Other U.S. Health Insurance Co-Ops
Could Be Going Down The Same
Bumpy Road As Iowa's CoOportunity
Health
Primary Credit Analyst:
Deep Banerjee, New York (1) 212-438-5646; shiladitya.banerjee@standardandpoors.com
Secondary Contacts:
James Sung, New York (1) 212-438-2115; james.sung@standardandpoors.com Caitlin Weir, New York (1) 212-438-5669; caitlin.weir@standardandpoors.com
Table Of Contents
High Medical Claims Lead To Negative Earnings
Lack Of Future Funding And Negative Retained Earnings Will Hamper
Capital Growth
Generally Adequate Liquidity With Some Short-Term Concerns
Will The Disruptors Be Disrupted?
Going Down The Same Bumpy Road As Iowa's
CoOportunity Health
Being a consumer operated and oriented health insurance plan (co-op) can be like learning to ride a bike without training wheels. A few falls and bruises along the way are inevitable. The solvency of co-ops in the U.S. has come to the forefront with the current liquidation of Iowa-domiciled co-op, CoOportunity Health.
On Dec. 23, 2014, the Iowa state regulator stated in the petition for rehabilitation that CoOportunity Health was not "insolvent on a statutory basis at that time," but "the lack of additional solvency funding places it in a financially hazardous situation." CoOportunity Health's request for additional funding had been denied by the Center for Medicare and Medicaid Services (CMS). Inadequate liquidity at the company and lack of funding options likely led the state insurance regulator to first put CoOportunity Health into rehabilitation, and then move the company to liquidation in January 2015. The question is whether any other co-op's financial profile is weakening to the point of potential near-term insolvency.
Overview
• Co-ops represent more consumer options to the market, adding innovation and competition.
• The solvency problems experienced by CoOportunity Health introduce questions about co-ops' finances in general.
• Most co-ops have sufficient near-term liquidity, but will likely struggle against more-entrenched market players unless they can gain scale and stability.
In addition, putting aside the solvency question, what is the impact of co-ops on the health insurance industry in general? They have the ability to disrupt the competition by being nimble and innovative, and providing greater options for consumers. But can a start-up without sufficient financial strength have a far-reaching effect on the market? Standard & Poor's Ratings Services does have a credit rating on the co-ops referenced in this article. We looked at publicly available statutory financial statements of the co-ops' earnings, capital, and liquidity. The latest available statutory financials were from third-quarter 2014. The companies are required to report year-end 2014 (annual) statutory financial statements soon. Without annual statutory filings it is hard to provide a fuller picture of the financial strength of these entities, but a comparison with CoOportunity Health is a good start.
What Are Co-Ops?
Consumer oriented and operated plans (co-ops) are new private, not-for-profit, member-run insurance companies set up under the Affordable Care Act (ACA). The goal of the co-ops is to provide affordable health insurance to their members and increase competition and choice in the marketplace. Federal loans were allocated by CMS to eligible applicants for establishing co-ops. The Center for Consumer Information & Insurance Oversight (CCIIO), a branch of CMS, is in charge of overseeing the co-op program. As of Dec. 2014, funds were allocated to23 co-ops in the country, which provided insurance in 23 states, with a handful said to be expanding to neighboring states over the next 2 years. So far $2.4 billion of loans have been allocated to the co-ops under this program. However, not all allocated funds are given to the co-ops from the get go. As per the CCIOO, "as CO-OPs meet or exceed developmental milestones, funds are allowed to be incrementally drawn down."
ACA had originally required for "sufficient funding to establish at least 1 qualified nonprofit health insurer in each state". However subsequent Acts reduced the funding for this program and no new co-ops (other than the current 23) are likely to be established.
High Medical Claims Lead To Negative Earnings
All but one of the co-ops included in our study reported negative net income (see table 1) through the first three quarters of 2014. The only positive outlier was Maine Community Health Options, which reported positive net income through Sept. 30, 2014. Most co-ops' weak operating performance is a result of high medical claims trend and not enough scale to offset administrative costs. Medical loss ratios (MLRs; the percentage of premiums used to pay medical claims) were hopelessly high for several of the co-ops (see chart 1) due to high medical-services utilization by its members, leaving very little to cover administrative costs. In fact, nine of the co-ops (including CoOportunity Health) reported a MLR of 100% or more through September 2014.
