Setup for co-ops unhealthy

Federally created nonprofit insurers feel sting of restrictions

WASHINGTON - When the new health-care law was being cobbled together, Congress decided to establish a network of nonprofit insurance companies aimed at bringing competition to the marketplace, long dominated by major insurers.


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But these co-ops, started as a great hope for lowering insurance costs, are already in danger.

While the debut of the Patient Protection and Affordable Care Act this month has been marred by widespread computer problems, the difficulties facing the co-ops have been less obvious to consumers. One co-op has closed, another is struggling and at least nine more have been projected to have financial problems, according to internal government reviews and a federal audit.

Their failure would leave taxpayers potentially on the hook for nearly $1 billion in defaulted loans and rob the marketplace of the kind of competition they were supposed to create. And if they become insolvent, policyholders in at least half the states where the co-ops operate could be stuck with medical bills.

Although the co-op plan originated in the Senate, resistance to the initial proposal quickly materialized on Capitol Hill, in part because of pressure from insurance industry lobbyists.

So Congress saddled its new creations with restrictions that, experts say, doomed the co-ops to failure. Federal grants for the co-ops were converted to loans with tight repayment schedules; they were barred from using federal money for crucial marketing; and they were severely limited from selling insurance to large employers, which represent the most lucrative market.

And even as President Barack Obama’s administration was setting up the program, White House officials, who had no pride of authorship and feared it would be risky, repeatedly suggested that funding for the co-ops be reduced, according to more than half a dozen people familiar with budget negotiations and the legislative debate. The funding was cut to a small fraction of what experts told Congress would be needed for the ventures to be viable.

Brian Cook, a spokesman for the Centers for Medicare and Medicaid Services, the federal agency overseeing the co-ops, said it is closely monitoring their progress and is “confident that co-ops will bean important option available to millions of consumers.”

But while the program was meant to be nationwide, only two dozen co-ops have begun selling insurance on the new health-care exchanges. The difficulties confronting the co-ops pose a challenge to the new law that is largely separate from the troubled roll out of the exchanges this month. But the problems, in particular the malfunctioning federal exchange website, are hitting the co-ops hard because they depend on the exchanges for business.

The co-ops differ from traditional insurers in their nonprofit status, consumer focus and organizational structure. They are governed by boards controlled by policyholders.

Those co-ops that have opened their doors are sending their small staffs door to door to educate people about what they do without violating a ban on explicit marketing. To get around what she called the “really difficult” restriction, Julia Hutchins, chief executive of the Colorado Health Insurance Cooperative, sent scantily clad models into the streets of Denver to urge people to “get covered.”

The Obama administration has estimated that more than a third of the nearly $2 billion it has lent to co-ops will not be repaid.

The co-ops have been set up by health-care organizations, such as hospitals and doctors’ groups, as well as by local businessmen, unions and community groups, and are being run by a variety of people, including former hospital and insurance executives and two former state insurance commissioners.

But Karen Davis, a professor of health policy management at the Johns Hopkins Bloomberg School of Public Health, said the co-ops were not designed with the support they need to thrive.

“One provision after another got stuck in there to limit their probability of success,” she said. “It’s a little ironic to say you are for competition in the free market, and then you don’t make it easy for new entrants.”

CONGRESSIONAL CUTS

It all started with “co-op night” in North Dakota. For two decades, leaders of the state’s numerous agricultural and other co-operatives had a chance at an annual forum to preach their virtues to one of Washington’s most powerful lawmakers, Sen. Kent Conrad, D-N.D.

When Senate leaders were seeking in 2009 to make the insurance market more competitive amid opposition toa proposed government-run health plan called the public option, they turned to Conrad, who chaired the Budget Committee. He suggested co-ops. He said their potential to compete with major insurers while remaining out of government hands could place co-ops in a middle ground acceptable to Democrats and Republicans.

But the American history of health insurance co-ops has been “littered with failures,” Davis said. If these new entities were going to succeed, experts told Congress, they would need government help.

Congress commissioned insurance and actuarial experts to find out how much help was needed. They recommended $10 billion. Early legislative drafts funded the co-ops at that amount through government grants, because Conrad argued that loan repayments would excessively burden co-ops.

The insurance industry balked. Industry lobbyists objected to what they called unfair government backing for the co-ops and raised concerns that they were not financially viable. Others familiar with the lobbying effort said the insurers didn’t want the competition.

If the government was to finance the co-ops, the lobbyists said, the new entities should get loans, not grants. The insurance industry had an ally in Sen. Ben Nelson, D-Neb., and he had emerged in late 2009 as a key vote for the bill’s passage. He insisted to Senate Democratic leaders that coops receive loans instead of grants, and they consented.

In another provision sought by industry lobbyists, the legislation said “substantially all” of the co-ops’ business must be in the individual and small-group insurance markets, meaning the outfits were essentially barred from the lucrative large employer market.

The law allowed co-ops to band together to purchase actuarial and other services, but it prohibited them from jointly negotiating contracts with doctors, which could have helped them compete with major insurers. Although the law required the administration to give top consideration to co-op applicants with significant private financial funding, it hampered their means of getting it by preventing them from accessing equity markets or investor capital.

Then there was the restriction on using federal money for marketing.

The changes still rankle Conrad, who left the Senate in January. “The long knives were out for this,” he said. “No money could be used for marketing? Really? That was clearly intended to be a poison pill.”

By the time the bill passed, Congress had cut co-op funding from $10 billion to $6 billion.

Then as the Obama administration prepared to implement the health-care law, Republicans began investigating the co-ops and pressing comparisons to Solyndra, a bankrupt California solar-panel maker that defaulted on a half-billion-dollar federal loan.

White House backing melted. The remaining co-op funding was cut in budget negotiations with Republicans in 2011 and 2012, leaving only a small contingency fund, and the administration was prevented from lending additional money.

Meanwhile, the way financing for the co-ops was designed meant taxpayers could pay the toll.

As a condition of licensing the co-ops, state insurance commissioners insisted that most of their federal loans be structured so that state officials can control whether and when the loans are repaid. If the co-ops run into trouble, state officials can order them to withhold payment. And if they go under, any remaining money will go to doctors and other debtors before the federal government, according to loan documents and insurance industry officials.

And despite the assurances of some co-op advocates, policyholders in some cases could be left with medical bills.

“It’s always possible,” said Monica Lindeen, commissioner of securities and insurance in Montana. That’s because at least 11 of the co-ops, because of the way they’re licensed, are not eligible for the guarantees available to traditional insurance companies, industry officials said.

Officials at the Centers for Medicare and Medicaid Services did what they could to help. They designed regulations saying co-ops could use federal funding to educate people about their companies, although they could not mention specific insurance plans. They also clarified that one third of co-op policies could be in the large-employer market.

Yet the obstacles remain daunting. In July, a Health and Human Services Department inspector general audit found that 11 co-ops had projected start-up expenditures that exceeded their start-up funding - and that there was “little evidence” of critical private support for 16 co-ops. Information for this article was contributed by Alice Crites of The Washington Post.

Front Section, Pages 7 on 10/23/2013

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