Health insurance co-op lost $50.4 million, most in U.S.; officials blame high enrollment, big claims; say it will stay solvent

By Melissa Patrick
Kentucky Health News

A federal audit of the non-profit health insurance companies formed under federal health reform found that at the end of 2014, all but one were operating at a loss, and the Kentucky Health Cooperative had the greatest loss, $50.4 million, but the lowest administrative costs.

The co-op chair and spokeswoman blamed the loss on an enrollment that was 183 percent higher than expected in 2014, its first year of operation. As of Dec. 31, its enrollment was 56,680; it had projected to enroll 30,929 by that date. The co-op sold three-fourths of the federally subsidized insurance policies sold on Kynect, the state health-insurance exchange.

The larger enrollment forced the co-op to put more money in its solvency fund to cover possible claims, under rules of the federal Centers for Medicare and Medicaid Services, co-op Chair Joseph E. Smith said in an interview.

"We had to set aside money, and money is what you use to pay the bills with," said Smith, whose main job is executive director of the Kentucky Primary Care Association. He said CMS rules require co-ops "to set aside 500 percent of the premiums," while "Most commercial products have a 200 percent requirement."

Another cause of the loss was that medical claims exceeded the premiums paid. Co-op spokeswoman Susan Dunlap said much of the higher-than-projected enrollment came from the sickest population in Kentucky, and many of them bought a top-level "platinum" policy, which pays 90 percent of claims and limits a patient's out-of-pocket expense to $500. Kynect has four levels of policies that qualify for federal premium subsidies.

"Of the 29 percent of the formerly insured who were in the high-risk pool who transitioned to a qualified health plan, Kentucky Health Cooperative attracted 93 percent of that number," Dunlap said in a telephone interview. "Those in the high-risk pool tend to be a sicker population and couldn't get coverage before the Affordable Care Act."

Smith concurred: "We were the only ones that took on the risk from the risk pool, the sickest population." The state had created the pool, funded by a fee on insurance companies, to provide coverage to those who couldn't otherwise afford it. When health reform was implemented, the pool was abolished and the fee was converted to pay the expenses of Kynect.

Dunlap also noted that the co-op had expected to have added healthier clients to their plans by now, but because the federal government has extended exemptions for the "grandfathered health plans" twice, this hasn't happened.

Grandfathered plans are those that were offered before the reform law passed and are still exempt from some of its rules and protections. They are often less expensive than qualified plans, largely because of the limitations on coverage, and have the potential to destabilize the insurance industry because it allows a two-tiered health insurance market, with only the sickest Americans entering the state and federal exchanges, reform advocates say.

Initially, the U.S. Department of Health and Human Services said about 40 percent of exchange policies should be bought by people between 18 and 35, the most healthy age group, to keep the exchanges financially stable. However, according to HHS data, that group has accounted for only 28 percent of the policies sold nationwide.

The co-op is one of 23 Consumer Operated and Oriented Plans formed under the reform law, as a way to give for-profit insurance companies more competition and hold down rates. They are funded by low-interest government loans. The start-up loan must be paid within five years and solvency grants must be paid within 15 years, all with interest. The audit noted some concerns about the repayment of these loans.

Cover of federal audit report

"The low enrollments and net losses might limit the ability of some co-ops to repay startup and solvency loans, and to remain viable and sustainable," says the report by the HHS Office of Inspector General.

The Kentucky Health Cooperative has received $146,494,772 in federal funding. It received its last installment of $65 million November 2014 to keep it afloat just days before the second open-enrollment period began.

The audit prompted criticism from one of Kentucky's most outspoken opponents of the law.

"Frankfort's corruption and incompetence is on full display in the Kentucky Health Cooperative and it should be shut down immediately," David Adams wrote on his Kentucky Progress blog. "It's as simple as making them understand the taxpayer money flow they have run on the last two years is all gone for this experiment in socialized medicine."

Smith, asked if the co-op will be able to pay back its loans, replied, "That is the question, isn't it? We think we will be able to pay it back. Why would we be doing this if we didn't think we could make a go of it, and making a go of it presumes we can pay it back? You saw that our projections end up in the black."

UPDATE: "Regarding our continued viability, there is a tremendous amount of uncertainty shared not only by health insurance cooperatives, but also, for all health insurance issuers,This is a time of tectonic shift," Dunlap said in an e-mail. "Kentucky Health Cooperative is putting tremendous energy behind a mission in which we are fully invested. We are doing as we have said all along that we would do-- serving Kentuckians -- many of whom never had health insurance coverage prior to the implementation of the Affordable Care Act. Kentucky Health Cooperative has paid millions of dollars in claims on our members’ behalf. We intend to continue serving them, and we intend to continue to sustain the strong partnerships that have been in place since day one with the Centers for Medicare & Medicaid Services; with the Kentucky Office of the Health Benefit and Health Information Exchange and with the Kentucky Department of Insurance."

The state Department of Insurance has allowed the co-op to increase it premiums an average of 25 percent for 2016. The audit reports that the co-op's 2016 projected net income will be $516,000. The co-op also plans to expand its service area to West Virginia next year.

Asked why the co-op is needed, Smith said, "Everybody needs an alternative to the commercial insurance companies. The concept of a co-op is a phenomenal concept where the users are the owners. Rather than taking money out to go to the shareholders, the money stays within the plan enhancing benefits to the enrollees, increasing benefits, and reducing cost of the benefits."

Janie Miller (AP file photo)

On June 5 the co-op announced that its CEO, former state health and human service secretary Janie Miller, had resigned for personal reasons and been replaced by former state insurance commissioner Glenn Jennings.

A trade group representing the non-profits took issue with the federal audit report.

The audit "reveals little in the way of new information about co-ops, and unfortunately relies primarily on seven-month old data," Kelly Crowe, CEO of the National Alliance of State Health CO-OPs, told The Associated Press. The group says its members' total sign-ups more than doubled this year, to over 1 million. That's "helping many co-ops move closer to their initial goals," Crowe said.

The Associated Press used data from the audit to calculate per-enrollee administrative costs for the co-ops in 2014 and found that "it ranged from a high of nearly $10,900 per member in Massachusetts to $430 in Kentucky. Fourteen co-ops had administrative costs of more than $1,000 per member. The audit found that the Massachusetts co-op collected $2.9 million in premiums, and spent $18.5 million on administration."

The audit recommends closer federal and state oversight of the co-ops and clearer standards and criteria to identify under-performing co-ops, as well creating a plan for how they will pay their loans back if they are no longer viable.

Oversight is "nothing new for us," Dunlap said, adding that the Kentucky co-op has welcomed oversight since the beginning. Now, she said, " We are working with an even closer relationship with CMS and the state Department of Insurance just to make sure that everybody has all sets of eyes upon it and that we are all seeing the same thing and interpreting the same things and making sure that things aren't missed."

Other findings from the audit:

• Projected losses for 2014 were higher than most co-ops projected.
• Maine was the only co-op that made money last year, with $5.9 million in net income.
• 13 co-ops fell short of their enrollment projections, and nine met or exceeded them.
• 19 co-ops had medical claims that exceeded premiums.
• The Iowa/Nebraska co-op has already gone out of business.
• The Louisiana Health Cooperative will not offer coverage next year.

UPDATE: Dunlap told The New York Times for a story published Aug. 14 that the co-op's enrollment was down to 52,000, from 56,680 at the end of 2014. “We attracted many consumers with serious illnesses,” Dunlap told the Times. “One of our most popular plans had low premiums, low out-of-pocket costs and a large network of providers. It’s difficult, it’s uphill, but we are energetic and hopeful. Trends are going in the right direction.”