Why Health Co-Ops Are Closing in So Many States

Co-ops were created to keep the cost of insurance down on Obamacare marketplaces. Now half of them are going out of business.
by | November 3, 2015
Members of Colorado's health-care co-op encourage the public to get insured in Denver. (AP/Brennan Linsley)

Health-care co-ops had the odds stacked against them from the beginning.

They were created by President Obama's health law as a public, non-profit alternative to major insurance companies to keep premium prices down and prevent monopolies in the marketplace. Each state was supposed to have its own co-op, but because of limited funds, only 23 launched. And not only has Obamacare itself been under attack for years, the co-ops were killed and revived several times during the fiscal cliff talks and sequestration budgets in 2013.

Fast forward two years, and things still aren’t going well.

Almost half of the 23 health-care co-ops that opened with the health insurance exchanges in 2013 have already or plan to close in the coming months. That leaves about 500,000 people -- in places like KentuckyIowaNew YorkNevada and Tennessee -- who have to find a new health insurer for 2016 and may end up paying higher premiums.

This is more problematic in some states, like South Carolina and Louisiana, that already have fewer options for insurance. The closures also hurt rural areas particularly hard because co-ops exist specifically to serve harder-to-reach populations that aren't as likely to have employer-based insurance.

Short for "consumer operated and oriented plan," health-care co-ops are non-profit entities run by volunteer planholders who are usually well-versed in business and health policy and call the shots on benefits.

Much of their failure is due to recent federal cuts to the risk-corridor program, which gives co-ops some financial padding to help keep premiums down.

“It was assumed that the people who were signing up in the state exchanges at the beginning were people who were uninsured but knew they needed to go to the doctor -- the sickest and the frailest," said Shana Alex Charles, an assistant professor at University of California, Fullerton and a health policy expert. "Those are the people who end up driving health costs up,”  and that's where the risk-corridor money came to the rescue.

But the Centers for Medicare and Medicaid Services (CMS) announced last month that it would only honor 12.6 percent of co-ops' requested risk-corridor payments this year. For example, Kentucky Health Cooperative, which announced last month that it will close at the end of the year, requested $77 million but only got $9.7 million. CMS didn't give a reason for the smaller-than-promised payments.

 

Beyond the cuts to the risk-corridor program, there were many provisions written in from the beginning that made it hard for co-ops to thrive. Any surplus funding, for example, could only be used in three ways: to reduce premiums, improve benefits and/or improve quality of care.

“We had so many more obligations that private insurers don’t have," said Dawn Bonder, CEO of Health Republic, Oregon’s soon-to-close co-op. "We weren’t allow to use money to market ourselves. To be a new entrant in the health-care space is difficult enough, but to be a new entrant during a sweeping public policy change adds another layer of issues.”

After learning that her co-op would only get 12.6 percent of its requested risk-corridor funds, Bonder had a tough decision to make.

“We’d be going off a prayer that things would shake out in the end, and if they didn’t, then we’d have to close in the middle of a plan year. So we decided that it would just be best to close early,” she said.

Some of the closing co-ops will be offering coverage through the end of the year, but all members must shop for new insurance during open enrollment, which started Nov. 1.

Last week, Health and Human Services Secretary Sylvia Mathews Burwell said the administration is “exploring options” about the next steps for the surviving co-ops but didn't elaborate more than that.

There's hope, though, that this isn't the end for all.

“My hunch is they will try to reallocate funds," said Charles. "The Obama administration really does want this to work, and I think they’ll do something to make sure all 23 don’t go down."