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Health Insurance CO-OPs Fail… at Gaming the System

The opinions expressed by columnists are their own and do not necessarily represent the views of

Obamacare health insurance cooperatives are falling by the wayside like drunken ice skaters on a frozen pond. Four health insurance CO-OPs failed just this past week. Health cooperatives in Oregon, Colorado, Tennessee and Kentucky have either announced the decision to wind down operations or have been forced to stop writing policies. In July and August, the Louisiana Health Cooperative and the CO-OP in Nevada, announced they will both close their doors in 2015. In September, Health Republic of New York bought the farm. These recent examples come after the spectacular failure of Iowa-based CoOportunity Health earlier this year. That adds up to eight of 23 health insurance cooperatives that have collapsed in 2015! A ninth CO-OP in Vermont failed to even get off the ground and was disbanded in 2013.


Consumer Operated and Oriented Health Plans (CO-OPs) as they are officially called, were intended to function as a so-called “public plan option” under Obamacare. I predicted CO-OPs’ demise in testimony before the House Committee on Oversight and Government Reform subcommittee on health back in February 2014. As an economist, I knew CO-OPs’ only reason to exist was political. They were established to gain the support of liberal progressives, who really wanted a government health insurer to replace the private health insurance industry. Progressives lobbied for a public plan because they believe for-profit insurers have high overhead, greedy shareholders and other expenses which would be better spent on health care. CO-OP proponents naïvely believed that health insurance CO-OPs would out-compete for-profit insurers because CO-OPs ostensibly do not have a profit motive. However, even nonprofit health insurers have to earn a profit eventually, or they face bankruptcy just like for-profit insurers.

From the start, the CO-OP program was plagued by numerous flaws. When CO-OPs were established, they had no customers and no historical actuarial data to assist in setting realistic plan premiums. The pool of potential enrollees were sicker than average, and CO-OPs had virtually no access to the capital markets to shore up losses; start-up costs and solvency reserves were borrowed from the government. To date, the government has lent CO-OPs approximately $2.4 billion. Virtually all the CO-OPs are losing money and have burned through their solvency reserves. The eight CO-OPs that have failed so far in 2015 owe taxpayer nearly $1 billion in loans that will never be repaid.


Some CO-OPs appear to be purposely underpricing premiums to gain market share, assuming taxpayers would bail out their losses. CoOportunity Health (Iowa and Nebraska) and Health Republic of New York both exceeded their enrollment projections by large multiples by underpricing premiums. The latest failures illustrate how CO-OP executives assumed government bailout money was unlimited. To date, every failed CO-OP points to the lack of taxpayer bailouts as the source of its failure.

When Obamacare was being developed, Congress established a risk-sharing provision in the Affordable Care Act, called Risk Corridors, to help health plans manage losses. Risk Corridors is a temporary risk-spreading program, made up of funds collected from fees and taxes on all insurers. It was intended to help offset the initial losses a few firms were expected to suffer. However, the risk-sharing provision is required to be budget neutral and the number of firms suffering losses is greater than the fees available to be shared. In October the U.S. Department of Health and Human Services, which oversees the program, announced payouts from the Risk Corridors program would amount to just 13 percent of what insurance carriers hoped to receive to offset some of their losses. At that point, the reality became clear that subsidies available to CO-OPs who lost money were not open-ended. Furthermore, taxpayers were not on the hook for CO-OPs’ risky strategies.


From the beginning, the strategy for many CO-OP executives was to purposely set artificially-low rates to gain market share, expecting taxpayers would bail out their losses. This blatant attempt at “gaming the system” should not be allowed, but it appears to be a common strategy among health insurance CO-OPs.

The failure of eight health insurance cooperatives in 2015 should serve as a wakeup call. Going into open enrollment for 2016, state insurance regulators and other government regulatory bodies need to be on the look-out for CO-OPs that employ strategic plans premised on losing money while gaining market share. CO-OPs’ executives are on notice that taxpayers will not bail them out again. Unfortunately, these won’t be the last CO-OPs that go broke owing taxpayers large sums of money. This strategy will likely play out again and again until the remaining CO-OP health insurers lose all their taxpayer financing and go bankrupt.

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