Even If You Like Your Obamacare Co-Op Insurance, You Probably Can’t Keep It

How one of progressives’ favorite parts of the ACA fell apart, and why Congress did nothing to stop it.

One of Obamacare’s most liberal provisions is dying.

The Consumer Operated and Oriented Plan program, which establishes nonprofit insurance plans, was included in the health care law to spur competition and lower premiums on exchanges. It was also a consolation prize for progressives, who were hoping for a “public option” federal insurance plan but couldn’t find the votes for it.

Now, five years after being passed into law, the CO-OP program is falling apart, with 21 of the 23 nonprofit insurers participating in the program incurring net losses as of the end of last year. As of this month, 12 have closed, unable to stay in operation after charging premiums too low to pay for enrollees' health care claims. Although some of the remaining co-ops seem stable, several other co-ops’ rates will skyrocket in 2016, with double-digit increases as high as almost 40 percent.

For the hundreds of thousands of people losing their insurance, this is an alarming development. But in Congress, it appears that both the program’s proponents on the Left and critics on the Right long saw this collapse coming. A paper trail of oversight reports and congressional letters points back to at least 2013, when the alarm bells first began ringing both in Congress and the Department of Health and Human Services. Yet from big talk came little action, and the co-ops were left alone to spin their wheels.

Instead, Congress repeatedly slashed funding to the program, without offering either a fix or a replacement.

How a program that hundreds of thousands are depending on for their insurance could be left to wither while Congress did nothing to fix it—or replace it with something more palatable to the current majority—is, in part, the familiar story of the Affordable Care Act, in which disagreement over the law as a whole strangles any attempts to improve its parts.

But now, the death cycle of the co-ops demonstrates that the consequences of this legislative autopilot are hitting home—not for politicians, but for the people they’re elected to serve.

Neglected, sabotaged, or just a dumb idea?

For most lawmakers, the co-op program was never a first choice.

They wanted a public option that would have included a publicly run insurance plan—comparable to Medicare—in an exchange consisting of competing private plans. But some moderate Democrats, as well as nearly all conservatives, opposed it as too much government intervention into the health insurance market. Additionally, the insurance lobby and medical providers said it could drive down provider-reimbursement levels, causing doctors and hospitals to charge private insurers more and, in turn, forcing private insurers to raise premiums.

Eventually, liberals who wanted the public option conceded, and included in the bill instead was a provision creating nonprofit, consumer-operated insurance plans that would compete in insurance exchanges. Less controversial, they had the support of liberals skeptical of private insurance and senators from rural states in which co-ops had a record of success in other sectors.

But health insurance is, by nature, a risky business, and nonprofit start-up insurers would need funding to work with. Start-up loans were written into the description, which were to eventually be paid back to the government after the co-ops theoretically became self-sustainable. In the meantime, according to the plan, marketplace enrollees would benefit from the co-ops; as nonprofits, all revenue would go towards lowering premiums, driving down costs through competition in the entire marketplace.

The co-ops were championed by rural senators such as former Sen. Kent Conrad, a Democrat from North Dakota, and Republican Sen. Chuck Grassley of Iowa, who was then ranking member of the Finance Committee and was at the table while Democrats were still hoping to move the bill with GOP support. But even as the partisan split sharpened during the Congress’ yearlong battle over the law’s passage, co-ops remained under the radar and went into the final bill largely untouched. What criticism there was of co-ops was mostly folded into generic criticism of the Democrats’ health care reform plans as a whole, although health care experts voiced their skepticism. But the program was never an integral part of the health care law, and once the public-option battle was lost, there weren’t any real alternatives to the alternative.

What follows is a story of slow decline. In December of 2014, the Iowa insurance commissioner announced it was taking over the co-op serving both Iowa and Nebraska, CoOpportunity. It could not cover its enrollees’ health care costs, and it could not get any more money from the Centers for Medicare and Medicaid Services. In January, the plan was designated for shutdown. A stream of co-op closure announcements followed, with the grand finale a cluster of co-ops shuttering before Nov. 1, the start of open 2016 enrollment.

The evidence of the decline is ubiquitous. What’s not clear, however, is whether the co-ops were doomed from the inception, or whether they might have succeeded had Congress been more active in helping the law—or at least not working against it.

