Health Republic of New York — the nation’s largest Consumer Operated and Oriented Plan (CO-OP) created and funded by the Affordable Care Act (ACA) to sell health insurance on the public exchanges — has failed, leaving 200,000-plus customers to find new coverage for 2016. But there is debate about what this means for the overall program, with some saying the New York CO-OP’s closure does not spell disaster for other CO-OPs while others point to inherent weaknesses among all such insurers brought on by funding issues and lack of branding potential.

To date four CO-OPs out of a total of 23 have met their end. Nevada Health shut at the end of August blaming “challenging market conditions.” Before that, CoOportunity Health, Inc. in Iowa and Nebraska and the Louisiana Health Cooperative, Inc. said they could no longer operate and would not be selling plans for next year. And a July 30 report by the HHS Office of Inspector General said 21 of the 23 CO-OPs were losing money, with 13 falling short of enrollment goals and some possibly unable to pay back $2.4 billion in aggregate government loans. The report cited as a glaring example the weak enrollment for the CO-OP in Arizona, which signed up 869 people, versus a target of 24,000 for 2015.

Why the bad performances? Deep Banerjee, an associate director at Standard & Poor’s, tells AIS it is all about high startup costs and an inability to scale up their businesses. “The legacy companies have much bigger scale,” he says. “But the key is pricing. If you don’t price risk appropriately you have a limited amount of time to get to profitability.” These factors, combined with low access to external funding, make it hard on CO-OPs.

Deborah Chollet, Ph.D., fellow at Mathematica Policy Research, says this is tough stuff, reimagining health insurance for a new marketplace where much was unknown about the type of customers that would come into the exchanges. “It’s been a very, very long time since we’ve seen a new plan enter any marketplace. When a plan enters a marketplace, let’s say UnitedHealthcare goes into a market, they don’t go in cold. They go in by buying what would have been a competitor. They do it by acquisition. They don’t just walk in and open a storefront as a new player. It hasn’t happened that way in at least a decade. Probably 20-25 years. So to some extent, despite the fact the ACA attempted to fund these plans, it set them up in an environment that no commercial insurer has succeeded in for decades.”

And it is ultimately about the ability to get your name known. “UnitedHealthcare is a good example of this because for many years they did not rebrand plans they purchased. The owner changed but nothing that the consumer ever saw, whether a current policyholder or prospective policyholder. Nothing changed. So if it was called Physicians Health Plan and UnitedHealthcare bought it, it remained Physicians Health Plan and that went on for many, many years. It is only since the ACA that UnitedHealthcare decided to rebrand. It is a very different model that we have seen play out over the years and the CO-OPs were set up to do very differently.”

Against this backdrop of gloom stands Martin Hickey, M.D., CEO of New Mexico Health Connection. He tells AIS he does not expect more shutdowns across the CO-OP landscape, although he admits the New York closure came as a surprise to him. He contends that every CO-OP is unique, and for New Mexico Health Connection “it’s blue skies ahead,” Hickey says.

The New Mexico CO-OP said it earned $22.7 million in premiums and paid out $19.5 million in claims for the individual market in 2014, according to filings submitted to the National Association of Insurance Commissioners (NAIC). The insurer’s medical loss ratio (MLR) for this segment was 86% and total lives covered stood at 7,704. On the group side, which came mostly from small-group sales, the CO-OP told NAIC it collected $8.2 million in premiums and paid out $5.3 million in claims for a very low 64.7% MLR on 6,593 lives covered.

In total, for year-ended 2014, the insurer covered 14,297 people, with an MLR of 80.3% and collected $30.9 million in premiums versus paying out $24.8 million in claims. It counted $58 million in total assets.

“Honestly, this sounds like propaganda but it’s not. I couldn’t be happier and I will tell you why,” Hickey says. “Last year at this time we had about 10,000 members and today as we speak we have 35,000. Open enrollment starts in a month and Blue Cross Blue Shield of New Mexico, a subsidiary of of Health Care Service Corp., had wanted a 50% to 71% rate increase but the superintendent only allowed 24% on the individual exchange so they pulled out.” This leaves the Blues plan’s 50,000 lives on the individual exchange for the taking and Hickey expects to enroll the vast majority of those, considering his insurer shares similar provider networks. Large gains could push the CO-OP’s enrollment over the 50% market share threshold and give it between 70,000 and 90,000 lives come March 2016 when open enrollment ends.

When it comes to the performance of the CO-OPs, he urges observers to put the broader picture in perspective. “We lost money our first year obviously, because you have a lot of fixed costs getting a health plan off the ground. And we didn’t have a lot of volume. This year we are still not at the volume where you get to break even, so we’ll show a loss this year. But next year we will show a healthy profit,” he says.

“The first thing is whoever put out this expectation that CO-OPs would make money before year three does not understand business or startups. I mean hello, what startup makes money in the first couple of years? At the end of the first year, 50% fail. And we haven’t had 50% failure. So that is No. 1.”

His second point is that New Mexico’s unique economic situation has actually aided his CO-OP. “A lot of the CO-OPs last year, while there was still government money, got supplemental money to help them through adverse selection because there was a lot of that pent up demand,” Hickey continues.
But a quirk in his state, which has an very high number of low-income residents, left the CO-OP with additional funding from the start.

“If you look at the Robert Wood Johnson health risk profile, we are at the bottom. So, the program, when giving out loans, said normally we would give you about $33 million for solvency but because you are so sick we are going to give you $64 million. Great. So, literally up until last week because we had to pay off this malfunctioning risk adjustment to Blue Cross through a government formula, we had not touched a penny of that loan,” he says. Also, he says the New Mexico CO-OP does not offer PPO products, only HMOs, and none are on the platinum level where many of the sickest lives seek coverage.

For CO-OPs that failed, the circumstances are not the same. For instance, Hickey says the Iowa and Nebraska CO-OPs suffered because they took on too many sick lives, including Medicaid beneficiaries that ballooned enrollment and harpooned the balance sheet.

As for the notion that CO-OPs cannot raise outside money, he says that it is not easy but possible, if CMS gets in gear.

“I literally have 10 investment groups, mostly community benefit investors, looking for long-term returns in the 2% to 4% range. They keep asking to invest and would like to invest, but they get the sense the feds can’t figure out how to approve it,” Hickey says. He says recent CMS guidance may make it easier, but there needs to be a lot more clarification on rules and regulations before it can be achieved.

Other than investors, creative financing is also available through the workings of reinsurance, he says, refusing to get too detailed. “Everyone has their own little thing.”

Excerpted from the 10/5/15 issue of AIS’s Health Plan Week.

© 2015 by Atlantic Information Services, Inc.