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JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act by Robert W. Cooper, PhD Lisa A. Gardner, PhD

Vol. 70, No. 5 | pp. 53-71

ABSTRACT

This article examines the implementation of

the portions of the Affordable Care Act (ACA)

[42 U.S.C. § 18001 (2010)] aimed at improving

access, affordability, and quality of health in-

surance, particularly that which is sold in the

individual and small-group markets. Accom-

plishing these broad objectives has led to ex-

tensive market reforms, creation of insurance

exchanges (marketplaces), and establishment

and funding of Consumer Operated and Ori-

ented Plans. The findings will provide finan-

cial services professionals with up-to-date

information on the current state of the ACA

for use in discussions with clients and other

members of the profession as well as in eval-

uating upcoming political proposals for re-

peal or other forms of modification of the law.

Introduction ost researchers agree that access to afford- able, quality health care positively influenc- es a country’s health outcomes. While some

countries adopted universal health care coverage several decades ago, the approach taken by policymakers in the United States has been more incremental, often relying on a mix of private and public solutions. For example, in the first part of the twentieth century, employer-spon- sored health insurance became more widely available, particularly among employers dealing with a unionized labor force. Workers compensation, which includes pay- ments for work-related injuries and illnesses, was adopted by the states during the same time period, too. In 1965, the U.S. government got involved in financing health care for persons aged 65 and older in an unprecedent- ed way through Medicare. At the same time, the U.S. Congress extended support for poor persons, regardless of age, who needed assistance in paying for health care through Medicaid. Despite these efforts, the number of uninsured persons in the United States grew significant- ly over the last two decades of the twentieth century and well into this century, thanks partly to health care costs escalating, cuts in employer-sponsored health insurance, a shrinking middle class, and other factors. With the passage of the Patient Protection and Af- fordable Care Act (ACA) in 2010, health insurance ad- vocates finally saw a health care program that requires the participation of virtually all U.S. citizens and legal

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

remainder of the paper is organized in the following way: It begins broadly by providing an overview of ACA health market reforms. Following that, it fo- cuses more narrowly on health insurance exchanges. Next comes an overview of one aspect of those insur- ance exchanges, the CO-OP program. This sets the stage for the discussions to follow about the experi- ences of the CO-OP program from 2014 to 2016. The paper ends with concluding comments.

ACA Health Market Reforms Aimed at achieving its objectives of expanding ac- cess to affordable, high-quality health care, the ACA instituted a considerable number of reforms that now impose requirements on private health insurance plans. The reforms, as indicated in a Congressional Research Service report issued recently and summarized in Table 1, targeted improved access to health insurance, coverage affordability, and coverage quality.2 Reforms targeting ac- cess include guaranteed issue and renewability, creation of insurance exchanges, creation of the CO-OP program, the individual mandate, and extension of dependent cov- erage to age 26. Those addressing affordability include guidelines about what constitutes fair health insurance premiums, prohibited rating factors, premium tax credits, cost-sharing reductions, small-business health tax credits, rate reviews, minimum medical loss ratios for insurers, and again, CO-OPs. Attempts to improve coverage qual- ity include creation of an essential health benefits package, out-of-pocket maximums, removal of lifetime and annu- al limits for essential benefits, removal of cost-sharing for preventive benefits, coverage choices tied to cost-sharing, and the designation of qualified health plans (QHPs) and corresponding requirements. As indicated in Table 1, the market reforms do not apply uniformly to all types of plans.3 While some re- forms apply to plans in both the individual and group insurance markets, most are focused on the individual and small-group markets alone. In the group market, the reforms do not always apply to both fully insured plans and self-insured plans purchased or established, respectively, by employers. In addition, grandfathered plans—health plans in which an individual was already

permanent residents.1 To permit implementation of its mission of expanding access to affordable, high-quality health care, the law required major reforms of the health insurance market, particularly the individual and small- group segments. The ACA also created a mechanism aimed at reducing premiums by increasing the number of health insurance providers and thus competition in state markets. More specifically, the ACA provided for a network of federally chartered Consumer Operated and Oriented Plans (CO-OPs) operating in newly created insurance exchanges that would provide a nonprofit competitor to for-profit insurance companies. The CO-OPs, ill-positioned from the start, came about as part of a legislative compromise between those who wanted a single-payer public option and those who opposed the ACA. As start-ups, CO-OPs faced the chal- lenge of competing with existing health insurers who arguably understood their respective competitive envi- ronments better. Unlike the incumbent insurers, CO- OPs were also subject to rules that restricted many aspects of their operations, further disadvantaging them against what was in some cases robust competition. Risk stabili- zation programs included in the legislation suffered from poor design and implementation. The ACA also limits access to external sources of capital for the CO-OPs, which has proved particularly problematic for those ex- periencing a less-favorable loss experience than expected. Despite initial congressional promises of significant, pe- riodic financial support to help stabilize these start-ups, Congress has fallen short on its promises many times. For some, like Iowa’s CoOportunity, an unmet request of fed- eral funding needed to continue operations was the final straw, necessitating intervention by the state’s insurance commissioner. Finally, note that allegations of oversight failure on the part of the U.S. Department of Health and Human Services (HHS) continue to raise doubts about whether the federal government could have made better decisions about the CO-OPs. This paper discusses the nature of CO-OPs and the insurance exchanges on which they predominant- ly operate or operated, and it describes and analyzes the key factors that have led to failure of a majority of CO-OPs in only their second year of operation. The

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

TABLE 1 Health Insurance Market Reform—Improved Access to Affordable, High-Quality Health Insurance

Applies to Applies to Reforms Description Individual Market Group Market

IMPROVED ACCESS

Guaranteed issue and Each health insurance issuer Individual market Large-group market renewability of health must accept every employer and nongrandfathered plans and insurance regardless of individual in the state that applies plans inside and nongrandfathered health status for coverage and renewal. outside an exchange small-group market plans inside and outside an exchange

Provide dependent Permits young adults to stay on All individual plans All group plans coverage their parents’ health care plan until age 26.

Exchanges Creates exchanges for individuals Individual market Small-group market and small businesses, and provides oversight of health plans with regard to the new insurance market regulations, consumer protections, rate reviews, solvency, reserve fund requirements, premium taxes, and definition of rating areas.

CO-OPs Creates the CO-OP program to foster the creation of nonprofit, member- run health insurance companies in all 50 states and District of Columbia to offer QHPs.

Individual mandate Requires U.S. citizens and legal permanent residents to have qualifying health coverage. (There is a phased-in tax penalty for those without coverage, with certain exemptions.)

AFFORDABLE

Fair health Premiums may vary only by family Individual market Small-group market insurance premiums size, geography, age (limited to a nongrandfathered nongrandfathered ratio of 3 to 1), and tobacco use plans inside and plans inside and (limited to a ratio of 1.5 to 1). outside an exchange outside an exchange

Prohibited rating factors Premiums prohibited from Individual market Small-group market reflecting health status, medical nongrandfathered nongrandfathered history, gender, and industry of plans inside and plans inside and employment. outside an exchange outside an exchange

Premium tax credit Depending on estimated household Individual market income for the next year, an plans inside an individual may qualify for a premium exchange tax credit that lowers the monthly premium for coverage purchased in an exchange.

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

TABLE 1 (cont’d) Health Insurance Market Reform—Improved Access to Affordable, High-Quality Health Insurance

Applies to Applies to Reforms Description Individual Market Group Market

Cost-sharing reductions Depending on estimated household Individual market income for the next year and the plans inside an purchase of a “silver” plan from an exchange exchange, an individual may qualify for cost-sharing reductions that lower the plan’s deductibles, coinsurance or copayments, and annual out-of-pocket maximum.

Small-business Employers with fewer than 25 Small-group plans health care tax credits full-time equivalent employees who purchase coverage for their employees on the Small Business Health Options Program exchange may qualify for a tax credit worth up to 50 percent of their premium contributions.

Rate review The ACA requires that insurance Nongrandfathered Nongrandfathered companies planning to increase plans sold in the plans sold in the premiums 10 percent or more individual markets small-group markets submit their rates to the state insurance department for review, and justify publicly and post on their Web site any unreasonable rate increases.