“There were some hopes and prayers associated with the co-ops that were probably unrealistic,” said Larry Levitt, a senior vice president at the Kaiser Family Foundation. “The support for the co-ops was as much ideological as pragmatic. The way they emerged was so bizarre.”

Without a time machine, it’s difficult to know what Congress might have done to save the failing co-ops. It’s possible that through more financial support, or a restructuring of the provisions designed to help the new insurers deal with their risky initial years on the exchanges, more of them might have survived.

But regardless of what might have been, what actually happened is that Congress slashed funds to the program.

When the Affordable Care Act passed in 2010, it allocated $6 billion in funding for the CO-OP program, which was to be used to make loans to qualified co-op applicants to help them get on their feet. Start-up funding was essential to the success of the co-ops. New insurers have to guess how to price their premiums, having no prior claims data to use. Loans put money in the bank in case claims are more expensive than the amount brought in by premiums. The idea was that eventually the co-ops would adjust, learn their enrollees, stabilize, and be able to repay their loans.

But $6 billion turned out to be too attractive as an offset for other legislation, and it was negotiated away long before the ACA marketplaces were up and running. In 2011 and 2012, appropriations bills passed under Republican House leadership reduced the funding level to $3.4 billion. At the end of 2012, CO-OP funding was chopped once again under the American Taxpayer Relief Act; in 2013, another $13 million was lost to sequester, and CMS ended up awarding only $2.4 billion in loans to co-ops.

And then in 2013, during the disastrous rollout of Healthcare.gov, the co-ops took another blow. The Obama administration announced that insurers could wait, eventually saying until 2016, to cancel plans not in compliance with the ACA. This, theoretically, kept some healthier, wealthier people who liked their current plans out of exchanges, making enrollees more expensive than originally intended.

The ACA also built in additional safety-net provisions for insurers who agreed to sell plans on exchanges, a risky endeavor. One of these provisions was the risk-corridor program, which would redistribute funds from insurers who made more than their target and give them to insurers who had made less than the target.

But in October, federal authorities announced insurers would at first receive only 12.6 percent of the funds they requested through the program. A provision in a budget bill passed last year, pushed by Sen. Marco Rubio, required the risk-corridor program to be budget neutral.

While insurers on exchanges owed money through risk corridors—including co-ops —submitted claims for $2.87 billion, they are only receiving $362 million. The full amount probably wouldn’t have saved the co-ops, but the shortfall insured that the last-resort measure wouldn’t help.

Why didn’t anyone do anything?

“Strongly worded letters” are written so frequently in Congress, and to so little effect, that the phrase has become a catchall term for futile action. So, when Republican Sen. Orrin Hatch of Utah penned one such letter in late 2013 warning of a co-op’s demise, it was understandable that it passed without much notice—dismissed as another ripple in the dueling rivers of partisan rhetoric about Obamacare.

Instead, Hatch’s letter proved prophetic.

“We made it pretty clear that they weren’t going to work, and they haven’t worked, nor did they really have much of a chance to work,” Hatch, currently chairman of the Senate Finance Committee, said in an interview. Sens. Lamar Alexander of Tennessee, Michael Enzi of Wyoming, and Tom Coburn of Oklahoma coauthored the letter with him, as well as Rep. Charles Boustany of Louisiana, who was then chairman of the House Ways and Means Committee’s oversight subcommittee.

After Hatch sent the letter to HHS, he said, “that was kind of the end of it, as far as the administration was concerned. They don’t think seem to be that interested in trying to restructure it or change it or get it to work.” But then he defaulted back to a broader critique of the health care law—an “abject failure,” he said—and Democrats’ perceived reluctance to admit its shortcomings. On co-ops specifically, while he and the other Republicans “raised the issue ... it’s been impossible to really correct Obamacare because the Democrats treat it like a scripture,” he said.

Hatch wasn’t the only one who sensed trouble on the horizon. Earlier that year, in July, HHS’s Office of Inspector General released a foreboding report: “If unforeseen circumstances ... or barriers ... impede CO-OPs from becoming operational,” the report read in a section detailing what it found, “there is a risk that CO-OPs could exhaust all startup loan funding before they are fully operational or before they earn sufficient operating income to be self-supporting. This may affect the CO-OP program in the long term.”

