A Healthcare Stumble That Could Wreck the Obamacare Facade

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The inclusion of not-for profit "cooperatives" in President Obama's signature health law was supposed to offer progressive policymakers a lesser alternative to a so-called public option. The co-ops were a concession to those who wanted the ACA to include a government-run health plan. They were a nod to the liberal desire for a federal health plan that would have been offered directly by agencies in Washington.

The co-ops were fashioned as an egalitarian alternative to the private, for profit health plans being offered in the Obamacare exchanges. Funded with taxpayer money, the co-op plans were a deliberate test of whether a not-for-profit approach could triumph over the for-profit plans being offered by traditional insurers.

But the co-op program got off to a rocky start, with many of the plans struggling in 2014 to keep prices low, form provider networks, enroll members, and stay afloat.

Now the co-ops are facing perhaps their biggest test to date. At stake, may be whether these plans can stay in business for another year. Also on the line is a more profound question of politics and policy. Whether or not the co-op plans will be the triumph of government administration over markets that many liberal policy makers had envisioned when they wrote this provision into the original law.

A number of the co-ops have announced their 2015 rates in filings this week. Some of these plans are proposing to sharply cut their premiums. Private insurers are going to be raising their 2015 premiums an average of about 10% in many states (to reflect their higher costs as a result of Obamacare's rocky rollout). By contrast, some of the co-op plans will be proposing to cut their premiums by a similar magnitude.

If the co-ops can successfully lower premiums, and still offer comparable benefits, liberal policy makers will hail the scheme as a triumph of government over markets. If they can't pull off these rate cuts, then the co-op plans could end up bankrupted.

In many states, the co-ops didn't start out as the cheapest insurance options. So the rate cuts come on top of premiums that are, at least in some cases, above average. But the reductions in 2015 premiums are still highly significant as a matter of both politics as well as business. These reductions, and the outcome, bear close watching.

The co-ops are basing their 2015 rate cuts on some very aggressive assumptions on their medical costs, and how much money they believe they can save on "trend." This is the amount of premium revenue that needs to be used to cover beneficiary medical costs. Since many of these co-op plans are brand new, they don't have a lot of experience providing coverage and paying medical claims. So their assumptions about their 2015 medical costs can amount to ambitious guesswork.

Among the health plans announcing 2015 rates is the Evergreen Health Cooperative, which is offered on the Maryland Exchange. Evergreen Health is proposing to cut its 2015 rates by 10.3%. In achieving this reduction, Evergreen assumes in its filing with state regulators that it will achieve a medical loss ratio (MLR) of 87.5%. This means that in 2015, the Maryland co-op plans to spend 87.5% of its premium revenue directly on the cost of providing healthcare benefits to its members.

This medical loss ratio is significantly better than the 80% MLR that is the typical benchmark among commercial health plans - both in and off the exchange. Moreover, Evergreen is assuming a medical cost trend of only 4.8% in 2015 - meaning that it expects the cost of providing medical care to rise no more than 5% next year. This assumption is highly aggressive relative to other estimates. Many other health plans are estimating high single digit or even double digit increases next year, as a recovering economy prompts more consumers to seek out medical care. Evergreen is also baking into its rate assumptions significant cuts in what it pays to providers, and reductions in what it spends on drugs and overhead costs.

In Connecticut, HealthyCT - another co-op that got off to a rocky start in 2014 - is making some similarly ambitious assumptions for 2015, and projecting big rate cuts.

HealthyCT is proposing to cut its premium rates by 9% in 2015, and achieve an MLR of 93.4%. To secure these metrics, HealthyCT is planning to reimburse providers at Medicare rates, and assuming an overhead margin (spending on general administration or G&A) of only 4.95%, down from a level of 11.6% in 2014.

Last year, HealthyCT was the subject of a prominent article in the New York Times that noted how the co-op plans were floundering. HealthyCT drew attention because of its lackluster enrollment numbers. Even after a rocky start, the co-op plans seem to be optimistic heading into 2015. It begs the question whether these assumptions are an expression of business fundamentals, or their political aspirations.

The success of the co-ops may be riding on the answer to that question. These plans were seeded with more than $2 billion in federal loans. Critics of these not for profit plans worry that the co-ops will eventually default on these commitments.

If the co-ops pull off their proposed 2015 premium cuts without seriously crimping benefits, liberals will hail the outcome as a triumph of progressive principles over the marketplace. If these co-ops stumble, others will point to this experiment as a vivid illustration of the failure of liberal ambitions when it comes to healthcare.


American Enterprise Institute (AEI) Resident Scholar Scott Gottlieb, M.D. is a practicing physician.  He previously served in senior positions at the Food and Drug Administration (FDA) and the Centers for Medicare & Medicaid Services (CMS). 

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