Minimum medical If an insurance company spends Individual markets Large- and small- loss ratios for insurers less than 80 percent (85 percent group markets in the large-group market) of premium on medical care and efforts to improve the quality of care, they must rebate the portion of premium that exceeded this limit.

CO-OPs Creates the CO-OP program to foster At least two-thirds of At least two-thirds of the creation of nonprofit, member- the policies or the policies or run health insurance companies to, contracts for health contracts for health among other things, enhance insurance coverage insurance coverage competition in the state markets and issued by a CO-OP issued by a CO-OP exchanges, thereby reducing in each state must in each state must premiums and/or premium growth be QHPs be QHPs and giving consumers affordable choices.

QUALITY

No lifetime limits Insurance companies are All new plans or All new plans or prohibited from placing lifetime plans renewing on plans renewing on dollar limits on essential health or after September or after September benefits. 23, 2010, including 23, 2010, including grandfathered plans grandfathered plans

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

TABLE 1 (cont’d) Health Insurance Market Reform—Improved Access to Affordable, High-Quality Health Insurance

Applies to Applies to Reforms Description Individual Market Group Market

No annual limits Insurance companies are Applies to all plans Applies to all group prohibited from placing annual (excluding grand- health insurance dollar limits on essential fathered individual plans—large market health benefits. plans) and small market

Coverage of preventive Health plans are required to provide New individual health New group health benefits without cost minimum coverage for preventive plans established on plans established on sharing services without cost sharing. or after September 23, or after September 2010 23, 2010

Essential health benefits ACA creates an essential health Plans in the individual Plans in the small- benefits package that provides a market and exchanges group market and comprehensive set of services with exchanges limited annual cost sharing.

Levels of coverage 60 percent for a bronze plan, All nongrandfathered All nongrandfathered 70 percent for a silver plan, health plans in the health plans in the 80 percent for a gold plan, and individual market small-group market 90 percent for a platinum plan; plus a separate catastrophic plan

Out-of-pocket maximum The total amount, including All nongrandfathered All nongrandfathered deductibles, coinsurance, and health plans health plans copayments, an individual will have to pay during the policy period before health insurance starts to pay 100 percent for covered essential health benefits.

QHP A QHP must include certification Individual market Small-group market that the plan meets the requirements inside and outside inside and outside for certification by each exchange an exchange an exchange through which the plan is issued and that it provides the essential health benefit package (the 10 essential health benefits); follows established limits on cost sharing; and provides either the bronze, silver, gold, or platinum level of coverage.

QHP requirements QHPs participating in the exchange Individual market Small-group market are required to meet marketing inside and outside inside and outside requirements, have adequate provider an exchange an exchange networks, contract with essential community providers, contract with navigators to conduct outreach and enrollment assistance, be accredited with respect to performance on quality measures, and use a uniform enrollment form and standard format to present plan information.

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

handling enrollments. In the 2014 open enrollment peri- od, 8 million people signed up for coverage on the public exchanges—2.6 million on the state-based exchanges and 5.4 million on the federally facilitated, including federal-state partnership exchanges. Public exchange enrollments for 2015 grew to 11.7 million consumers (2.9 million on the state-based exchanges and 8.8 mil- lion on the federally facilitated, including federal-state partnership exchanges). The role of public exchanges continues to grow, with 12.7 million enrollments (3.1 million on the state-based exchanges and 9.6 million on the federally facilitated, including federal-state part- nership exchanges) during the 2016 open enrollment period. However, in contrast with open enrollment, problems have been encountered with regard to special enrollment periods that permit individuals to enroll in one of more than 30 categories of special enrollment, creating difficulties for insurers.4 Insurers indicate their costs are being driven up by people who are gaming the system by using special enrollment periods where com- pliance with eligibility requirements is often not vali- dated to (1) delay signing up for coverage until medical expenses are actually encountered while, at the same time, avoiding a penalty for missing open enrollment; (2) quickly incur claims; and (3) then drop coverage without paying much in the way of premiums. A second problem is that people enrolling in special enrollment periods have higher claims costs, resulting in higher loss ratios than expected. A third concern is with the absence of any requirement of documentation or validation, such as that which is commonly required in other guaranteed issue markets. In response, the Centers for Medicare and Medicaid Services (CMS) tightened the rules for certain special enrollment periods effective May 11, 2016, and made it clear that special enrollment periods are available only in six defined and limited types of circumstances.5

In a 2015 survey of health care consumers, 76 per- cent of the public insurance exchange enrollees indi- cated the overall amount that they have to pay in terms of premiums, deductibles, and copays was an import- ant factor when they chose their current plan, and 64 percent said that finding good value/benefits for what they pay was also important.6 However, those enrolled

enrolled on the date the ACA was enacted and that continued to meet special requirements to maintain their grandfathered status—are exempt from most of the ACA market reforms. The market reforms, howev- er, do apply uniformly to QHPs offered outside, as well as inside, the health insurance exchanges.

Health Insurance Exchanges (Marketplaces) The exchange concept was included in the ACA as a means to improve access to health insurance. A health in- surance exchange (termed a “marketplace” in the ACA) is a structured online marketplace (Web site) where qual- ified individuals and small businesses can compare and purchase coverage offered by competing private health insurers. Coverages available on exchanges are QHPs that provide comprehensive coverage and meet all of the private market reforms specified in the ACA. In addition to providing a marketplace where qualified individuals can purchase QHPs in the in- dividual market, exchanges also assist certain low- to middle-income individuals with obtaining federally subsidized premium and cost-sharing assistance that reduces the costs of purchasing and using health in- surance. Exchanges also identify individuals who are eligible for Medicaid and other public programs. Similarly, Small Business Health Options Pro- gram exchanges aim at helping qualified small em- ployers and their employees with the purchase of QHPs available in the small-group market. Employ- ers can choose from among the exchanges’ QHPs those they will offer to their employees and specify the amount of premium they are willing to contribute. The ACA requires public exchanges to be established in every state. A state can choose to create and run its own exchange; if it chooses not to do so, the state’s residents can shop on an exchange run by the federal government, or the state can partner with the federal government to share responsibility for operating the state’s exchange. At the beginning of 2016, there were 13 state-based (includ- ing the District of Columbia), 31 federally facilitated, and seven federal-state partnership exchanges. Public exchanges have played an increasing role in

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

ernment’s involvement in health care. Providers were concerned that due to the strong negotiating power of a public plan, their reimbursements would be low- ered as a way to allow for a reduction in premiums. The debate on the public option progressed quite differently in the House and Senate.9 A public option offered through an insurance exchange was included in H.R. 3962 passed by the House on November 7, 2009.10 On the other hand, with heated debate be- tween progressive and conservative Democrats in the Senate during the fall of 2009, support for the public option diminished, and several other alternatives were discussed and rejected except for one. Recognizing that the public plan lacked the votes for adoption, Senator Kent Conrad, a Democrat from North Dakota, pro- posed a network of federally chartered CO-OPs that would provide a nonprofit competitor to for-profit in- surance companies. A CO-OP was substituted for the public option in the insurance exchange proposed in H.R. 3590, The Patient Protection and Affordable Care Act, passed by the Senate December 24, 2009, and by the House March 21, 2010.11 The law was signed by President Barack Obama March 23, 2010, and rules and regulations required to implement the law were drafted by CMS on behalf of HHS. The final rule was published in the Federal Register December 13, 2011.

