A federal program designed to aid federally created health plans such as the Louisiana Health Cooperative Inc. instead became the final nail in the ailing nonprofit’s coffin.
Louisiana Health — taken over by state regulators on Sept. 1 — was one of 23 plans created nationally under the Affordable Care Act to ensure there would be competition among health insurers. Altogether the co-ops received more than $2.4 billion in low-interest federal loans to get started. Only two have proven to be profitable amid restrictions that experts say have hampered the co-ops’ development.
The Louisiana plan landed more than $66 million to get it started.
But the Affordable Care Act, known as Obamacare, also included programs designed to stabilize the health insurance market. One of them, risk adjustment, takes money from insurers with a healthier mix of customers and spreads it among companies who take on sicker policyholders. The idea was to get insurers to compete on the value and efficiency of their plans rather than targeting the healthiest, least risky and more lucrative customers.
The co-op thought it would receive $2.8 million under the risk adjustment program, but health insurers didn’t know exactly how the provision would affect them until June 30. That’s when the U.S. Department of Health and Human Services issued a report that contained an unpleasant surprise for the Louisiana co-op: Instead of getting $2.8 million, the co-op would have to pay $7.5 million to the federal government.
“So there was a $10 million swing … The company expected a revenue bump, and instead, they got a revenue hit,” said Billy Bostick, the court-appointed receiver overseeing the cooperative’s operations. “That was a big part of it. There were other things.”
The co-op was already bleeding cash.
Louisiana Health had lost more than $28 million by the end of 2014, its first year of providing coverage, according to records filed with the state Department of Insurance. The risk-adjustment payment was a death blow.
“Ultimately, the effect of the actual amounts related to the risk adjustment program raise substantial doubt about the company’s ability to continue as a going concern,” the health plan’s auditors said in a July 31 report.
The Louisiana co-op’s board already had met July 7 to discuss the ramifications of the HHS report. Board members saw no way forward. They voted to shut the co-op down.
The cooperative informed its nearly 17,000 members by letters, dated July 24. Five days later, the Louisiana Department of Insurance placed the cooperative under administrative supervision, stationing regulators in the Metairie company’s offices. On Sept. 1, a state district judge in Baton Rouge issued an order allowing the Insurance Department to take control of the cooperative.
Bostick dismissed the management team, including co-op CEO Greg Cromer, a state representative who chairs the House Insurance Committee, on the same day. Cromer did not respond to requests for comment.
However, in the July statement announcing the cooperative’s demise, Cromer said the plan had enough money to pay its claims.
One of Insurance Commissioner Jim Donelon’s first tasks after the court-ordered takeover was to reassure “tens of thousands” of health care providers and policyholders that the co-op’s claims would be paid.
The co-op’s second-quarter report shows it had about $180,000 in capital and surplus — well below the $3 million state law requires HMO’s maintain.
Three months earlier, the co-op reported $13.3 million, but that was before it was hit with the risk adjustment payment.
The co-op, like other startups, stumbled out of the gate, Donelon said. It takes new insurers a while to get their processes in place and to begin operating efficiently.
But what drew the Insurance Department’s attention was “the inordinate number of consumer complaints,” Donelon said.
The department received 106 complaints about the co-op in 2014 and 91 in the first five months of 2015. The greatest number of complaints involved the payment of claims, Donelon said.
Overall, the complaints occurred at a rate well above what might be expected for a company the size of the co-op. The co-op’s complaint rate was roughly double that of Blue Cross and Blue Shield of Louisiana, which has nearly 80 times as many members.
Bostick said regulators’ main task is making sure the co-op continues to serve its members, and that means paying claims on a timely basis.
The co-op was so late that virtually every claims payment included interest, Bostick said. Payment is required within 25 days for electronically filed claims with no issues; 45 days if the claim is filed by mail or fax.
The co-op had a backlog of 50,000 claims that hadn’t been processed when the Insurance Department took over, although not all of those were late, Bostick said. Roughly 30,500 of those claims have since been paid.
The Louisiana plan was the second Affordable Care Act-created co-op to crater this year. The other offered coverage in Iowa and Nebraska.
The federal Centers for Medicare and Medicaid Services says the co-ops that competed for and won low-interest loans were thoroughly vetted. Their business plans passed muster in three critical areas: financial, operational and strategic viability.
Only two of the 23 co-ops made money in 2014, according to HHS’s Office of Inspector General. For 19 of the co-ops, premium revenue didn’t cover claims expenses.
“Starting a new company in the midst of the rollout of the Affordable Care Act is proving to be truly challenging in at least 23 of the 24 states that got co-ops,” Donelon said. “That’s sad but true.”
Bostick said regulators have not had time to examine the underlying causes of the Louisiana co-op’s failure and won’t until the co-op’s coverage ends on Dec. 31.
Experts, including think tanks like The Commonwealth Fund and Robert Wood Johnson Foundation, say the co-ops were handicapped by a number of factors, from cuts to the program’s funding to regulatory restrictions.
Some suggested the plans were set up for failure. The Washington Post compared the situation to the legendary opening scene in “Raiders of the Lost Ark,” where Harrison Ford narrowly evades a giant boulder only to find himself surrounded by an army.
