All You Need to Know About Health Insurance Co-ops

Created by the Affordable Care Act, these cooperatives were supposed to expand Americans’ health insurance options. Some did, but many others failed. Here’s why, and what that means for you going forward.

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It’s possible the only thing you know about health insurance co-ops is they aren’t doing very well right now.

Or maybe you know the federal government created these companies so they could help Americans who struggle to find affordable health plans using traditional carriers.

That’s just the tip of the iceberg, though, when it comes to why they exist, what they offer (and don’t offer), and why so many have failed in the last year.

Why We Have Health Insurance Cooperatives

First, let’s tackle why these co-ops exist. The government created them in 2010 alongside the Affordable Care Act – also known as the ACA or Obamacare.

Specifically, a provision of Obamacare called for the government to provide loans to medical professionals, business groups, and others so they could launch “consumer operated and oriented plans” in every state.

A primary goal of that effort was to give people an alternative to traditional health plans. Another was to lower the rates of those plans by increasing competition among insurance providers.

Speaking of rates, if you think you’re paying too much for health coverage, shop around. QuoteWizard can help with this by connecting you with multiple insurance companies. Then you can compare quotes and get the best rates.

What Caused These Co-ops to Fail

In the end, the government handed out more than $2 billion in low-interest loans. And various groups initially used those funds to open 23 co-ops as of early 2014.

Why weren’t enough created to cover all 50 states? A big reason is lawmakers made massive cuts to the funding streams that were supposed to support co-op formation.  

Those budget cuts also impacted existing ones. In fact, some critics blame the cuts for causing more than half the original 23 co-ops to go belly-up.

In particular, they point to shortfalls in government payments that were supposed to help them cover unexpected losses as being especially damaging.

This prompted former North Dakota Senator Kent Conrad, who proposed the cooperatives, to say Congress sabotaged them. He also said: “Those who wanted to kill them — largely Republicans and competing insurance companies — just step by step took actions to subvert them and to assure they would have an extraordinarily difficult time surviving.”

Experts say a number of restrictions, placed on co-ops by Congress, also likely played a role. Two examples:

  • They can’t use federal money for marketing
  • Their ability to sell insurance to large employers is limited

Cooperative Leaders Also to Blame

Despite the above, there’s little doubt that co-op leaders also deserve some blame for their lack of performance. For starters, most of the failed cooperatives priced their plans too low. That proved to be a problem when the co-ops had to pay their less-than-healthy customers’ claims.

A good case in point is the U.S. Department of Health and Human Services report that said 21 of 23 co-ops ended their first year of operation with net losses.

Another report found they lost an additional $200 million during the first half of 2015.

Add in the fact that most co-ops enrolled fewer Americans than expected and it’s easy to see why so many closed their doors.

The Future of Health Insurance Co-ops

As of today, only 11 of the original 23 co-ops created by the Affordable Care Act are still operational.

Given how quickly 12 failed, it probably won’t be long until the others follow in their footsteps, right? Although that may be the case, some experts aren’t so sure the remaining Obamacare cooperatives are doomed.

Deborah Chollet, a senior fellow at policy research firm Mathematica, recently said co-ops can survive, and maybe even thrive, especially if their rates are competitive.

“They were all starting from scratch and that’s a very difficult way to come into the market in any industry,” Chollet told The Pew Charitable Trusts in September. “Even so, in some regions in the right conditions, I think they can do quite well.”

It helps that the government continues to work on creating those conditions. An example: officials say the Obama administration is taking steps to help these cooperatives attract capital and merger partners.

That’s a big deal because a major complaint voiced by co-op leaders is that the ACA limits their options in both of those areas. 

What Does All of this Mean for Me?

If you live in a state -- like Iowa, Kentucky, Louisiana, Nevada, or New York -- that lost its health insurance co-op, you’ve already had to find a plan elsewhere. (Assuming you use the federal or state exchanges to buy health coverage.)

Should any additional cooperatives fail this or next year, the people in those states can expect to make the same scramble.

Thankfully, says Paul Moyer, a licensed health and life insurance agent and founder of SavingFreak.com, if your co-op goes out of business you “get an immediate open enrollment exception and [can] switch to another company without having to worry about a lapse in coverage.”

Those who live in a state that still has a co-op, though, may benefit from that continued presence. Take the Urban Institute’s most recent report on the topic. It found that co-ops in 22 of the 73 regions the research firm keeps tabs on offered the best prices in their market in 2015.  

If you’re in a state that has a co-op, add Moyer, “they’re still a good option and will continue to pay their part of medical bills.”

Frequently Asked Questions

Q: How are health insurance co-ops different from more conventional non-profit health insurers?

A: One way Obamacare’s co-ops differ from other non-profit health insurers is that co-ops are more than just non-profits.

At first, they’re actually public-private entities. That’s because government loans helped establish them. Until the cooperatives repay those loans, they’re at least partially public organizations. Once those loans are off the books, though, they become private, member-owned companies.

Q: How are these companies different from typical insurance providers?

A: First, the co-ops are not for profit. Also, once they pay off their federal loans, they become public, member-owned entities. The way these cooperatives are structured is different too. Boards of directors controlled by policyholders govern them.

Q: Why were health insurance co-ops created?

A: The federal government created them for a few reasons. One was to help Americans who have a hard time getting health plans through traditional carriers. Another was to lower rates by increasing competition among health insurers.

Speaking of rates, if you think you’re paying too much for health insurance, let us help. We can put you in touch with a number of insurers so you can find the best rates.

Q: What are the pros and cons of health insurance co-ops?

A: Early on, the biggest “pro” associated with these companies was that they provide an alternate avenue to health coverage. Also, they tend to offer some of the lowest rates around. And of course the goal was for them to become fully member-owned, almost like credit unions.

As for the cons of these cooperatives, one has to be that the low rates mentioned above may have caused – or helped cause – a number of failures. Another negative is they’re limited in who they can serve and how they can spend their federal loan money.

Q: Why have so many co-ops failed?

A: The 12 co-ops that went under in the last two years likely did so for a variety of reasons. Many critics and experts will tell you that Congressional budget cuts played a big role – maybe even the biggest role.

The many restrictions placed on co-ops likely played a role too. One of those is the companies can’t use their federal loans to pay for marketing efforts. Also, they usually can’t provide health insurance to large companies like their main competitors can.

Q: What is the outlook for health insurance cooperatives moving forward?

A: It’s hard to say, although most experts probably would tell you that the future isn’t exactly bright. More than half of the co-ops Obamacare created in 2014 are now out of business.

Still, some that remain are doing well. Not only that, but many are providing health insurance to the public at a low price. If they can continue to do that and not lose money because their customers file too many hefty claims, they may have a bright future.

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