The CO-OP Program The ACA directs the secretary of HHS to estab- lish the CO-OP program to provide loans to foster the creation of new, consumer-governed, nonprofit health insurance issuers called CO-OPs as vehicles to provide high-quality, affordable care and to use inno- vative care models in the exchanges. The program’s mission is also to enhance competition in the exchang- es and provide additional plan choices for consumers and small businesses. In addition to discussing the key features of a CO-OP, what follows examines the rules of the program that have presented challenges to the ability of CO-OPs to operate successfully, resulting in the failure of 13 of the 24 established CO-OPs in the first 2 years of the program and four more, located in Ohio, Connecticut, Oregon, and Illinois, in 2016.12

in an exchange are less confident they can find afford- able care when they need it as compared with those in employer, Medicaid, and Medicare plans. While it is clear by its nature that an objective of an insurance exchange is to improve access to health insurance, an exchange’s less obvious role in creation of affordable health insurance coverage became appar- ent during the drafting of ACA legislation by Congress from early 2009 until its passage by the Senate Decem- ber 24, 2009, and the House March 21, 2010. While, in general, the concept of the insurance exchange was broadly supported by both parties throughout this pe- riod, inclusion of a public option as a key feature in the design of an exchange was one of the most hotly contested issues throughout the entire legislative draft- ing process. Halpin and Harbage indicate the concept of the public option “was to offer a publically insured plan in direct competition with other options for pri- vate insurance coverage, in the hope of driving down both premiums and underlying health care costs.”7 Progressive Democrats and other supporters of the public option, particularly labor unions, contended the high degree of concentration in health insurance mar- ketplaces, where a few insurers provide the bulk of the coverage, reduces the degree of competition and there- by permits private insurers to charge excessive premi- ums and earn excessive profits. While often subject to dispute in the past, a number of recent studies provide evidence of a positive relationship between market concentration and insurer profits and/or premiums in health insurance markets.8 In addition to arguing that the public option would create a more competitive marketplace, supporters also believed that as a large purchaser of health care services, the public option could contain costs through more-effective bargaining power and by lowering administrative costs. Conservative Democrats and other opponents of the public option, particularly the health care and health insurance industries, argued that since a pub- lic plan would cost so much less and have such mas- sive bargaining power, it would threaten the future existence of the private health insurance industry, as well as provide a foundation for expanding the gov-

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

the majority of board members no longer required to be members of the CO-OP as of May 11, 2016, the CO- OP will have greater flexibility in soliciting candidates for the board who bring health insurance experience and expertise as well as represent outside entities pro- viding loans, investments, and services.13 Sponsors— those who were involved in the development, creation, or organization of the CO-OP or provided 40 percent or more in total funding of the CO-OP (excluding any loans received by the CO-OP program)—may or may not be members depending on whether they are covered by a policy issued by the CO-OP. Beginning January 1, 2014, CO-OPs were able to offer qualified health insurance coverage both inside and outside the exchanges. The coverage issued is a QHP that must meet certification requirements by each exchange through which the plan is issued and that provides the essential health benefit package—10 essential health ben-

Features of a CO-OP A CO-OP is a consumer-governed, qualified, non- profit health insurance issuer established with federal start-up and solvency loans. “Qualified” means the en- tity satisfies all requirements of Section 1322(c) of the ACA and Section 156.515 of the final rule summarized in Table 2. Especially noteworthy is that despite CO- OPs being created predominantly by federal law, state regulators have primary authority for oversight of CO- OPs as health insurers. As such, CO-OPs are required by the program to work with the relevant state insurance departments or licensing agencies to achieve licensure and meet the same solvency and reserve requirements as all other similarly situated health insurance issuers. A CO-OP must be governed by an operational board with a majority of its directors elected by the CO- OP’s members. Members are individuals covered under health insurance policies issued by the CO-OP. With

TABLE 2 Qualification Requirements of a Nonprofit Health Insurance Issuer

ACA Section

1322(c)(1) Is organized under state law as a private, nonprofit, member corporation; activities substantially consist of issuance of CO-OP QHPs in the individual and small-group markets in each state in which it is licensed to issue such plans; meets the other requirements in subsection 1322(c).

1322(c)(2) Not eligible if the organization or related entity (or any predecessor of either) was a health insurance issuer on July 16, 2009, or if a state or local government or subdivision sponsors it.

1322(c)(3) Meets governance requirements to ensure consumer control, including— a. The governance of the organization is subject to a majority vote of its members. b. Its governing documents incorporate ethics and conflict of interest standards protecting against insurance industry involvement and interference. c. The organization is required to operate with a strong consumer focus, including timeliness, responsiveness, and accountability to members.

1322(c)(4) Organization profits must be used to lower premiums, improve benefits, or for other programs intended to improve the quality of health care delivered to members.

1322(c)(5) Organization must meet all requirements that other issuers of QHPs are required to meet in any state where the issuer offers a QHP, including solvency and licensure requirements.

1322(c)(6) Prohibited from offering a health plan in a state until that state has in effect required market reforms.

§ 156.515 of Governance requirements—member control; standards for board of directors; ethics and the Final Rule: conflict of interest; consumer focus; standards for health plan issuance—at least two-thirds CO-OP of the policies or contracts for health insurance coverage issued by a CO-OP in each state Standards in which it is licensed must be CO-OP QHPs offered in the individual and small-group markets; if operating in the individual and/or small-group market, loan recipients must offer a CO-OP QHP at the silver and gold benefit levels; requirement to become a CO-OP.

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

tronically through Grants.gov, a government initiative providing a single access point for grants offered by the 26 federal grant-making agencies. Applications were re- viewed with input and expertise from an independent party, Deloitte Consulting, which used a team of insur- ance experts, actuaries, former state insurance regulators, and other experts to verify eligibility and evaluate each element of the application. The Deloitte findings and recommendations were sent to the internal CMS review committee, a committee led by insurance experts, and an actuary not on the CO-OP program staff.14

Of the 147 applications, 24 were selected to receive loan funds totaling $2.1 billion, 87.5 percent of the $2.4 billion remaining following four rescissions by Congress to the initially committed funding of $6 billion. During 2014, CMS provided approximately $352.5 million in additional solvency loan funding. Taken together, the CMS and actual congressional loan funding total less than half of the amount promised initially by Congress. One of the 24 CO-OPs, the Vermont Health CO- OP, whose plan was preapproved by CMS and was ini- tially funded with $33 million of start-up and solvency loans, was dissolved after it was denied an insurance license by Vermont’s insurance commissioner. Pollock indicates that some of the factors considered by the com- missioner in reaching her decision were Vermont Health CO-OP’s optimistic membership forecast; a lack of staff with experience in either business or insurance; a non- competitive sweetheart contract worth $500,000 or more arranged by the CO-OP’s newly installed president with an insurance agency he owned; poor governance by a board filled with conflicts of interest, insiders in positions to exploit the company for personal gain; noncompeti- tive premiums set 17 percent higher than the same pol- icies sold by competitors; deceptive advertising; and the commissioner’s prediction that the CO-OP would lose money each year, attract too few new customers, and face insolvency in only 3 years.15 While the Vermont CO-OP was prevented from conducting business in the insur- ance markets, some CO-OPs operating in other states engaged in the same type of self-dealing and conflicts of interest discovered in Vermont, as well as other question- able tactics. These include diverting to for-profit entities

efits; limits on cost sharing; and either the bronze, silver, gold or platinum level of coverage. Catastrophic health insurance plans may also be available to persons under age 30 and persons of any age with a hardship exemption from the requirement to have health insurance. As indicated previously, a CO-OP must be a recipi- ent of loans from the CO-OP program in order to create a new, private, consumer-operated insurer. It cannot raise funds through common stock issuance or through any other mechanism except by taking out loans. The ACA divides CO-OP loans into two categories: startup loans and solvency loans. A startup loan (to be repaid with in- terest no later than 5 years from the disbursement date of the loan) is seed capital for costs associated with establish- ing a CO-OP. These costs include establishing provider networks, paying for claims and financial operations, and meeting regulatory surplus requirements through the ini- tial phase of operations. However, CO-OPs were barred from using federal start-up funds to advertise and market their plans. (As an aside, note that established health in- surance companies faced no such restraints.) A solvency loan (to be repaid with interest no later than 15 years from the disbursement date of the loan) provided core capital for meeting state solvency and reserve requirements con- sistent with insurance regulations for the state(s) in which the loan recipient will offer CO-OP QHPs.

