New Insurance CO-OPs Off to a Sluggish Start

New Insurance CO-OPs are off to a sluggish start in the health insurance market based on recently released data.  According to the National Association for State Health CO-OPs, a national trade association, the recently closed Obamacare health insurance open enrollment period saw over 400,000 people sign up for CO-OP coverage.   On an aggregate basis the number sounds good, but with CO-OPs in just 23 states, that comes to less than 18,000 CO-OP members per state on average.  In the health plan world, less than 18,000 members statewide makes you a tiny player and being a tiny player can spell trouble for a health plan.

For the uninitiated, a CO-OP is a non-profit consumer oriented and operated plan organized under provisions of the Affordable Care Act (ACA) to offer health insurance as competition to private health plans.  Under provisions of the ACA, the federal government has provided over $2 billion of loan support to help launch CO-OPs operating in 23 states.  Among various governance and operational requirements set forth in the ACA, qualified CO-OPs are expected to devote any profits towards lowering premiums, improving benefits or enhancing care for their membership.

Without having to pad their premiums to cover profits and income taxes, in theory CO-OPs should be very price competitive with private insurers, all other things being equal.  Unfortunately for CO-OPs, all other things are not equal.  Membership size matters a great deal in the real health insurance world and right now few, if any, of these new CO-OPs have enough membership size to compete effectively. 

The reality in health insurance is that taxes and profits only account for a few percent of the premium dollar, so not having to worry about them provides little edge to CO-OPs.  The key cost driver, by far, for health insurers is the cost of member medical claims, which eats up eighty percent or more of each premium dollar.  After medical claims costs, health insurers will typically see another fifteen percent or more of its premium dollars consumed by their administrative costs.   These administrative costs include all of the expenses associated with the people and systems infrastructure needed to build and manage provider networks, pay medical claims, manage utilization, service customers, distribute products and ensure compliance with a complex set of state and federal regulations.

At the end of the day, health insurance is a capital intensive business where economies-of-scale give a significant advantage to big membership plans.  Big plans can absorb fixed administrative costs more easily and, more importantly, they have serious bargaining power when negotiating medical service rates with healthcare providers.   In healthcare, as in most businesses, suppliers are prone to giving their best rates to the biggest buyers.  And with not much buying power, small insurers rarely get the best medical service rates from providers. Combine higher medical service rates with a proportionally greater administrative cost burden and the financial picture for small insurers is not so good.  Health insurance is a very tough business for the small guy.

Industry participants have known for a long time that bigger is better in health insurance, which is why the industry has seen significant consolidation over the past twenty years.  Small player after small player has exited the business over that past two decades, either through mergers, acquisitions and even plan terminations.  Right now the new insurance CO-OPs are small fry in the health plan business.   It is still too early to write them off as relevant players in the health insurance market.  But if these new CO-OPs want to thrive, they must achieve significant membership growth over the next 3 to 5 years.   Otherwise, many will suffer the same fate that so many other small health plans experienced over the past twenty years.