As the battle for the hearts and minds of Americans relative to the Affordable Care Act (ACA) continues, and the tracking sentiment index waxes and wanes between ‘favorable’ and ‘unfavorable’ one front in particular seems to have a fair degree of utility with the narrative profferred by the ‘repeal and replace‘ crowd.
Consumer Operated and Oriented Plan (CO–OP) Program
Nested in Section 1322 of the Affordable Care Act (ACA), the ACA created the Consumer Operated and Oriented Plan Program (the CO–OP program):
‘to foster the creation of new consumer-governed, private, nonprofit health insurance issuers, known as ‘‘CO–OPs.’’ In addition to improving consumer choice and plan accountability, the CO–OP program also seeks to promote integrated models of care and enhance competition in the Affordable Insurance Exchanges established under sections 1311 and 1321 of the Affordable Care Act. The statute provides loans to capitalize eligible prospective CO–OPs with a goal of having at least one CO– OP in each State. The statute permits the funding of multiple CO–OPs in any State, provided that there is sufficient funding to capitalize at least one CO–OP in each State. Congress provided budget authority of $3.8 billion for the program’
For program details and background see the Notice of Proposed Rule Making (NPRM) here. 
As fodder for the anti-ACA crowd, much of the recent headlines have rightfully focused on the problematic ‘failure‘ rate of many of these community based AND governed start-up health plans.
Just witness some of the associated reports recently in the news:
- More Than Half of Obamacare Co-Ops Are Closing
- Illinois Moves to Shut Down Failing Health Insurance Co-Op Set Up Under Affordable Care Act
- Oregon fail: Another ObamaCare co-op collapses
Lets underscore the fact that CO-OPs are de-facto start-up health plans – a problematic undertaking under ideal launch conditions. As any entrepreneur or VCs fueling their vision knows, there is a tender proof of business model period during which an entities’ expenses typically exceed their revenues as they build market share and compete for members or lives in the market where they operate.
The ‘break-even’ (B/E) formula is rather simple:
revenues – expenses + subsidies = profit (or for non-profit entities: surplus revenues over expenses)
While not a golden rule, the B/E crossover point is rarely (if ever) within the first 24 or even 36 months of a stand alone (vs. subsidiary) operations and wholly determined by local market conditions and competitive landscape. Whether capitalization is via private investment or as in the case of CO-OPs via Federal loans this start-up fragility can not be overstated.
The other consideration unique to the CO-OP Program is the locally brewed, governed and accountable nature imbued in the operating culture and mission of these entities.
When you layer in the well established actuarial dynamics of profit and loss cycles predictably inherent in health insurance industry including ALL managed care derivatives, the critical variable of timing of market entry may introduce a volatility factor over-expressed under the current market conditions the ACA has fostered.
In other words, start-up health plans take time to create the infrastructure (people, processes and culture) to market, retain, price and operate successfully under ideal let alone typical market conditions. When you add the disruptive conditions the ACA has created (see: ‘Risk Adjustment Gone Wrong‘) in the small group and individual markets via Federally Facilitated or State run health insurance exchanges that complexity, associated market share gain challenges and ‘volatility ratio‘ can only be expected to play an increasingly important role in the success or failure of the enterprise.
The HMO Act of 1973
There is precedent to perhaps gauge and contextually consider the relative success or failure of the CO-OP Program spawned by the ACA. When the managed care revolution was birthed by then Republican President Richard Nixon via the HMO Act of 1973 as a market driven solution to remedy the run away costs of healthcare, HMO’s were typically seeded as non-profit, community based AND governed risk bearing health plans with a principal mission to maintain the health 
and well being of its members.
HMO’s like the CO-OP program today received Federal support via start-up loans to manage through the typical B/E point associated with the start-up of a community based health plan vs. the typical indemnity based, fee for services insurance companies that dominated the market. The two exceptions to this rule where the non-profits licensed and operating under the Blue Cross and Blue Shield label and at least in California the Kasier Permanente Health Plan.
During the launch trajectory as then designated ‘alternative delivery systems‘ (ADS) HMO’s slowly gained share (both mind-share and members) and made their way out of California, though constrained by their non-profit nature and operating culture including the limited marketing upside of ‘staff’ or group model HMOs portrayed as second class medicine. In the 80s HMO’s went mainstream via the introduction of Independent Practice Associations (IPAs) and later ‘network models’ which attracted the independent private practice cohort into managed care if for no other reason than to defend against an emerging trend that could threaten their livelihood as more and more health benefit plans started to traffic patients to a contracted network of ‘participating providers’.
Shortly thereafter fueled by Wall Street the major health insurance companies went on a acquisition binge of these sleepy, capital constrained community based health plans. This consolidation orgy created a legal bonanza via a new industry of for-profit conversions of community based health plans, the behemoths of which included many of the Blue Cross/Blue Shield licensees. During the ‘urge to merge‘ imperative the seminal transaction was likely the for profit conversion of Blue Cross of California under the stewardship of health wonk Leonard Schaeffer (former Administrator of HCFA – the predecessor agency to CMS). Blue Cross of California was then to serve as the founding member of the for-profit WellPoint empire now re-branded and operating as Anthem, Inc.
As simple and narrow as HMO (alternative delivery system model) charge was then, it pales in comparison to the charge and expectations placed on the nascent and fragile CO-OP industry. Not only are CO-OPs to stand up entities that provides non-profit, community based alternatives in a competitively vetted, comparably priced tiered benefits package for exchange facilitated marketplaces, they are to do this while the hospital, physician and a health plan communities are rapidly consolidating to gain scale and thus pricing leverage.
Bottom Line
The health insurance industry is a complex and some would argue ‘protected‘ industry (see: McCarran–Ferguson Act) that challenges even best-of-breed leadership (Mark Bertolini, Bruce Broussard et al) to sustainably operate their business as profitable enterprises during the volume to value shift. Witness the ‘urge to merge‘ amidst the majors, i.e., Aetna’s proposed acquisition of Humana, and Anthem’s proposed acquisition of Cigna, both recently challenged by the Department of Justice, and both rationalized by the need for scale to achieve the operating results expected by their investors.
As to ACO implications, clearly there are some. It’s hard to predict the rate of legal and clinical integration and the seamless care coordination and commitment to quality envisioned by 2nd or 3rd generation ACOs (typically risk bearing) or any of their derivative plays as exchanges become the de-facto market place for small group and individual offerings, but the handwriting is clearly on the wall.
So as some of us point to the CO-OP failure rate as another example of ACA over-reach via fundamentally flawed legislation and thus cause for repeal or re-entrenchment from the law, it may be helpful to historically gauge the nature of their challenge AND the market conditions in which they operate. A little humility can go long way here.
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