A lot of people have been justly offended by the Solyndra scandal, in which the Obama administration squandered $535 million in a failed solar-energy company backed by one of Obama’s largest donors. But $535 mill in failed loans is chump change for this administration. Obamacare, according to the White House, will waste over $3 billion on faulty loans to state-sponsored health insurers called CO-OPs. It’s bad enough that taxpayer funds are going down the tubes. But internal documents show that the administration isn’t particularly bothered by it.
First, some of the backstory. When moderate Democrats balked at the government-run “public option” in their health-care bill, they compromised by creating state-sponsored insurers called Consumer Operated and Oriented Plans, or CO-OPs. These CO-OPs, however, are not to be confused with private co-ops, which are privately sponsored cooperative enterprises. The Obamacare CO-OPs were designed to fail.
The Obamacare CO-OPs were allocated $6 billion in subsidized, cut-rate loans, so as to ensure that they would meet state capital requirements. (Insurers have to have a certain amount of money in reserve in order to pay out the claims of their beneficiaries.) Interest on the loans would be a point or two less than Treasurys—a nice deal, if you can get it. But the bigger problem, as Bradford Gray of the Urban Institute explained last summer, is that the CO-OPs aren’t built to function like normal insurers.
Structural flaws in the design of CO-OPs
For one thing, the plans are prohibited from marketing. So there isn’t an obvious way for the plans to make consumers aware of them. The plans are prohibited from working with insurers already in operation, hence limiting their ability to gain from the experience of existing market players. The plans will have to enroll members and contract with providers—but unless they are able to enroll a good mix of healthy and sick people, they’ll pay out more in claims than they take in premiums: the classic problem of adverse selection. Since healthy people have plenty of options already, it’s sick people who will be most likely to sign up for the CO-OP plans.