All the political (and I mean purely political) blaming the failure of a significant percentage of health insurance cooperatives on the Obama administration (or the new regulatory environment or even the failure for reinsurance/risk adjustment/risk corridor to prop them up enough) is very ridiculous. But before I go there, let me start with some background.

To promote new competition in the states, Congress authorized the CO-OP (Consumer-Operated and Oriented Plans) program to help establish member-owned and governed nonprofits as new players in local health insurance markets. Formed in the same way that many health care, telephone and electric power cooperatives were begun in the 1930s, the program had been strongly pushed by numerous groups who wanted more options for buyers purchasing health insurance on the individual and group markets.

At the start, there was a pool of $6 billion budgeted within the Affordable Care Act for two purposes: provide federal loans for start-up costs and a second fund that would act as collateral to cover solvency concerns that state Departments of Insurance might raise as they become operational. While that sounds like a ton of money, we are talking about health insurance companies. By the end of 2012, 23 start-up cooperatives to sell health insurance were authorized and approximately $2 billion was promised — about $87 million per entity.

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That still sounds like a ton of money. Until you consider volume: 25,000 members with an average premium of $320 per month is $96 million in premium volume. If you are an actuary or underwriter, your natural assumption is that you are going to lose money and have $125 million in claims that first year.

That would leave the average cooperative with no money to cover administrative costs: employees to do customer service, provider negotiations, and sales and marketing; technology to pay claims, support customer service and bill customers (which were higher than usual because most of them couldn’t afford to buy their own systems); rent, electricity and other utilities; and pay commissions to the agents who were often the ground marketing force for these entities.

But even if they performed better than expected, according to the National Association of Insurance Commissioners the average “net income” of a health insurer in America in 2013 was approximately 2.2% of premium. With its 25,000 members, this relatively low-membership cooperative would have approximately $2.1 million to pay back start-up loans to the federal government, and to put money into reserves.

Long-term consequences

By comparison, Blue Shield of California in 2014 had about 3.4 million lives covered, 5,000 employees with a total of $13.6 billion in revenue (about $333 per life, per month in revenue, which is a very simplistic calculation). That company ended the year with $4.2 billion in reserves, or about 30% of their annual revenue.

So why is all this important? Because the first rule with any start-up is this: when your biggest backer pulls back what they promise, there’s going to be consequences to your long term financial viability.

Remember that I said the original amount budgeted in 2010 for these start-up loans and solvency funds started at $6 billion. A political deal cut in 2011 had reduced that fun to only $3.4 billion, leaving it with about $1.4 billion in December 2012 after HHS had loaned out approximately $2 billion. The remaining funds were to be used as solvency reserves and to help the co-ops survive the first few years of operation.

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The death of the cooperatives was sounded when a second broad budget compromise was struck between the White House and Congress in January 2013, a part of which included a second significant reduction to the fund, leaving only $200 million, or about $8.7 million per entity.

The cookie jar had been raided, and now there was no money to left for the hard times.

Conspiracy theories

Now there are a million conspiracies about why all this happened, the biggest of which is that the carriers didn’t really want more competition in their markets, or the providers realized their future was in owning their own entities and not being tied up by the arcane ownership issues with the cooperatives. It wasn’t the Republicans that killed them, since every budget deal included the White House and Democratic leadership. Nor can anyone say that their failure was a natural outcome from the Affordable Care Act’s overregulation (another topic for another day) or bad executive leadership at the cooperatives.

The reality is that the CO-OPs could not overcome the most vital aspect of our insurance infrastructure: maintaining adequate reserves. With little access to finance markets and even less collateral, if there isn’t any money in the bank to pay claims when they come (and they will come), then no insurance company can survive.

The cooperatives that have failed (either by their own business decision or that of their state insurance department) are the natural result of good intentions not being supported with the promise of the money you need to survive. When your financial legs are cut out from under you, you can’t endure.

Let’s own that they were set up to fail, and nothing else.

Smith is vice president, health & welfare benefits, at Ebenconcepts in Fayetteville, N.C. Reach him at dcsmith@ebenconcepts.com.

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