A recent review by PoliticoPro of insurers’ financial filings has found that the remaining 11 companies in the Affordable Care Act’s CO-OP program sustained substantial losses in 2015 – collectively close to $400 million, with the bulk of the losses coming in the fourth quarter. Perhaps even more distressing, CO-OPs that appeared to do reasonably well in 2014 were hit hard in 2015, suggesting that their early strong performance was temporary. For example, Maine’s CO-OP – which we highlighted in our recent report for the Commonwealth Fund as a company that had exceeded targets for enrollment and revenue in its first year – had losses of $74 million in 2015, according to Politico’s analysis.

Thanks to two separate budget deals cutting funding for the CO-OP program, there are no additional federal funds coming to save these companies. Without much of a financial cushion, it’s hard to see how they can sustain these losses much longer. State and federal insurance regulators are undoubtedly watching closely. Should any of them fail, let’s hope that the state, federal officials and company executives can work out a smooth transition for enrollees and avoid the mess that occurred when New York’s CO-OP folded before the end of last year, leaving hundreds of thousands of consumers scrambling for coverage and providers with millions in unpaid claims.

Why are these companies failing, just two years into their existence? The concept of a CO-OP program certainly sounded pretty good: Provide seed money for new, non-profit, consumer-run health plans to inject competition into highly concentrated insurance markets. Affordable Care Act drafters liked the idea so much they provided $6 billion in federal funding for the program.*

In the research paper we published with the Commonwealth Fund, we identified some of the many factors that limit market competition and have contributed to the CO-OPs struggles:

• Critical health plan functions. With very short deadlines to file rates and plans and be ready for launch in the fall of 2013, CO-OPs had to outsource critical plan functions such as network design, actuarial services and claims processing. This kind of outsourcing limits the company’s ability to control costs and manage quality.
• Marketing. The ACA prohibits CO-OPs from using federal funds for marketing. Most CO-OP executives with whom we spoke told us the lack of funding was a “hindrance,” requiring them to get creative with their marketing campaigns, raise funds from partners and take advantage of community events to educate the public about their company and products.
• Benefit design. Of the CO-OPs we studied, half offered a platinum plan in their first year; others offered benefit designs that were more attractive to people with certain diseases, such as HIV/AIDS. Executives reported that, as a result, they enrolled a sicker mix of enrollees than their competitors.
• Pricing strategies. The failure to set an adequate price for their products is probably the most significant reason the CO-OPs are losing money. But setting prices was harder for CO-OPs than for competitors with years of experience in the market. The CO-OPs lacked the same historical claims and market data to help them estimate their costs. But many also probably overly relied on the ACA’s risk mitigation programs (often called the 3Rs) to rescue them if they mis-priced. That reliance ultimately proved to be a bad business decision (see below).
• High vs. low enrollment. While over half the CO-OPs fell short of enrollment goals in the first year, it was those that took on more than expected enrollment that have struggled the most. These companies struggled to build capacity under time pressure and manage cash flow.
• The “3Rs.” Delays and lower-than-expected payments to insurers under the ACA’s risk mitigation programs harmed a significant number of CO-OPs.

To be clear: the CO-OPs are not alone in facing losses. For example, the new insurance company Oscar reported $105 million in losses in 2015. Even experienced companies have stumbled – Health Care Service Corporation (HCSC), the parent company for Blue Cross Blue Shield plans in 5 states, reported $65.9 million in losses in 2015 (although that was an improvement over 2014, when they lost almost $282 million). What’s the difference between these companies and the CO-OPs? Deep pockets and diversification. Oscar has been valued at $2.7 billion and HCSC had $31.2 billion in overall revenue in 2015, thanks largely to its presence in the employer group and government insurance markets.

Policymakers like to talk about increasing competition and expanding consumer health plan choices. But doing so is a lot harder than it looks, and certainly requires much more financing and political capital than anyone has yet been willing to spend.

*This amount was later reduced to $2.4 billion.