When the National Conference of Insurance Legislators (NCOIL) met last week for its national meeting in Portland, Oregon, the fate of the Affordable Care Act’s (ACA) 23 CO-OPs was high on the agenda. With only 7 CO-OPs remaining in business, state legislators want to understand how so many fledgling insurance companies failed, as well as what they can do to reduce the harm caused by such failures for enrollees, providers, brokers and others.

What is NCOIL?

NCOIL is an association made up of state legislators working on insurance issues. Many are chairs or members of their legislature’s insurance committee. With respect to the ACA’s CO-OP program, legislators demonstrate a strong interest in understanding what went wrong, including an assessment of the state’s role as a solvency regulator. To that end, members convened a panel of experts, including CHIR’s own Sabrina Corlette, whose recent Commonwealth Fund report on the CO-OP program served as a roadmap for the discussion, Chris Condeluci of CC Law & Policy PLLC, and Eric Cioppa, Maine’s Superintendent of Insurance.

Why are So Many CO-OPs Failing?

As outlined in CHIR’s Commonwealth Fund report and affirmed during the NCOIL meeting, the CO-OPs’ failures are the result of an almost perfect storm of policy and business decisions. As Mr. Condeluci put it during his testimony: the CO-OPs were “set up to fail,” and later policy decisions only made the situation worse.

The ACA and its implementation – setting companies up to fail

First, the law itself hobbled the program. During the legislative process, the start-up grants originally envisioned by advocates were converted to loans that the CO-OPs had to pay back beginning in 5 years. CO-OPs were prohibited from using any of their federal loans for marketing purposes. Additionally, the law required CO-OPs to generate “substantially all” of their enrollment from the individual and small group markets, limiting their ability to diversify into the more stable large group and government markets.

Second, Congress and the Obama administration made several implementation decisions that both directly and indirectly harmed the CO-OPs. Two separate budget agreements with Congress slashed the program’s funding from $6 billion to $2.4 billion, making it impossible for the administration to throw struggling CO-OPs a financial life line when they needed it. The Obama administrations so-called transitional or “grandmothering” policy, which allowed existing insurers to hang on to healthy enrollees, left a sicker-than-expected risk pool for the companies participating on the ACA’s marketplaces. Compounding the problem, this decision was made late in 2013, well after insurers had finalized their 2014 premium rates.

Yet another budget deal in 2014 required the ACA’s risk corridor program to be budget neutral, limiting the amount the federal government could remit to insurers for their losses. As a result, marketplace insurers received only 12 cents on the dollar for 2014. This was a particularly harsh blow for the CO-OPs, which lacked the financial cushion of their more established and diversified competitors.

Even if these policy decisions had not been made, however, it is questionable whether the CO-OPs would have all survived. The health insurance industry has notoriously high barriers to entry, requiring very deep pockets and patient investors. The CO-OPs had neither.

Factors limiting the CO-OPs’ competitiveness

First, the short time frame between the award of loans to the CO-OPs and their launch date meant these brand-new companies had to outsource multiple key insurance functions, including provider networks, claims processing, actuarial and customer support. This kind of outsourcing limited the CO-OPs’ ability to control costs and manage service quality.

Second, setting prices for their plans was probably the most important business decision the CO-OPs faced. For many, it was disastrous. To be clear – pricing in the first two years after the ACA’s market reforms was a shot in the dark for all insurers. But it was particularly tough for the CO-OPs, which lacked their competitors’ historical data about medical claims and provider practice patterns.

The inevitable resulting misfires were particularly hard on the CO-OPs because they also lacked any margin for error. Some priced their plans too low, got swamped with enrollment and weren’t able to generate the premium revenue to cover claims. Others priced too high and weren’t able to garner sufficient enrollment to cover their fixed costs.

Third, because of their lack of any financial cushion – and lack of diversification – the CO-OPs are more dependent than their peers on the ACA’s risk mitigation programs, often called the “3 Rs.” The ACA’s risk corridor program, as in the Medicare Part D program, was designed to help companies that mis-priced their plans in the early years; receiving only a fraction of what they were promised was a death blow for many CO-OPs.

CO-OPs have also suffered under the ACA’s risk adjustment program, largely because they lack the data collection and analytical capacity of their more established competitors. Collecting and understanding the data about the health status of enrollees is critical to putting a company’s best foot forward in this program. This lack of data infrastructure has likely contributed to the CO-OPs’ higher-than-expected charges under this program.

What’s Next?

Several state legislators at the meeting are in the midst of managing a CO-OP failure in their state. They have been inundated with calls from enrollees, providers and insurance brokers, all struggling to manage the disruption associated with the abrupt closure of these companies. In many cases, the departure of the CO-OP has not gone smoothly, leaving providers with millions in unpaid claims, brokers with unpaid commissions, and patients – sometimes mid-treatment – struggling to find a new plan that includes their hospital and doctor. Eric Cioppa, the Superintendent of Insurance in Maine summed it up this way: “Premium increases give me heartburn, but regulating solvency gives me an ulcer.” He noted that protecting consumers and other stakeholders from an insolvency is the most important thing insurance departments do. Unfortunately, in the case of the CO-OPs, which are often not part of state guaranty funds, these insolvencies have been, at least in some states, very messy. In some states, it is also not clear whether the CO-OP must pay back its federal loans before other debtholders can be paid. All of this contributes to a great deal of confusion among state policymakers and legislators about how to best manage these market failures.