In his September 9, 2009, prime-time speech to a joint session of Congress, aimed at selling the health care reform legislation that would eventually be known as Obamacare, President Barack Obama went out of his way to criticize profit-seeking health insurers. "As one former insurance executive testified before Congress," he said, "insurance companies are not only encouraged to find reasons to drop the seriously ill, they are rewarded for it. All of this is in service of meeting what this former executive called 'Wall Street's relentless profit expectations.'"
To keep the private-sector insurers "honest," the president proposed a system of nonprofit, government-run health insurance plans dubbed the "public option." The public option would keep traditional insurers in check by offering lower premiums, made possible due to lower overhead and administrative costs. Taxpayers, Obama promised, would not end up subsidizing these plans.
Despite enthusiastic support from liberals, the public option did not make it into the final bill. But a similar, smaller-scale measure did: $6 billion for government-backed loans to create a network of startup, nonprofit health insurers dubbed co-ops (short for "consumer operated and oriented plans"), which backers asserted would increase competition and exert downward pressure on insurance premium prices without requiring the government to fully run them.
Five years later, Obamacare's co-ops have gone live-and are teetering on the brink of disaster.
Wracked by enrollment headaches and pricing problems, the government-backed plans are struggling to stay afloat. Several have already shut down or announced their intentions to do so. Instead of serving as a viable alternative to traditional health insurers, the co-ops are leaving consumers in the lurch and sticking taxpayers with a tab that could reach into the billions.
Not Going As Planned
The public option favored by many liberals would have created a fully government-run insurance plan to "compete" with private health insurance plans. The co-op compromise instead provided government-backed loans to state-based, community-run nonprofits that supporters hoped would serve the same function. For the Obama administration, there was little difference between the two nonprofit systems. Speaking to Bloomberg News about the co-op idea in 2009, as the bill was taking shape, then-Health and Human Services Secretary Kathleen Sebelius explicitly compared the idea to a public option: "You could theoretically design a co-op plan that had the same attributes as a public plan," she said.
Warning bells about the plans' financial sustainability rang early, with a 2012 report by congressional Republicans estimating that co-op losses would eventually consume more than 90 percent of the money appropriated to back the plans. (The original $6 billion loan in the March 2010 Patient Protection and Affordable Care Act was whittled down to $3.4 billion by Congress as part of a 2011 budget authorization following GOP criticism of the program, and would eventually be cut down to $2.4 billion as part of the deal to avert the fiscal cliff at the start of 2013.)
Horror stories started piling up. In 2013, one proposed plan in Vermont called it quits before enrolling a single member after the state's insurance regulator expressed concerns about its ability to repay its loans. Federal health authorities subsequently demanded that the Vermont co-op return nearly $10 million in startup funding.
Originally envisioned as a nationwide alternative, with plans active in every state, only 23 co-op plans ultimately went online. And as predicted early on, nearly all of the plans that made it to market have faced serious financial difficulties.
In 2014, the first year of operation, all but one co-op operated at a loss, according to a July 2015 report by the Health and Human Services inspector general (IG); 13 of the 23 had "considerably lower" enrollment than projected.
Given their ongoing precariousness, it's not clear how long these plans will survive. Indeed, the IG report explicitly questioned their ability to stay solvent, warning that "the low enrollments and net losses might limit the ability of some co-ops to repay startup and solvency loans and to remain viable and sustainable."
The Obama administration doesn't seem particularly concerned. According to the IG report, officials at the Centers for Medicare and Medicaid Services, which oversees the program, have put four of the plans on a shorter leash through enhanced oversight. But they haven't even set out clear rules about what constitutes viability or sustainability. Nor have they released the names of the plans on the heightened watch list.
For some plans, it's already too late. In January 2015, CoOpportunity Health, a nonprofit plan serving Iowa and Nebraska that received hundreds of millions of dollars from the federal government, shut down, leaving 120,000 Obamacare customers suddenly without health insurance. Unlike many of the nonprofits, though, CoOpportunity's problem wasn't under-enrollment; it had only expected to sign up about 15,000 people, according to The New York Times. Instead, it was the unexpectedly poor health of the people who signed up, and their subsequently high claims costs. After running up more than $150 million in total liabilities with no obvious way to address them, the co-op had little choice but to shutter.
Troubled finances have already doomed three other state plans. The Louisiana Health Cooperative announced in July that it would close its doors by the end of the year. The company reported a $5.7 million loss last year, according to Modern Healthcare; for every dollar in premiums the cooperative collected, it paid out $1.13. In August, the Nevada Health co-op, which took nearly $66 million in federal money to help fund its launch, said that it would shut down at the end of the year too. And in September, New York state's co-op, Health Republic, announced that it would cease writing new policies at the end of the year.
Along with enrollment, the biggest challenge for the nonprofit plans may be setting premiums at the right levels. Many of the co-ops attracted customers initially by setting unsustainably low rates, but are now getting set to jack up prices, with 10 of the 23 requesting premium hikes of more than 20 percent for the next year, according to Politico.
State regulators, through negotiation with insurers, may ultimately push rates down somewhat, but it's also possible that the authorities will push rates in the opposite direction in the name of fiscal solvency. In Tennessee and Oregon, state regulators actually urged co-ops to raise their prices. Oregon's Health Co-op proposed a 5.3 percent premium hike, but state officials instead called for a 19.9 percent increase, on the grounds that insufficient rates could result in the inability to pay claims or even outright closure.
Many of the co-ops also appear to be struggling with the administrative costs that Obama promised they would avoid. Fourteen had annual administrative costs of greater than $1,000 per member, according to the Associated Press, and Massachusetts spent a whopping six times as much on overhead as it collected in premiums—about $10,900 per member. In comparison, one 2008 study funded by the insurance industry found that administrative costs for both Medicare and private insurers frequently came in at around $150 per person per year.
A Silver Lining
If there's an upside to the co-op mess, it's that it provides a tidy demonstration of how poor the judgment of federal health bureaucrats is when it comes to picking successful entrants into a marketplace—even a marketplace, such as Obamacare's exchanges, that they designed themselves. At least in theory, the Centers for Medicare and Medicaid Services only selected organizations that, as the IG report says, "demonstrated a high probability of becoming financially viable." Obviously, that didn't turn out to be the case.
But maybe taxpayers dodged a bullet anyway, by sidestepping an even bigger bill. If Obamacare had included a true public option, it almost certainly would have faced similar troubles with pricing, enrollment, and administrative bloat. But unlike the co-op plans, which are backed by government loans but not officially government-run, a public option likely wouldn't have shut down, leaving taxpayers permanently on the hook for years, even decades, of losses that would have tallied up to far more than a few billion in startup credit.
Obamacare's co-ops may have turned out to be useful after all—not as a check on private insurers, but as a demonstration of how awful a fully government-run public option would have been. As bad as the future of health policy might be, the failure could have been far worse.