Applying for Start-Up and Solvency Loans An applicant for start-up and solvency loans from CMS must be an entity, a nonprofit member organiza- tion, that intends to become a CO-OP. Unless a spon- sor wants to become a CO-OP, it must form a separate entity to apply for loans from CMS. In practice, appli- cants represent a broad array of stakeholders, including consumer groups, community organizations, medical provider organizations, unions, business coalitions, and other groups. Submitted applications must include but are not limited to a project narrative feasibility study; a detailed business plan; a detailed budget narrative; bylaws; evidence of nonprofit status; evidence of en- gagement with state regulators; a list of state licensure requirements; evidence of private support, if applicable; and various affidavits. Applications were submitted elec-

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

transferring funds from plans with lower-risk enroll- ees to plans with higher-risk enrollees. With some ex- ceptions, the program applies to all nongrandfathered plans in the individual and small-group markets both inside and outside of the exchanges. The aim of the temporary reinsurance program, applying from 2014 through 2016, is to stabilize pre- miums by reducing the incentive for insurers to charge higher premiums due to uncertainty about the health status of enrollees. When an enrollee’s medical costs exceed a certain level called the attachment point, the plan is eligible for payment up to a reinsurance cap. Funds collected from all health insurance issuers and self-insured plans are used to make payments to non- grandfathered plans in the individual market. The temporary risk corridors program, applying from 2014 through 2016, limits losses and gains for QHPs beyond an allowable range to stabilize premi- ums and protect against inaccurate premium-setting during initial years of reform. The risk corridors pro- gram provides payments to insurance companies de- pending on how closely the premiums they charge cover their consumers’ medical costs. Insurers whose premiums exceed claims and other costs by more than a certain amount pay into the program, and insurers whose claims exceed premiums by a certain amount receive payments for their shortfalls.

Experience of the CO-OP Program 2014–2016 The 23 CO-OPs were permitted to issue health insurance on and off the exchanges beginning Janu- ary 1, 2014. By that time, they had experienced, and in some cases, were still dealing with, many of the challenges typically encountered in starting an insur- ance company, including:

• relying on third parties for pricing information since they have no prior claims experience on which to build rates (recognizing that even existing insurers would encounter challenges in projecting rates from prior data given the new ACA rules on guaranteed issue and prohibition of rates reflecting health status, medical history, and gender)

millions of dollars of funds meant to establish CO-OPs and paying salaries that appeared to violate federal laws and regulations barring excessive compensation for tax-funded enterprises. Despite these activities, the of- fending CO-OPs were funded and licensed to sell health insurance both inside and outside the exchanges. Pollock also indicates that The Washington Examiner’s review of the 24 CO-OPs found multiple cases of

CO-OP officers who had previously filed for bank- ruptcy, created fictitious resumes, faced federal sanctions, delivered poor consumer services, and compiled lengthy records of failed start-up ventures.16

Beginning January 1, 2014, when health insur- ance policies could first be sold on the exchanges, 23 CO-OPs offered health coverage in 23 states.

Premium Stabilization Rules introduced by the ACA, particularly those requiring insurers to issue coverage to all applicants and prohibiting varying premiums based on an individual’s health status, heavily affected the key functions of un- derwriting and ratemaking, raising uncertainty not only about how to price coverage but also about the health status and medical costs of those, particularly the unin- sured, enrolling in a plan. Moreover, there was serious concern about the extent to which insurers might con- tinue to use differences in coverage (e.g., less-than-gen- erous drug formularies) to discourage applications from those with expensive health conditions and to encour- age healthier applicants by, for example, including high- er deductibles and lower premiums.17 Anticipating that these and other uncertainties might lead to volatility in losses and premiums that in turn, might dissuade insur- ers from participating in the newly created exchanges, three premium stabilization (risk management “3Rs”) programs—termed “risk adjustment,” “reinsurance,” and “risk corridors”—were created in an effort to stabi- lize premiums and protect insurers against large losses, particularly during the initial years of reform.18 The permanent risk adjustment program is in- tended to counterbalance the usual incentives for health insurance plans to avoid enrolling people with higher-than-average costs. The program works by

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

addition of a single insurer was associated with 3.5 per- cent lower premium for the benchmark plan and a 2.8 percent reduction in the growth rate of premiums for the second-lowest-cost silver plan, respectively.24

While this revealed that the addition of a single insurer, including a CO-OP, to an exchange might, as indicated in the statement from the regulatory impact analysis, add competition sufficient to reduce premiums and/or premium growth, the demonstration came at an exceedingly high price in practice. A review conduct- ed by the HHS Office of the Inspector General (OIG) found that as of December 31, 2014, the member en- rollment of 13 of the 23 CO-OPs was considerably lower than the initial annual enrollment projections contained in the loan award application feasibility studies.25 In addition to exchange technical difficulties, delays in obtaining required licenses, and CO-OP man- agement changes, the low enrollment was attributed to some CO-OPs pricing their plans higher than other health insurers with more name-brand recognition. Ten CO-OPs exceeded their projected enrollment mainly by offering lower-priced plans than competing insurers. OIG review findings also indicated that 21 of the 23 CO-OPs incurred net losses from January 1 through December 31, 2014. Only the Maine CO- OP had a positive net income for that period. Data were not available for the Iowa/Nebraska CO-OP, CoOportunity, which, due to financial concerns, had been placed under control of the Iowa Insurance Commissioner on December 23, 2014. CoOportuni- ty was declared insolvent and issued a final order of liquidation on February 28, 2015. Net losses for 13 of the remaining 22 CO-OPs exceeded $15 million each for 2014. For 19 of the 22 remaining CO-OPs with net losses, claims expense exceeded premium revenue for the period. For the three other CO-OPs that experienced a net loss, pre- miums exceeded claims expense, but revenue was not sufficient to meet general administrative expenses. In a briefing released August 17, 2015, A.M. Best indicated that during the first quarter of 2015, enroll- ment grew substantially for the majority of CO-OPs, totaling approximately 869,000 members compared

• possibly facing greater pressure to be price compet- itive to attract members because as new entrants they often have less brand recognition than insur- ers already existing in the market (a problem, as mentioned earlier, encountered by CO-OPs since they were prohibited from using federal start-up funds to advertise and market their plans)

• having limited capital available to them, which leaves them with less of a cushion to absorb errors in pricing or random spikes in claims

• having to address all of these issues while at the same time attempting to establish important op- erations, such as enrollment, billing, claims adju- dication, and customer service19

The regulatory impact analysis of the CO-OP program’s final rule states: “By adding competition to state markets, CO-OPs have the potential to promote efficiency, reduce premiums and/or premium growth, and improve service and benefits to enrollees.”20 Based on analysis of information on pricing across plan types and actuarial value tiers contained in over 21,000 QHP filings for plan year 2014, Banerjee et al. found that in addition to offering the most products of all new entrants in the market, “CO-OPs have emerged as price leaders, offering 37 percent of the lowest-priced products in the 22 states where CO-OPs are present.”21 Subsequently, a study of 2014 and 2015 premiums in the exchanges conducted by Gabel et al. indicated that the addition of a carrier in a rating area had not only lowered average premiums for the two lowest-cost silver plans and the lowest-cost bronze plan by 2.2 percent, but plans in the CO-OP program also had lower premiums and average premium increases than the national com- mercial and Blue Cross and Blue Shield plans.22 Simi- larly, a study of the impact of competition on premiums in the exchanges conducted by Dafny et al. found that markets with CO-OPs have lower premiums, indicat- ing, “A portion of this association is attributable to a direct effect because CO-OPs are often among the two lowest-price silver plans in a market; their premiums di- rectly lowered the weighted average 2LPS [second-low- est-priced silver plan] by 2.1 percent.”23 Studies by Jacobs et al. and Sheingold indicated that in the exchanges, the

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21 CO-OPs were higher than the 15.9 percent ratio for the total U.S. health and HMO plans.

• Plans priced too low—Whether intentionally priced too low in an effort to offer cheaper policies and in- crease market share by undercutting competing in- surers or accidentally due to inaccurate pricing of premiums, the result was the same—a CO-OP at- tracting large enrollments containing a disproportion- ate share of unhealthy individuals looking for cheap insurance to cover high-cost illness. With the relatively high claims costs exceeding the expected losses built into the relatively low premiums charges, a CO-OP was increasing its sales of an unprofitable product.

• High-priced health insurance plans—Several CO-OPs priced their health insurance plans higher than other health insurers with more name-brand recognition, thereby failing to attract customers.

• Financial mismanagement—As mentioned earlier, some CO-OPs have, among other things, diverted to for-profit entities millions of dollars of funds meant to establish CO-OPs, been involved in self-dealing and conflicts of interest, and paid salaries that ap- peared to violate federal laws and regulations barring excessive compensation for tax-funded enterprises.

