Failure of ObamaCare co-ops demonstrate the need for business basics

Printed from: https://newbostonpost.com/2015/10/28/failure-of-obamacare-co-ops-demonstrate-the-need-for-business-basics/

If only we could get profits out of the system, then things would work right.  That’s what proponents of government-run health care often suggest. Yet ObamaCare’s “co-ops” – including one in Massachusetts – are proving that health care must be run like a business, or it will run into the ground.

The idea behind ObamaCare’s co-ops (Consumer Oriented and Operated Plans) was that traditional insurance companies had failed to offer affordable products because they operate as for-profit companies. If co-ops were non-profit, and depended solely on government loans for initial funding, then they would be able to offer affordable consumer products.

Who could have possibly predicted disaster?

Today, co-ops are forbidden from advertising their new products (which saves them money, but may also hurt their enrollment efforts). These new nonprofits started with no actuarial data or history to use for pricing. And, like for-profit health insurance companies, co-ops have to follow ObamaCare’s rules: They must issue plans with “essential health benefits” to all comers – which include lots of benefits many people do not actually want and would prefer not to pay for.  Plus, they are forbidden from using medical underwriting or risk-rating to determine premiums.

The result?

The co-ops priced premiums too low. As a study from the University of Pennsylvania reveals, “The ratios to premiums of medical claims, claim adjustment expenses and general expenses for co-ops combined for the first three quarters of 2014 were 91.7 percent, 3.8 percent, and 21.3 percent, respectively, producing a total ratio of costs to premiums of 116.8 percent.”

What does this mean?  Put simply, for every $100 that the co-ops took in, they spent $116 – a formula for bankruptcy.

Another claim about for-profit insurance companies is that they spend too much money on administrative costs. Turns out, co-ops spend plenty on overhead too.  Minuteman Health Co-op in Massachusetts tops the list of co-ops when it comes to the ratio of administrative expenses to premiums. Granted, Minuteman’s poor performance in its first year was partially due to technical problems in the Massachusetts exchange. But Minuteman got more than $156 million in funding in 2014; it covered only 1,822 people – nearly $86,000 in total expenses per enrollee.

Now in their second year of operation, co-ops are faced with some tough realities. An analysis from A.M. Best showed 22 of 23 co-ops were losing money in 2014 (only one, in Maine, was profitable). Nine have already closed their doors, leaving more than 600,000 people nationwide without insurance coverage for next year (and leaving taxpayers on the hook for outstanding loans). Others are asking for shocking rate hikes to restore financial stability to their operations. Indeed, Minuteman is asking for rate increases of 11-35 percent in Massachusetts and 42-51 percent in New Hampshire next year.

Perhaps we shouldn’t be too hard on the co-ops.  After all, they might be products of poor management or bad execution, but their failure is driven, in large measure, by bad public policy. It’s hard for any firm to weather the impact of ObamaCare. In fact, many small insurance companies have shuttered as well. Virtually all insurers, regardless of size, have had to increase rates due to expensive coverage requirements and regulations that limit their ability to gauge risk.  Under ObamaCare, businesses can’t truly run like businesses.

It is worth remembering that the co-ops we have now were adopted because they provided a more politically palatable alternative to what many Democrats really wanted – a “public option.” Those who favored the “public option” (or universal healthcare) argued that private companies were to blame for the high cost of health insurance, and that their greed led to dysfunction in health markets. What they really wanted (and still hope for) is a government takeover of the health sector, with no private healthcare market.

But this view gets our healthcare system completely wrong. Markets aren’t the problem; in fact, they are the solution to many of the problems that have long plagued America’s healthcare system, where too much red tape and government intervention often get in the way of real competition.

Health reform was an opportunity to make health care and health insurance more like a competitive business, by encouraging more price transparency and better options for consumers.  Such an approach would allow consumers to prioritize with scarce resources and recognize tradeoffs between cost and more services. In other words, markets offer choice.

Providers then must compete to offer quality service at a good value, which encourages them to use resources more efficiently. Real, meaningful competition among private options will serve the public far better than a public option – or co-ops – ever could.

But instead, we got a health reform law that moves us in the opposite direction: micromanaging and standardizing insurance plans, and creating non-profit co-ops based on a political agenda. It is a misguided utopian delusion that resources can be better allocated by government than by market forces. It was this delusion that drove the creation of the co-ops; it’s reality that is driving them to bankruptcy.

Hadley Heath Manning is a senior policy analyst for the Independent Women’s Forum.  

This article has been edited to reflect that Minuteman Health’s poor performance in its first year was partially due to technical problems in the Massachusetts exchange, and that Minuteman covered nearly $86,000 in total expenses per enrollee.

Also by Hadley Heath Manning:

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