Updated: My Half-Assed Attempt to Explain the Transitional Policy Brouhaha

Ever since I laid into Congressional Republicans on Friday for deliberately sabotaging the funding program for the ACA's CO-OP Risk Corridor program last December, several people have correctly pointed out that, while having federal funds cut for this program cut off was certainly a major factor in at least one of the CO-OPs going under (the Kentucky Health CO-OP), there was a different policy change--made nearly 2 years ago--which may also contributed to their financial woes (and which may have played a role in some of the other 4 CO-OPs which fell apart prior to the risk corridor debacle hitting home a week or so ago).

I'm referring to President Obama (and the HHS Dept's) policy change (in response to the "If You Like Your Plan You Can Keep It" debacle) in November 2013 which allowed "transitional" policies to be extended by up to a year at the discretion of the individual state insurance commissioners (as well as the individual insurance carriers in states which allowed this extension). This one-year extension was later quietly extended even further, to up to 3 years out (ie, October 2016).

Here's President Obama's official statement on Nov. 13, 2013:

The other problem that has received a lot of attention concerns Americans who have received letters from their insurers that they may be losing the plans they bought in the old individual market, often because they no longer meet the law’s requirements to cover basic benefits like prescription drugs or doctors’ visits.

Now, as I indicated earlier, I completely get how upsetting this can be for a lot of Americans, particularly after assurances they heard from me that if they had a plan that they liked, they could keep it. And to those Americans, I hear you loud and clear. I said that I would do everything we can to fix this problem. And today I'm offering an idea that will help do it.

Already, people who have plans that predate the Affordable Care Act can keep those plans if they haven’t changed. That was already in the law. That's what's called a grandfather clause. It was included in the law.

Note: In other words, anyone still enrolled in a policy which started prior to March 2010 was already allowed to keep it, as long as they didn't let it lapse after then. These are the "Grandfathered" policies, which are not a factor here.

Today, we're going to extend that principle both to people whose plans have changed since the law took effect, and to people who bought plans since the law took effect.

So state insurance commissioners still have the power to decide what plans can and can’t be sold in their states. But the bottom line is, insurers can extend current plans that would otherwise be canceled into 2014, and Americans whose plans have been canceled can choose to re-enroll in the same kind of plan.

As I noted above, Pres. Obama's original 11/13/13 announcement allowed these policies to be bumped out until the end of 2014. Then, on 3/5/14, the HHS Dept. announced that to heck with it, they were gonna allow those policies to be bumped out even further, all the way into October 2017, again, at the discretion of the insurance commissioners and carriers in each state which allowed it at all. These policies, which were enrolled in between March 2010 and September 2013, are known as "transitional" or "grandmothered" policies.

In response to these announcements, 13 states (+DC) decided to stick with the original 12/31/13 cut-off for non-compliant policies; none of these states were impacted by the "transitional policy" announcement. Two states (Colorado and Oregon) allowed 2 year extensions, but are cutting them off even as I type this (October 2015). However, the other 35 state insurance commissioners all decided to take full advantage of the offer, and allowed their insurance carriers to extend non-compliant policies all the way out through October 2017.

(Note: My earlier posts about this issue stated that only 34 states total were allowing transitional policies; it turns out that Texas, Virginia and West Virginia reversed themselves at some point or another and are allowing some transitional plans after all).

Now, it's important to keep in mind that even in these states, no insurance company was required to offer the extension; some did, some didn't. Even among those which did, some of them only allowed extensions on some of their policies. Finally, even the policies which were extended might have only been extended for 1 or 2 years, not all three.

HOWEVER, the fact remains that several million people spread across those 32 states who the insurance carriers all thought were going to be kicked off of their non-compliant policies as of 12/31/13 were suddenly allowed to stick around for one, two or up to three years in some cases.

Why was this a problem? Well, for one thing, this seriously impacted how the actuaries for the various companies in each state calculated their premium rates for the brand-new 2014 ACA-compliant policies.

