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Perfect storm blamed for closure of niche insurance companies

A perfect storm involving poor policy, partisan politics, and bad business decisions is being blamed for the shuttering of most of a group of niche health insurers set up following the passing of the Affordable Care Act (ACA).

Only seven of the 23 original consumer operated and oriented plans (co-ops) are now operating following the demise of four in recent weeks, including Land of Lincoln Health in Illinois last Thursday.

Four of those remaining are under the enhanced supervision of the federal government, meaning they are in serious financial difficulty. Outstanding loans provided to the closed businesses, to help with start up costs, amount to just over $1.2 billion.

As experts sift the wreckage of the shuttered businesses — which offered plans designed for those not covered through their work, and for small employers — there are divergent views as to what exactly happened, and who is to blame.

“There is no one single reason for the failures of so many co-ops,” said Sabrina Corlette, of the Georgetown University-based Center on Health Insurance Reform (CHIR). “But in many respects these small companies were set up to fail. This is not really a story about one thing, but a perfect storm of multiple things.”

Policy decisions by President Obama, changes by Congress — mainly by Republicans — and business decisions by companies selling the plans through the state exchanges all contributed to the demise of so many, Corlette said.

Start up funding was curtailed, the companies could not use federal money for marketing, and were barred from competing in the larger corporate or government markets, Corlette said. 

While companies operating the plans blame the federal government, and Congress, for failing to provide the funds to cushion their introduction to the insurance markets, others say the businesses made bad strategic decisions based on the promise of a back stop from Washington.

The companies wanted market share and under priced their plans in order to snare it, said Tom Considine, chief executive officer of the National Conference of Insurance Legislators (NCOIL).

“They anticipated a federal back stop. That was no way to plan,” said Considine.

He said, “The federal bailout was not there the way they planned. They were banking on this money as part of a business plan but you cannot go into a business expecting a government bailout. It’s an illogical way of setting up your business.”

Considine, who was New Jersey Insurance Commissioner when the plans were introduced, said he thought at the time it all could explode very quickly because of the federal back stop, if businesses were not careful about their rates.

“In New Jersey. we did not allow Health Republic to use federal back stop to consider rates. It remains solvent,” he said. Still, Health Republic is one of those under federal supervision.

Some $6 billion in startup loans — initially grants — was originally planned to be diverted to co-ops, but that was whittled down to $2.4 billion by Congress.

In addition, the risk corridors program, shifting money from profitable plans to those losing money in the early years of Obamacare, was changed by Congress so that it had to be revenue-neutral.

In 2014, too few insurers made profits to cover the losses. Insurance companies wanted $2.87 billion, but received $362 million. This hit the smaller co-ops harder than the larger, established companies.

Land of Lincoln, the Illinois insurer that shut down last week, lost $90 million last year. It was expecting risk corridor funding of $68.6 million. It sued the U.S. government last month, claiming it set its premiums on the understanding the money was coming in.

Corlette, of the CHIR, said it is “notoriously difficult for a new company to enter the health insurance market, just huge barriers according to all the economic literature.”

“It requires deep pockets and patient investors, co-ops had neither. The design of the program in the start itself clearly contributed to failure and difficulties,” said Corlette.

“I was certainly somebody cheering from the sidelines ... but this is a cautionary tale of how challenging it really is to bring competition to the market.”

As for the federal loans still outstanding, Considine said his “gut instinct” is that they will not be repaid.

“It was going to be grant money, never an expectation of anything other than a grant,” he said.

Co-ops faced, and those still surviving continue to face other problems including risk adjustment payments, designed to shift money from an insurer with healthier customers to those with riskier ones.

One profitable co-op, Maryland’s Evergreen, faces a bill of $24.2 million, but is suing the Centers for Medicare and Medicaid Services, which determines the risks and the amounts owed.

Evergreen argues that the process puts small and new companies at a disadvantage because they lack the technical sophistication, and years of medical history, to provide accurate estimates of the customers' health, according to a report in the Baltimore Sun.