Are Obamacare’s 22 Health Insurance Co-ops Near Financial Collapse?

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Ominous signs are proliferating among 22 Obamacare health insurance co-ops of imminent financial collapses that could leave more than a million Americans without coverage, according to a Daily Caller News Foundation Investigative Group analysis.

All but one of the federally funded co-ops are experiencing accelerating net losses. President Obama’s signature health care reform program established the co-ops to provide non-profit competition to private sector health insurance providers.

Many of the 22 co-ops could soon follow an Obamacare co-op that defaulted earlier this year, suffering $163 million in operating losses in a single year. That collapse left 120,000 customers without coverage on Christmas Eve.

“We’re certainly going to have fewer co-op’s by the end of the year,” Thomas Miller, a resident health care fellow at the American Enterprise Institute think tank, told DCNF.

New figures compiled by Miller and Marie-Grace Turner, president of the Galen Institute, show that net losses for the co-ops reached a record $614 million in 2014. Both AEI and Galen are Obamacare critics.

The figure is nearly three times the $234 million in losses suffered through the first three quarters of 2014 as reported by Standards & Poor’s in a February 2015  report. It means that the burn rate for the experimental Obamacare co-ops is quickening.

“All but one of the co-ops,” S&P noted, “reported negative net income through the first three quarters of 2014.”

Insurance ratings firm A.M. Best also warned in January that as of September 30, 2014, “the ratio of surplus notes outstanding to capital and surplus exceeded 100% for all of the co-ops.”

Arizona’s Meritus Mutual Health Partners co-op has long-term loans that are nearly 1,000 percent of the value of its capital and surplus, according to A.M. Best.

S&P identified the co-ops suffering the worst capital ratios as those in Illinois, Arizona, Colorado, Nevada and Maryland.

The Community Health Alliance co-op in Tennessee reported that it’s net losses were 314% of its federal funding, according to the S&P report.

Community Health said in January that it would no longer offer insurance on the state exchange, according to the Tennessean daily newspaper. The co-op enrolled 140 customers and received $73 million from Obamacare, a cost of more $521,ooo per enrollee.

Another indication of serious co-op financial weakness is the fact that CMS gave out $317 million in additional “solvency loans” to one out of every three co-ops last year.

The injection of the federal funds was to prevent co-op capital reserves from falling below the minimum capital rates set by each state insurance commissioner.

The emerging picture of massive losses across all of the federal co-ops was forecast by an original White House Office and Management and Budget estimate that warned up to four of every 10 co-ops could default.

The human wreckage left behind a failing co-op was seen earlier this year when regulators in Iowa and Nebraska liquidated the assets of a failing federal health care co-op known as Co-Opportunity Health.  Insurance regulators officially declared the co-op was in “hazardous condition” last December.

Co-op supporters hailed Co-Opportunity health because it had initially enrolled 50,000 customers, the second highest in the nation.

“We are very pleased with the market response to our products,” said David Lyons, Co-Opportunity’s chief executive officer and a politically-connected former Iowa insurance commissioner.

What Lyons failed to say was that Co-Opportunity slashed prices and offered very low, below-market premiums to attract new customers.

The low premiums came at a cost. Co-Opportunity’s ratio of costs to premiums was 140 percent. That meant that for every dollar it collected in premiums, it had to pay out $1.40 in medical claims.

The ratio is not much better among the other remaining co-ops.  According to Scott E. Harrington of the University of Pennsylvania’s Leonard David Institute of Health Economics, “The ratios for the first three quarters of 2014 produced “a total ratio of costs-to-premiums of 116 percent.

“Most co-ops’ weak operating performance is a result of high medical claims,” concluded S&P, adding, that the medical costs were “hopelessly high” for many of the co-ops.

Brian Gillette, the chief operating officer of the Urbandale, Iowa-based Group Benefits Limited, said that the unexpected closure of Co-Opportunity Health was “massively disruptive” to 800 of his employer groups and for thousands of individual policyholders.

