Epic Fail: The (Relatively Short) Confessions of an Insurance Company Chairman


When Barack Obama was running for President, I was excited about his proposal for health care reform. He was committed to a goal of universal coverage, setting some ground rules at the national level for the messy state-regulated health insurance markets, a massive expansion of Medicaid/SCHIP coverage for folks who made too much to qualify under unreasonably low income ceilings, significant reduction of out-of-pocket costs for beneficiaries, and a bold new federal effort to improve health care quality, efficiency and outcomes. The Obama plan stood in stark contrast to the proposals put out by his opponent, Senator John McCain, who would have tinkered at the edges of reform, but whose reliance on tax credits and the end of tax-exempt, employer-provided health care would have meant that far fewer people would have gotten health care coverage. Obama’s ideas were not all that I wished for, but I am a pragmatic sort of progressive, and it seemed a good start.

obama-signs-aca-780x290In those salad days, no one could have anticipated the depth of political resistance to what seemed like common sense reforms wanted by the majority of Americans. Like everything else we as a nation have tried over the past 7 and a half years, Obamacare would end up tangled in the dysfunction of a broken political system. This week, as Aetna followed an increasingly long list of insurance companies pulling out or pulling back on selling Obamacare policies, that broken system produced its latest bad outcome: less competition, higher prices and fewer people covered in the year ahead.

I watched in dismay as the Blue Dog Democrats, led by Senator Max Baucus, gutted the one proposal that would have made the Affordable Care Act live up to its name: a “public option” allowing people to purchase insurance coverage from the federal government that would have been roughly equivalent to the benefits of Medicare. Then, the Supreme Court, in NFIB v. Sebelius, dealt a severe blow to the fiscal integrity of program by allowing states to opt out of the Medicaid expansion, thus creating a huge coverage gap of folks too poor to receive subsidies but too “rich” to qualify for Medicaid in those states that would opt out of the expansion.

The ACA would interface with most people via state-based “marketplaces”, which were envisioned as a sort of insurance Travelocity or Expedia where people could shop for the lowest price on insurance and see how much they would receive in federal tax subsidies that could only be used to lower their insurance costs. These state-based “exchanges,” while operating under uniform federal rules, would offer state insurance regulators the opportunity to make sure that any insurance company selling policies in their state was adequately funded, so consumers were protected. The law included “risk corridor” payments and cost sharing arrangements that were supposed to lower the risks inherent in insuring large numbers of people who had never had insurance before, and were likely to be, especially if they were older or poorer, less healthy than the general public.

In each state, the ACA provided for a Consumer Owned and Operated Plans, nonprofit insurance companies that could offer low-cost alternatives to the big insurance companies. It was in the CO-OP’s that the ACA had its greatest promise. These nonprofits would receive a mix of federal start-up grants and loans that would be repaid as they gradually moved towards profitability. (Yes, nonprofits can make a profit, but those profits are plowed back into service delivery and are called “increase in net assets” on a nonprofit balance sheet.)

The law required that each state tell the federal Department of Health and Human Services, whether or not it would set up its own exchange or allow its residents to access to a federal exchange. I was asked by South Carolina Governor Nikki Haley to serve on her Health Planning Committee, which was charged with recommending to her whether or not South Carolina should set up its own exchange or allow access to the federal exchange (the infamous Healthcare.gov).

We met more than 30 times over 7 months, and we worked hard to make a non-political recommendation. The Committee was nonpartisan and included health care professionals, political leaders, insurance agents, nonprofit executives (like me) and information technology experts. We listened to national experts on health care and insurance, IT consultants, actuarial consultants and finally concluded that, with South Carolina’s dismal record on IT infrastructure, we would be better off allowing the federal government to run the exchange, rather than trying to do it ourselves and failing. Our report was politicized and criticized from both the right and the left, and the final report included a promotion of privately-run insurance company owned exchanges, which were not part of the ACA.

Since I knew that the federal government was not going to approve South Carolina setting up private exchanges, and in spite of my misgivings about the language in the report that seemed to veer towards the political, I believed that giving the federal government the green light to manage the sale of insurance and consumer subsidies would provide the best chance for South Carolina to increase coverage for more people. I stand by that decision.

A few months later, after federal government informed South Carolina that it would implement the federal option, South Carolina’s new nonprofit CO-OP was formed. Without hesitating, I accepted a position as a member of the Board of Directors, the better to lead our state into a new way of thinking about health insurance. Over the next four years, I would volunteer countless hours to the strategic direction and oversight of Consumers Choice Health Plan, eventually becoming Chairman of the Board.

The CO-OP Alternative

cchp_logoWe shot to the top. In spite of the legendary problems with Healthcare.gov, Consumer’s Choice Health plan enrolled nearly 40,000 costumers during the first enrollment period of 2014. That was remarkable in a state in which one company, Blue Cross Blue Shield of South Carolina, owned nearly 80% of the health insurance market.

We did it as every other successful company does it, by offering what our customers wanted, namely value and service they couldn’t get anywhere else. The  Board and staff were giddy as we received the enrollment results in 2015: we were closing in 70,000 customers.

