ACA Co-op Troubles Not Surprising

Strong support emerged during the Congressional deliberations that led to the Patient Protection and Affordable Care Act behind a government-run health plan to compete with private carriers. The “public option” failed, but did create political space for the concept of consumer-owned, non-profit health insurance co-operatives. The co-ops found their way into the ACA, but now, as a group, are in big trouble. Eight of the nation’s 23 health co-ops are going out-of-business and more may follow.

The Case for Health Co-ops

Then Senator Kent Conrad championed health co-operatives during the health care reform debate. Modeled after the electrical co-ops in his home state of North Dakota, he saw them as health plans owned by local residents and businesses. They would receive start-up money from the federal government, but otherwise would compete against private carriers on a level playing field.

Co-op advocates hoped they would bring competition to markets dominated by too few private carriers. In addition, they expected these non-profits to provide individual consumers and small businesses additional affordable health insurance choices. With focus on the first goal, health co-ops might be in a better place today. Unfortunately, too often they sprung up in states where competition was already strong.

The ACA set-up a roughly $6 billion fund to help get “Consumer Operated and Oriented Plans” up-and-running. The long-term financial viability of health co-ops was to flow from premiums paid by those they insured and the “Three Rs”—programs established by the ACA “to assist insurers through the transition period, and to create a stable, competitive and fair market for health insurance.” Specifically these were the ACA’s reinsurance, risk adjustment and risk corridor programs.

It’s Tough Being New

A (not so) funny thing happened on the way to the health co-ops’ solvency. Starting a health insurance plan is difficult and failure always an option. (I know. I was executive vice president at start-up SeeChange Health, an insurer that failed last year.) New carriers, by definition, have no track record, no data concerning pricing, provider reimbursements, claim trends, and the like. Their first foray into the market is an educated guess. Worse, new plans usually have a small membership base. This provides little cushion against the impact of miscalculations or unwelcome surprises.

A new health plan launching in the midst of the industry’s transition to a post-ACA world faced added exponentially greater difficulties. In 2013, when most of the health co-ops launched, no one knew what the market would look like in 2014. Exchanges, metallic plan requirements, guarantee issue of individual coverage and more were all happening at once. Were employers going to stop offering coverage? How were competitors going to price their offerings? Would provider networks be broad or narrow? The questions were endless; the answers at the time scarce. In a speech during the lead-up to 2014 I described the situation as carriers “playing chicken on tractors without headlights in a dark cave while blindfolded–at night.”

This is the world into which ACA-seeded health co-ops were born. That they now face  serious financial problems should surprise no one. They saw themselves as “low-cost alternatives” in their markets. If they were going to err in setting prices it was not going to be by setting premiums too high.

Besides, if they priced too low they were protected by the risk corridor program. As described by the Centers for Medicare & Medicaid Services, which manages the ACA’s financial safety net, the “risk corridors program provides payments to insurance companies depending on how closely the premiums they charge cover their consumers’ medical costs. Issuers whose premiums exceed claims and other costs by more than a certain amount pay into the program, and insurers whose claims exceed premiums by a certain amount receive payments for their shortfall.”

The majority of the nation’s health co-operatives saw claims exceeding premiums. Being on the “shortfall” side of the equation, the government was to come to their rescue like the proverbial cavalry with the money needed to keep them going.

Except the cavalry is a no-show. Too few carriers had too little claims surpluses to cover the too large losses of too many health plans. Only 12.6 cents on the dollar due under the risk corridor program is expected to make it to plans on the shortfall side of the equation the CMS announced on October 1st.

The Math Always Wins

Several of the health co-ops were in financial trouble before this news. Losing millions of dollars in expected relief doomed more. As of today, the dollars-and-cents have failed to add up for CoOportunity Health (the co-op in Iowa and Nebraska), the Kentucky Health Cooperative (which also served West Virginians), Louisiana Health Cooperative, Health Republic Insurance of New York, Health Republic Insurance of Oregon, the Nevada Health CO-OP, Community Health Alliance (a Tennessee co-op), and the Colorado HealthOP. Just to use the Colorado situation as an example, the Colorado HealthOp needed $16.2 million; they expect to receive $2 million.

