Better in their words…

WSJNov. 9, 2015 7:41 p.m. ET

The majority of ObamaCare’s insurance co-ops—12 of 23—have now folded, and their $1.24 billion in federal loans has all but vaporized. More will fail, nearly a million Americans may lose coverage, and now the contagion from their failures is spreading.

The co-ops are government-sponsored nonprofits that were supposed to increase competition, but instead they’re causing the greatest insurance disruption in decades. The co-ops aren’t merely jilting their displaced members or the taxpayers who supplied their “seed money.” Local regulators are defying the feds to close them because other insurers are liable for their toxic balance sheets.
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After the S&L crisis in which a wave of health and life insurers were collateral damage and defaulted on bills, the states that regulate insurers prioritized stability over innovation. By and large, they’ve ensured that health insurers are conservatively managed and well capitalized, and insolvencies are rare.

Only five health insurers of any significant size have failed since the 2008 financial panic, along with another 10 life insurers writing health policies on the side, according the National Organization of Life and Health Insurance Guaranty Associations. The last time a dozen or more life and health insurers failed in a single year was 1994, when 13 went under, and the rolling 10-year average is 1.7.

At the direction of state insurance commissions, receivership groups called guaranty associations wind down troubled insurers and sell off assets. But under the guaranty process, any pending or outstanding obligations to policyholders, doctors or hospitals after liquidation are then transferred to all other insurers doing in-state business, based on market share.

So ultimately all consumers will pay for the co-op implosion as their IOUs are passed to commercial insurers. Guaranty associations typically are financed ex post facto, depending on how much is required, so no one can know how bad the arrears will be. But they will not be negligible, and not all the runoffs will be orderly.

Some co-ops were hapless amateurs—Maryland’s Evergreen Health signed up all of 450 members in the first enrollment period—but others became major ObamaCare players. Health Cooperative (now defunct) in Kentucky snapped up three of four consumers on the KYnect exchange. Health Republic Insurance (defunct) was New York’s second-largest individual carrier with 19% of the market and Utah’s Arches Health Plan (defunct) took 25%. One of five beneficiaries joined a co-op in year one and enrollment surged 150% for 2015.

Most co-ops that grew the fastest are now ruined—namely, six of the eight that exceeded the enrollment projections in their loan applications. The reason is that they bought customers with discounted premiums below the cost of medical claims.

The Government Accountability Office reports that average co-op rates were lower than commercial health plans in 54% to 63% of the regions where they competed, depending on the coverage. You don’t have to be a bankruptcy specialist on par with Donald Trump to understand that loading up on clients who are consuming health care but aren’t paying close to full freight is unsustainable.

Liberals pretended that these synthetic prices were the result of a lack of “profits,” as if insurance wasn’t already a low-margin business. But the plan all along was for the co-ops to ride their special advantages to dominance over private industry and use “risk corridor” and other ObamaCare slush fund dollars to bail them out.

Congress partially defunded these honeypots, but the co-ops can hardly plead poverty. The Administration pushed out $354 million in 11th-hour cash infusions for six co-ops in late 2014 just before the budget authority lapsed. (Three have since entered the morgue.) And as recently as last week the feds disclosed that seven co-op remnants have been allowed to convert debts to the Treasury into phantom “capital assets” for solvency and accounting purposes, on no legal basis.

The real story is that state regulators are intervening to stop a failure contagion. In Tennessee, the Community Health Alliance Mutual Insurance Company requested a 32.6% rate increase for 2016, but the state mandated a 44.7% increase to prevent failure—and the co-op was still declared nonviable weeks later. The states know that their voters can’t draw on an ObamaCare line of credit and the longer the co-ops lose money, the deeper the guaranty holes will be. The greatest danger may be the 11 co-ops that remain in business, given that 10 have run deficits for as long as they’ve existed.
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The co-ops are also exposing the larger ObamaCare problem. Contrary to popular belief, the exchanges aren’t profitable for insurers. The consultants at McKinsey inspected commercial insurer finances and concluded that the industry spent $2.5 billion in 2014 over revenue on net, even after government risk payments. Some 64% of health-care payers lost money, 23% posted earnings of $0 to $10 million, and 13% earned more than $10 million.

Unlike the co-ops, large diversified insurers can survive by selling employer-sponsored insurance and Medicaid managed care, while waiting for the exchanges to improve. But they can take writedowns only for so long. Mugging them coming and going—once by co-op pricing and again for the co-op failures via the guaranty associations—adds to the risk. Imagine if the rollout of the Medicare drug benefit under George W. Bush had been as chaotic as ObamaCare still is, three years later.