Let's say it's September 2013, and you have a state with 2 insurance carriers: Big Blue and Little Guy Healthcare. Big Blue has 5,000 enrollees in policies already compliant with ACA rules, and another 45,000 in non-compliant plans. Little Guy is just breaking into the individual market for the first time (the CO-OPs would fall into this category along with some commercial carriers).

(Update: I've modified the hypothetical situation above based on some clarifications from Louise Norris; the example still stands, however)

With the ACA rules in hand, both companies start crunching the numbers to figure out how much to charge for their new ACA-compliant 2014 policies. Big Blue knows that they're gonna have to kick 90% of their customers off of their current policies...and that some of those 40K might decide to abandon them in favor of Little Guy. They set their new policy rates accordingly in an attempt to retain those customers.

Little Guy also knows that Big Blue is at risk of losing up to 90% of their customers, and in anticipation of potentially winning over those customers, sets their rates accordingly. In addition, Little Guy knows that those 40K people who are up for grabs are very likely to be pretty low risk (ie, fairly inexpensive to treat). How do they know this? Because prior to the Affordable Care Act, Big Blue was able to cherry-pick their enrollees. That means that most of those 40,000 people are probably reasonably healthy overall, and therefore aren't likely to cost Little Guy much in claims.

So, Big Blue sets their rates. Little Guy sets theirs. October 1st comes along. The ACA exchanges launch (and many of the websites immediately crash). A month later, the worst of the technical damage is repaired and people are finally starting to actually sign up for their new policies. At the same time, Big Blue starts sending out cancellation notices to those 40,000 people, letting them know that they have to move to a different policy effective January 1st.

People start to get angry because they were promised that If They Liked Their Plans They Could Keep It. Never mind the fact that the insurance carriers had 3 years to bring their policies into compliance with the ACA. Never mind that insurance companies drop policies all the time and had done so routinely for decades prior to the ACA being passed, for any number of internal business reasons; the fact remained that these policies were being dropped due to (or at least, blamed upon) the Affordable Care Act. The GOP and news media in general takes the story and hypes it up something fierce, given fuel by the fact that President Obama did, indeed, repeatedly state that "If You Like Your Plan You Can Keep It".

In response to the backlash, on November 13th, 2013, President Obama makes the "transitional plan extension" announcement to get everyone to calm the hell down. On it's face, this seems like a reasonable compromise: It resolves the original problem, while gradually weaning people off of non-compliant policies over a 1, 2 or 3 year period instead of "pulling the band-aid off all at once", so to speak. The insurance commissioner of the hypothetical state in question gives the thumbs up to this policy. Little Guy is already compliant and therefore has no policies to reinstate...but Big Blue decides to take the President up on his offer and gives a full 3 year extension to all 40,000 of their non-compliant policy enrollees. The enrollees are, for the most part, relieved that they don't have to change anything after all, and most of them stick with the non-compliant Big Blue policy for as long as they can continue to do so.

This works out great for Big Blue (they get to keep up to 40K inexpensive customers for another few years!), but if you know anything at all about actuarial work (even the tiny bit that I do), you can immediately see the problem for Little Guy.

Suddenly, Little Guy's pre-October actuarial enrollment projections for 2014 are meaningless. They thought that up to 40,000 inexpensive, low-risk potential customers were about to be put on the market for them to scoop up. Instead, most of those 40K are staying right where they are. Little Guy still has plenty of people to market themselves to...but they were relying on those 40K in particular, since not only is that group low-risk, they're also highly reliable (that is, these are people who have already been reliably paying their monthly premiums for many months or years).

Here's the worst part: President Obama's change in policy was made in mid-November, well after Little Guy's 2014 rates had been locked in stone. They were stuck with those rates for at least 1 full year, unable to change them until January 2015.

