Health Republic is latest health care co-op to go under

WASHINGTON -- About 200,000 New Yorkers will see their Health Republic policies expire on Monday, marking the demise of the 12th health insurance co-op established under the Affordable Care Act.

That's more than half of the 23 consumer operated and oriented plans that were created with federal loan money to promote competition on the state online exchanges selling insurance under the 2010 health care law.

The 12 co-ops, which received $1.2 billion in taxpayer-funded loans, failed for a variety of reasons, including:

-- Severe limitations on using the loan money for marketing or attracting outside investment money.

-- Under-priced premiums in the case of some co-ops and overpriced premiums in the case of others.

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-- Congressional budget-cutting that reduced the original $6 billion in grants and loans to $2.4 billion of only loans.

-- Lack of understanding by federal health officials of how hard it would be for the co-ops to compete with established insurers. New federal initiatives frequently use pilot programs to work out problems before going nationwide, but that wasn't the case with the co-ops.

-- Unexpected sharp cutbacks in reimbursement rates under a federal "risk adjustment" formula that moves money from companies with healthier customers to those with sicker ones.

Several co-ops said they wouldn't be able to enroll new customers in 2016 after the Centers for Medicare and Medicaid Services (CMS) announced that certain reimbursement rates would be only 12.6 percent of what had been expected. Eighteen co-ops were denied money they were expecting, according to Martin Hickey, CEO of New Mexico Health Connections and chairman of the National Alliance of State Health CO-OPs.

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Kevin Counihan, the CMS regulator overseeing the co-ops, said their mission was "to go forth and multiply,."

“We worked within what we understood to be the regulations and statute of what we were given, which was: You’ve got money. You need to start this up and get into as many states as possible.’’

Experts say that after initial funding for the co-ops was reduced and it became apparent that establishing them in all 50 states wouldn't be possible, federal officials could have adjusted their approach by focusing on states with the least competition among health insurers. If that had happened, the first co-ops would have started operating in each of the 17 states where a single insurer claimed at least 65 percent of the market in 2010.

Instead, co-ops were established, for example, in New York and Colorado, where the most dominant health insurer claimed less than 35 percent of the statewide market.

Health Republic received $265 million in federal loan money. And despite its 29 percent enrollment growth (from 155,400 policyholders in 2014 to 200,000 as of June), New York regulators ultimately decided it couldn't afford to continue operating even until the end of the year, when the next enrollment period begins.

Customers who haven't chosen a new plan by Monday will be automatically enrolled in one of three other health plans, which will cover them for December. They will need to find a policy on their own to cover them after that expires.

Wendell Potter, a former Cigna executive who writes a column on health care issues for the Center for Public Integrity, said the co-ops were "not a well-devised experiment.''

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"I wonder where the restrictions came for how to use that money,’’ Potter said of the co-ops and the rules that barred them from using federal money for advertising and attracting investors.

Some of the co-ops likely would have failed even without such rules. But the collapse of 12 out of 23 is a much worse failure rate than the national average, according to PolitiFact, a Tampa Bay Times-run fact-checking website.

“Compared to the three-year failure rate in America, the co-ops have done much worse -- cratering at a rate that is about 40 percent faster than average,’’ Politifact wrote recently.

Vermont's chief financial services regulator never allowed a co-op to begin operation even after it received a federal loan. Susan Donegan, commissioner of the state's Financial Regulation Department, ruled in May 2013 that the business plan of the co-op in question showed “cumulative losses during the first three years’’ and probably would run out of money.

Despite the failures, the co-ops have positively affected health insurance premiums, according to John Morrison, a founder of the National Alliance of State Health CO-OPs.  The price of the average silver (mid-level) insurance plan in 2014 was 8 percent lower in states with a health care co-op than in those without one, and that increased to 13 percent this year, Morrison testified at a House hearing earlier this month.

"Consumers have already saved more than the total cost of the co-op program,'' Morrison said.

Former Democratic Sen. Kent Conrad of North Dakota, the lawmaker who first proposed establishing co-ops under the Affordable Care Act, blames their failure on “fierce lobbying’’ by the insurance industry,“systematic sabotage’’ by congressional Republicans and general indifference by the Obama administration.

Conrad said the latest reimbursement formula for the co-ops was “the coup de grace’’ in their collapse.

Congressional Republicans say the co-ops' failure is another example of why the Affordable Care Act should be scrapped.

“We are witnessing Obamacare imploding onto itself,’’ Republican Rep. Chris Collins of New York said. “Obamacare, as it was designed, was not sustainable. No one knew really three years ago how bad it was going to end of being.’’

Republican leaders of the House Energy and Commerce Committee recently accused federal regulators of not disclosing a plan for keeping the remaining 11 co-ops afloat. Those co-ops “represent over $1 billion in federal loans that should be paid back to the federal treasury over the next decade,’’ the lawmakers noted in a letter sent Tuesday.

Counihan, the regulator overseeing the co-ops, said the federal government is trying to recover as much of the loan money as possible.

“We consider ourselves to be very strong and sensitive stewards of this money," he said. "We want these guys (the co-ops) to succeed, but they need to succeed on their own.’’

Counihan said his agency is working to provide more flexibility’ for the remaining co-ops and give them technical assistance. He declined to predict how many of the 11 remaining will survive.

“Things can change from quarter to quarter,’’ he said.

Contact Brian Tumulty at btumulty@gannett.com Twitter: @NYinDC