Do these failures mean health insurance co-ops are a bad idea? Not necessarily. What they point to is that health co-ops may have been better off focusing on bringing competition to markets where there were too few plans, not joining a pack where there were enough. Even then, the collapse of the risk corridor program may have doomed them, but they’d have stood a better chance.

As noted above, Senator Conrad modeled the health co-operatives on electrical co-ops found in some rural communities. Where too few customers make it unprofitable for traditional utilities to invest in the infrastructure required, consumers, seeking electricity, not profits, come together to extend the grid.

Those implementing the ACA should have followed this model. Instead of funding 23 health co-operatives, the Administration should have offered seed money to fewer co-ops located where they would be the alternative in the market, not just another one. This may have allowed them to extend financial support long enough to at least partially offset the risk corridor shortfall. Then, just maybe, we could have avoided the “surprise” of failing health co-ops.

Effort to Eliminate Waste Coming Soon

It’s not that the Patient Protection and Affordable Care Act doesn’t contain any provisions aimed at reducing the cost of medical care – it’s that it doesn’t have enough of them. Still, what it has should be acknowledged. For example, Politico Pulse has reported that a unit of Health and Human Services will soon announce a package to incent providers to “disseminate effective practices and foster the spread of new knowledge on patient safety to the hospital community.” According to Spencer Health Strategists, who obtained a copy of a draft memorandum a few weeks back, the goal is to dramatically cut the estimated $50 billion spent each year on preventable hospital readmissions and hospital-acquired conditions.

The grants are designed to get private hospitals to improve patient safety and improve outcomes. Instead of developing new approaches or dictating specific practices, financial incentives will be to encourage hospital-generated innovations and to share best practices.  For example, the Innovation Center within the Centers for Medicare and Medicaid Services within HHS will support “states and large systems to developed networked learning project.” Those networks that achieve specified results will get additional resources to expand their efforts.

This focus on the private sector links the effort to improve safety and reduce readmissions underway within Medicare. According to the memo posted by Spencer Health Strategies, by 2013 six percent of hospital payments from Medicare to providers will be tied to public reporting of errors and the provision of safer, more reliable care ….” Over the next 10 years, $70 billion of Medicare hospital payments will be tied to hospitals’ “delivery of high quality care.” Medicaid will introduce similar provisions.

None of this is “official” yet, but based on the Politico Pulse report, it appears the Obama Administration will be launching this initiative soon. The potential of the program is to save billions of dollars and to do so relatively quickly. Even more significantly, the program could save thousands of lives. There’s a lot wrong with the PPACA, but this is an example of something that it gets right.

Health Care Reform 2009: Required Reading

Health care reform will be painful enough without requiring home work, but such is life. Here then is the required reading list for understanding the 2009 health care reform debate, where it’s going, and why.
(Note: a second list of health care reform required reading was added June 2, 2009 and a third list was added on August 11, 2009)

1. Critical: What We Can Do About the Health-Care Crisis by Tom Daschle withScott S. Greenberger and Jeanne M. Lambrew.

Former-Senator Daschle will be leading President Barack Obama’s health care reform effort, both in his position as Secretary of Health and Human Services and as Director of the Office of Health Reform inside the White House. Ms. Lambrew will be serving as Deputy Director of the Office of Health Reform. That there even is an Office of Health Reform highlights the importance of this issue to the incoming administration. That the Director of this office is also a Cabinet Secretary enhances the prestige — and clout — of both the office and its leader.

This makes understanding soon-to-be Secretary Daschle’s outlook on health care reform, well, critical. His book, Critical serves as a blueprint to his thinking.  Although the book was written before the identity of the Democratic nominee would be, Senator Daschle was an early supporter of Senator Barack Obama. It’s not surprising that his proposal ties-in well with the then presidential candidate’s health care reform proposal. Senator Daschle’s book, however, goes further.