So, what happens? Well, instead of snapping up, say, 20,000 low-cost/low-risk enrollees along with another, say 20,000 higher risk folks, Little Guy ends up with perhaps 30,000 total...except a far higher percentage of these are high-risk, since they haven't been "pre-screened" by Big Blue already. However, their premium rates for all of 2014 are still based on their original assumptions.

Result? They take a beating throughout 2014, ending the year in the red.

Which, of course, is where the risk corridor solution was supposed to come to the rescue, by covering a substantial portion of the losses that Little Guy took in 2014.

Of course, thanks to the Republicans demanding that the risk corridor provision not be funded properly, it wasn't...leaving Little Guy to only get 12.5 cents back on every dollar in losses they were promised would be covered.

Now, it's important to keep in mind that the "transitional plan" policy change (being made, I have to stress again, after open enrollment had already started) can not be blamed for every dollar which was lost or insurance carrier which ended up in the red at the end of the year. Plenty of companies (including small ones) did just fine, even in the "transition plan" states, and some companies took a loss even in the states which didn't allow transitional policies. Some companies had misjudged the market even without this change; some were just being poorly managed anyway; and some might have only been making their previous profits due to massive abuses of their customers (recission, denying claims without cause and so forth) which the ACA now prevents them from doing.

However, the fact remains that from an acturial POV, it would have been much better if President Obama had stuck to the original rules and pulled the band-aid off all at once. Hell, even politically it probably would've been smarter; after all, it's not like spreading things out did his party any good in the 2014 mid-terms, where they still had a terrible year.

At this point, critics are probably accusing me of partisan hypocrisy: Why are you beating up on the Republicans for cutting off Risk Corridor payments at the knees but letting the Democrats off the hook over the Transitional Plan decision, which may have contributed to some of the cash flow woes that the Kentucky Health CO-OP, WINhealth of Wyoming and others are having in the first place? I have several responses:

First: I'm not letting them off the hook: That's the whole point of this blog entry.

Second: To the best of my knowlege, the Transitional Plan decision was President Obama's alone. I mean, obviously he consulted with the HHS Dept. on it; I presume he discussed it with various insurance industry officials, perhaps got input from Congressional leaders and so on. I really don't know how his decision was made. In the end, however, I believe it was his call (and he's the one who was catching the "If You Like Your Plan..." heat anyway). By contrast, Congressional Republicans demanded en masse that the risk corridor program be crippled.

Third: No, I'm not throwing President Obama under the bus here. I fully understand his decision at the time, even if I don't necessarily agree with it. Forget about politics--millions of people were genuinely confused and outraged regardless of whether they "should" have been or not. For some people the extension of their current policy did make a positive difference depending on their specific circumstances. In addition, the entire insurance industry was in turmoil at the time, a decision had to be made quickly about how to handle it, and it did resolve the immediate problem at hand.

By contrast, the Republicans decided to cripple the risk corridor program for no particular reason other than they didn't like it. There was no pressing need to do so. No one outside of the insurance industry, insurance/budget reporters/wonks, Congress or the administration knew anything about this program or would've understood it if they had. Keeping it as it was wouldn't have impacted anything other than temporarily adding a couple billion dollars to the federal budget (most of which would have likely been paid back the following year or two anyway). There was zero practical, human or political gain to be had here; they crippled a program they didn't like even though a similar program has worked very well for years for Medicare Part D.

Fourth: While the Transitional Plan decision may have contributed to the red ink spilled last year (and to a lesser extent, this year) by some insurance carriers--including the CO-OPs--it's very difficult to tell just how much damage it caused. As I noted above, some smaller companies in "transitional states" are doing just fine, and some in states without transitional policies are doing poorly anyway. For instance, two of the CO-OPs (the ones in Maine and South Carolina) are doing just fine at the moment...even though both are in states which took the full 3-year transitional policy option. There's a hundred different factors involved which can impact the profitability of an insurance company.

