Why Obamacare Co-Ops Keep Failing

It's been a bad month for the Affordable Care Act.


Credit: White House / Flickr.com

It's been a no good, very bad month for the Affordable Care Act.

One of the nation's top insurance companies has threatened to pull out of the government-run health insurance exchanges, while others are raising rates by double-digits after realizing that people signing up for insurance tend to be older and sicker than originally hoped.

On top of that, enrollment projections are way off.

But perhaps the biggest immediate crisis facing the Obama administration's signature health reform measure is the utter collapse of many of the so-called cooperatives that were set up by states as part of the 2010 law.

The Consumer Operated and Oriented Plan, or Co-Op, portion of the health care law established nonprofit health insurers that would receive federal funding and were intended to compete with private, for-private insurers on the exchanges as a way to lower prices. They were supposed to be small-scale single-payer systems that would be free from the profit motive; a progressive's dream solution to the problem of providing health insurance for all.

Instead, they've turned into a nightmare. So far, 12 of the 23 co-ops have failed, defaulting on more than $1.2 billion in federal loans. Only two have been able to break even so far, and most of the remaining co-ops are eyeing massive premium increases—as high as 40 percent in some cases—to stay solvent.

A government program being poorly run is nothing new, of course. But the co-ops established under the health care law were subject to a series of regulations that make you wonder how they were ever supposed to succeed in the first place.

"It should be no surprise that so many of them are going belly-up," said John Davidson, director of health policy for the Texas Public Policy Foundation, on the latest edition of the Watchdog Podcast. "The rules that they put on these co-ops almost set them up to fail."

For starters, the co-ops were barred from hiring anyone who had served at an executive level at any health insurance company in the country.

Think about that for a second. This was essentially a brand new business venture that was prevented from relying on the expertise of anyone who might have the slightest idea what they were doing.

Another regulation prevented the co-ops from raising any capital aside from what was provided via those federal loans. Other rules prevented the co-ops from being allowed to turn a profit, and if one happened to accidentally make money anyway, it wasn't allowed to use its profits to help it grow.

It's the kind of business plan that would be laughed out of a business school classroom.

"The co-ops were essentially amateur exercises," said Davidson. "Running a health insurance company and keeping it actuarially sound is a difficult thing to do, under the best of circumstances."

Republicans are eager to make the failures of the co-ops look like a major disaster for Democrats who backed the overhaul and particularly for the progressives who pushed for the inclusion of the pseudo-single-payer-programs.

Sure, it's a political nightmare, but it's a real life nightmare too.

Several hundred thousand people—more than 100,000 in New York alone, where the nation's largest co-op is now going under—stand to lose their health insurance as a result of the implosions. Even those who don't lose coverage altogether face the prospect of paying significantly higher premiums.

"There were some hopes and pray­ers as­so­ci­ated with the co-ops that were prob­ably un­real­ist­ic," Larry Levitt, a seni­or vice pres­id­ent at the Kais­er Fam­ily Found­a­tion, told National Journal's Caitlin Owens last week. "The sup­port for the co-ops was as much ideo­lo­gic­al as prag­mat­ic. The way they emerged was so bizarre."

As Owens' detailed piece goes on to explain, there is a long history behind the sudden failure of so many of the co-op programs.

But the rules and regulations written into the text of the law makes it hard to believe there was ever much of a chance for the co-ops to succeed.

This article originally appeared at Watchdog.org.