• Lack of experience—Unlike large health insurers, CO-OPs, as start-ups, lack experienced managers and actuaries as well as existing well-discounted contracts with integrated networks of health care providers essential not only to providing the afford- able, high-quality benefits promised by their plans but also to developing and using innovative, val- ue-driven care models the ACA seeks to promote.

• Lack of diversification—Unlike established com- peting health plans with well-diversified market portfolios, at least two-thirds of the policies or contracts for health insurance coverage issued by a CO-OP in each state in which it is licensed must be CO-OP QHPs offered in the individual and small-group markets.

• Lack of federal funds—Discussed below. • Flawed risk adjustment formula—Discussed below. • Low risk corridor payments—Discussed below. • Very limited access to external sources for capi-

with 478,000 at the end of 2014.26 However, despite a growth in revenue resulting from this membership growth, the majority of CO-OPs continued to report underwriting losses and net losses that totaled to an aggregate $72.4 million. A.M. Best pointed out: These losses have a negative impact on the absolute

level of capital and surplus and when combined with large premium growth, can lead to deterioration in risk-adjusted capitalization… . Furthermore, with- out external sources of funding for capital, the finan- cial viability for some plans will be questionable.27

Given the limited options for capitalization, there is no reason to believe that the financial outlook for these plans has improved. As shown in Table 3, following CoOportunity Health’s placement in rehabilitation in late December 2014 and ordered liquidation in February 2015, a series of 11 other CO-OPs ceased operations during the year as did four more in 2016. The closings were attributed to various combinations of the following factors:28

• Limited enrollment—During 2014, 13 of the 23 CO-OPs had enrollments considerably lower than those projected during the loan application process, thereby providing an inadequate mem- bership over which to spread fixed costs.

• Higher-than-expected medical claims—Claim costs were greater than expected due to higher-than-ex- pected enrollment of people with expensive health problems, lower-than-expected enrollment of young- er people, and inaccurate pricing of premiums.

• High administrative costs—The minimum medical loss ratio provision required insurers in the individual and small-group markets to spend at least 80 percent of premium on medical care and efforts to improve medical care, leaving at most 20 percent to cover ad- ministrative expenses. A study by A.M. Best of 21 CO-OPs for which data were available indicated that during the first quarter of 2015, the administrative expense ratio was greater than 20 percent of premi- ums for 16 of the 21 CO-OPs included. Seven of the CO-OPs had administrative expense ratios ex- ceeding 30 percent, with the highest equaling 82.8 percent.29 The administrative expense ratios for the

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Robert W. Cooper and Lisa A. Gardner

data. What seemed questionable about this argument was the fact that neither existing health insurance companies nor CO-OPs had ever experienced such an extensively reformed market in the past. Health insurers would no longer be permitted to reject applicants or charge premi- ums based on medical underwriting or reflecting specific differences in age—the key factors underlying their past data. Other factors encountered on the exchanges also led to unanticipated conditions in the market, including: (1) special enrollment periods in which eligibility criteria to use this alternative to open enrollment were often not en- forced, allowing individuals to sign up for coverage after the open enrollment period ended, quickly incur claims, and then drop coverage without paying much in the way of premiums; (2) lower-than-projected enrollment of younger and healthier individuals left enrollees dispro-

tal—Discussed below. Excluding Vermont, the 12 failed CO-OPs re- ceived $1.175 billion in federal loans that may not be paid back. As of November 28, 2015, these failures caused 753,573 members to lose CO-OP coverage. CMS indicated that as of January 21, 2016, three-quar- ters of those who lost coverage due to CO-OP failure had been able to secure coverage with other plans.

CO-OPs’ Problems with Pricing Were Not Unique Especially prior to 2014, discussions of the challenges that would be faced by CO-OPs in pricing their products frequently suggested that their premiums would be less precise than those of existing health insurers with histor- ical data and actuaries experienced in working with these

TABLE 3 Failed CO-OPs

State(s) of Closing Announced CO-OP Name Operation (Ceased Operations) Enrollment Loans

Failed during 2014-2015

1 CoOportunity Health IA/NE 12/16/14 (2/28/15) 120,000 $145,312,100

2 Louisiana Health Cooperative LA 7/24/15 (12/31/15) 17,000 $65,790,660

3 Nevada Health CO-OP NV 8/25/15 (12/31/15) 20,000 $65,925,396

4 Health Republic Insurance of NY NY 9/25/15 215,000 $265,133,000

5 Kentucky Health Care Cooperative KY/WV 10/9/15 (12/31/15) 51,000 $146,494,772

6 Community Health Alliance Mutual Ins. Co. TN 10/14/15 (12/31/15) 27,000 $73,306,700

7 Colorado Health Insurance Cooperative CO 10/16/15 (12/31/15) 80,000 $72,335,129

8 Health Republic Insurance of Oregon OR 10/16/15 (12/31/15) 15,000 $60,648,505

9 Consumers’ Choice Health Insurance Co. SC 10/22/15 (12/31/15) 67,000 $87,578,208

10 Arches Mutual Insurance Co. UT 10/27/15 (12/31/15) 66,000 $89,650,303

11 Meritus Health Partners AZ 10/30/15 (12/31/15) 59,000 $93,313,233

12 Consumers Mutual Insurance of Michigan MI 11/3/15 (12/31/15) 27,500 $71,534,300

Failed during 2016

13 InHealth Mutual OH 5/26/16 (12/31/16) 22,000 $129,225,604

14 HealthyCT CT 7/5/16 (12/31/16) 40,000 $127,980,768

15 Oregon’s Health CO-OP OR 7/8/16 (7/31/16) 20,600 $56,656,900

16 Land of Lincoln IL 7/13/16 (upon liquidation) 50,000 $160,154,812

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Robert W. Cooper and Lisa A. Gardner

to protect against adverse selection, supports health in- surance issuers that disproportionately attract higher-risk populations by transferring funds from plans with relative- ly lower-risk enrollees to plans with relatively higher-risk enrollees. Some contend the program does not work as intended and that it penalizes many new or fast-growing health plans, as well as those focused on efficient and val- ue-driven care. Risk adjustment payments are based on a plan’s ability to accurately identify and collect all diagno- sis codes and severity of the condition for its enrollees. In addition to the possibility of requiring training to ensure providers are accurately coding all of a claimant’s condi- tions, insurers need to have systems to capture the data collected and review them for accuracy and completeness. Insurers experienced in working with diagnostic coding and reporting in connection with risk adjustments used in the Medicare Advantage program are likely to have systems and expertise required to obtain appropriate risk adjustment payments based on their insureds. However, CO-OPs and other new entrants with limited expertise in risk adjustment may be less able to report accurately the full extent of their high-risk populations. Strategies for use by new health plans in responding to these and other competitive disadvantages are becoming available but not soon enough to help some plans.32 Claims that risk adjustment penalizes new health insurance plans experiencing rapid growth and any insurer that focuses on efficient, innovative, and val- ue-driven care arise from a purported technical problem with the risk transfer formula for calculating the pro- gram’s charges and payments.33 The estimate produced by this formula is affected by its use of the statewide market average premium. To the extent that a plan’s ac- tual premiums are significantly lower (or higher) than the market average, its estimated premium difference will be significantly exaggerated. In particular, for effi- cient, high-performing plans focusing on thorough care management, cost-efficient care, effective provider net- works, low administrative costs, and, in some cases, low nonprofit margins, member premiums will generally be well below average in an area for a given mix of enroll- ees. If such a plan’s premium is, say, 20 percent below the market average, then the risk transfer formula’s esti-

portionally older, less healthy, and more expensive; and (3) the ACA requirements to provide minimum benefits more generous than those commonly incorporated in in- dividual policies in the past.30 Operating in this same new, very different marketplace as the CO-OPs, a number of the largest existing health insurers, not surprisingly, also experienced very large losses at the outset due to setting premiums too low to cover claims and expenses.31 For ex- ample, UnitedHealth, Highmark, Blue Cross and Blue Shield of North Carolina, and Health Care Service Corp. have reported losses of approximately $720 million, $590 million, $400 million, and $240 million, respectively, resulting from mispricing of exchange business. Aetna, Cigna, Humana, and Anthem have also reported losses from exchange business. In April 2016, UnitedHealth announced that it was quitting the individual exchange programs in Arkansas, Georgia, Louisiana, Michigan, Connecticut, and others not yet named in 2017 due to losses suffered through participation in the exchanges. Thus, the availability or unavailability of past data did not provide existing insurers with much, if any, real ad- vantage over the CO-OPs in initially pricing their prod- ucts in the new market. In both cases, judgment was the key element in seeking to establish premiums adequate to achieve their objectives. Instead, it was the availability or unavailability of surplus to absorb the consequences of poor judgment in setting premiums that determined the financial impact on the insurer.