Table 1 Overview Of Co-Ops State of domicile Award amount ($)* Members¶ Net income ($)¶ Surplus¶ Net income as a % of surplus Freelancers Health Service Corp.
d/b/a Health Republic of NY
NY 265,133,000 139,683 (14,575,095) 91,006,366 (16) Land of Lincoln Mutual Health
Insurance Co.
IL 160,154,812 3,428 (11,065,363) 11,916,462 (93) Minuteman Health Inc. MA 156,442,995 1,822 (11,349,555) 16,488,323 (69) Kentucky Health Cooperative Inc. KY 146,494,772 56,924 (24,033,077) 45,738,375 (53) Cooportunity Health IA 145,312,100 91,477 (39,847,903) 74,912,746 (53) Other U.S. Health Insurance Co-Ops Could Be Going Down The Same Bumpy Road As Iowa's CoOportunity
Table 1
Overview Of Co-Ops (cont.)
Meritus Health Partners AZ 93,313,233 2,679 (7,421,657) 4,760,000 (156) Arches Mutual Insurance Co. UT 89,650,303 21,679 (9,364,680) 12,661,901 (74) Consumers Choice Health Insurance
Co.
SC 87,578,208 48,193 (7,349,138) 14,598,278 (50) Montana Health Cooperative MT 85,019,688 12,966 (2,619,352) 27,516,836 (10) New Mexico Health Connections NM 77,317,782 10,693 (8,228,714) 19,569,668 (42) Community Health Alliance Mutual
Insurance Co.
TN 73,306,700 2,094 (8,533,142) 2,718,517 (314) Colorado Health Insurance
Cooperative Inc.
CO 72,335,129 12,714 (14,615,852) 15,640,609 (93) Consumers Mutual Insurance of
Michigan
MI 71,534,300 4,196 (7,623,595) 9,803,425 (78) Nevada Health Co Op NV 65,925,396 14,651 (13,605,641) 14,816,925 (92) Louisiana Health Cooperative Inc. LA 65,790,660 11,771 (11,506,677) 21,872,869 (53) Evergreen Health Cooperative Inc. MD 65,450,900 3,480 (9,247,408) 7,403,562 (125) Freelancers Consumer Operated and
Oriented Program of Oregon d/b/a Health Republic of Oregon
OR 60,648,505 6,652 (6,622,433) 9,953,335 (67)
Oregon's health Co-Op OR 56,656,900 1,279 (2,894,816) 7,688,926 (38)
Total 2,444,401,783 522,617 (234,501,900) 552,608,755 N/A
*As of Dec. 16, 2014. Source: Center for Medicare and Medicaid Services. ¶As of Sept. 30, 2014. Source: Quarterly NAIC statutory filings. N/A-Not available.
Chart 1
To quantify the weak earnings further, we looked at net loss as a percentage of available surplus. The rehabilitation petition filed in the case of CoOportunity Health highlighted this ratio. As per that filing, CoOportunity Health had a "net loss of $45.7 million through Oct. 31, 2014," which "equates to a 66% loss to remaining surplus." In comparison, the weighted average net loss-to-surplus ratio for the co-ops was 42%, which indicates a weakness in earnings across the companies. In fact, 10 of the co-ops had worse ratios than CoOportunity's as of the end of third-quarter 2014. The positive outlier for this ratio was Maine Community Health options, while the weakest was Community Health Alliance Mutual Insurance Co. (see table 1).
Lack Of Future Funding And Negative Retained Earnings Will Hamper Capital
Growth
Other U.S. Health Insurance Co-Ops Could Be Going Down The Same Bumpy Road As Iowa's CoOportunity Health
internal cash flows. These are shorter-term loans that generally need to be repaid starting five years after they are issued.
• Solvency loans: This is a form of capital infusion recognized on the co-ops' statutory balance sheets as surplus notes (not debt). The purpose of solvency loans is to meet insurance reserving or capital requirements of each state. These are longer-term loans that do not have to be repaid until 15 years from issuance.
The funding for co-ops has come under fire since 2011. Initially, the Affordable Care Act allocated $6 billion to fund the co-op program. This was reduced to $3.4 billion through two Acts in 2011 and 2012. Then in 2013, as per the American Taxpayer Relief Act, 90% of all remaining unallocated funds were rescinded, leaving minimal solvency funding for the co-ops. At this stage, the co-ops have to look for private sources if they need capital beyond the
allocated funds, especially because internal capital restoration is difficult as net income losses eat into available capital. In addition, some co-ops' capital quality and financial flexibility are unfavorable because of their high debt-leverage burden and significant surplus note-to-capital ratios (see table 2).
