(Bloomberg) — Obamacare's startup health insurance plans are flirting with financial distress, as all but five of the 23 nonprofit companies had negative cash flow from operations in the first three quarters of 2014, Standard & Poor's said in a report today.
The startups, called Consumer Operated and Oriented Plans, or co-ops, were created with $3.4 billion in federal loans as a counterweight to established health insurers. One of the largest of the companies, Iowa-based CoOportunity, has failed already and is being liquidated by the state.
Republican critics of the law have long warned that the co-ops would struggle in competition with larger carriers such as Anthem Inc. and UnitedHealth Group Inc. While some of the co-ops rung up impressive market share in the first year coverage was offered on the marketplaces created by the Affordable Care Act, most are losing money and face further challenges in 2017, when federal subsidies financed in part by surcharges on private health-insurance plans will expire.
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"The short term is hard to predict," Deep Banerjee, an S&P analyst and lead author of the report, said in a phone interview. "Forget solvency for a second and look more longer term. How good will these companies be when they compete against bigger, more financially stable legacy players? It's going to be very hard."
Martin Hickey, chairman of the National Alliance of State Health Co-Ops, a trade group, called the S&P report "premature" because it only covered the first nine months of 2014.
Membership gains
Many of the co-ops, including the one Hickey runs in New Mexico, saw large membership gains at the end of the year as they signed up companies shopping for new health plans for their employees, he said. The government has said it expects about 9.1 million people to be paying for coverage in 2015 through insurance plans purchased on the marketplace. The deadline to select a plan for the year is Feb. 15.
The co-ops also expect to benefit from millions of dollars in funding this year thanks to programs in the Affordable Care Act that partially compensate insurers who lose money in 2014, or who sign up sicker customers than expected.
"It's absolutely the wrong time to make this kind of pronouncement," Hickey said in a phone interview. "If that lulls our competitors to sleep for another year, fantastic."
Another co-op that has shown stress is Community Health Alliance Mutual Insurance Co. in Tennessee, which froze its enrollment for 2015. The Tennessee co-op lost $8.5 million through Sept. 30 according to S&P. The state's insurance commissioner, Julie Mix McPeak, called the enrollment freeze a "preventative measure to support the long-term viability" of the co-op.
High loss ratios
All but one of the startups had negative net income through the first three quarters of 2014. Medical-loss ratios, a measure of how much revenue the companies spend on health-care versus premiums collected, "were hopelessly high" for several of the co-ops, the report said. Nine reported loss ratios above 100 percent, meaning they spent more money on medical claims than they received in premiums.
Aaron Albright, a spokesman for the U.S. Centers for Medicare and Medicaid Services, which administers the loans for the co-ops, didn't immediately comment on the report.
Maine Community Health Options in Lewiston, Maine, was the exception among the startups: it made money in the first nine months of 2014. The company reported $10.9 million in net income, S&P said, calling it a "positive outlier."
Clear field
Kevin Lewis, the chief executive officer of the Maine co- op, said his company benefited from having little competition — only one other insurer, Anthem, offers plans on the state's Affordable Care Act exchange. Lewis's company offered the lowest premiums in the state in 2014 and signed up 39,000 customers through Sept. 30, S&P said.
In other states, "it's a crowded field with entrenched carriers that have very deep pockets," Lewis said in a phone interview. "It's going to be a tough environment."
Lewis said the co-ops deserve credit for holding down premiums in the new Affordable Care Act marketplaces, called exchanges. In 2014, average premiums for the least-expensive level of coverage were lower by about 8 percent in states with co-ops than in states without one, according to an analysis by the National Alliance of State Health Co-Ops, Hickey's group, based in Washington.
"Co-ops across the country should be given both recognition for the impact we've made as well as some time," Lewis said.
Danger sign
Four of the co-ops in addition to CoOportunity were particularly distressed by one measure, the amount of cash and investments they have on hand compared with their short-term obligations, called a liquidity ratio. The S&P report said the ratio was less than 1.2 for the four companies. CoOportunity's ratio was 0.8 in September, before it was taken over by the state insurance commissioner.
Most of the co-ops, however, "had adequate or strong liquidity," S&P said. Any liquidity weakness would be "more of a concern than negative earnings, especially when it comes to the survival of an insurance company," the report said.
The report didn't name the four co-ops with low liquidity ratios other than CoOportunity.
"There's nobody who's going to fail this year, except Iowa," Hickey said. "That's it."
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