Problems with the Premium-Stabilization Programs As mentioned earlier, the ACA requires the estab- lishment of three premium-stabilization programs—risk adjustment, reinsurance, and risk corridors—designed to mitigate the impact of potential adverse selection and stabilize premiums in the individual and small-group markets as insurance reforms and the exchanges are im- plemented, starting in 2014. Concern has arisen, par- ticularly regarding the operation of the risk adjustment and risk corridors programs.

Risk Adjustment Program The permanent risk adjustment program, intended

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from other insurers.37 On October 1, 2015, CMS an- nounced that with submissions of $2.87 billion for risk corridors payments and $362 million in risk corridors collections, insurers would be paid approximately 12.6 percent of their risk corridors payment requests, less than 13 cents for every dollar requested. Regarding the shortfall of $2.5 billion, CMS indicated that the remaining 2014 risk corridors payments would be made from 2015 risk corridors collections, and if nec- essary, 2016 collections. The shortfall is the subject of a class-action lawsuit lead by failed CO-OP Health Re- public of Oregon against the federal government. The suit seeks $2.5 billion in funding for the 2015 shortfall incurred for 2014 policies, and another $2.5 billion for the expected 2016 shortfall for 2015 policies. The risk corridors shortfall has been directly implicated in the failure of eight CO-OPs, seven of which failed in October.38 These seven CO-OPs were in serious financial jeopardy as a result of the risk corridors shortfall as well as other factors. Rather than waiting to deal with likely insolvencies some- time during 2016, state insurance commissioners shut these CO-OPs down before or at the beginning of the 2016 open enrollment period, thereby prevent- ing, among other things, the need for their enrollees to seek replacement coverage during the year.

Very Limited Access to External Sources of Capital Capital, also called surplus, is the amount by which an insurer’s assets exceeds its liabilities. Pribe et al. indicate: Companies need surplus for many reasons, in-

cluding support for the companies’ loss reserves, protection from adverse cash flow shocks, and funding future capital investments (e.g., admin- istrative systems, buildings) and growth.39

A joint study by the Academy of Actuaries and Society of Actuaries in 2009 of the start-up costs for health insurance CO-OPs (and, alternatively, a public plan) indicated that the start-up capital for a CO-OP includes risk capital (to mitigate the insolvency risk associated with insurance premium income being in-

mate of the plan’s premium related to disallowed health factors will be 20 percent greater than the reality. CMS scheduled a public meeting for March 31, 2016, to solicit feedback on the current risk adjust- ment methodology and discuss possible improvements for the 2018 benefit period and beyond. Prior to the meeting, CMS distributed a discussion paper contain- ing a summary of the current risk adjustment meth- odology, including explanations of the risk adjustment models, the payment transfer formula, and updates to the models made since 2014, as well as potential mod- ifications being considered for the 2018 benefit year and beyond.34 In addition to comments and infor- mation obtained at the meeting, CMS requested that comments on the proposals discussed in the paper be submitted to a dedicated Web site by April 22 to pro- vide as much input as possible for use in future policy making for the risk adjustment program.

Risk Corridor Program Katterman describes this ACA program as it initially existed with government financial participation as follows: The risk corridor program was designed as a

two-sided program requiring insurers with bet- ter-than-expected financial results to pay the federal government a portion of their earnings, while at the same time requiring the federal gov- ernment to reimburse a portion of losses to insur- ers with worse-than-expected financial results. The program was not originally required to be budget neutral. In other words, payments out of the program could be greater than payments in.35

However, Section 1342 of the ACA, which created the risk corridor program, contains no explicit appro- priation. Rather, the program requires annual budget appropriations if the risk corridors collections for a year are insufficient to fund risk corridors payments for the year. Based on the program’s 2014 experience, the first risk corridors payments were scheduled for 2015. With passage by Congress of the “CRomnibus bill” in late 2014, the risk corridors program became budget neutral.36 The bill required that 2014 risk cor- ridor payments be funded by risk corridor collections

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Robert W. Cooper and Lisa A. Gardner

vestment income or by borrowing.”44 Responses from CMS indicate that a CO-OP’s surplus funds (defined as revenue in excess of expenses) must be used to low- er premiums; improve benefits; improve the quality of health care delivered to its members; repay loans awarded by the CO-OP program; and accumulate reasonable and sufficient reserves to provide for enroll- ment growth, financial stability, and stable coverage for members. Thus, unlike most insurers, CO-OPs are not permitted to use “profits” to generate capital. Fitzgerald et al. provide a detailed analysis of debt as a means for a CO-OP to raise additional capital.45 With the limited permitted uses of surplus just men- tioned, Fitzgerald et al. conclude that “CO-OPs ac- cordingly cannot use surplus to pay interest to other debtors which makes any debt unlikely during the term of the start-up loans or surplus notes.”46 In addition, the authors point out that “there is good reason to be skeptical of any plan involving CO-OPs raising capital through the use of debt,” given that the federal loan agreements prohibit CO-OPs from issuing or incur- ring new indebtedness without prior written consent of CMS, creating or granting any encumbrance upon its assets that is of equal or higher priority than existing CMS loans without the prior written consent of CMS, and then also requiring that the CO-OP obtain the consent of its domestic insurance regulator for issuance of additional debt when CMS solvency loans have been structured as solvency notes.47 Provisions of a CMS loan agreement would also permit a CO-OP’s merger with only another consumer-operated entity and then only with approval of the state insurance regulator. Lack of ability to effectively access external sourc- es of capital has become an increasing problem for CO-OPs, particularly when combating the results of other challenges such as significant net income loss- es, rapid growth in enrollment, and the risk corridors shortfall. Responding to questions at the time of the Senate Committee on Finance hearing on January 21, 2016, Andy Slavitt, acting administrator of CMS, in- dicated recognition of the important impact the lack of access to private capital was having on the operations of the CO-OPs in emphasizing the need to loosen up

sufficient to cover claims and expenses), and preoper- ational capital required to develop a CO-OP prior to selling any insurance.40 Most of the start-up capital is required to meet risk-based capital (RBC) standards in the states where a CO-OP is licensed to issue QHPs. The federal solvency loans and start-up loans were awarded initially to 24 CO-OPs (including Vermont Health CO-OP, which was denied a license) to fund their projected risk capital and preoperational capital needs, respectively. According to the Government Ac- countability Office, the 24 CO-OPs were awarded loan funds totaling $2.1 billion, 87.5 percent of the $2.4 billion remaining following several rescissions by Congress to the initially committed funding of $6 billion.41 During 2014, CMS awarded six CO-OPs approximately $352.5 million in additional solven- cy loan funding. As of early January 2015, CMS had disbursed about $1.6 billion (64 percent) of the $2.4 billion in loans awarded to the 23 CO-OPs remaining after the failure of the Vermont CO-OP to obtain a license. The $1.6 billion disbursed includes $351 mil- lion (98 percent) of the total startup loans awarded and $1.2 billion (59 percent) of the solvency loans awarded. Under the terms of the loan agreement, the RBC level that a CO-OP must maintain is specified in its business plan. For all CO-OPs this level is 500 percent RBC, which is higher than the sufficient 200 percent or 300 percent levels found in most states.42 Failure to maintain an RBC level that is within at least 10 percent of this RBC level is a potential “event of default” under the loan agreement. However, CMS evaluates CO-OPs that fall below 500 percent RBC on a case-by-case basis to determine whether the CO-OP should be placed on a corrective action plan or notified that the drop in RBC constitutes an event of default, per the loan contract. In the 2012 “fiscal cliff ” deal, Congress elimi- nated the remaining CO-OP funding, leaving only a small contingency fund and preventing the adminis- tration from lending additional money.43 As a result, CO-OPs would be required to obtain future addi- tional capital from other sources. Pribe et al. indicate that not-for-profit plans can “generate surplus through operating margins and in-

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Robert W. Cooper and Lisa A. Gardner

abilities. The report summarizes the findings of the subcommittee’s investigation as follows:

• HHS approved the failed CO-OPs despite receiv- ing specific warnings from a third-party analyst, Deloitte Consulting, about weaknesses in business plans, including defective enrollment strategies, budgetary and financial planning problems, and management weaknesses.

