Financial Collapse of Insurance Co-op Could Cost $145.3 Million

One of the fledgling insurance cooperatives developed under the healthcare reform law has taken a financially fatal turn in Iowa. Now the repayment of solvency and start-up loans to CMS may be in peril.

The death knell has sounded for CoOportunity Health.

With a liquidation petition filed last week, the Des Moines, IA-based health insurance carrier is destined to become the first financial failure among the nearly two dozen cooperatives launched simultaneously last year with the Patient Protection and Affordable Care Act exchanges.

In a statement announcing the liquidation petition, Iowa Insurance Division (IID) officials said CoOportunity is insolvent and beyond rehabilitation. Iowa Commissioner Nick Gerhart, who obtained a court order placing the company into rehabilitation in late December, concluded that "further efforts to rehabilitate the company would be futile."

CoOportunity's demise could cost taxpayers at least $145.3 million, money the Centers for Medicare & Medicaid Services gave the cooperative in start-up loans beginning in 2012 and a $32.7 million "solvency funding" loan awarded on Sept. 26, according to federal records.

CMS also provided $15.4 million last year to help cover the cash-starved cooperative's operational costs, according to the petition for rehabilitation filed in December.

Operational losses are continuing at CoOportunity, and liabilities exceed assets by at least $48 million. "It is difficult to predict if there will be sufficient funds to repay solvency and start-up loans from CMS," IID officials said via email on Friday.

In addition to CoOportunity, five other PPACA cooperatives received solvency loans in the fall, according to CMS:

Cooperatives Weathering Start-Up Storm
Officials at three of the five cooperatives that received solvency loans say their organizations are now financially sound. Officials at the Kentucky Health Cooperative did not respond in time for publication.

HealthyCT CEO Ken Lalime said HCT applied for solvency funding in the summer to ensure the cooperative had adequate reserves. "HealthyCT took advantage of the opportunity to acquire an additional solvency funding of $48 million to further strengthen our financial position and to reduce the risk of not meeting established requirements. As a new entrant in the Connecticut health insurance market, the fund fortifies our capital position and ensures that adequate capital is on hand in the remote chance that losses could jeopardize HCT's financial stability," Lalime said Sunday.

Kevin Lewis, CEO of Maine Community Health Options, said MCHO applied for solvency funding in June to help finance reserves and expenses linked to beneficiary growth.

"MCHO received an additional solvency award to support our growth as well as expansion into New Hampshire… Health insurers need to maintain a risk-based capital (RBC) ratio with plenty of reserves to cover unexpected liabilities arising from the membership… CO-OPs are held to an even higher standard, with an RBC requirement set by CMS at 500% as opposed to 300% in most states… This solvency funding is for upcoming growth, not present need," Lewis said Saturday.

Melissa Duffy, chief strategy officer at Common Ground Healthcare Cooperative, said CGHC has faced challenges but is highly unlikely to follow CoOportunity into the financial abyss.

"The CO-OP program always envisioned additional loans and adjustments in light of updated business plans and [actuarial] projections. Unfortunately, quite a bit of funding was cut from the program after [start-up] loans were granted, which made this more difficult. CGHC has exceeded its projections, not dramatically like Iowa, but enough that it was prudent for us to request additional solvency," Duffy said Saturday.

Health Republic officials say they are confident about the cooperative's finances. "With decades of experience in the health insurance industry, Health Republic's executive leadership has made prudent business decisions along every step of the way, including negotiating lower-cost services, diversifying our commercial business lines, and securing affordable rates that allow us to maintain solid financial footing," they said in an email Sunday.

Utilization Costs, Accounting Switch Crush Cooperative
IID officials say a pair of factors collapsed CoOportunity's finances: higher-than-expected beneficiary utilization of healthcare services and an act of Congress that changed the accounting standards for HIX risk corridors, which is part of a CMS program that protects carriers from risks associated with operating on the exchanges.

Last year, CoOportunity sustained a net loss of $45.7 million between Jan. 1 and Oct. 31, according to court records. IID officials say a preliminary examination of CoOportunity's healthcare service claims indicates that several factors drove utilization costs beyond the limits of the cooperative's actuarial projections.

"While we are still investigating the cause, some items we have noticed are high incidence of HIV/AIDS patients enrolled with CoOportunity Health, with very high medical costs due to high-cost medications and frequency of other conditions, including hepatitis C. Sovaldi as a course of treatment for hepatitis C costs approximately $85,000," the IID officials said, adding there was also a "high incidence of transplants, which are very high-cost procedures."

IID says CoOportunity appears to have been over exposed to one of the primary risks that face insurance carriers operating on the new exchanges: "Pent up demand for services for people who had not had insurance coverage."

An act of Congress in early December pushed CoOportunity over the financial edge, according to the liquidation petition filed last week: "The [PPACA] provides three risk-spreading mechanisms to address risk pool issues by limiting the amount an insurance company can lose by participating in the [PPACA exchanges].

These mechanisms are

• Risk corridors
• Risk adjustment
• Reinsurance

Payments from the Three R's have been treated as assets of CoOportunity. However, on December 13, 2014, when Congress adopted the Consolidated and Further Continuing Appropriations Act of 2015, a provision of the Act placed in jeopardy the projected risk corridor asset. CoOportunity estimates the potential loss of assets attributable to the risk corridors to be approximately $81 million dollars."

The risk-corridor accounting switch prompted the rapid unraveling of CoOportunity's finances, according to IID and court records. On Dec. 16, CMS advised CoOportunity and Gerhart that the federal agency would not be providing further financial assistance. That day, Gerhart declared the cooperative in a "hazardous financial condition" and placed CoOportunity under a supervision order.

A week later, the insurance commissioner petitioned for rehabilitation. The petition to liquidate the cooperative was filed less than two months after the risk-corridor accounting switch in Congress.

To avoid an interruption in services, the cooperative's 96,000 beneficiaries in Iowa and Nebraska have until Feb. 28 to enroll in a new HIX health plan, according to IID. A special enrollment period for CoOportunity beneficiaries also has been set for March 1 to April 29.

John Hunter, a lawyer for Brown, Winick, Graves, Gross, Baskerville and Schoenebaum PLC, the Des Moines-based law firm representing CoOportunity, declined to comment for this report.