Why are the insurance co-ops failing? This article provides the best answer yet

As a media critic and healthcare reporter, I read a lot about health policy in general and the Affordable Care Act in particular, from plenty of different sources. But earlier this month, I came across one of the best Obamacare stories I’ve seen since the debate on the law began—and it was in a trade publication that I have to admit I’d never heard of.

Adam Cancryn’s Nov. 11 article for SNL Financial on America’s incredible shrinking insurance co-ops is the story I’ve been waiting for someone to write: the best account to date of why, and how, the insurance co-op experiment is failing. These “consumer operated and oriented plans” were intended to bring choice and competition to the insurance exchanges, creating an alternative to the big insurers. They were one of the most notable innovations in the law, and many succeeded in enrolling large numbers of customers. But now 12 of 23 have shut down or made plans to do so, and the fate of many of the others is uncertain.

The story of how we got to this point, Cancryn writes, amounts to a “step-by-step guide for how not to build a successful… program.” Cancryn is a senior reporter for SNL, a specialty site that focuses on financial services, real estate, energy, and insurance, and he had room to work with—the article runs about 4,800 words. He put the story together the old fashioned way: reading the accumulating pile of documents about the co-ops, dissecting how they work; understanding the intricacies of insurance finance and finding experts to help him when he got stuck, and placing the co-ops in the political context of their birth and subsequent abandonment.

He documents how the co-ops made errors born of inexperience, how big insurers exploited their deeper resources to work the system and stifle competition, and how “politics-driven policy changes” on the part of both Congress and the administration put the co-ops at a deeper disadvantage. As a disappointed former Sen. Kent Conrad, who helped create the co-op program as an alternative to the doomed “public option,” tells Cancryn: “[A]ll this effort’s gone into this, we’ve gotten this far, and well, one person described it to me as fighting now with one hand tied behind our back.” 

The resulting narrative isn’t exactly light reading—the fate of the co-ops “has not been a huge story in Washington because it is so complicated,” one former government employee tells Cancryn, and there’s no getting around that complexity—but it’s clear, coherent, and compelling.

Cancryn pulls together several important threads, beginning with an early October announcement from the Centers for Medicare and Medicaid Services that much of the federal “risk corridor” money the co-ops had been counting on to cushion the expense of taking on new, sick customers would not be arriving after all, despite assurances to the contrary. (Last week, CMS said it still considers these unmade payments to be a future obligation of the government—not that that will do much to help co-ops that have folded.) And he explores why some co-ops once promoted as program poster children because of their success in enrolling customers, like New York’s Health Republic and Kentucky’s Health Cooperative, suddenly went out of business. They collapsed in part, he writes, “because their customer bases grew too big and costly for their thin capital reserves to support,” a problem exacerbated by federal funding decisions.

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Like most reporters dealing with federal health agencies these days, Cancryn had his share of trouble getting information. He reports that CMS “did not respond to several questions about the agency and the co-op program” and “denied requests to interview” top CMS officials. He told me that when the agency did answer questions about the risk corridors, he was often referred back to CMS press releases. “Not much was really new compared to the rest of their statements,” he said. 

One set of unanswered questions is particularly important. According to Cancryn, the agency declined to talk about an internal group called the Risk Committee, which has apparently been set up to dig into the co-ops finances. He writes: 

There is no public documentation of the Risk Committee’s activities or goals or even that it exists. CMS refuses to tell the co-ops who sits on the committee or what their qualifications are, executives said. The secrecy has raised suspicions among the co-ops as to the federal government’s intentions for the CO-OP program and to what extent the Risk Committee is influencing CMS’ decision-making.

That’s a detail that gives reporters in the 11 remaining co-op states—Connecticut, Illinois, Massachusetts, Maryland, Maine, Montana, New Jersey, New Mexico, Ohio, Oregon, and Wisconsin—something to start looking at now, because whether the federal government provides support to the surviving co-ops will be key. Barring the unexpected, Cancryn said, co-ops in these states will be in business at least through the early part of next year. But, he cautioned, they are “heavily reliant on government funding.” The dates to watch are February and March and mid-summer when the government will announce further funding available from other ACA programs that help insurers absorb new, sick policyholders into their pools. “If co-ops don’t receive what they expected, or if they get it late, it could create major financial issues,” he said.

For journalists in other states, meanwhile, the co-ops offer a valuable lesson in covering insurance in the broader marketplace. Insurance companies are not charitable institutions. They need adequate capital and adequate rates to stay in business. For some of the co-ops, the warning signs were obvious. In New York, for instance, Health Republic had received solvency loans from the federal government, and in the summer state regulators handed the insurer a 14 percent average increase, higher than other carriers on the exchange. What triggered the need for such a large increase? It turns out that policies with low premiums can turn into fools’ gold—just one of the many important points that comes through in Cancryn’s story.

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Trudy Lieberman is a longtime contributing editor to the Columbia Journalism Review. She is the lead writer for CJR's Covering the Health Care Fight. She also blogs for Health News Review and the Center for Health Journalism. Follow her on Twitter @Trudy_Lieberman.