An aggressive price cut by Colorado’s nonprofit health insurance cooperative this year led to it capturing the biggest market share of the state exchange, but analysts warn the move carries financial risk.
A similar co-op serving Iowa and Nebraska was shut down by regulators in January after heavy losses, and the Colorado HealthOP’s losses were even greater when compared to its remaining funds, according to one analysis report.
“I would want to watch any cooperative that grew rapidly after a rate cut,” said insurance and risk management professor Scott Harrington at the Wharton School of the University of Pennsylvania. “People, especially regulators, should really be looking closely.”
In the second year of the state exchanges, the Colorado edition of the federally created Consumer Operated and Oriented Plans, or CO-OPs, upended the local marketplace by undercutting other plans’ premiums and pushing down federal subsidies available on the exchange.
Colorado HealthOP, one of 23 CO-OPs nationwide, reduced premiums on its middle-tier, or silver, plans by an average of 10 percent. Its customer count shot up from about 14,200 in late 2014 to about 75,000 this enrollment period.
“We’re right about where we projected we’d be,” said HealthOP chief executive Julia Hutchins. “Growth is really important for stability. You really need a big pool to spread risk effectively.”
The Affordable Care Act established the member-governed cooperatives — a political compromise for a quasi-public health option — to spur competitive pricing in the state marketplaces. Yet their relatively small sizes and some cut-rate premiums make them vulnerable to catastrophic medical claims, analysts say.
Financial and health policy analysts at Penn and Standard & Poor’s, among others, have sounded the alarm that high medical claims and net losses are a worrisome feature of the cooperatives.
Colorado HealthOP reported a net loss of $23 million in 2014 as claims and administrative costs overtook revenue from premiums.
“There was pent-up demand for health services,” Hutchins said of the newly insured.
To keep the cooperative solvent during the startup period, it successfully applied as Colorado Health Insurance Cooperative Inc. to the U.S. Department of Health and Human Services for $72 million in loans with five-year terms at interest rates at or near zero.
There are questions about what will happen when loans run out. Overwhelmed by high medical costs not covered by premium revenue, the 100,000-member Iowa and Nebraska CO-OP, CoOportunity, was shut down for liquidation, the Iowa Insurance Division announced Jan. 23. It lost nearly $40 million in 2014.
Claims generally get paid when states commandeer a carrier, but customers must find new insurance plans and sometimes lose the advantage of having met deductibles.
In the first nine months of last year, 11 cooperatives, including Colorado Health OP, had net loss-to-remaining funds ratios worse than CoOportunity’s 53 percent when it failed, according to a Standard & Poor’s analysis, reported by Modern Healthcare. Hutchins said Colorado HealthOP’s number was high because it didn’t include federal funds awarded but not yet disbursed. She pegs the truer third-quarter number at 45 percent.
Medical-loss ratios, the percentage of premiums that pay medical claims, were unsustainably high for many cooperatives, according to Harrington’s report last month for the Robert Wood Johnson Foundation.
Hutchins said the CO-OP refers to the medical-loss ratio as the “medical-benefit ratio” because it is the percentage of premiums and other revenue going toward medical care. For 2014, the Colorado HealthOP ratio was 89 percent. Harrington said he’s seen far worse numbers, including a few cooperatives at several hundred percent.
“It’s not a good measure for a CO-OP,” Hutchins said of the net loss-to-remaining funds ratio. “It’s a traditional measure, but it doesn’t quite translate to a cooperative … created with federal loans for unmet health care needs.”
The federal government also provides the cooperatives some risk protection.
The Colorado Division of Insurance recently reviewed fourth-quarter 2014 filings by Colorado HealthOP and other carriers, and the cooperative met the minimum capital and surplus requirements required by law, said division spokesman Vincent Plymell.
“We’ll have to see what 2015 brings,” Plymell said. “We have processes in place for any carrier that goes insolvent so that consumers aren’t left holding the bill. If it comes to taking over a company, claims continue to be paid through a nonprofit company called the Colorado Life and Health Insurance Protection Association.”
Broker Tom Crennen, president of ColoradoHealth.com, stays neutral on carriers’ prospects and wouldn’t hazard a guess about the complex financial considerations of cooperatives’ viability, but he admires the excellent customer service that Colorado HealthOP provides.
“They were super green when they started,” Crennen said, “but they are one of the sharpest, fast-learning groups out there. They have very satisfied customers.”
Of the 75,000 Colorado HealthOP customers, almost 55,000 signed up through the exchange, which meant the cooperative garnered 39 percent of the 141,639 open-enrollment customers of Connect for Health Colorado. By comparison, the giant nonprofit Kaiser Permanente signed up 49,500 individuals, or about 35 percent of the exchange.
Electa Draper: 303-954-1276, edraper@denverpost.com or twitter.com/electadraper
