"As the camel falls to its knees, more knives are drawn" —Bedouin Proverb.
Despite the fact that the Affordable Care Act (Obamacare) has significantly reduced the number of uninsured in the United States, it has also failed to live up to its promises and has seen a great number of failures. The number of uninsured is still high, premiums are growing, networks are narrowing, insurers are losing money, and the Co-Ops, set up as a significant innovation of the program, are failing and will continue to fail everywhere.
In this hot election season, this has brought out enemies on the Left and the Right. The Left wants Obamacare dumped and replaced with a single payer system. The Right just wants it dumped. Both sides attack the program with cherry picked examples that are nonsense and half truths. It's like watching a mud wrestling match where you know you hate one of the wrestlers, but you can't tell them apart anymore.
I am going to post three articles where I try to get to the bottom of what is really happening. I find the sniping on the Right and the Left mostly useless, but also infuriating. The system is broken and Obamacare has revealed all of the cracks. In the first article, I will talk about the Co-Ops and why they had to fail given the structure of the current insurance system. In the second, I will discuss what's going on with market risk and how the big insurance players, despite their massive resources and sophistication, also found themselves sucked into the whirlpool. In the third article I will talk about what we can and can't do about it.
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The Affordable Care Act contained a provision to establish and fund the creation of 50 statewide non-profit insurance Co-Ops. There were several reasons for this. First, there was the concern that the current commercial insurers would not enter the ACA marketplace in large enough numbers to support millions of newly insured. Second, it was rightly believed that insurance markets in the United States tend to be dominated by one main insurer and the Co-Ops would add badly needed competition. Third, the Co-Ops were a compromise meant to forestall a government run "Medicare" option that might have a potential to move the entire country towards single payer insurance. And last, many people unclear of the concept of not-for-profit and citizen boards of directors in the United States thought that the Co-Ops would be less greedy and more consumer friendly.
Because the funding for this program was prematurely and summarily cut during one of our GOP manufactured budget crises coupled with Red State resistance to the idea itself, only 23 Co-Ops were eventually established. Of these, half have failed outright. Most of the rest are very weak and a significant number of these have been quietly put under some form of direct regulatory control. With the sole exception of the Maine Co-Op, the Co-Op program will fail unless radical measures are taken (which I will outline in article three).
The provision of all that sweet, sweet government money ($1.6 billion) drew into it two kinds of speculators. The first were the normal kind who wanted a crack at The Big Federal Pie. The second consisted of people who wanted the program to succeed for various political and occupational reasons. Most, but not all, were blinded by the fact that the mass establishment of these Co-Ops was probably the riskiest start- up venture in American history. While the insurance risk factors played a part in this (and the risk factors are what people focused on) I will argue that structural factors played a bigger role in creating risk here and I will try to outline these as briefly as I can.
A. Creating a Network
One of the main things that insurance companies do in the United States is obtain discounted rates from providers. These rates and their terms are set by individual private contracts. Insurance companies and providers are always recontracting with each other, hoping to gain an advantage. Any insurance company's contracting staff will be large and well funded with the latest complex modeling software and contract language software. And this will be true of any insurance company that already has a well developed network.
The insurance company will try to get the best terms and steepest discounts and then will aggregate these discounts to find an average discount so that it can begin to design its different benefit packages and price them. (It is also necessary to know in what way its member population uses the providers, but I will discuss this later).
The Co-Ops started out with no networks at all, no contracting staff or infrastructure, and a mandate as THE state Co-Op to be prepared to cover any member in the entire state.
What most Co-Ops did was to create "instant networks" by using what is called a "rental network." A rental network is a broad, usually multi-state network that has a very shallow discount with a large number of providers. They are usually used in cases where a business (typically a hospital) will want to create a quasi-network for its own employees, where these workers will get a steep discount for using their own hospital and hospital owned doctors, but will also get some sort of small discount should they go somewhere else. Rental networks are not meant to be used as full networks by insurance companies, because their discounts are so small that they can't compete with regular insurance companies with their own sets of contracts.
The Co-Ops plan was to start with the rental network in order to establish an "adequate" network per the state regulatory rules of wherever they were located, and then as quickly as possible, recontract the providers within it with their own more deeply discounted contracts on their own terms. If they did this quickly enough, they would have a network that would cover everyone, but they would also be able to eliminate the main rental contracts with their own competitive ones.