Table 2
Co-Ops' Quality Of Capital
(%) State of domicile Surplus note as % of capital* Debt leverage*
Maine Community Health Options ME 100 24
Coordinated Health Mutual Inc. OH 127 24
Montana Health Cooperative MT 130 23
Freelancers Health Service Corp. NY 146 20
Common Ground Healthcare Cooperative WI 159 17
Kentucky Health Cooperative Inc. KY 172 30
CoOportunity Health IA 174 16
Louisiana Health Cooperative Inc. LA 198 38
Consumers Choice Health Insurance Co. SC 222 56
New Mexico Health Connections NM 229 40
HealthyCT Inc. CT 243 47
Arches Mutual Insurance Co. UT 256 45
Minuteman Health Inc. MA 256 60
Colorado Health Insurance Cooperative Inc. CO 259 47
Nevada Health Co Op NV 269 53
Consumers Mutual Insurance of Michigan MI 273 65
Oregon's Health Co Op OR 286 48
Land of Lincoln Mutual Health Insurance Co. IL 300 57
Meritus Health Partners AZ 370 0
Evergreen Health Cooperative Inc. MD 373 64
Community Health Alliance Mutual Insurance Co. TN 754 87 *Based on third-quarter NAIC statutory financial statements. Debt leverage = borrowed money reported on balance sheet/total capital.
Generally Adequate Liquidity With Some Short-Term Concerns
Lack of adequate liquidity is more of a concern than negative earnings, especially when it comes to the survival of an insurance company. In aggregate, the co-ops reported $91 million of negative cash flow from operations (CFO). During three quarters of 2014, cash flow was clearly not a strength for this group, with only five of them reporting positive CFO during that period. As a point of reference, CoOportunity Health also had negative CFO during the same period. To further estimate liquidity, we compared available cash and investments to short-term liquidity needs. The higher this ratio, the stronger the liquidity. On the other hand, companies near or less than 1x indicate stressed capacity for meeting short-term obligations. As a point of comparison, CoOportunity Health had a liquidity ratio of 0.8x as of Sept. 30, 2014, indicating inadequate short-term liquidity. This ratio clearly declined by the time CoOportunity was put to liquidation because, as per the rehabilitation filing, the company "reported cash and investment assets of
approximately $17.1 million" as of Dec. 12, 2014, compared to $72 million as of the end of September 2014. Most co-ops had adequate or strong liquidity as of the end of third-quarter 2014, except for five that had a liquidity ratio of less than 1.2x, demonstrating potential liquidity weakness (see chart 2).
Chart 2
Other U.S. Health Insurance Co-Ops Could Be Going Down The Same Bumpy Road As Iowa's CoOportunity Health
Not all co-ops have drawn down on the entire amount of solvency funds allocated to them. If they are able to meet the milestones set up as per their loan contracts, the co-ops should be able to draw-down allocated funds incrementally to alleviate some of the near-term capital and liquidity concerns.
In addition, all the co-ops except one have generally maintained their investments in the form of cash, short-term investments, and bonds. We view this conservative investment strategy as appropriate at this time, given the
short-term liquidity needs that they might have. The one exception is Montana Health Cooperative that has about 60% of its investments in equities (as of Sept. 30, 2014), which we consider a riskier asset class.
Will The Disruptors Be Disrupted?
Not all co-ops will go the way of CoOportunity Health. As indicated in our analysis, some may have capital or liquidity issues, but most seem to have adequate liquidity at least to survive the near term.
We view the barriers to entry in the health insurance sector to be significant. Regulatory restrictions, scale
requirement, and actuarial and pricing expertise make it harder for new entrants to challenge the legacy financially stable insurers. Keeping pricing low may help co-ops gain scale and perhaps even disrupt the market in the near term, but in the longer term after two of the 3Rs (permanent risk adjustment, temporary risk corridor, and temporary reinsurance) are no longer available to subsidize performance, the market will likely transition to rational pricing. At that time, it is likely that some of co-ops will continue to struggle against the more-entrenched players unless the co-ops can build positive brand recognition, contract well-negotiated provider networks, and gain financial stability. Related Criteria And Research
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