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A Health Republic ad
(Health Republic)
SYRACUSE, N.Y. - Health Republic of New York made a big splash when it debuted in 2014 with rock-bottom health insurance prices that undercut its competitors across the state.
Its premium rates were 30 percent below average in Onondaga County. The new company, backed with $265 million in federal loans, quickly captured the biggest share of new business on the state's health insurance exchange created by the federal Affordable Care Act, also known as Obamacare.
Now Health Republic is going broke because of those low prices, forcing its 200,000 members - including 4,060 in Central New York - to get their health coverage from other insurers, experts say. State and federal regulators recently ordered the insurer to stop writing new policies and shut down its business because it's on the brink of insolvency. And it's not clear if the federal loans will ever be repaid.
The state announced last week it has ordered Health Republic to stop offering insurance Nov. 30 because the company is in even worse shape than previously thought. Regulators had initially told Health Republic to shut down Dec. 31. Now Health Republic customers must choose a new plan on the state health insurance exchange by Nov. 15 or else they won't have coverage on Dec. 1.
Health Republic is an insurance co-op created under Obamacare to increase competition and provide consumers with more affordable insurance. A little-noticed section of the federal health law called for the creation of "Consumer Operated and Oriented Plans," or co-ops, to compete against traditional for-profit and nonprofit health insurers.
Feds provided $2 billion to create insurance co-ops
The federal government provided $2 billion in loans to create 23 co-ops, Health Republic being the largest. Many Democrats in Congress supported the idea. But Republicans questioned the wisdom of spending federal money to start new health plans to compete against well-established health insurers and predicted taxpayers would lose a bundle on the co-op program.
As year two of Obamacare comes to a close, Health Republic and eight other co-ops have failed, and experts say more co-op failures may be in the offing. The nine co-ops insure about 500,000 people in nine states, less than 5 percent of Americans enrolled in private Obamacare plans.
Tom Dennison, a Syracuse University and health care expert, said the co-op problems won't undermine Obamacare.
He said the co-ops are an experiment that didn't work. He likens them to HMOs created in the 1970s under a federal law that provided millions of dollars in start-up funding for health maintenance organizations.
Scott Harrington, a professor and insurance expert at the University of Pennsylvania Wharton School who has analyzed Health Republic's finances, agrees.
"It creates a lot of short-term problems because all of these people have to switch coverage," he said. "But the co-op problems will be digestible."
He expects only one or two of the co-ops to survive.
Taxpayers may be left holding bag for unpaid loans
The insurance industry thinks New York regulators could have done more to help keep Health Republic afloat. Experts say Health Republic's demise demonstrates how difficult it is to start a health insurance company from scratch. They also warn taxpayers may be left holding the bag for unpaid co-op loans.
After Health Republic pays off outstanding medical claims " ... it's highly likely they will pay back only a fraction, if any, of what's owed for the loans," Harrington said.
Health Republic had an operating loss of $130 million - or $650 per member -- during its first 18 months.
Those financial problems were compounded by two government programs designed to protect co-ops from heavy losses. Under one of those programs, insurers with healthier members have to pay into a risk adjustment program which transfers money to insurers with sicker members. Because Health Republic insures a healthier than average population it had to pay $80 million into that program.
Health Republic might have been able to recoup most of that $80 million through another program, known as "risk corridors," designed to protect insurers from extreme losses.
But the federal government recently announced co-ops would only get 12.6 percent of the "risk corridor" payments they had requested. The significantly lower "risk corridor" payment was a factor behind regulators' decision to shut down Health Republic, Harrington said.
While the government payment issues hurt Health Republic, the insurer's biggest problem was its pricing, Harrington said. It's unlikely Health Republic would have survived, even without the government payment problems, he said.
"When you peel back the onion, they were not pricing their business at a level that would make them sustainable," Harrington said.
Harrington said he has not seen any evidence the company was mismanaged. The problem Health Republic and other co-ops faced as startups was they did not have any claims data to base their prices on, he said.
Why did NY regulators cut troubled insurer's rate hike request?
A top official of the New York Health Plan Association, an insurance industry association, questioned why state insurance regulators cut Health Republic's 2016 rate hike request filed earlier this year, even though they were aware of the insurer's financial problems. For its individual policies, Health Republic asked for a 14.36 percent increase, which the state trimmed to 14.03 percent. The state announced its decision on Health Republic's rate request July 31, two months before the insurer was ordered to close.
Health Republic filed that request with the state Department of Financial Services before it knew it had to pay $80 million into the risk adjustment program.
Leslie Moran, an association vice president, said regulators could have told Health Republic it needed a bigger rate increase than it asked for.
"That is something we find perplexing and troubling," Moran said, adding that she's unsure if a bigger rate hike would have saved the insurer.
Matt Anderson, a spokesman for the state Department of Financial Services, said Health Republic's financial condition got worse after his department completed the rate review process. "As a general matter, however, the department attempts to balance keeping premiums affordable and maintaining the financial strength of individual insurers," he said.
In 2015, Health Republic asked for an individual rate increase of 15.4 percent, which state regulators reduced to 13 percent.
Harrington said state regulators are often under political pressure to keep health insurance rate increases down. "Sometimes that can conflict with the goal of keeping companies financially strong," he said.
The federal government provided $265 million in start-up loans to Health Republic. The Freelancers Union of Brooklyn, which sells insurance to freelance workers, sponsored and helped create Health Republic. Health Republic became an independent entity, not owned or controlled by Freelancers, after it was established.
Sabrina Corlette, a professor and health insurance expert at Georgetown University, said about 50 percent of new health insurance companies fail because the industry is so risky.
She said it's not surprising Health Republic and other co-ops failed given the complexities of Obamacare.
Debra Friedman, Health Republic's CEO, echoed that in a letter to members. "Starting a new insurance company is a daunting task in any environment, but the systemic challenges placed on us by the structure of the co-op program were simply too difficult to overcome," Friedman wrote.
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