Among other things, federal grants that were supposed to fund the co-ops became loans. Those loans had to be paid back in five years, hardly enough time for the nonprofits to establish themselves. In addition, Congress made it illegal for the startups to use the loan money for marketing. And with the White House’s OK, Congress slashed the program’s funding from the original $10 billion that experts said would be required for the co-ops’ survival to $2.4 billion.
Insurance industry lobbyists also pushed through a provision that basically limited the co-ops’ business to individuals and small groups, leaving the more lucrative large-employer market to established insurance companies.
In addition, many of the co-ops didn’t have customer support and claims processing in place. Initially, the Louisiana co-op and others paid consultants for those services. Outsourcing those “critical functions” costs more and reduces the co-ops’ ability to manage quality, according to the Commonwealth Fund.
The Louisiana plan was founded by Atlanta-based Beam Partners LLC and co-sponsored by Ochsner Health Plan. Beam Managing Member Terry Shilling served as the co-op’s first CEO and Ochsner CEO Warner Thomas as chairman of the board. Shilling, until 2003, headed Ochsner’s HMO, which had more than 193,000 members when Humana bought it. Shilling then founded Beam.
The co-op paid Shilling’s firm $3.1 million in 2013 for “health plan development,” according to the nonprofit’s tax records. The co-op also paid a firm headed by Shilling’s partner in Beam, David Smith, close to $672,000 for health plan development. Neither Shilling nor Smith responded to requests for comment. State and federal regulators saw no problem with the contracts.?Donelon said the co-op contracted with Beam and related companies to set up the cooperative, operate it, handle claims, build agency and provider networks, and pay commissions.
“In effect they were a TPA, or third-party administrator, as the co-op was bringing on their own permanent folks and taking on those responsibilities on a gradual basis and reducing Beam’s involvement and payments as they went,” Donelon said.
None of the department’s investigators have raised the contract costs as an issue or suggested that they played a role in the co-op’s financial problems, Donelon said.
A spokesman for HHS’s Office of Inspector General said the co-ops had to pay someone to organize the businesses. It’s not a surprise that the health consultants who organized a cooperative had themselves in mind for doing that work, he said.
The Louisiana co-op entered a highly concentrated insurance market. In 2013, three companies held more than 90 percent of the individual and small-group businesses, according to the Kaiser Family Foundation. Blue Cross and Blue Shield of Louisiana alone had 73 percent of the individual market and 81 percent of the small group business.
The Louisiana co-op, a startup with zero name recognition and no marketing budget allowed, was trying to penetrate a near monopoly via a poorly understood and nearly useless federal website sign-up system — at least in the first few crucial months of Obamacare enrollment.
Many of the cooperatives found creative ways to reach out to possible customers, said Sabrina Corlette, project director at the Center on Health Insurance Reforms at Georgetown University’s Health Policy Institute. “But there’s no question that the prohibition in the law forced them to compete with one hand behind their back,” Corlette said.
The nonprofit projected it would cover more than 28,000 people in 2014. The plan ended the year covering 9,980 people, according to records filed with the Insurance Department.
And the co-op paid for those members in blood-red ink. By the end of 2014, the health plan had already lost close to $28 million.
The co-op also ended 2014 with $19 million in unpaid claims, a total that swelled to $22.5 million by March 31. By then, the plan covered 16,322 people, Insurance Department records show.
In May, the health plan sought to increase its 2016 rates by close to 23 percent, saying it expected to “transition to full profitability” with an enrollment that would swell to more than 42,000 members.
That growth might have been enough to save the Louisiana plan. Industry experts say that the break-even point for health insurers ranges from 20,000 to 50,000 members.
Jeff Drozda, president of the Louisiana Association of Health Plans, said the break-even point depends on a number of factors in the state where a company is doing business, including its competition and the insurer’s expenses and costs to pay claims.
The Louisiana Health Cooperative’s premiums didn’t come anywhere close to covering its expenses and claims.
Corlette said pricing has been a major issue for the co-ops.
The startups had to set prices without any of the claims history insurers typically rely on to calculate premiums, she said.
“Ultimately, what was borne out in both marketplace enrollments was that customers were shopping on price,” Corlette said. “So if you didn’t have the lowest-, or among the lowest-priced options, you really were sort of dead in the water.”
Health plans that set their premiums too low ran the risk of gaining customers at unsustainable prices.
Linda Beauvais, executive director of the Capital Area Agency on Aging, District II, said the Louisiana Health Cooperative’s rates were “right in there” with the other companies offering coverage through the federal marketplace. Capital Area Agency on Aging was one of the nonprofits that received federal funding to help people enroll in Obamacare plans.
Donelon said he could not discuss the co-op’s finances or what led to its failure.
“They were just another HMO. We could not have avoided this. Their shortfall is way beyond the capital requirements of Louisiana law,” Donelon said.
Drozda said despite all of the obstacles the co-op faced, its failure came as something of a surprise.
“We expected they would be around for many years,” Drozda said.
Follow Ted Griggs on Twitter @tedgriggsbr.