• Despite being aware of serious financial distress suffered by the CO-OPs in 2014, HHS failed to take any corrective action or enhance oversight for more than a year.

• Despite serious financial warning signs, HHS did not withhold any loan disbursements from the now-failed CO-OPs and in some cases accel- erated planned disbursements.

• HHS approved additional solvency loans for three of the failed CO-OPs in danger of being shut down by state regulators, despite obvious warning signs that those CO-OPs would not be able to repay the loans.

• HHS looked on as CO-OPs booked as assets massive, uncertain payments from the risk cor- ridor program.

• The heavy costs of failed CO-OPs will be borne by taxpayers, doctors, hospitals, patients, and other insurers.51

Concluding Comments Review of the implementation and current sta- tus of the ACA’s contribution to improving access to affordable quality health insurance protection reveals numerous successes and failures, depending on the perspective of the reader. On the one hand, the ACA did reduce the number of uninsured citizens, at least for a period of time. On the other hand, many of the CO-OPs formed as a result of the act have failed, and others continue to experience unfavorable operating results, raising questions about their financial viability. A number of factors seem to have contributed to the adverse financial results experienced by CO-OPs, and in some cases, by established insurance compa- nies participating on the exchanges. This paper high- lights several of these.

the capital rules to make it easier for CO-OPs to attract outside capital or a merger partner. He indicated CMS would soon provide guidelines for what steps CO-OPs can take to partner with investors and attract outside capital or merger partners.48 While new regulations is- sued May 5, 2016, do not change the rules regarding the types and sources of investments available to CO- CPs, CMS indicates, “They are intended to enhance the ability of CO-OPs to attract investors and develop new relationships that we anticipate will support their short- and long-term financial viability.”49

Federal Government’s Oversight Role in CO-OP Failure Based on detailed information gathered about the 12 failed CO-OPs created under the ACA, a majority staff report prepared for the Permanent Subcommittee on In- vestigations of the U.S. Senate released March 10, 2016, provides the most up-to-date findings and analysis avail- able from Congress at the time regarding government re- sponsibility for their collapse—the Congress or HHS.50 While HHS officials and others have suggested that a se- ries of budget cuts passed by Congress played a role in the CO-OP failures, evidence collected by the subcommittee alleges that this was not the case, since rather than depriv- ing the failed CO-OPs of any funds requested in their loan applications, they received $350 million more than they requested in their 2011 loan applications, based on 10-year business plans. Instead, the budget cuts’ prima- ry consequence was to prevent HHS from funding any more of the CO-OPs, one per state, provided for by the ACA. This, in turn, limits future losses to the taxpayers. The extensive evidence presented in the subcom- mittee’s report suggests that, rather than Congress’s budget cuts, it was HHS’s failure to respond appro- priately (if at all in many cases) when alerted to serious problems occurring throughout the period from the initial application process until the 12 failures that constituted government’s greatest contribution to the collapse of the CO-OPs. The report indicates that at the time, the subcommittee estimated the costs as- sociated with the CO-OP failures as approximating $2.33 billion in unpaid federal loans and nonloan li-

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Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

Lisa A. Gardner, PhD, holds the rank of professor at Drake University. Her research mainly concerns consumer-ori- ented insurance topics. She also serves various adminis- trative roles as the Sammons Group director of the School of Actuarial Science and Risk Management and director of the EMC Insurance Center.

(1) Patient Protection and Affordable Care Act, 42 U.S.C. § 18001 (2010). (2) U.S. Library of Congress, Congressional Research Service, Pri- vate Health Insurance Market Reforms in the Patient Protection and Affordable Care Act (ACA), by Annie L. Mach and Bernadette Fer- nandez R 42069 (2016). (3) Ibid. (4) Bob Herman, “CMS Reins in Special Enrollment Chances for Health Reform Law Plans,” Business Insurance, January 18, 2016; accessed at: www.businessinsurance.com/article/20160120/NEWS 03/160129988?tags=58%7C413%7C74%7C62. (5) “Special Enrollment Periods for the Health Insurance Market- place,” Centers for Medicare and Medicaid Services, Department of Health and Human Services, May 6, 2016. (6) Gregory Scott et al., “Public Health Exchanges: Opening the Door for a New Generation of Engaged Health Care Consumers,” Deloitte Center for Health Solutions (2015). (7) Helen A. Halpin and Peter Harbage, “The Origins and Demise of the Public Option,” Health Affairs 29, No. 6 (2010): 1,118. (8) Cassandra R. Cole et al., “Market Structure and the Profitability of the U.S. Health Insurance Marketplace: A State-Level Analy- sis,” Journal of Insurance Regulation 34, No. 4 (2015): 1–30; and Leemore Dafny et al., “Paying a Premium on Your Premium? Con- solidation in the U.S. Health Insurance Industry,” American Eco- nomic Review 102, No. 2 (2012): 1161–1185. Also, U.S. Library of Congress, Congressional Research Service, The Market Structure of Health Insurance, by D. Andrew Austin and Thomas L. Hungerford R40834 (2010). (9) Jonathan Oberlander, “Long Time Coming: Why Health Re- form Finally Passed,” Health Affairs 29, No. 6 (2010): 1,112–1,116. (10) H.R. 3962, 111th (October 29, 2009). (11) H.R. 3590, 111th (September 17, 2009). (12) Louise Norris, “CO-OP Health Plans: Patients’ Interests First,” HealthInsurance.org, May 20, 2016; accessed at: www. healthinsurance.org/obamacare/co-op-health-plans-put-patients- interests-first/. (13) “Special Enrollment Periods for the Health Insurance Market- place” (2016), endnote 5. (14) Scott et al. (2015), endnote 6. (15) Richard Pollock, “Vermont Insurance Regulator Delivers Set- back to Obamacare Co-Op” Washington Examiner, May 30, 2013; accessed at: www.washingtonexaminer.com/vermont-insurance- regulator-delivers setback to obamacare co-op/article/2530852; and Richard Pollock, “Vermont Regulator Who Killed Obamacare Co- Op Has No Regrets,” Daily Caller, November 12, 2015; accessed at: http://dailycaller.com/2015/11/12/Vermont-Regulator-Who- Killed-Obamacare-CO-OP-Has-No-Regrets/. (16) Ibid. (2013). (17) “Explaining Health Care Reform: Risk Adjustment, Reinsur- ance, and Risk Corridors,” Henry J. Kaiser Family Foundation (2014);

Despite these shortcomings, it is too soon to draw meaningful conclusions about the ACA’s overall suc- cess or failure. On an almost-daily basis, the media re- port on the act’s problems and proposed modification, as well as about ongoing conflict over which proposals for reform or repeal are needed or even possible. None- theless, the authors think it is important to raise some questions for consideration. For example, what is the goal of any alternative proposal—(1) improving access to affordable quality care to be delivered by the private health insurance industry as is being done with the ACA, (2) providing coverage to Americans aged less than 65 through a public program as Medicare does for those over 65, or (3) something else? If any pro- posed change is to be based on delivery by the health insurance industry, are changes similar to the ACA’s reforms essential to bring about needed change in the operation of the marketplace as ACA has done with the individual and small-group markets, and if so, what reforms are necessary? Would giving individual tax credits to those who obtain their health insurance either from an employer-based plan or as individuals provide adequate affordability or would, as with the ACA, an additional subsidy be necessary for some? Would providing health insurance coverage through a public plan provide adequate protection or would cov- erage provided by private insurers also be needed to supplement the public plan’s benefits? These are just a sample of the issues that the ACA faced in its design and implementation. However, finan- cial service professionals owe more to their clients, other professionals, and especially themselves than to mere- ly rely on a few words presented to describe a proposed change in health insurance protection, or worse yet, a call to eliminate an existing approach for delivering coverage without presentation of an alternative to replace it. n

Robert W. Cooper, PhD, is Employers Mutual Distinguished Professor of Insurance at Drake University. Previously, he was dean of the Huebner School at The American College where he was responsible for the CLU program and the creation of the ChFC professional designation program. His recent research efforts have focused heavily on busi- ness and professional ethics.

