ObamaCare co-ops at risk of failing after billions in loans

The future of an ObamaCare program that was intended to create non-profit insurers is increasingly in doubt, with several of the ventures forced to close down around the country.

On Friday, co-op insurance plans in Colorado and Oregon became the latest to call it quits, following the closure of similar plans this month in Tennessee, Kentucky and New York.

{mosads}Just 15 of the original 23 co-ops remain in operation, and the administration acknowledges that more of them could fail, potentially leaving a strike against President Obama’s signature law.

“The co-op program was always kind of swimming upstream,” said Larry Levitt, senior vice president at the Kaiser Family Foundation, which does nonpartisan health analysis. “Starting an insurance company is not easy, and there’s a reason why it’s not done very often.”

Democrats created the non-profit co-ops under ObamaCare as a way to increase competition with established, for-profit insurers. Liberals rallied to the idea after they failed to secure the passage of a government-run insurance option.

But experts say the co-ops are facing a range of problems that could prove hard to overcome.

For starters, Congress has cut funding for the program. While ObamaCare initially provided $6 billion, that number was slashed to around $3 billion in 2011. The federal government has given out $2.4 billion in loans, but the remaining funds were nearly eliminated as part of the 2012 “fiscal cliff” budget deal. 

More recently, co-ops received bad news when the Obama administration announced on Oct. 1 that they would receive significantly lower payments from the “risk corridors” program than expected.

The risk corridors program was designed to protect insurers from heavy losses by reallocating money from insurers doing well to insurers faring poorly. But so little money came into the program that it could only pay out 12.6 percent of the $2.87 billion requested, leaving large holes in the budgets of many co-ops. 

A similar program called “risk adjustment” has also posed problems for co-ops. 

“Between reduced congressional appropriations and disappointments with respect to risk adjustment or risk corridors, it’s a lot for any startup to overcome,” said Mike Adelberg, who used to oversee the co-ops as an official in the federal Centers for Medicare and Medicaid Services (CMS), and is now a consultant at FaegreBD. 

But he predicted that at least some of the remaining co-ops would survive. 

“Co-ops run the continuum, many have now failed, on one end of the continuum, and some will make it, on the other end of the continuum,” he said. 

Republicans are seizing on the troubled program as evidence of deeper failings in the health law, and warn that millions of federal loans to the co-ops may never be repaid. 

Senate Majority Leader Mitch McConnell (R-Ky.) pointed to the people who would lose their plans at the end of the year after Kentucky’s co-op failed earlier this month. Kentucky’s co-op covered 51,000 people, while New York’s failed co-op, the largest, covered more than 200,000. 

“Barely a week goes by that we don’t see another harmful consequence of this poorly conceived, badly executed law,” McConnell said when Kentucky’s co-op failed.

There are also congressional probes. Republicans on the House Ways and Means committee asked CMS for information on its oversight of the co-ops last month. The committee set a deadline of Oct. 14 for a response, but says it has not heard back.

CMS says it plans to respond to the committee.

After each announcement of a co-op failure, the Obama administration has stressed that not every start-up succeeds. It also says it understands that the low risk corridor payments could pose a problem, and that it is working with states and insurers. 

As of the end of September, the administration had placed 11 co-ops under more intense scrutiny, known as “enhanced oversight” or a “corrective action plan.”

Some have suggested those steps are mostly intended to show Congress and other watchdogs that the administration is not asleep at the switch. But CMS also has some limited steps it can explore, like allowing co-ops to use unspent start-up money for ongoing solvency, or potentially looking to find a way for extra financing from outside the government. 

A major question is whether the $2.4 billion in federal loans made across all of the co-ops will be repaid. 

For the failed co-ops, repayment appears doubtful. Adelberg said that when co-ops go into state receivership, the receiver prioritizes paying insurance claims over paying back the federal government. An inspector general report in July found that financial losses might “limit” the ability of some co-ops to repay loans, and that as of the end of last year, 21 of 23 were losing money. 

“For the co-ops that go into receivership, the state receiver will determine how to settle the estate,” Adelberg said. “Paying back the federal loans likely will not be the highest priority.”

Dawn Bonder, CEO of the Oregon co-op that announced its closure on Friday, said the Obama administration had been increasing its oversight and “working with us to drill down into our business plan.”

She blamed the co-ops’ failures on an unwillingness to modify and improve ObamaCare. 

“We unfortunately have such a dysfunctional legislature on the federal level,” she said, “that we can’t go back in and make refinements and changes to make sure public policy actually works.”

– Sarah Ferris contributed to this report.

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