As the Co-Ops created under the Patient Protection and Affordable Care Act fail one after another and their members enroll in coverage with other carriers, the carriers face increased financial risk in ways that were never contemplated by state or federal authorities.


Throughout the health care reform debate, members of Congress, providers, insurers and stakeholders consistently stressed the need to reform the nation's health care marketplace. While they may not have agreed on how best to reform the system, consumer choice, accountability and affordability were recurring themes in most proposals. Section 1322 of the Patient Protection and Affordable Care Act (ACA) created the Consumer Operated and Oriented Plan program ("Co–Op" program) to foster the creation of new consumer-governed, private, nonprofit health insurance issuers. These Co-Ops were intended  to improve consumer choice and plan accountability, promote integrated models of care and enhance competition in the Affordable Insurance Exchanges. Notably, Section 1322 of the ACA authorized a $3.8 billion appropriation to capitalize eligible Co–Ops.

A participating Co-Op is a health plan, typically licensed in a state as a health insurer or managed care plan, which has received federal loans pursuant to the requirements set forth in Section 1322 of the ACA and attendant regulations. Prior to receiving a loan, each Co-Op must demonstrate that it satisfies specific criteria for being both "consumer oriented" and "consumer operated" as established by the US Department of Health and Human Services (HHS).

Signs of trouble

While the ACA initially appropriated $3.8 billion to be loaned to qualifying Co-Ops, the American Taxpayer Relief Act of 2012 eliminated funding for Co-Ops that had not already signed a loan agreement HHS, including those that had applied but not yet finalized an agreement.  As such, 90 percent of the unused portion of the original $3.8 billion was rescinded, with the remaining 10 percent to be managed by HHS in the form of a "contingency fund" to make loans to the twenty four existing Co-Ops under the terms of then-existing loan agreements.

Despite the significant cut in funding, other sources of funds were to remain available to Co-Ops, including, for example, the Risk Adjustment, Risk Corridors, and Reinsurance programs. These premium stabilization programs were created by the ACA, and are available to carriers on, and in some cases off of, the Insurance Exchanges and are commonly known as the "3Rs."

  • The Risk Adjustment program administered by the federal government for all states (other than Massachusetts) was designed to offer financial protection to carriers and reduce incentives for insurers to avoid high-cost members by shifting money among carriers based on the health status of each carrier's members. Those carriers with lower than average claims cost would contribute to a fund from which payments would be made to carriers with higher than average claims costs thereby "socializing" the risk of attracting a outsized number of unhealthy members.  
  • The Risk Corridor program aimed to protect carriers financially from uncertainty in rate setting from 2014 to 2016 by having the federal government share risk in losses and gains at different rates according to set thresholds or "corridors."  
  • The Reinsurance program provides funding to issuers that incur high claims costs for enrollees. All issuers and third party administrators on behalf of group health plans contribute funding; non-grandfathered individual market plans (inside and outside the Exchange) are eligible for payments.

However, given the complexities of the health insurance and managed care markets, the 3Rs—particularly the Risk Adjustment and Risk Corridor programs—did not work as anticipated and, in some cases, may have exacerbated financial issues facing carriers, and Co-Ops in particular.

All is not as it seems

The Risk Corridor program has proven to be one of the more controversial and damaging programs under the ACA. The Risk Corridors were designed to reduce insurers’ risk during the first three years of health reform. By addressing aggregate pricing uncertainty, the program was intended to induce plan participation and promote market stability. In reality, the Risk Corridor program was not funded as anticipated. In early 2014, HHS announced in both the Notice of Benefit and Payment Parameters for 2015 Final Rule (79 Fed. Reg. 13744) and the Exchange and Insurance Market Standards for 2015 and Beyond Proposed Rule (79 Fed. Reg. 15808), that it intended to revise the Risk Corridor methodology " … to implement this program in a budget neutral manner, and may make future adjustments to program parameters, upwards or downwards, as necessary to achieve this goal." (79 Fed. Reg. 15808, 15822).

CMS provided additional guidance in an April 11, 2014 bulletin entitled, ‘‘Risk Corridors and Budget Neutrality.’’ Notably, the ACA did not require that the program be budget neutral. Pursuant to the these imposed adjustments, Risk Corridor charges for 2014 would be based on a payment proration rate of 12.6%, reflecting risk corridors charges of $362 million and payments of $2.87 billion requested by issuers. As a result, the majority of payments that carriers anticipated receiving from the Risk Corridor program (in some cases including funds that would have offset Risk Adjustment payments) were not made.

Meanwhile, the Risk Adjustment program reportedly caused some Co-Ops to owe millions to the federal government because they had attracted a healthier than average member population. Given that the Co-Ops were by definition new carriers to the market, and that by design they typically charged lower premiums than many competitors, they had neither the data nor the experience to price their coverage appropriately to pay claims and to account for the healthier-than-average population. Thus, the program exacerbated the issues facing Co-Ops by causing them to owe Risk Adjustment funds to the federal government when they did not necessarily even collect enough premium to pay claims.

While the Reinsurance program was largely successful, the deleterious effect of the Risk Corridor and Risk Adjustment programs continues to be felt by remaining Co-Ops and other carriers, particularly the smaller and newer carriers to which Co-Op members tend to migrate.

"Adjusting" the risk: From Co-Ops to other carriers and beyond?

Despite the early successes of participating Co-Ops, many have been forced to close their doors due to onerous financial risk and resulting instability. As the Co-Ops created under the ACA continue to fail, Co-Op members enroll in coverage with other carriers and these carriers face increased financial risk in ways that were never contemplated by state or federal authorities. The failure of Co-Ops and the strain imposed on other carriers has been a growing source of concern both throughout the industry and in Congress.

Traditionally, carrier financial risk has not been "pooled" as is required by the 3Rs. That is, member migration in the past meant only a transfer of underwriting risk from one carrier to another. Now, however, carriers are required to pay the federal government if their member population is healthier than "average." As a result, the health status of the member may transfer financial risk to his/her carrier, in some cases requiring a carrier to pay more in Risk Adjustment charges than it receives in premium for the members—a seemingly absurd but nonetheless possible result.

Moving forward, it is possible that the federal government will take the position that the health status of each member should count equally toward the "average" regardless of whether the member has been enrolled with the carrier for a full year or only the final month of the plan (as would be the case with respect to the migration of a number of Co-Op members). In such cases, where a member has only been enrolled for the final month or two of a plan year, there may be no claims data available when Risk Adjustment reporting is due, making these short-term members appear erroneously to be perfectly healthy. Such an interpretation would skew the Risk Adjustment calculation for the carriers who accept Co-Op members (not to mention that a single month of data would arguably lack credibility from an actuarial perspective), likely requiring them to accept far less from, or to pay far more to, the federal government.


While Congress is currently focused on troubled Co-Ops, Congress and HHS are facing numerous requests from a variety of stakeholders to review and revise the existing Risk Adjustment program to avoid additional failures. As noted above, existing enrollments and regulations have the potential to adversely impact the Risk Adjustment calculation for the carriers who accept Co-Op members. The effect could be particularly devastating for newer and smaller carriers. Should such carriers be required to exit the market like the Co-Ops before them, the ripple could continue to reach yet other carriers throughout the insurance market resulting in fewer, rather than more, choices for consumers.