In addition to instituting sweeping reforms designed to improve consumers’ access to affordable, comprehensive health insurance, the Affordable Care Act (ACA) created the Consumer Operated and Oriented Plan (CO-OP) Program to give consumers the option to choose a nonprofit insurer with a strong consumer focus. Of 23 CO-OPs launched, all but two have fallen short of their enrollment or profitability projections. Twelve plans have or are about to shut down, and two more have capped enrollment for 2016. The experiences of these fledgling companies reveal the many factors that limit market competition. We examined plan, pricing, and enrollment data for six CO-OPs located in Iowa and Nebraska (IA/NE), Kentucky, Maine, Maryland, Montana, and Tennessee. We supplemented this review with structured interviews of senior CO-OP executives and other experts to gain insights on the market assumptions and strategies of these new companies.
Critical health plan functions. To meet the very short deadlines for filing rates and plans with state departments of insurance, CO-OPs were forced to outsource critical functions such as network design and claims processing. For example, among the six CO-OPs we studied, Maine’s CO-OP was the only one that did not “rent” all or part of a provider network from another insurance carrier. This kind of outsourcing limits CO-OPs’ ability to control costs and manage service quality. Renegotiating vendor contracts and building their own networks are top priorities for CO-OP leaders.
Marketing. The ACA prohibits CO-OPs from using federal start-up loans for marketing. Most CO-OP executives reported that the statutory restriction was a hindrance but not an insurmountable barrier. CO-OPs were creative with their marketing campaigns, raising funds from partners and taking advantage of community events to educate the public about the new marketplaces and their products. Benefit design. A critical early decision for the CO-OPs was whether to offer the richest (platinum) level of coverage on the marketplaces. Of the six CO-OPs studied, half offered a platinum plan in their first year. But because their lower out-of-pocket costs make platinum plans attractive to consumers with significant health needs, these CO-OPs concluded that they attracted a sicker mix of enrollees than other plans. Of the three CO-OPs we studied that offered platinum plans in 2014, all subsequently reversed that decision.
Pricing strategies. Setting the initial and subsequent prices of their products may have been the most important decisions CO-OPs faced. However, unlike their competitors, CO-OPs lacked historical claims and market data to help them estimate their costs. The outcome of the CO-OPs’ pricing strategy often depended on the pricing behavior of their largest competitor, usually the Blue Cross Blue Shield (BCBS) plan. CO-OPs that priced their plans generally lower than the BCBS carrier gained significant market share; those with plans generally priced higher than the BCBS carrier had significantly less enrollment than projected.
High vs. low enrollment. Over half of the CO-OPs fell short of their enrollment targets in 2014, making it difficult for them to cover fixed costs and ultimately to generate the premium revenue to pay back their federal loan obligations. However, CO-OPs with higher than expected enrollment faced grave challenges, too, as they struggled to build capacity under time pressure and manage cash flow.
The ACA’s premium stabilization programs. The ACA includes three programs designed to help keep premiums stable. These programs are particularly critical to the viability of new carriers with limited capital such as the CO-OPs. Yet the delays and lower-than-expected payments under these programs have worked against small insurers. For example, companies had to wait 21 months before receiving a payment.
Adjusting to market conditions. CO-OPs recalibrated pricing to reflect market positioning and enrollees’ health needs. Those with low enrollment in 2014 cut prices to capture market share in 2015; those with high enrollment—and higher than expected costs—increased premiums. By contrast, Maine’s CO-OP kept premiums relatively stable, reflecting their belief that they priced their plans appropriately in year one.
Two years into the CO-OP program, more than half of these new nonprofit insurers have shut their doors. Eleven remain, and it is likely that some of these will continue to struggle. Even the most optimistic CO-OP executives acknowledge numerous challenges to their sustainability as a nonprofit coverage alternative for consumers. Some of these challenges are inherent to the health insurance industry and confront any new company looking to enter the market. However, other obstacles—resulting from policy decisions made during implementation of the ACA—have made business harder for CO-OPs. Policymakers often talk about how important it is to encourage greater competition in health insurance markets and provide consumers with more choices. But actually delivering on that goal requires a much greater investment of financial resources and political capital than has been made to date.