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The ACA's ill health

Joel Zinberg is a visiting scholar at the American Enterprise Institute, a practicing surgeon at Mount Sinai Hospital, and an associate clinical professor of surgery at the Icahn School of Medicine

Joel Zinberg

is a visiting scholar at the American Enterprise Institute, a practicing surgeon at Mount Sinai Hospital, and an associate clinical professor of surgery at the Icahn School of Medicine

Another day, another health-care co-op failure.

In July alone, three co-ops, HealthyCT in Connecticut, Community Care of Oregon, and Land of Lincoln in Illinois, announced they are closing up shop. They join 13 other failed co-ops out of the original 23 that were a centerpiece of the Affordable Care Act's vision for the future of health-care organization - an unrealistic vision based on wishful thinking and sabotaged by the ACA itself.

The ACA created consumer-operated and -oriented plans (co-ops) - private, state-licensed, nonprofit health insurance companies - to provide low-cost, consumer-friendly coverage to individuals and small businesses. The theory was that, since the co-ops didn't have to show a profit, they could charge lower premiums, provide more services, and be more responsive to their members. They would use collective purchasing power to lower administrative and information-technology costs and keep members healthy through preventive care and evidence-based medicine.

The new plans would increase competition and lower everyone's premiums.

Twenty-three plans, funded with $2.4 billion in government loans, opened enrollment in 2013. By the end of 2015, 12 plans had failed, leaving $1.3 billion in delinquent loans, more than 700,000 people in 13 states scrambling for coverage, and hospitals and doctors with hundreds of millions of dollars in losses uncovered by the assets of the failed co-ops.

This result is hardly surprising. The people running the co-ops had no experience running an insurance company - co-ops were forbidden to have anyone affiliated with insurers on their boards. Their premiums were too low and their benefits too high. The failed co-ops went on to lose $376 million in 2014 and more than a billion in 2015. Only one co-op turned a profit in 2014, and all lost money in 2015.

The red ink was not simply the result of inexperience. Co-ops believed they would be bailed out by the ACA through programs intended to even out risks borne by health insurers who were enrolling new people with unknown health problems and costs. The ACA risk-corridors program required insurers whose claims costs are less than 97 percent of their premium revenues to pay a percentage of the difference to the federal government. In turn, the government would use that money to pay the insurers whose costs exceeded 103 percent of premium revenues.

During the first two years of the health-insurance exchanges, the majority of insurers lost money. In 2014, only $362 million was paid to the government to cover the $2.87 billion in requested payments. The U.S. Department of Health and Human Services announced it would pay only 12.6 cents on the dollar for payment claims.

The shortfall led to several co-op failures. Multiple insurers, including three co-ops, have sued the federal government to recover unpaid risk-corridor claims. It is doubtful that they will collect, and in the best of cases, relief would come too late to save the co-op.

The latest co-op failures have fallen victim to another ACA risk program - risk adjustment. Since the ACA prohibits insurers from denying coverage or charging higher premiums to enrollees with preexisting conditions, insurance companies who enroll sicker, more expensive members are disadvantaged.

The ACA risk-adjustment program directs insurers with healthier-than-average members to pay fees to the same state insurers with sicker-than-average members. The 2015 risk-adjustment numbers released by HHS on June 30 show that nine of the 10 co-ops still operating then owed money to the risk-adjustment system for 2015. Only one - Maine/New Hampshire Community Health Options - will receive a risk-adjustment payment ($710,000). The three July co-op failures were pushed over the edge by risk-adjustment bills of $914,000 in Oregon, $13.4 million in Connecticut, and a whopping $31.8 million in Illinois.

One of the remaining co-ops, Maryland's 40,000-member Evergreen Health Cooperative, sued the federal government. It claimed that the method used by the risk-adjustment system to determine how much companies pay or receive favors older, well-established companies and puts small insurers like Evergreen at a disadvantage. Evergreen owes approximately $22 million - a quarter of its 2015 premium revenue - most of which will be paid out to CareFirst BlueCross BlueShield, the largest insurer in the state.

HHS numbers confirm that smaller insurers like the new co-ops were more likely to incur a risk-adjustment charge than larger companies, and the amount was likely to be greater than what a larger insurer would pay.

The failure of 16 out of 23 co-ops within three years confirms that government experts should not impose an "optimal" form of health-care organization from on high. ACA programs that sounded great on paper have failed in real life. Allowing health-care policy to evolve through the market is more likely to result in workable, efficient solutions than any government plan.

Joel Zinberg wrote this for