Modern Healthcare

Kentucky co-op blames inadequate risk-corridor funding for closure

By Bob Herman
October 12, 2015

Kentucky Health Cooperative will end operations by the end of this year, forcing 51,000 Kentuckians to find new health coverage during the next open-enrollment period. It's the fifth casualty of the Affordable Care Act's politically contentious co-op program.

A major factor behind its demise, the insurer said, was low payments from the ACA's risk-corridors program, which could force more co-ops to close in the near future.

The law established the temporary risk corridors as a way to cap winners and losers during the early run of the ACA's insurance expansion. Earlier this month, the CMS said it would pay only 12.6% of requested risk-corridor payments.

For Kentucky Health Cooperative, that meant it would receive only $9.7 million from its request of $77 million. The co-op was collecting far less in insurance premiums than it was paying out in medical claims.

“In plainest language, things have come up short of where they need to be,” Kentucky Health Cooperative interim CEO Glenn Jennings said in a statement.

The CMS has emphasized that the risk-corridors program is the smallest of the ACA's so-called three Rs—three programs that were created to mitigate overall risk associated with insuring a new population with unpredictable healthcare needs. But the federal agency also hinted that more co-op closures, like Kentucky Health Cooperative's, could be in the cards. During the risk-corridors announcement, a CMS official said “solvency and liquidity” problems could arise at small health insurance companies that were relying on the risk payments.

“A lot of these co-ops are reliant on the three Rs working,” said Deep Banerjee, an analyst at Standard & Poor's who has studied co-ops' finances.

At the end of September, Health Republic Insurance of New York, one of the largest co-ops in the country with roughly 100,000 individual and small-group members, announced its intent to close by the end of 2015. The co-ops in Iowa, Louisiana and Nevada also shut down.

Several of the other remaining 18 co-ops are on perilous financial ground, according to an August report from credit-rating agency A.M. Best Co. Medical-loss ratios at co-ops in Arizona, Connecticut, Michigan and Montana all topped 90% in the first quarter this year, leaving little room for extra investments. The CMS has also placed a handful of co-ops on “enhanced oversight” or required “corrective action plans,” according to a report from HHS' Office of Inspector General (PDF), although the agency has not revealed which co-ops are being monitored.

Kentucky Health Cooperative's closure also highlights the highly partisan political environment that still surrounds co-ops. Liberals, dismayed that a public option wasn't included in the healthcare law, viewed co-ops as alternatives to provide competition over large, established health insurers. But co-op funding was slashed multiple times before the not-for-profit companies ever got off the ground, and plans to create a co-op in every state were swiftly dashed.

Conservatives have criticized co-ops as a waste of taxpayer money, since co-ops were awarded federal loans to get started. However, strict conditions were placed on the loans, including a quick payback period and prohibition from using the money on advertising.

Sen. Mitch McConnell (R-Ky.) characterized Kentucky Health Cooperative's collapse as “another consequence of Obamacare's failures.” McConnell did not mention lower risk-corridor payouts or the overall reduced program funding.

Kentucky Health Cooperative will pay out all financial obligations through Dec. 31. The next open enrollment starts Nov. 1.