The state’s shutdown of its three-year-old Land of Lincoln Health was no surprise, observers say, coming amidst a nationwide trail of failures of nonprofit alternative insurers set up under the Affordable Care Act.
Those insurers faced many obstacles, but most important were two financial hits: the federal government’s reneging on hundreds of millions of dollars in subsidies promised under ACA, while at the same time demanding the struggling startups pony up hundreds of millions in other contributions required under that law.
Enrollments in the plan also started slowly then burgeoned quickly, and included a lot more sick people than anticipated.
The Affordable Care Act, also known as Obamacare, allowed states to create nonprofit “Consumer Operated and Oriented Plans,” commonly referred to as co-ops. And 23 set up shop in 2013.
Given those obstacles, the surprise, perhaps, is that seven of those 23 co-ops are still operating.
“Illinois ranks nationally as one of the worst in terms of health insurance competition. [Obamacare] was intended to create competition, and we certainly had put together a plan we thought would work,” said Dennis O’Sullivan, a spokesman for Land of Lincoln, which lost $90 million in 2015, and this year more than $17 million through May 31.
“Shortly after the creation, Congress and [Centers for Medicare and Medicaid Services] ended up eliminating some of the funding mechanisms co-ops were relying on,” Sullivan added. The loss of money that co-ops had expected to receive from a risk-adjustment program “really had a devastating impact,” he said.
Also adding to the recipe for disaster were premiums that were set too low initially, and competition from large legacy insurers with deeper pockets.
“I don’t know that there’s one particular fatal flaw with the co-ops,” says Sabrina Corlette, a researcher at Georgetown University’s Center on Health Insurance Reforms. But she said a major issue was the co-ops’ inability to predict their costs of caring for a massive pool of previously uninsured customers, and thus having no idea how high they should set their premiums to cover those benefits.
“The health care market is notoriously difficult for a new company to penetrate and really succeed,” says Corlette. “You need very deep pockets and a long timeline.”
Illinois Department of Insurance officials announced last week they would seek a court order allowing the state to take over Land of Lincoln Health and prepare it for liquidation, impacting 49,000 policyholders throughout the state.
Customer Andrew Maggio, a self-employed video editor whose wife is five months pregnant, learned of the Chicago-based carrier’s dissolution in the news, and had yet to hear from the co-op or the state as to the future of his health coverage.
“We chose Land of Lincoln without knowing that in five or six months the whole thing would go kerplunk,” Maggio says.
Like many customers who fill social media with complaints, he said customer service and claims processing weren’t Land of Lincoln strong points.
“Every claim is in re-processing,” says Maggio. “We have no idea how much has been counted against our deductible, how much is going to be covered. The bills are piling up, the hospitals are calling us, and we’re saying, ‘Hey, we’re just dealing with the insurance company.’ … We’re paying out of pocket just so doctors will see us.”
The 23 private, nonprofit, state-licensed carriers were established in 2012 with $2.4 billion in low-interest loans. Land of Lincoln was started by the Metropolitan Chicago Healthcare Council, an Illinois hospital trade association; it received $160 million in funding. Like its peers, it was slow out the gate.
It had a goal to enroll up to 75,000 members by 2014, but instead languished at 4,000 customers by mid-2014. Enrollment eventually grew, but that just created another problem. By 2015, Land of Lincoln was grappling to serve more than 50,000 customers. Some 400,000 people nationwide moved to the co-ops during 2014’s open enrollment period, a number that burgeoned to more than a million by 2015’s open enrollment.
Poor or inexperienced management occasionally is cited as a factor in their downfall. Land of Lincoln saw major leadership changes in its short tenure. O’Sullivan says current CEO Jason Montrie drew a base salary of $265,503. In 2014, Montrie received more than $325,000 in compensation, according to the co-op’s tax records. Montrie did not return phone calls.
A former employee tells the Sun-Times that the co-op’s funding issues were compounded by inadequate management. Declining to be identified, the former staffer asserts the carrier, among other things, suffered from “poor vendor selection to handle invoicing, ID cards and claims.”
O’Sullivan admits to issues with service, but not management.
“We were the last co-op nationally to actually get started. Certainly there were some growing pains,” he says. “We were investing in operations, in learning more about our population. Late last year, we brought our member services department in-house. We really had high hopes to turn the corner in 2017. Then came the unfortunate federal government situation.”
Under ACA, three risk management programs were created: a temporary reinsurance program that distributed contributions from all carriers to those serving individuals with catastrophic claims; the temporary risk corridors program, that would transfer contributions from thriving issuers to struggling ones; and the risk adjustment program that required carriers with healthier enrollees to subsidize carriers with sicker populations.
However, the co-ops were blindsided in October 2015, when the Centers for Medicaid and Medicare Services announced the risk corridors’ contributions were not sufficient to pay what carriers had been expecting to receive under that program. It paid out only 12.6 percent of what was owed; that alone cost Land of Lincoln about $70 million.
“The management for the business decisions was not always optimal. But even if you had the most crackerjack management, given the headwinds they were facing, I don’t know if it would have made a difference,” says Georgetown’s Corlette. “It was a death by a thousand cuts.”
Over the course of 2015, 12 of the co-ops shut down, including the nation’s largest, in New York. The 11 remaining soldiered on, with several, including Illinois’ co-op, suing the federal government. Some sued over the reneged risk corridor payments; others argued that the risk adjustment tabs were inherently unfair to small carriers.
Ohio’s co-op dissolved in May.
Then, in June, the Centers for Medicare and Medicaid Services told carriers what they owed under the risk-adjustment program. The bill for Land of Lincoln was $31.8 million.
That’s when co-ops in Connecticut and Oregon dissolved.
Then, this month, Land of Lincoln finally shut down.
Illinois Department of Insurance Acting Director Anne Melissa Dowling unsuccessfully lobbied for the Center for Medicaid and Medicare Services to make good on its risk corridor payments, in an effort to keep the co-op open through the end of the year.
“I’m fully appreciative of how alarming this is to some people,” Dowling says. “What’s happened is not unique to Land of Lincoln and it’s not unique to Illinois. It’s happening all over the country.”
The state will work with the federal government to establish a 60-day special enrollment period for policyholders, a window that could open as soon as Aug. 1, Dowling says.
“If there’s any good to come from the closure of Land of Lincoln, we hope that it’s a conversation about some of these misbehaving programs, especially risk adjustment,” O’Sullivan says. “And for the remaining co-ops, access to private capital.”
In the meantime, Land of Lincoln policyholders must continue to pay their premiums to maintain coverage, and care providers must continue to honor contracts for servicing those patients.
But customers like Maggio feel left in the lurch, worrying about pricing, as choices diminish within the insurance exchange.
“What’s going to happen while all these insurance companies are basically pulling their plans off the market?” asks Maggio, who started his own business six years ago. “Honestly, it makes me think I should just go get a job somewhere, just so I don’t have to deal with the insurance.”