“We were notified on Christmas eve that the insurance division was taking over Co-Opportunity Health,” Gillette told the DCNF in an interview. “I’ve never seen anything like this,” he said. “This was without precedent in my career.”

Hints of the financial Co-Opportunity debacle came last September when the co-op abruptly announced it was dumping more than 10,000 of its poorest and sickest customers and transferring them to the state’s Medicaid program.

That harsh action appeared contrary to the originally stated mission of the consumer-oriented co-op as presented by Obama administration officials.

At its formation, federal officials at the Centers for Medicare and Medicaid Services promised the co-ops would offer “affordable, consumer-friendly and high quality health insurance options.”

Sally Pipes, another Obamacare critic who is president of the Pacific Research Institute think tank, called the dumping of enrollees “totally, absolutely immoral.”

“If I were dumped on Medicaid, I’d be furious,” she said.

Ultimately, the Iowa Insurance Division reported in court that Co-Opportunity suffered $163 million in operating losses in its lone year of operation.  More than 120,000 customers lost their coverage.

Some co-ops are taking steps to stem their large losses with huge new rate increases.

Health Republic in Oregon, for example, boosted its 2015 rates by a whopping 37.8% according to state data.

On April 8, its president and CEO unexpectedly resigned, saying he wanted to return to his home state of Louisiana.

But Co-Opportunity Health didn’t suffer the worst losses, according to S&P.

Obamacare co-ops in Utah, Colorado, Michigan, Tennessee, Maryland, Oregon, Connecticut, Illinois, Arizona, Massachusetts and Nevada “had net loss-to-surplus ratios that were worse than Co-Opportunity’s,” S&P said. “That means their net losses represented a larger portion of their remaining funds compared with Co-Opportunity, as of Sept. 30.”

Co-Opportunity Health received an initial $145 million in low-cost loans from the CMS in 2012. Then last September it received an emergency $32 million in new “solvency loans.”.

CMS officials turned down a third Co-Opportunity request for an injection of another $55 million in a solvency loan, according to Nick Gerhart, Iowa’s insurance commissioner in an interview with the DCNF.

Explaining the rejection, CMS spokesman Aaron Albright told the DCNF that “CMS did not have sufficient funds” to cover the $55 million.

Albright’s comments underscore the financial dilemma facing all the co-ops.

Unlike traditional insurance companies, Obamacare from the start restricted the co-ops from regular access to conventional credit markets. They cannot obtain short-term bridge loans, offer stock, seek equity or other forms of private capital. All the co-ops are funded with federal tax dollars.

Miller warned that the co-ops are in such precarious shape they many could fail very quickly. “One lesson is that this happens very quickly,” he said. “These things could suddenly explode and leave a lot of injured parties to clean up.”

The speed with which Co-Opportunity failed was recounted by Gillette, whose firm was the largest general insurance agency for the co-op.

“Only a couple of weeks prior to the announcement, maybe two weeks prior to the announcement, we met with their senior leadership to discuss financial performance because we were aware what were disturbing trends,” Gillette said. “We were given every assurance that they had a sustainable model, not just for 2015 but well into the future.”

“They don’t have any other cushion except for taxpayers to bail them out or lend them more money.  When that’s gone, so is the co-op,” explained Miller.

Gerhart agreed, telling the DCNF that once Washington turned off the spigot, the co-op was gone.

“A lot of traditional insurance companies have a lot of different tools at their disposal to raise capital.  And insurance, as you know, is a very capital-intensive business,” the commissioner explained.

“If you’re a more traditional company, if you run into problems, you try to offer debt, you try to offer stock to folks,” he said. “You go to financing that’s more flexible, maybe. There’s a lot of different financing tools available that’s just not available to a co-op.”

“It wasn’t realistic given the structure of the non-profit,” he observed. “So they weren’t able to raise the capital necessary,” he recalled.

“Our message to Iowans and Nebraskans was they should be get out. ‘Get out now,’” he said.

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