JOURNAL OF FINANCIAL SERVICE PROFESSIONALS | SEPTEMBER 2016

Extensive Changes and Major Challenges Encountered in Health Insurance Markets under the Affordable Care Act

Robert W. Cooper and Lisa A. Gardner

(32) David M. Liner and Jason Siegel, “ACA Risk Adjustment: Spe- cial Considerations for New Health Plans,” Milliman Healthcare Reform Briefing Paper, July 2, 2015; accessed at: http://us.milliman. com/insight/2015/ACA-risk-adjustment-Special-considerations- for-new-health-plans/. (33) CHOICES, Technical Issues with ACA Risk Adjustment and Risk Corridor Programs, and Financial Impact on New, Fast-Growing, and Efficient Health Plans, White Paper (2015). (34) “March 31, 2016, HHS-Operated-Risk Adjustment Methodol- ogy Meeting,” Discussion Paper, Centers for Medicare & Medicaid Services, U.S. Department of Health and Human Services, March 24, 2016; accessed at: www.cms.gov/CCIIO/Resources/Forms- Reports-and-Other-Resources/Downloads/R A-March-31-White- Paper-032416.pdf. (35) Scott Katterman, “Headwinds Cause 2014 Risk Corridor Funding Shortfall,” Milliman Healthcare Reform Briefing Paper (October 2015): 1; accessed at: www.milliman.com/insight/2015/ Headwinds-cause-2014-risk-corridor-funding-shortfall/. (36) Consolidated and Further Continuing Appropriations Act, 2015; Public Law No: 113-235 (2014). (37) S. Goodell, “An Amendment to the 2015 Federal Budget Con- tinuing Appropriation Raises the Question: Will Insurers Receive Their Full 2014 Risk Corridor Payments?” Health Policy Brief, Robert Wood Johnson Foundation, February 19, 2015; accessed at: www.rwjf.org/en/library/research/2015/02/risk-corridors.html. (38) Norris (2016), endnote 12. (39) Daniel Pribe et al., “Considerations for Surplus Determination under ACA,” Health Watch, 75 (2014): 22–28. (40) “Federal Health Care Reform 2009: Start-Up Capital Costs for Health Care CO-OPs and a Public Plan,” American Academy of Actuaries and Society of Actuaries, technical report, October 30, 2009; accessed at: www.actuary.org/files/publications/tech_coops_ nov09_start-up.pdf. (41) U.S. Government Accountability Office, Private Health Insur- ance: Premiums and Enrollment for New Nonprofit Health Insurance Issuers Varied Significantly in 2014, GAO-15-304 (Washington, DC, 2015); accessed at: www.gao.gov/assets/670/669944.pdf. (42) “Frequently Asked Questions on the Consumer Operated and Oriented (CO-OP) Program,” Centers for Medicare & Medicaid Ser- vices, Center for Consumer Information and Insurance Oversight, January 27, 2016; accessed at: www.cms.gov/CCIIO/Resources/Fact- Sheets-and-FAQs/Downloads/CO-OP-Questions-Final-1-27-16.pdf. (43) American Taxpayer Relief Act of 2012, 26 USC 1 (2012). (44) Pribe et al. (2014), endnote 39: 25. (45) Kevin Fitzgerald et al., “The CoOpportunity Liquidation and the Future of Affordable Care CO-OPs,” Health Insurance Report, Bloomberg Bureau of National Affairs, April 15, 2015. (46) Ibid., 3. (47) Ibid. (48) Stephanie Armour, “Fixes Are Planned for Health Coopera- tives,” Wall Street Journal, January 21, 2016: 2. (49) “Special Enrollment Periods for the Health Insurance Market- place,” (2016), endnote 5. (50) Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations, Majority Staff Report, Failure of the Affordable Care Act Health Insurance CO-OPs, United States Senate, 114th Congress, 2016. (51) Ibid., 1–5.

accessed at: http://kff.org/health-reform/issue-brief/explaining- health-care-reform-risk-adjustment-reinsurance-and-risk-corridors/. (18) “Risk Adjustment and Other Risk-Sharing Provisions in the Affordable Care Act,” American Academy of Actuaries Issue Brief (June 2011); accessed at: www.actuary.org/files/Risk_Adjustment_ IB_FINAL_060811.pdf. (19) Erica Coe et al., “How The Competitive Landscape On The Public Exchanges Is Continuing to Unfold,” McKinsey Center for U.S. Health System Reform (September 2015): 1–4. (20) Patient Protection and Affordable Care Act, Establishment of Consumer Operated and Oriented Plan (CO-OP) Program, 76 Fed. Reg.: 77,392 and 77,410; to be codified at 45 C.F.R. pt. 156 (2011). (21) Ananya Banerjee et al., “Exchanges Go Live: Early Trends in Exchange Dynamics,” McKinsey Center for U.S. Health System Reform (October 2013): 5. (22) Jon R. Gabel et al., “In Second Year of Marketplaces, New En- trants, ACA ‘CO-OPs,’ and Medicaid Plans Restrain Average Premi- um Growth Rates,” Health Affairs 34, No. 12 (2015): 2,020–2,026. (23) Leemore Dafny et al., “More Insurers Lower Premiums,” American Journal of Health Economics 1, No. 1 (2015): 79. (24) Paul Jacobs et al., “Insurer Competition in Federally Run Mar- ketplaces Is Associated with Lower Premiums,” Health Affairs 34, No. 12 (2015): 2027–2035; and Steven Sheingold et al., “Competi- tion and Choice in the Health Insurance Marketplaces, 2014–2015: Impact on Premiums,” ASPE Issue Brief, Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, July 27, 2015; accessed at: https://aspe.hhs.gov/ba- sic-report/competition-and-choice-health-insurance-marketplaces- 2014-2015-impact-premiums. (25) “Actual Enrollment and Profitability Was Lower Than Pro- jections Made by the Consumer Operated and Oriented Plans and Might Affect Their Ability to Repay Loans Provided under the Af- fordable Care Act,” Department of Health and Human Services, Office of the Inspector General (2015); accessed at: www.oig.hhs. gov/oas/reports/region5/51400055.pdf. (26) “Viability Issues Persist among U.S. Health CO-OPs,” Best’s Briefing, August 17, 2015. (27) Ibid. (28) “Nonprofit Consumer Operated and Oriented Plan Organi- zations (CO-OPs),” U.S. Health Policy Gateway, Duke Center for Health Policy & Inequalities Research, Duke University (2016); ac- cessed at: http://ushealthpolicygateway.com/vii-key-policy-issues- regulation-and-reform/patient-protection-and-affordable-care- act-ppaca/ppaca-repea l/components-of-aca-not-work ing-well/ components-of-aca-not-working-well-health-exchanges/nonprofit- consumer-operated-and-oriented-plan-organizations-co-ops/. (29) “Viability Issues Persist among U.S. Health CO-OPs” (2015), endnote 26. (30) For a more detailed discussion of the factors producing premium changes for 2014 and 2015 under the ACA reform rules, see: “How Will Premiums Change under the ACA?” American Academy of Actuaries Issue Brief (May 2013); and “Drivers of 2015 Health Insurance Premium Changes,” American Academy of Actuaries, Issue Brief (June 2014). (31) Allison Bell, “S&P Analysts: Individual Health Still Attrac- tive,” LifeHealthPRO, April 12, 2016; accessed at: www.lifehealth- pro.com/2016/04/12/sp-analysts-individual-health-still-attractive. Bell reports S&P analysts indicate that “insurers hurt themselves by pricing too aggressively, given the lack of information they had about how PPACA would affect claims.”

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