Health Insurance Co-ops Detail Growing Pains

Insurance cooperatives face daunting startup challenges, from market forces to federal and state regulations. A Co-op in Iowa has already succumbed to financial and political pressure.

Building a health insurance carrier from scratch is risky business.

The rapid financial collapse of CoOportunity Health, an Iowa-based insurance cooperative launched last year, highlights the growing pains being experienced at nearly two dozen federally financed co-ops across the country.

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

Iowa insurance officials say two factors unraveled CoOportunity's finances: higher-than-expected utilization costs among the cooperative's exchange beneficiaries and an accounting switch Congress initiated in December that stripped $81 million from the co-op's balance sheet.

Officials at cooperatives in Connecticut, Maine, and Tennessee say that though their finances are sound, a broad set of challenges exists. Among them: basic insurance-carrier startup steps such as hiring experienced staff and coping with explosive beneficiary growth over short timeframes.

Acting in concert with regulators on Jan. 15, Knoxville, TN-based Community Health Alliance froze enrollment in its health plans offered in Tennessee. CHA officials say they reached the bounds of the cooperative's ability to serve beneficiaries this year.

"The challenges are not unlike any organization where growth has to be managed to offer continued high-touch, consumer-focused service to members," they say. "Growth has to happen over time and within capacity."

CHA does not anticipate having to freeze enrollment again during next year's HIX open enrollment season, and said future exchange enrollment surges will be difficult to predict. "[Exchange] consumers will become more savvy as the environment matures, and there may be periodic enrollment spikes as the overall health insurance market, including employer-based health plans, evolve."

Connecticut Co-op Adapts to Market Forces
Ken Lalime, CEO of Wallingford, CT-based HealthyCT, says the Connecticut cooperative had a key staffing advantage over its counterparts in other states, but has still faced several startup obstacles.

"We're very fortunate to be in Connecticut, the 'insurance capital of the world,' giving us access to a large pool of very experienced leaders and staff with the passion for driving change in our industry," Lalime says.

HealthyCT managed to overcome those early challenges while dealing with frequent and significant changes in healthcare mandates at the state and federal levels, he says.

Among the difficulties: lack of historical data for rate setting, and the extremely fast pace required to get HCT up and running for [HIX open enrollment on] October 1, 2013.

But its "greatest challenge has been breaking into a very mature market dominated by large, well-known carriers and driven largely by price," Lalime says.

"Starting out, it can be difficult to negotiate contracts in an industry favoring volume-based discounts. Because we couldn't compete on price at the outset, we built our business plan around other factors. We put more resources where we expected higher enrollments but we didn't exclude the rest of our small state. We created partnerships with high-volume brokers who welcomed a new choice for their clients, and we connected with other nonprofits and small businesses. We offered products both on and off the Connecticut exchange and, in early 2014, we expanded into the large group market, which offers the greatest opportunity for growth."

In Maine, Challenges on Multiple Fronts
Kevin Lewis, CEO of Lewiston, ME-based Maine Community Health Options, says MCHO's challenges have ranged from common startup obstacles to thorny problems that are unique to PPACA cooperatives.

"In the very early going, there were challenges in terms of staff recruitment," Lewis said of summer 2012. "We were two people in the very beginning."

Securing enough financing to cope with beneficiary growth and federally mandated financial reserve levels has vexed cooperative officials across the country, including at MCHO and CHA in Tennessee. co-ops are federally mandated to maintain a relatively high risk-based capital ratio: 500% as compared to the 300% RBC ratio set for health insurance carriers in many state.

Lewis says accessing third-party capital for MCHO required significant effort. "We couldn't use the federal financing for marketing," he said of the first HIX open enrollment period in fall 2013. But "we were able to meet the challenge."

MCHO drew third-party financing from several sources, including a loan for office equipment purchases from the cooperative's banking partner, Cleveland, OH-based Key Bank. "It was uncollateralized except for the equipment itself," Lewis says. "They definitely took a stake in our success."

Financing is a challenge for all of the PPACA-spawned cooperatives. "The lack of significant, established capital and capital investors may possibly be the largest difference in structure [the cooperatives] face versus traditional commercial health plans," CHA officials say.

While higher-than-expected beneficiary growth last year created call center capacity challenges and prompted MCHO to secure $64.8 million in federal solvency funding to maintain regulator-mandated reserve levels in future years, Lewis says the Maine-based cooperative “has been in the black since Day One.” He also noted that having 40,000 beneficiaries in 2014 as opposed to the 15,000 the cooperative had forecast became a major strong point. "The greater membership smoothed the utilization rates across the entire [beneficiary] pool."

Casualty of PPACA Political Battle
CoOportunity is the first major casualty in the post-midterm election struggle over the PPACA in Washington, a legal analyst at New York-based Wolters Kluwer Law and Business says.

Kathryn Beard, JD, says Republican lawmakers nixed HIX risk corridor payments as an asset for exchange carriers to whittle away at the PPACA. "This provision was included in the Consolidated and Further Continuing Appropriations Act of 2015 for two reasons, to damage the Affordable Care Act, and to push back against the Obama administration's use of executive action and rulemaking."

Beard says HIX risk-corridor payments have become a political football. "Although… the [PPACA] required the establishment of a temporary risk corridor program, no funding source was specified for the program… The appropriations bill for FY 2014 contained language that would have allowed use of other funding for the risk-corridor program, but no payments were received during that year."

"President Obama's FY 2015 budget proposal included a provision to use the CMS Program Management account to make risk-corridor program payments. ACA opponents Rep. Fred Upton (R-MI) and Sen. Jeff Sessions (R-AL) accused the Obama administration of 'circumventing Congress and seeking to write its own laws' for this plan, which they referred to as an Executive attempt to make appropriations. Therefore, the FY 2015 appropriations bill contains different language from 2014, ensuring that the president's proposal would not go into effect."

Beard says the loss of risk-corridor payments as an asset has implications for any carrier operating on the exchanges that has priced health plan products too low for the market conditions. "The lack of funding for the risk-corridor program will be a problem for any co-op or carrier that, like CoOportunity, offered qualified health plans on the [exchanges] at a lower price than other insurers. The low cost of CoOportunity’s plans resulted in more enrollees, and a more costly, sicker pool of enrollees than anticipated."

Rep. Upton and Sen. Sessions did not immediately respond to requests for comment.