By contrast, the damage from the Risk Corridor program being crippled is specific, quantifiable and obvious: Company X lost $22 million in 2014; they were supposed to receive $20 million (or whatever) back in risk corridor reimbursements; the CMS dept. only has $2.5 million to pay them back with, period, so they have to eat the remaining $17.5 million loss until next year or the year after...if they're able to stick it out that long.

The Kentucky Health CO-OP couldn't stick it out that long...and it's possible that similar press releases may be forthcoming for a few other CO-OPs (and/or other smaller insurers) over the next week or so.

UPDATE: Thanks to Louise Norris for correcting/clarifying a few points, though none of these really change my larger points:

  • Virtually none of the pre-2014 policies sold were ACA-compliant.
  • On the other hand, many states were already allowing non-compliant policies to continue until they came up for renewal later towards the end of 2014 even before the first, 1-year extension, which (in addition to the 14 states which didn't take up the extension offer at all) reduces the impact of President Obama's original November 2013 announcement.
  • Because of this, according to Louise, the first extension (1 year) didn't really change things much, but the second announcement (2 more years) did cause a lot of scrambling.
  • Even in some states which are allowing transitional plans, the impact is minimal or nonexistent. For instance, Montana is officially allowing them, but none of the carriers chose to extend their policies, making it moot.

Oh, one more thing about the CO-OP program:

Some have attacked the CO-OP program as being "guaranteed to fail" no matter what, and/or claimed that it would be "throwing good money after bad" to reimburse them for their early-year losses. These people tend to take the "Government Should Be Run Like A Business" mantra: Sink or Swim, Invisible Hand of the Free Market and all that.

Fair enough. Guess how many brand-new startup businesses fail in the free market?

According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. A whopping 80% crash and burn.

But why? What can we learn from the colossal amount of failure with small business that we can apply to our own business aspirations?

In my 30 plus years as a serial (yes – hate that word too) entrepreneur, and through my exposure to thousands of entrepreneurs via my company Mighty Wise Media, I have seen plenty.

And yes, at surface level the primary reason businesses fail is they simply run out of cash.

Now, I've heard various estimates on the "new startup" failure rate. Gallup says it's half of them in the first five years, while the Small Business Administration says that it's more like 33% in the first 2 years. I assume these wide variances depend on different methodologies and different definitions of "failure". Presumably the failure rate also varies widely depending on the industry you're talking about (and health insurance is presumably one hell of a tough industry to try and leap into).

However, what they all agree upon is that the failure rate is high in general; anywhere from 33% to 80% depending on your source.

There were 23 CO-OPs to start with. Two years in, regardless of who you blame for it, 5 of them (22%) have failed to date. That means that 78% of them are still chugging along at the moment.

If you use the private market as your Pass/Fail marker, they've already surpassed Bloomberg's definition (only 1 CO-OP, CoOportunity, actually went belly up during the first year and a half of operation), and up to 7 of them could fail by December and still beat the Small Business Administration average. If at least 12 of them survive until 2019, they'll have beaten the odds according to Gallup.

Obviously I'm not saying that any of the CO-OPs failing is a good thing; ideally, all of them would have survived and thrived. But relatively speaking, so far they seem to be doing pretty well given the massive odds (both natural and deliberate) against them.

UPDATE x2: It turns out that the CO-OP program has been sabotaged left and right from day one:

The program has been under siege from the start, including from the insurance industry. Before the law’s passage, government grants to help them get going were switched to loans. None of that money could go for advertising — a wounding rule for new insurers that needed to attract customers. Moreover, the amount available was cut from $10 billion to $6 billion and then later, as part of the administration’s budget deals with congressional Republicans, to $2.4 billion. Federal health officials abandoned plans for a co-op in every state.

The article above also includes some updated numbers for the 18 remaining CO-OPs as of June 30th. Many of them are still in dire straits, but at least 3 of them (Maine, Tennessee and Wisconsin) have actually turned a profit for the first half of the year, and several more seem to be righting their ships.