Commentary: Health Insurance CO-OP Flops

by John McClaughry (May 28, 2013)John McClaughry

“Commissioner of Financial Regulation Susan Donegan has emphatically pulled the plug on the new Vermont Health Insurance CO-OP.”

An ambitious plan to create a Vermont cooperative health insurance company (CO-OP) has crashed and burned, leaving egg on many prominent faces.

During the 2010 debate in Congress, the Senate put into the ObamaCare bill an authorization for the Federal government to underwrite nonprofit consumer-owned health insurance cooperatives. Soon after the bill’s enactment the Federal Center for Medicare and Medicaid Services (CMS) began to distribute $3.4 billion to hastily-created coops around the country.

Mitchell Fleischer, a principal of the Fleischer Jacobs insurance agency of South Burlington, quickly organized and became chairman of the board of the Vermont CO-OP. It went to CMS and obtained t a $6.3 million “startup loan”, plus another $27.5 million loan for the CO-OP’s required reserve against claims.

The CO-OP business plan promised a Vermont consumer-owned enterprise, integration of mental health and substance abuse coverage, and some version of “payment reform” with its provider groups.

At the CO-OP’s “grand opening” last October, Gov. Shumlin enthusiastically appeared to hail “innovators like Mitch and Christine [Oliver] in the CO-OP that are going to give Vermont the ability to contain costs in our health care system.” Congressman Welch also appeared to add his blessing.

With the state’s political leaders on board and the $33.8 million from Washington on call, all that remained for the CO-OP was to secure a Certificate of Public Good to offer health insurance in Vermont. On May 22, after a year of interaction with the fledgling CO-OP, Commissioner of Financial Regulation Susan Donegan issued her ruling. It was not a close call. She smashed the application into smithereens.

Her decision found that after promising to offer health insurance premiums at 4% lower cost than competitors Blue Cross Blue Shield of Vermont and MVP, the CO-OP’s rates would actually be at least 15% higher.

It found that there was no way the CO-OP could attract the projected 19,645 policy holders in 2014 by offering similar policies at 15% higher cost.

It found that the sole-source contract Fleischer arranged between his CO-OP and his insurance agency to market the small group policies on Health Connect, the state’s new insurance exchange, constituted a “stark ever-present conflict of interest” for Fleischer, and was also flatly illegal.

It found that Fleischer’s $126,000 a year salary was “surprisingly high”, especially when the board chair of the much larger Blue Cross Blue Shield of Vermont is paid only $28,900 a year.

It found that the CO-OP’s board of directors, handpicked by Fleischer, was suspiciously passive.

It found that between the time the CO-OP had promised to implement a “risk sharing partnership” with its prospective provider groups and the filing of the state application, it had scrapped the “innovative” idea and reverted to the traditional “fee for service”.

It found that notwithstanding all the rhetoric about being a “Vermont owned” enterprise, the CO-OP would have to rely on contracted services from numerous vendors from out of state, where a large fraction of the revenues would end up.

The Department’s financial review found that the CO-OP would lose money every year, and be forced to tap the Federally-supplied claims reserve just to continue to stay in business. “Within three years of beginning operations,” the decision found, “there is a high risk that the CO-OP would be insolvent.”

Vermont’s new Health Connect exchange (that has consumed $125 million already) is scheduled to open for business next January. Vermont alone among the fifty states has made it mandatory for all individual and small group health insurance to be sold through the exchange.

Three years from then, in 2017, Gov. Shumlin’s taxpayer-financed Green Mountain Care is supposed to come into being. The sale of health insurance will then end, and Health Connect will be abolished.

The Commissioner concluded that “any attempt by a startup company [the CO-OP] to enter a highly concentrated industry that will cease to exist as early as three years after entry may not serve the public interest.” (Why Fleischer would create the CO-OP knowing that it will be driven out of business in three years remains an unsolved riddle.)

In a state that has given the nation two decades of notable health care policy mistakes, Commissioner Donegan has gotten this one right. The politicians who danced around the CO-OP maypole are likely to find themselves eating a large helping of crow.

– John McClaughry is vice president of the Ethan Allen Institute 


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The Ethan Allen Institute is Vermont’s free-market public policy research and education organization. Founded in 1993, we are one of fifty-plus similar but independent state-level, public policy organizations around the country which exchange ideas and information through the State Policy Network.

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