As it so happens, what was deemed a “risk” is almost exactly what has happened to more than half of the co-ops established under the health care law.

This was clear in a hearing held by a Ways and Means subcommittee on the ailing program earlier this month. “In the face of multiple pressures, it’s not surprising that some new entrants have struggled to succeed,” said Mandy Cohen, CMS chief operating officer and chief of staff, while testifying before the committee.

Cohen listed ways HHS has monitored the program: “There are guideposts and checkpoints, and we make sure to look at oversight,” she said. “If we feel like they’re going beyond the guardrails we set up, we enhance our oversight, put folks on enhanced oversight or corrective action plans; we do on-site visits to gather more information than just them sending us information.

“I don’t think we’ve been easy on the co-ops. ... We’ve taken our job as stewards of the taxpayer dollar very seriously,” she said.

Most members of Congress are happy to explain why they didn’t save the co-ops: The other side of the aisle would have never let anything pass.

Democrats don’t want to touch their favorite-yet-failing law, Republicans say. And Republicans turn up their noses at anything that might improve Obamacare, desperate to prove it doesn’t work, Democrats counter.

“You can’t get the Democrats to do anything on Obamacare. We’ve tried on various occasions to find—not necessarily on that issue—but yeah, we’ve tried to get them to work with us on some of these Obamacare issues,” Hatch said. “It’s as though it’s an inviolate set of scriptures, but scriptures are items that really are true, and work, and don’t destroy things. Obamacare avoids all three of those.”

“All the Republicans want to do is vote to eliminate the Affordable Care Act,” said Sen. Debbie Stabenow, a Michigan Democrat. “So when we have things that would be good to address, instead all we have are votes to repeal the Affordable Care Act instead of addressing things.”

And so what happened was nothing.

“Find me anyone in Congress that made any proposal whatsoever to suggest that we do anything to fix them,” a Grassley aide said. “Show me where it is that CMS said, ‘Hey, please come to the rescue.’ Where’s the white horse? I don’t think that happened.”

So what now?

The more than 110,000 Iowans and Nebraskans receiving insurance through CoOpportunity were not only the first to fall, but also were among those who fell hardest. The co-pays and deductibles they’d been paying into did not transfer, and consumers had to start over again with new plans.

“We had folks who spent money. And they’re not going to get the money back,” the Grassley aide said.

Hundreds of thousands—more than 200,000 on New York’s failed co-op alone—must now find new health insurance, although HHS has argued that to make the most of the system, consumers need to shop around anyway.

“All those people right now hopefully can use window shopping and are going window shopping to figure out what they might want to do,” HHS Secretary Sylvia Mathews Burwell told reporters at a briefing in October.

There is a positive takeaway to be had on the co-ops' failure: On one hand, it shows the competitiveness of price-sensitive Obamacare marketplaces.

But with the departure of the co-ops, that competition is diminished. The plans were in many instances the first or second lowest-cost silver plan on the marketplace, and their absence could both decrease competition and raise premiums. Co-ops were somewhat more likely to fail where they had been one of the two lowest-cost silver plans, in at least half of the states. All but one of the states using Healthcare.gov in which a co-op has closed also have benchmark premium rate increases in 2016 that are higher than average. However, tax credits are also tied to the benchmark plans, so as those premiums rise or fall, subsidies reflect those changes.

It’s up in the air whether teetering co-ops will be able to right themselves and continue on as planned. If they do, the program will probably continue in a stable, smaller version of its original self. And if the congressional fight over co-ops moves along the familiar Obamacare drama trajectory, the program’s failure will eventually be forgotten or fade into a bullet point listed among the slew of reasons why the law should be repealed and replaced.

But it’s also indeterminate whether other provisions of the law will similarly fall victim to congressional gridlock over the Affordable Care Act, which is showing no signs of abating anytime soon. The country’s newest entitlement program has been left on legislative autopilot for the last five years, leaving its course to be determined by how far the administration can bend the statute to its liking—and how sympathetic the Supreme Court will be until Congress decides to abandon its talking points in order to amend the law.

With the presidential election a year away and a filibuster-proof Obamacare-repeal bill currently working its way through the Senate, the chances of any large-scale, controversial ACA edits in the near future are slim. And in that case, the CO-OP model of congressional inaction—and the costs it imposes on people who live under it—is an occurrence the country should get used to.