But all was not well. Most of the Board members were experienced leaders from around the state. We knew budgeting, staffing, leadership and, most of all, how to increase the bottom line. We had public sector, private sector and nonprofit experience. We had the ability to look at a balance sheet or a profit and loss statement and zoom in on the problems.

And the problems were screaming at us. Our Medical Loss Ratio, the total amount of claims paid out divided by the total premiums earned was staggering. Many of our customers were sick, very sick, and we worked hard to get their medical bills paid. We were receiving tens of millions of dollars in premiums, but our losses were mounting. We were experiencing what the insurance industry calls “adverse selection:” too many sick people and not enough healthy people in our customer pool. We doubled down on selling new policies to younger, healthier customers, whose premiums would offset our losses. We renegotiated reimbursement rates. We didn’t want to abandon any markets, but we knew it was a possibility.

And then there was the specter of all those start-up loans that we would have to start paying back in 2017. We had to get profitable, fast. But we had the ACA equivalent of an angel investor: the federal government, which had promised us payments from three programs which were designed to stabilize the market during the initial market disruption that ACA would cause during implementation.

Risk adjustment was the first. To understand this, you must first understand that insurance is a socialistic concept. My premiums are used to pay your medical bills. It’s basically a huge market short against sickness, a transfer of wealth from healthy people to sick people (in reality to their medical providers). In pre-ACA days, insurance companies did this by refusing coverage to people with pre-existing conditions or dropping them when they ran up huge bills. It was a cruel system, and the ACA ended it by requiring insurers to take everyone who paid a premium, sick or not. The Risk Adjustment Program was designed to transfer funds from companies with healthier customers to those with sicker ones. A small company, like ours, might have to pay a big company like Blue Cross Blue Shield, if our customers were healthier.

The second program was Reinsurance. For the first couple of years of the ACA, there was to be set aside a pool of “reinsurance” funding, basically insurance on the insurance companies, to prevent them from going broke or raising their rates so high that no one could afford to buy the product, even with subsidies.

But the biggest program was the Risk Corridor . Before we started to sell policies, we had to guess how much to charge to cover our costs of paying out claims. We needed to be competitive, but we needed to charge enough to get profitable. The Risk Corridor Program set an 80% target on spending from our premiums on medical expenses. If our medical costs exceeded that, we were to receive payments from the Risk Corridor to take us back down to the 80% level. By the third quarter of 2015, the federal government owed us more than $40 million dollars from the Risk Corridor.

When the Board received the financial reports in September of 2015, that number gave us hope. We were getting ready for a new enrollment year, and we had an internal target to increase our enrollment by tens of thousands more. Our rates had been approved by the state regulators. 2016 was the year we would, if everything went according to plan, break even, or maybe even make a little profit. We had one eye on the immediate bottom line and another on those loan payments that we would soon have to start making.

What we didn’t know that day,  was that, months before, Senator Marco Rubio had quietly inserted a poison pill into the 2014 Congressional spending bill. That provision effectively gutted the Risk Corridor Program. We found out when we received a letter that fall from DHHS informing us that we would receive only about 13% of what the federal government owed us. GOP_2016_Rubio-01184The Obama Administration apparently had not fully prepared for what would happen.

We were never funded adequately, because each Congressional budget chipped away since the ACA implementation and the GOP control of Congress chipped away at the law’s funding mechanisms. But Senator Rubio’s was the thousandth cut that would seal our fate.

End Game

It fell to me, as the Board Chair, to call the director of the State Department of insurance, and tell him that we were suddenly insolvent. I caught him on his cellphone, as he was walking into a meeting. He had been expecting my call, since DHHS had copied him on the letter that would be our death warrant.

A couple of weeks later, surrounded by lawyers and regulators, overlooking the Columbia skyline, I signed the form that would put us under administrative control of the DOI and liquidate the company. 70,000 people would no longer have insurance at the end of 2015. We would never reach profitability. South Carolina’s insurance market would be less competitive and far costlier. And the dream of a consumer owned and operated health insurance would die, right there in the glass-walled offices of the Department of Insurance.

Consumers Choice Health Plan was not the only CO-OP to fail. By the beginning of 2016, only 11 of the original 23 CO-OP’s were still operational. Three more have failed this year.  It’s doubtful that the rest will make it. The business plan was flawed from the beginning, with too little start-up capital, choking cost structures and a GOP-run Congress that valued scoring political points over serving the American people.

The ACA has done a lot of good. Millions more people have insurance today that before the law went into effect. But most of them have that coverage because they live in states that expanded Medicaid. The private insurance marketplace is not working. And that’s not because the ACA was too socialist. It’s because it wasn’t socialist enough.

As much as I hate to say it, the GOP mantra of “Repeal and Replace” is actually the only way forward. Only thing is, their solution, giving insurers back the power they had before the law is not the answer.

The answer is a public insurance system, run by the federal government, and paid for by all of us, in our taxes. Yes, that’s socializing our health care. But the only other choice is the epic fail of the health care system itself.

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