Core to his solution for what ails America’s health care system is the creation of a Federal Health Board. Modeled after the Federal Reserve Board, it’s aimed at removing effort to control health care costs one step away from the day-to-day politics of Capitol Hill. “I believe a Federal Health Board should be charged with establish the [health] system’s framework and filling in most of the details. This independent board would be insulated from political pressure and, at the same time, accountable to elected officials and the American people. This would make it capable of making the complex decisions inherent in promoting health system performance. It also would give it the flexibility to make tough changes that have eluded Congress in the past.”

Specifically, Senator Daschle would have the Board set the rules for the national health exchange he would create. Through its own research and helping to prioritize research by other federal agencies, the Board would help promote “high value” medical care by “ranking services and therapies by their health cand cost impacts.” Senator Daschle would also have the board “align incentives with high-quality care.”  This would be done through evaluating new technologies as well as by aligning provider payments made by the federal government with health outcomes, rather than with services delivered. Finally, Senator Daschle would ask the Board to assist in “rationalizing our health-care infrastructure” by issuing an annual report identifying where investments are needed across the country — and where they’re not.

In addition to providing a blue print for the Obama Administration’s future health care reform proposals, Senator Daschle does an exceptional job of describing the history of America’s health care reform efforts from 1914 through the present day. As a participant in much of that history, his review can’t help but reflect his own biases, but Senator Daschle ably places today’s debate in an appropriate context.

What’s most encouraging about Critical is that it signifies a clear understanding of the central role controlling medical costs holds in reforming the system. This doesn’t mean Senator Daschle won’t seek to change the health insurance industry. He calls for expansion of federal programs, including a government program that would insure most individuals and small groups. For insurance agents, what is most disconcerting is that Critical never once mentions the role agents play in the current system nor what role Senator Daschle foresees agents playing in his vision for a future system.

 Nonetheless, Critical is important reading as Washington prepares to address America’s health care challenges.

2. Key Issues in Analyzing Major Health Insurance Proposals, by the Congressional Budget Office, published December 2008.

The Congressional Budget Office provides critical input to lawmakers on the expected impact of their legislative proposals. A negative analysis ruling can — and probably should — kill a bill; a positive one can help build momentum and support. Key Issues is not aimed at instructing members of Congress what to do about health care reform. Instead, it lays out how the CBO intends to evaluate whatever proposals Congress generates. As the report notes, “This document does not provide a comprehensive analysis of any specific proposal; rather, it identifies and discusses many of the critical factors that would affect estimates of various proposals.”

The budgetary impact of any health care reform proposal will be critical to its eventual success. The CBO document lays out in significant detail how it will go about measuring that impact. In doing so, the CBO provides a host of statistics, graphs and data that will be bandied about during the debate.

As if all this wasn’t enough to make Key Issues  a must read, Peter Orszag was Director of the CBO when the report was prepared. Mr. Orszag will be Director of the Office of Management and Budget in the Obama White House. In that role, he will have a great deal to say about the financial impact of various reform plans. Given his involvement, it’s not unfair to expect the Administration’s analysis to closely mirror the Congressional analysis described in Key Issues.

3.  Roadmap for Implementing Value Driven Healthcare in the Traditional Medicare Fee-for-Service Program,” by the Centers for Medicare & Medicaid Services.

The upcoming reform debate will be peppered with calls for “transparency,” paying for “value, not services” and for making commercial coverage as cost effective as Medicare. So it makes sense to see what the folks who run Medicare are thinking about concerning these issues. This report is CMS’ effort to help lawmakers “create rationale approaches to lessen healthcare cost growth and to identify and encourage care delivery patterns that are not only high quality, but also cost-efficient.”  The report describes the programs and demonstration projects already put in place by CMS to “foster joint clinical and financial accountability in the healthcare system.”

The CMS report is a tougher read than the other’s on this list. But given that any reform proposal will need to tackle skyrocketing medical costs, the report is worth the time.

I’ll add to this list in later posts, but these three items are a good place to start. And remember, if you think the reading list for health care reform is bad, just wait until you see the final exam.