Fannie Med Implodes

By Devon Herrick,

The insolvent Iowa-based health insurance cooperative, CoOportunity Health, had to be taken over in December by Iowa insurance regulators. Iowa and Nebraska’s Guarantee Associations – and state and federal taxpayers – are now on the hook for millions in claims the insurer could not pay.

CoOportunity Health wasn’t a traditional health insurer. Rather, it was a taxpayer-funded, non-profit health insurance cooperative (co-op) established under the Affordable Care Act (ACA). The co-op program is plagued by numerous flaws. When co-ops were established, they had no customers and no historical actuarial data to assist in setting plan premiums. Startup funds and cash reserves were mostly borrowed from taxpayers. According to industry data only one of the 23 co-ops was profitable last year (a 24th co-op located in Vermont failed before it even got off the ground). While some of the remaining co-ops are losing money because of small size, others appear to have the strategy of losing money to gain market-share at taxpayers’ expense.

Prior to its first open enrollment, chief operating officer (COO) Cliff Gold told the Lincoln, Nebraska Journal Star that ‘CoOportunity would be a market disruptor,’ and ‘we’re nonprofit, we have absolutely no profit motive.’ Apparently Gold’s comments were meant to be taken literally; CoOportunity lost around $163 million in 2014 – its first year selling health insurance. An attorney hired to help liquidate the firm says doctors/hospitals are still owed some $100 million. Unfortunately for Gold, even nonprofit health insurers need to earn a profit to avoid bankruptcy. The Iowa Insurance regulators shuttered the failing insurer once it became clear CoOportunity would not receive another government emergency solvency loan and its anticipated $126 million risk corridor (bad-risk) bailout would be reduced by about half.

Sicker-than-average Iowa and Nebraska residents flocked to the CoOportunity’s generous benefits. It offered large provider networks and rich benefit packages – all for a low premium. This sounds great if you’re an Iowa or Nebraska resident with chronic conditions. But it’s not so good for taxpayers who have to bailout the losses. CoOportunity didn’t just suffer adverse selection – a situation where it attracted costlier-than-average members. It played a game of chicken with other insurers, when it purposely designed plans and set premiums it knew would disrupt the market. Indeed, The Wall Street Journal referred to it as Fannie Med, in reference to Fannie Mae, the infamous government-supported mortgage insurer whose risky investment strategy contributed to the financial crisis that tanked the U.S. economy.

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