Another Health Insurance COOP Bites the DustCommentary by Devon Herrick
August 25, 2015
Yet another health insurance COOP has failed. The Louisiana Health Cooperative will close its doors at the end of the year. This comes after the colossal failure of the largest health COOP earlier in this year – Iowa-based CoOportunity Health. In addition, a COOP in Vermont failed to get off the ground in 2013 and was disbanded.
Consumer Operated and Oriented Health Plans, or COOPs as they’re called, were intended to function as a so-called “public plan option” under Obamacare. A recent Office of Inspector General report found 21 of 23 COOPs had net losses in 2014. Data on CoOportunity Health was not available when the OIG collected data for its analysis. CoOportunity was shuttered in January 2015 bringing the number of COOPs earning a profit in 2014 to 1 of 23.
Proponents hoped COOPs would function like nonprofit, enrollee-controlled mutual insurance companies that would put the needs of people ahead of profits. Progressives lobbied for a public plan option because they believe for-profit insurers have high overhead, high marketing costs, bloated executive salaries, greedy shareholders demanding profits, and other expenses which would be better spent on health care. Supposedly, nonprofit health insurance COOPs could direct more of the premiums towards plan members’ medical needs. Yet that’s not what happened in Louisiana.
An analysis by the Washington Examiner identified self-dealing and conflicts-of-interest among the management team of the failed Louisiana COOP. For example, the COOP had signed a four-year contract to pay consulting fees of $7.3 million to a firm owned by the CEO. Several of his board members and three-quarters of top managers are also affiliated with the consulting firm he owns. That’s how graft sometimes works in the nonprofit world; funds are syphoned off in the form of excessive consulting fees to firms controlled by insiders. Costly “no-bid” service contracts – unavailable to competing service firms – are awarded to firms affiliated with top executives. This was a thinly disguised form of crony capitalism designed to loot taxpayers’ money!
COOP proponents – most of whom do not really understand how health insurance works – naïvely believed that health insurance COOPs would out-compete for-profit insurers because they supposedly did not have a profit motive. For those who think the profit motive is incompatible with health care, keep in mind that every organization has to earn a profit in order to grow. That includes nonprofit organizations. Those that fail to earn a profit go out of business sooner or later.
The COOP program is plagued by numerous flaws. They were started to serve a political purpose: to gain the support of liberal progressives. COOPs were not formed because they have a competitive advantage. When COOPs were established, they had no customers and no historical actuarial data to assist in setting plan premiums. The pool of potential enrollees were sicker than average, and COOPs had virtually no access to the capital markets to shore up losses; start-up costs and solvency reserves were borrowed from the government. To date, the government has lent COOPs approximately $2.4 billion. Some COOPs appear to be purposely underpricing premiums to gain market share, assuming taxpayers would bail out the losses. As the remaining COOPs fail, it will likely come to light that others have self-dealing, insider conflicts of interest that doomed them to fail.