Health Cooperatives Work to Gain Foothold Against Insurance Giants, Emphasize Local Ties

Some of the underdogs in the market to sell health coverage to uninsured Americans have scored unexpected early wins as they compete with industry giants for customers.

CoOportunity Health, a nonprofit cooperative operating in Nebraska and Iowa, will cover about 74,000 people in 2014, its first year of operation. That’s far more than the 18,000 that the co-op had earlier expected to cover, said Cliff Gold, its chief operating officer.

It’s just one example of the inroads the National Alliance of State Health CO-OPs points to in reporting that more than 400,000 people have enrolled in the 23 newly created nonprofit insurers. The covered population is still tiny compared to major for-profit insurers such as WellPoint Inc., which counts roughly 36 million people in its health plans.

But the chairman of NASHCO’s board, Martin Hickey, who also leads New Mexico’s new health co-op, said the group is “thrilled” with the progress.

“These numbers show that co-ops are indeed making a real impact on the health insurance marketplaces in their states,” said Hickey, whose group will release only an aggregate figure and doesn’t break down covered populations for individual members.

The co-ops were assembled largely from scratch over the past few years. Many have partnered with other groups for support operations or connected with an existing medical organization. Common Ground Healthcare Cooperative of Wisconsin, for example, is linked to the state’s largest medical system, Aurora Health Care.

Experienced insurance executives such as Hickey had to build entirely new enterprises while facing glitches in the startup of the federal health exchange website and some state exchanges.

It’s too early to tell whether the co-ops will have a lasting effect on the insurance landscape. Backers tout them as a way to rein in health costs for individual consumers and small businesses through an emphasis on local participation that the insurance giants lack.

A program that gives federal loans to start nonprofit health co-ops began as a conciliatory gesture for congressional Democrats disappointed that the 2010 health care law didn’t include a so-called public option. Republican lawmakers criticized the idea as unsound and politically motivated, and six GOP senators have asked the Government Accountability Office to examine the financial viability of the co-ops.

Debate so far has been dominated by anecdotes of a failed effort. Vermont state officials last year said that they wouldn’t issue a license to a co-op, citing concerns about its ability to stay solvent, repay federal loans and gain enrollment. The co-op has been approved to receive about $34 million in federal loans. Following the rejection of the license application, the Centers for Medicare and Medicaid Services directed the co-op to forfeit all unused money.

“American taxpayers lost $4.5 million in startup funds for a co-op that had been approved by the administration but that failed to meet even the most basic requirements for state licensure,” GOP staff of the House Oversight and Government Reform Committee charged in a February report. The report characterized the co-ops as the Obama administration’s $2 billion “gamble.”

Survival Questioned

Democrats in Congress have done little to defend the program. They have allowed funding to be whittled down from the original $6 billion target to roughly $2 billion through recent budget deals. Lawmakers also allowed the co-ops to be saddled with some onerous restrictions from the start.

The co-ops can’t use these startup funds to advertise and market their plans, according to Devon Herrick, a senior fellow at the nonprofit National Center for Policy Analysis. Nor can they compete freely with the insurance giants for large group employer plans, yet another reason Herrick sees them as doomed.

“As with most ill-conceived ventures run by inexperienced or undercapitalized management teams, health insurance co-ops will likely muddle along until they run out of taxpayers’ money,” Herrick said.

People running the ventures and some of their customers are more optimistic. Some of the co-ops appear to be gaining market share by emphasizing their local ties. A majority of the boards of co-ops must be members no later than two years after these nonprofit insurers become operational. The co-ops also have been stressing that they will return excess revenues to improve care in their communities.

“As a member-governed nonprofit organization, surplus revenues will be used solely for improving member health benefits, reducing health premium levels for members or for other programs intended to improve the quality of health care delivered to members,” the Kentucky Health Cooperative states on its website.

Publicly traded insurance giants have commitments to pay their shareholders regular dividends. WellPoint, which had operating revenue of $70 billion last year, paid cash dividend payments of $448 million last year, according to a regulatory filing.

“We are not obligated to send money to out-of-state masters,” said NAHCO’s Hickey, who also heads New Mexico Health Connections, one of the co-ops.

One insurance industry expert said such arrangements are a drawback, not an advantage.

Having shareholders provides more oversight for companies and also gives them another path for raising funds, said insurance industry consultant Robert Laszewski. The co-ops will need extra funds to try to keep their rates low enough to compete during their start-up years, and there are few places that they can turn, he added.

“The biggest challenge that they have is long-term access to capital. Because it takes five to 10 years to turn a profit, you really have to subsidize your rates in the first few years,” Laszewski said.

Co-op executives likely won’t be able to manage around this challenge, especially when competing with entrenched giants in their markets, Laszewski said.

“It’s possible a handful will survive,” he said. “Most will go by the way.”

Gold of CoOportunity agreed that there will be challenges ahead, but said there still are opportunities for which co-ops are well-suited.

He said the emergence of his co-op prompted a rival in Iowa, Wellmark Blue Cross and Blue Shield, not to increase premiums for individual and small business group plans to cover added medical and administrative costs this year. The Blue Cross plan will only raise rates less than 6 percent to recover costs associated with the health care law and added taxes.

Co-ops also are a part of a shift toward a more consumer-oriented care that could grow if more employers opt to stop health coverage and send their workers to exchanges.

“Our goal was never just to have a successful insurance company,” Gold said. “That’s not enough. It was to fundamentally change the markets in which we operate from our little corner out here in the prairie.”