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Commentary By Yevgeniy Feyman

What Washington Should Learn from Obamacare Co-op Failures

Health Affordable Care Act

Another of Obamacare’s insurers is going under. This time, it’s Health Republic of New York, an insurer that made waves in 2014 for offering some of the lowest-cost insurance plans on New York’s exchange. The non-profit, which had been hemorrhaging money since year one, will shut down by the end of November, taking $265 million in federally-subsidized loans with it. Health Republic is a textbook example of failure in government management, with lessons that should guide future reforms.

Here’s how the collapse happened. When an insurer, especially a new insurer, enters the individual market, they have two goals: First, gather enough market share to efficiently pool risk (this is at the core of what insurers do), sometimes through prices so competitive they’re lower than the actual cost of providing insurance; second, to ensure that premium revenue (the bill customers pay each month) is sustainable and covers expenses over time.

Health Republic was able to gather market share thanks to its low premiums—in the last enrollment cycle, they took home 20 percent of New York’s exchange market—but they failed to maintain adequate premium revenue.

According to regulatory filings, Health Republic’s 2014 “medical loss ratio” (MLR), a ratio of claims to premiums collected used to assess the financial health of insurers, was a whopping 133 percent. That means that for every dollar collected in premiums, the insurer had to pay out $1.33. The 2010 health law requires insurers in the individual group market to maintain MLRs of no lower than 80 percent.

In contrast, consider Oscar Health Insurance, a for-profit, New York-based startup insurer that is also new to the market. With clever marketing and a more modern approach to insurance (Oscar provides enrollees with access to telehealth, for instance, and offers a “search engine” for symptoms) the insurer has done a much better job balancing risk and revenue, with an MLR of 108 percent. Granted, Oscar hasn’t picked up as much enrollment, but it nevertheless has doubled its members from 2014 to 2015. And for 2016, the insurer expects to have a much more reasonable MLR of around 91 percent.

Why did Health Republic do so poorly in comparison? Part of it has to do with a temporary Obamacare program—“risk corridors”—that forces insurers with higher profits (and ostensibly either healthier populations or overpriced plans) to subsidize insurers lower profits. The idea behind this program is to encourage competition on the exchanges for insurers new to the individual market by making it more difficult to succeed simply by attracting a healthier population.  It appears that, in order to maintain its low premiums and broad network of providers, Health Republic was relying on collecting nearly $150 million in payments through this program, but the insurer is expected to actually receive only 15 percent of that.

The blame for that rests on Republicans in Congress. In budget negotiations last year, Republicans demanded deficit neutrality. As a result, most of the risk corridor claims for 2014 won’t be paid out.  But even the reduced payments are helping plenty of new insurers, including Oscar, to compete with more established insurance companies. It’s likely, then, that what really sunk Health Republic is a bad business model imported from Washington.

Health Republic is one of 23 non-profit insurers created by Obamacare and provided with taxpayer-backed loans. Called “co-ops,” they were offered as an alternative to a government-run insurance plan (the so-called “public option”) originally proposed in the law. While these co-ops offered low premiums initially, around half of them are now ending operations.

This high incidence of failure teaches us two things. First, it should end the thinking that non-profits are somehow better than for-profits. A recent look at premiums on Obamacare’s exchanges found that in just over half of all counties, the lowest priced plans were offered by non-profit insurers – not a huge advantage, especially considering that part of this was driven by the now failing co-ops. Indeed, affordability for buyers needs to be matched by sustainability for businesses. Non-profits may have initially offered a better price, but the failure of co-op insurers shows that their more affordable pricing was not typically sustainable long-term.

The second lesson is for Republicans in Congress. While there are major problems with Obamacare that should be addressed, legislators shouldn’t throw away the baby with the bathwater. Largely defunding the risk corridor program, for instance, was a bad move. As noted above, the program was designed primarily to encourage initial competition, and will go away by 2017 anyway. In fact, the same program works perfectly well in the Medicare Part D drug plan market, saving taxpayers around $1 billion a year between 2010 and 2012.

For New Yorkers, the collapse of Health Republic is not catastrophic. The state’s exchange will continue, for the most part, working well: There are still over 10 insurers participating in the state’s exchange, generating enough competition to keep premiums manageable for those with subsidies. For policymakers, co-ops’ performance should be a lesson to follow through on the monetary obligations they make and to avoid dictating the form health insurance companies should take.

This piece originally appeared in RealClearHealth.

This piece originally appeared in RealClearHealth