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More Than Half of Obamacare's Co-Ops Have Now Failed -- Here's Why You Should Care

By Sean Williams - Nov 15, 2015 at 2:18PM

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At the latest count, 12 of Obamacare's 23 health cooperatives have now failed, potentially putting taxpayers on the line for more than $1.2 billion and displacing more than 700,000 members. Here's why you should care.

Image source: Centers for Disease Control and Prevention.

The Patient Protection and Affordable Care Act, which you likely know better by its shorthand Obamacare, may be a highly controversial law that draws just as much criticism as support; but when push comes to shove, it's hit on one of its primary goals of lowering the rate of uninsured around the country.

Based on data available mid-year from the Department of Health and Human Services, there were nearly 9.95 million paying customers enrolled via an Obamacare marketplace exchange. This figure is marginally higher than the estimate of 9.1 million people that the Congressional Budget Office predicted would be enrolled by the end of 2015. Based on data from the Centers for Disease Control and Prevention in the first quarter, the uninsured rate in the U.S., inclusive of Medicare patients, stood at its lowest level on record: just 9.2%. Love it or hate it, Obamacare has lowered the number of people who remain uninsured.

Obamacare's healthcare cooperatives are dropping like flies
But behind the scenes, not everything is going well for Obamacare. Specifically, the health cooperative experiment for Obamacare is turning out to be a dismal failure. At the latest count, 12 of Obamacare's 23 cooperatives were closing up shop, footing taxpayers with a bill in excess of $1.2 billion (assuming the Centers for Medicare and Medicaid Services is unable to recover some or all of the funds) and requiring around 700,000 Americans in the current enrollment period to seek out a new health plan.  

Healthcare cooperatives, or co-ops, are nonprofit health organizations created as an alternative to established for-profit health insurance providers. Under Obamacare, some $2.4 billion in federal funds was apportioned to 23 co-ops throughout the country. The idea behind creating co-ops was to provide residents in certain markets with more choice and also to boost competition in the hope of controlling premium cost inflation.

However, problems have emerged along the way that have prevented co-ops from succeeding. In fact, depending on your source, all but a couple of co-ops are still losing money after two years.

Image source: White House on Flickr.

Reasons aplenty why co-ops are going belly up
The first major issue is that co-ops rely on exceptionally low premium prices to attract consumers to enroll. These low prices did lead to high volume enrollments in some states, but low premium prices typically didn't leave enough of a buffer to turn a profit. It also doesn't help that low premium costs proved to be something of a magnet that sicker individuals gravitated to, resulting in higher-than-anticipated medical costs for co-ops.

Secondly, the management teams for most co-ops didn't have enough experience in the health insurance business. It's hard enough for insurers such as Molina Healthcare (MOH 1.15%) and Centene (CNC 2.46%), which have been in the business for more than three decades a piece, to make the transition to the individual insurance market for the first time under Obamacare. Imagine how tough it must be for industry outsiders to succeed.

Countering this issue, Obamacare hasn't delivered the bounty of profits that insurers once believed it would provide -- at least not yet. CBO estimates originally had called for 21 million Obamacare enrollees by 2016, but now forecasts project just 10 million by the end of next year. Why the difference? The CBO was simply wrong on how many people were actually uninsured prior to the implementation of Obamacare. The result is that insurers haven't gained as many new members as they had expected prior to the rollout of Obamacare, and profits have also not been as large. Lower-than-anticipated profits for successful insurers are likely another big reason why co-ops are failing, because money-losing co-ops rely on the risk corridor for support and are simply not getting it.

The risk corridor is a tool designed to take excessive profits from healthy insurers and give it to struggling insurers to help buoy their business. Most struggling insurers are receiving just a fraction of what they've requested for 2016, leaving them with little choice but to close their doors.

Image source: Centers for Disease Control and Prevention. 

Why you should care that co-ops are failing
Regardless of whether or not you obtain health insurance through an Obamacare marketplace exchange, get it privately, or are insured through an employer, you should be paying close attention to the tumult among Obamacare's co-ops.

For starters, the failure of co-ops could be responsible for higher-than-normal premium cost inflation in select markets. Larger markets that are attractive to big insurers may not see a large impact, but smaller co-ops that shuttered their doors in Louisiana, Nevada and Utah, where competition among insurers is far less fierce than in highly populated states such as New York, could see a substantial premium hike in 2016 and beyond. Without low-cost co-ops in place, consumers in some states might be looking at just a few plans to choose from.

Secondly, the failure of new entrants into the marketplace provides even more evidence to existing national insurers that they're practically irreplaceable. If I were a national insurer like UnitedHealth Group (UNH 1.34%) or Anthem (ANTM 2.50%), I would have absolutely no fear about raising my prices moving forward considering that low-cost competition doesn't appear to be succeeding. With the checks and balances in place to halt large premium hikes turning out to be less scary than initially thought, for better or for worse insurers should be able to push through price increases on an almost at-will basis.

On top of simply facing less competition, which is opposite of what Obamacare would prefer to promote, national insurers are probably going to absorb the more than 700,000 displaced members from closing co-ops in the ongoing enrollment period. If sicker individuals are indeed partly responsible for the demise of a dozen Obamacare co-ops, then insurers like UnitedHealth and Anthem are going to be proactive about boosting their rates to ensure they don't see their profits evaporate.

All of this points to one thing: higher prices for you, the consumer.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool recommends Anthem and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$543.79 (1.34%) $7.19
Anthem, Inc. Stock Quote
Anthem, Inc.
$487.59 (2.50%) $11.87
Centene Corporation Stock Quote
Centene Corporation
$95.62 (2.46%) $2.30
Molina Healthcare, Inc. Stock Quote
Molina Healthcare, Inc.
$331.46 (1.15%) $3.76

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