By Julia Embry, 2018 M.P.P. Candidate, Georgetown University McCourt School of Public Policy

Just hours before President Trump took the oath of office, the Maryland health insurance CO-OP Evergreen Health officially closed a deal with the Centers on Medicare and Medicaid Service (CMS) to sever its ties with the Affordable Care Act’s (ACA) CO-OP program. The company will now transition from a nonprofit to a for-profit company, allowing it to gain an infusion of financing from outside investors. Executives credited the deal with enabling Evergreen to survive and stay competitive. However, it also provides insight into the immense challenges involved in starting up a new insurance company in the current market, even with federal financing.

The CO-OPs

The ACA’s CO-OP program didn’t get a lot of love from federal and state policymakers, particularly as several of the new companies started to suffer from financial difficulty. But the program had an impact, and helped keep premium prices down for consumers in several markets, particularly in the early years of ACA implementation. The original idea was that the federal government, through CMS, would provide support for 50 state nonprofit health insurers to start up along with the exchanges (also called marketplaces). These insurers would be required by law to funnel all profits back into benefits for their enrollees, hopefully leading to lower cost-sharing and premiums. Some proponents also thought these new companies would be market innovators and introduce promising new business practices. They would also inject much-needed competition into the insurance field. For Maryland, Evergreen Health was the first new commercial insurer in 20 years.

In the end, the program failed to live up to its lofty goals. Only 23 CO-OPs were created, and the combination of unpredictable exchange rollouts, uncertain federal funding policies, and in some cases internal mismanagement led all but six to declare bankruptcy or shut their doors. With Evergreen’s exit from the CO-OP program, that number goes down to five.

One of the biggest hurdles that the CO-OP program encountered was unpredictable financing. The initial money provided to the program under the ACA was cut by almost two-thirds in later budget deals. Congress also slashed support for an important risk stabilization (the “risk corridor”) program under the ACA, so that the CO-OPs received just 12 percent of the financing they were led to expect. These and other issues made it difficult for the CO-OPs to accurately predict each year’s financial outlook.

Switching to For-Profit

Evergreen Health announced its plan to change to a for-profit model in October 2016, aided by unnamed investors from the Maryland healthcare community. The company then had to exit the individual market exchange in December, pending approval from CMS. This resulted in a loss of 10,000 members to competing insurers. Their current 26,000 member population is drawn from the employer group market, with most coming from small businesses. Evergreen executives say that the transition to the for-profit model will allow Evergreen to continue fully serving its members and provides reliable financial support for its future growth.

A condition of Evergreen’s deal with CMS to exit the CO-OP program was that Evergreen would forgo the $30 million payment they were entitled to through the risk corridor program. They will also end their $24 million lawsuit against the federal agency, which claims that CMS’s formula for determining risk adjustment payments, payments insurers make to other insurers with sicker patients, favors older companies over new, smaller ones like Evergreen.

Marketplace Competition and Innovation

Thanks in part to this new deal, Evergreen will continue to compete in Maryland against larger, more established rivals such as Carefirst Blue Cross Blue Shield. Since they joined the Maryland marketplace in 2014, they have demonstrated that competition is key to keeping premium prices more affordable. At the same time, their conversion to for-profit status is a loss for consumers, as any business profits must now go to the benefit of shareholders and not to members.

Health insurance markets are notoriously challenging for new companies to enter, especially when a market is dominated, as Maryland is, by a large, established, and well-financed carrier. When coupled with federal and state policy decisions that led to a sicker-than-expected risk pool and unstable financing, it is small wonder that many CO-OPs failed and Evergreen was forced to look for alternative financing.