In practice, given the magnitude of the task and the fact that they were literally starting with nothing, they had no idea how long it would really take or what Co-Op contracts would actually be in place when the Co-Ops "went live" and actually started taking on new members. So in their business planning, they worked backwards from what they knew to be the average discount in the state to the average discount of the rental network. From this they created a fairy tale business plan and sent this to the regulators for approval. No one at either end of this chain believed the plan, which is why the Co-Ops were expected to lose money for the first one to three years of their existence until they could get a real network together. The vast majority of Co-Ops lost money in the first two years, even those that did not fail, because (in part) they simply could not build the network they needed. They had no market clout and their contracting infrastructure was mostly immature.
B. Building an Infrastructure
Modern health insurance companies have massive expensive IT infrastructures. It is commonly said in the insurance business that insurance companies are now basically IT companies with insurance companies attached to them.
The core of the infrastructure is the claims payment system. This system has to be able to adjudicate electronically all claims per all the various separate provider contracts that an insurance company has. The claims system also has to be integrated with the member enrollment system, the billing and payment system, the banking system, the accounting system, the hospital contracting system, and the member services system. All of these are separate things. The work of the large insurance companies is to have all of these systems "in house" and seamlessly integrated with each other. For the Co-Ops, all of these separate systems had to be rented from separate vendors. It was the integration of these systems, which were generally not designed to be integrated, that was usually done in house. For many of the Co-Ops, some of the systems weren't even designed to do what the Co-Ops needed them to do, either in their basic functioning or in the volume of transactions that were required. And in some cases, multiple versions of a system were needed. For example, there were cases where a Co-Op needed one enrollment system for individual members and another for employer group members. Both needed to be integrated with the rest of the system. Against this, the Co-Ops generally had inadequate staffs and had to rely on consultants who themselves were often inadequate, although terribly expensive.
To add to this, the Federal government was building its own enrollment and claims system from scratch (the latter not to pay claims but to do member level claims risk calculations) and required the Co-Ops and anyone else participating in Obamacare to able to integrate with their systems.
As you can imagine, there were massive, expensive, service affecting integration problems within the Co-Ops, within the government (which hit the news), and between the Co-Ops and the government. The Co-Ops did not figure these costs in their start up planning, and why should they have? No one had ever done this before.
C. Building a Staff
The Co-Ops had several staffing problems right from the beginning. The first was the acquisition of qualified management. Co-Ops were, by definition, start up companies and risky ones at that. The best executives and managers in the insurance industry could tell how risky they were, if only by listening to their own senior managers panicking about Obamacare. Not many people were willing to leave safe well developed jobs late in their careers to join a Co-Op at any price. This was not only true of the executives but also the middle managers. And even those seasoned executives and managers who did come over had little experience starting an insurance company from scratch. Nor did they have the "turnaround" experience they would need to fix the inevitable mistakes. And there was another problem with capital. While the Co-Ops were relatively well funded, with a Federal capital development fund that was separate from the claims guarantee fund, the manager found problems with how to spend the money. Aside from the fact that at the beginning there did not exist such things as purchasing departments, which meant that that the Co-Ops (having to build up quickly) were screwed by almost everyone they did business with, they had trouble figuring out how to staff up. They couldn't take their time, which caused hiring standards to slip. But they also didn't know if they should staff up quickly against the possibility of small enrollments (and therefore risk spending to much right off the bat) or staff up slowly against the possibility of high enrollments and therefore risk being understaffed and having basic service issues). What usually happened was the worst of all worlds. They didn't anticipate the integration problems, so they didn't staff for them. They tried to forestall permanent staffing, so they outsourced a lot of things they should have taken in-house right away. In some cases, especially in the second year of Obamacare, their membership increased dramatically over the course of a month or two and they found themselves very understaffed against the volume of membership. The IT integration problems, the staffing quality and quantity problems, the in-sourcing of activities and the inevitable initial mistakes all had to be addressed in "real time" as the Co-Ops were providing health services to actual people. And they had to do this while painting rosy pictures to the Boards of Directors (who being appointed from the membership often had no idea how insurance companies worked to begin with) and regulators who were often hostile towards them.
The impossibility (there, I've said it) of constructing an adequate and competitive provider network in the face of major insurance companies, creating a fully integrated claims, enrollment, and financial structure, and a well trained, well organized experienced staff made working conditions at the Co-Ops stressful as they lurched from one catastrophe into another. The level headed leaders who actually thrive in this kind of environment turned out to be rare. So the lights began to go out to a chorus of "I told you so" from politically motivated groups who had their own reasons to want the Co-Ops to fail.
But what about the major established insurance companies with solid networks, infrastructures, and stable well trained staffs? When they entered the Obamacare market, what happened to them?
Here the question of risk enters the picture. With the Co-Ops' basic structural problems, we can look at the questions of pure insurance risk as the coup de grace. But how did the sophisticated risk experts at places like Blue Cross and United Healthcare manage to also shoot themselves in the face?
