Politics, such as the Affordable Care Act, of which insurance co-ops are a part, is a hobgoblin of complex and mathematical stuff like insurance. Politicians, although sometimes well-meaning, practice politics, and they often pursue public or private agendas that do not square with reality. That’s not news to most people.
The Affordable Care Act permitted, no, mandated, the establishment of health insurance co-ops by the states, in the absence of which individuals could turn to the federal government’s marketplace. Given the solvency issues of nearly half of the state health insurance co-ops, it is not unlikely that at least some of the others will move to the federal marketplace to avoid the complications of running a state co-op.
Reasonable minds can differ on how good a job any government could do in running such an operation. Getting to and through the first step (enrollment) of the federal marketplace was painful and embarrassing for the feds and hard for individuals. Premiums frequently turned out not to be as touted. Is there reason to think that it will markedly improve, especially with respect to handling claims?
In insurance parlance, the major culprit in the financial collapse of health insurance co-ops is “adverse selection.” It also has to do with the government trying to do things that it can’t do well (or shouldn’t do at all), but that’s politics and I want to stick to insurance.
Health Insurance Co-Ops And Politics
In the context of insurance, adverse selection refers to the propensity of people who most need insurance to get it and use it the most. In a private health insurance market that is itself market-driven, the law of large numbers, as referred to above, prevails. That means that the risk undertaken by an insurer is spread over many people-some healthy-some sick-some in between. Over time, the balance among them may adjust, but that is offset by differing premiums. Additionally, private insurers use “underwriting guidelines” to determine those applicants who will be accepted as insureds and at what premium.
Among of the main goals of insurance regulation is to ensure the solvency of insurers. Solvency is the ability of an insurer to pay expected claims as they are incurred. Solvency is managed, in part, by the implementation by an insurer of rates (from which insurance premiums are derived) that, when coupled with other income, are sufficient to pay claims, overhead and a reasonable profit. State insurance regulators are closely involved in the oversight of those elements of the operation of a private insurer. An insolvent (bankrupt) insurer is one that is unable to pay claims as they are incurred. However, private insurers pay into state guaranty funds that, in cases of insolvency, provide funds and, through an orderly receivership or liquidation process, administer claims.
Any idea where money may come from to pay the claims of people who bought into the now-defunct government health insurance co-ops?
In contrast to the way private insurers work, consider the Obamacare health insurance co-ops. They, like other government mandates, do not use market principles, much less time-honored, actuarially sound insurance ones. Instead, they use political principles. Admittedly, some may be well-meaning but they are devoid of the reality of how insurance works.
In the case of health insurance co-ops, premiums were politically motivated, not reality motivated and they collapsed under their own weight.
Quite apart from the “affordable” part of the Affordable Care Act, it was promoted as a way to ensure that all people had access to health insurance and hence, to health care. That begs a very critical question: Can anyone identify a health care practitioner who, or a hospital that, has refused care to a person for the reason of lack of insurance? The question is important because the reality of the Affordable Care Act and its constituent health insurance co-ops is fostering precisely the problems that it professed to want to cure. That’s likely because it is politics, not insurance.