In late May, the CEO of an Obamacare health cooperative in Connecticut was downright bullish on the future, telling a New Hampshire newspaper, “We’re very viable.” Six weeks later, HealthyCT is on the way out the door.
On Friday, an Oregon co-op followed suit, joining the growing list of Affordable Care Act failures. Once envisioned as low-cost alternatives to private insurance that would operate in all 50 states with billions of dollars in federal loans, 14 of the original 23 co-ops will remain after the Connecticut and Oregon co-ops wind down.
“This is sad but predictable. This one was just next in a line of dominoes. It’s not looking good for the rest of them, either.”
“This is sad but predictable,” said Zachary Janowski, a spokesman for a Connecticut-based think tank called the Yankee Institute for Public Policy. “This one was just next in a line of dominoes. It’s not looking good for the rest of them, either.”
To Obamcare critics, the problems with co-ops are just one symptom of an unworkable law.
“It’s just another of many things where they [lawmakers and government officials] decided they were smarter than markets,” said Grace-Marie Turner, president of the Galen Institute, which advocate free market health reforms.
The proximate cause of HealthyCT’s failure is a $13.4 million “risk adjustment” payment it owed to the federal government under the regulations imposed by the Affordable Care Act. The law mandates that insurers within the same network have roughly similar customer pools. This is to prevent some companies from getting stuck with older, sicker customers who are costlier to insure. The hit prompted Connecticut regulators to freeze operations, forcing 40,000 customers to seek new coverage once their current policies expire.
The Department of Health and Human Services applies a complex formula to make that assessment and then transfers money from insurers with cheaper, healthier customers to those with more expensive, sicker customers. But some insurers have cried foul over how the government assesses customer pools.
Ed Haislmaier, a health care expert at The Heritage Foundation, said the companies have a point. In general, he said, the risk adjustment payments have hit co-ops and small insurance companies harder.
“They tend to be more vulnerable,” he said.
Problems with Government’s Formula
Haislmaier said he and a colleague are working on an analysis of the issue. While it is too early to make definitive conclusions, he said, the way “it has been designed and executed by HHS, there are indications it’s not working … We’re seeing enough anomalies in the data to indicate that.”
Haislmaier said that in the individual health insurance market, 15 companies had to pay penalties despite having a loss ratio of greater 116 percent, meaning that for every $1 they collected in premiums, they paid out $1.16 in claims. Yet those companies had to pay an average risk adjustment penalty of 7.7 percent of their premiums.
“Why?” he asked.
Haislmaier said one would not expect a company with a loss ratio that high to be paying a penalty. When a company pays more in claims than it collects in premiums, that is a sign that the customer pool is less healthy than average. But he added that he has not done enough research to prove that. Perhaps, companies do have healthier-than-normal customers and simply have been mismanaged.
But the sheer number of anomalies seems to make that unlikely, Haislmaier said. He pointed to examples in the other direction, too. The LifeWise Plan of Oregon, an affiliate of Premera Blue Cross, had a loss ratio of 68 percent, meaning that it collected $1 in premiums for every 68 cents that it paid out in claims. That suggests a healthy customer pool, Haislmaier said. Yet, the company actually received a risk adjustment payment of 1.4 percent of claims.
[lz_table title=”Obamacare Co-op Failures” source=”Centers for Medicare and Medicaid Services”]Co-ops in these states have failed after getting federal loans
Oregon (2nd co-op),$56.7M
“This isn’t making any sense,” he said.
But Turner, of the Galen Institute, said the problems experienced by the health co-ops go far beyond technical glitches in the risk adjustment formula. She said the co-ops launched without executives knowledgeable about the insurance industry and set prices either too low to break even or too high to attract customers.
“They are all struggling,” she said. “It was a flawed concept from the beginning, and it’s not getting any better. A lot of them did not know what they were doing … It seems to me, they were really just doing target-shooting with their pricing.”
Turner said insurance companies are also laboring under the regulations imposed by the Affordable Care Act. For instance, she said, customers have figured out that they can sign up for an insurance plan on the government’s health care marketplace and stop paying premiums for the last three months. Under federal law, insurance companies cannot drop them, and those customers can simply sign up again without penalty during the next open-enrollment period.
“People are figuring out how to game the system,” she said.
Some critics of the Affordable Care Act have suggested that it was designed to fail to pave the way for what liberals truly want — a completely government-run health care system. Indeed, both the Hillary Clinton campaign and the proposed Democratic Party platform call for moving the health care system in that direction.
But Haislmaier said he believes neither a universal health system nor a full repeal of Obamacare are likely.
“The Left wants to go to strongly to single payer,” he said. “They won’t get there because they won’t be able to sell the tax increases.”
Incremental reform is more likely, Haislmaier said. For instance, the current law prohibits insurance companies from charging older customers greater than three times more for insurance that younger people. That means insurance companies have to charge young adults more than they should be paying to subsidize older Americans, he said. And the result of that is a lower participation rate among the younger and healthier Americans needed to balance the customer pool.
Haislmaier there is no reason why a bipartisan proposal could not come together to change that.
“The issue in Congress is: Can you start incrementally reforming this in a way that Republicans can claim they are replacing Obamacare and Democrats can claim they’re fixing it?” he said.
Tuner said that if liberals thought Obamacare would be a stepping stone to government-run health care, they miscalculated. She said the experience of Obamacare has discredited government involvement in the health system.
“I honestly think they’ve shot themselves in the foot if that, in fact, was their agenda,” she said.