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Maine Co-Op's Announcement Casts Increased Doubt on Future of Others

December 16, 2015

Maine's Community Health Options insurance cooperative announced last week that it would cease writing new individual health insurance policies on December 15, or December 26 for policies it offers through the Healthcare.gov website. This announcement has increased concerns regarding the solvency of other state cooperatives established under the Consumer Operated and Oriented Plan (CO-OP) Program of the Affordable Care Act (ACA) because the Maine co-op was the only state co-op that had reported profits for 2014. On its website, Community Health Options blamed the partial shutdown on "significant enrollment growth over the last two years and higher than expected claims costs in 2015." The company will, however, continue to offer group policies.  

Prior to the Maine announcement, 12 of the 23 state co-ops established under the ACA's CO-OP Program had ceased writing insurance and/or entered insolvency proceedings. One of the key causes of stress on the co-op system is that the co-ops were expecting to receive a variety of payments from the federal government to compensate them for taking on an unusually risky subscriber population. A key component of that compensation is referred to as "risk corridor" payments. The ACA directed the U.S. Department of Health and Human Services to establish a temporary risk corridors program for the years 2014 through 2016, which the Centers for Medicare & Medicaid Services stated was designed to protect "against inaccurate rate-setting by sharing risk (gains and losses) on allowable costs between HHS and qualified health plans to help ensure stable health insurance premiums." Essentially, the federal government intended to reimburse certain costs in excess of a mandated threshold. To date, however, the government has funded only about 12 percent of risk corridor payments through collections from other carriers. Unfortunately, the co-ops only learned of this shortfall very late in the day.  

Community Health Options had about $24 million in statutory capital and surplus and over $100 million in assets as of September 30. Although it had recorded a statutory profit of $7.3 million for 2014 and was the only ACA co-op in the black for that year, it lost more than $17 million in the first nine months of 2015 on about $244 million of premiums, even though it was still cash flow positive. Statements by Maine's insurance regulator suggested that worse-than-expected claim experience put the co-op into trouble. He also indicated that the shortfall in risk corridor payments, although not helpful, was not the driving force behind the move to stop new individual business. The full effect of the shortfall in risk corridor payments on Community Health Options will not be known until the co-op files its statutory financial statement in March 2016. If the company's March financials show severe stress, Maine's insurance regulator could potentially place the company into state receivership proceedings (insurance companies are not permitted to file bankruptcy).

Given the poor financial condition of the other 10 remaining ACA co-ops, all of which reported losses for 2014 and eight of which have reported losses so far for 2015, the shortfall in risk corridor payments could be a serious blow to their solvency. Day Pitney clients that are creditors of these state co-op insurance plans may want to contact us for assistance in understanding the risks that may lie ahead for these plans and their creditors.

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