. Hawaii already had one of the most progressive insurance laws on the books: employers must provide insurance for any employee working more than 18 hours a week. So the HI exchange only got 10K applicants, not enough to be sustainable.

  28. 28
    Miss Bianca says:

    @Mnemosyne (iPhone):

    Are we leaving out the Elephant of Color in the room? White rural folks have been fed so long with the pernicious BS of “the blahs” are the ones getting all the govt. “handouts”. Until economics and the notion of a commonwealth trump racism in our lizard brains out here, I despair. There’s such a toxicly illogical mix of “I’ve got mine, FU”, and “My granddaddy ate dirt, dirt was good enough for him! And he didn’t get no govt. handouts!” – except, of course, for the Homestead Act, grazing rights on federal lands, etc. Honestly, Western states remind me of teenagers – “I hate you, Big Nanny State! I hope you die! Wait, I still get my allowance, right?”.

  29. 29

    […] to the private option.  Republicans saw to it that the co ops would be fragile, at best; see Richard Mayhew for an explanation. Since some co ops are failing, Republicans are trying to kill the entire […]

  30. 30
    Brachiator says:

    @Mnemosyne (iPhone):

    I’d be curious to know which countries you’re thinking of…

    This was part of a 2008 article about the German health care system:

    But even though her insurance covers the kids, it doesn’t cover her husband. Because Chris Ertl is self-employed, he has to buy insurance on his own, from a for-profit insurance company.

    About one in 10 Germans buy this so-called “private” coverage. It’s not just for people who are self-employed. Civil servants and anyone who makes more than $72,000 a year can opt out of the main system. It’s a kind of safety valve for people who want more and can pay for it.

    I don’t know what changes have been made in the system since then.

    And yes, there is tighter regulation, etc.

    There was also this on hospitals in Germany:

    All in all, there are more than 2000 hospitals in Germany. About half the hospitals in Germany are public, with about 30 of them being university clinics. One third of the clinics are private but non-profit, while the other hospitals in Germany are for-profit clinics. Their numbers are increasing.

    Mainly non-profit, with some small but increasing number of for-profit institutions.

  31. 31
    rikyrah says:

    Thanks for the explanation.

  32. 32
    Nastybrutishntall says:

    Thank you, Richard!

  33. 33

    […] I mentioned yesterday, the quality of insurance company reserves matters a lot to state regulators.  So let’s talk […]

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  1. […] I mentioned yesterday, the quality of insurance company reserves matters a lot to state regulators.  So let’s talk […]

  2. […] to the private option.  Republicans saw to it that the co ops would be fragile, at best; see Richard Mayhew for an explanation. Since some co ops are failing, Republicans are trying to kill the entire […]

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