Three years ago, the federal government provided a substantial loan to launch a new insurance company in New Jersey. Last month, the government caused potentially fatal problems for the same company by withholding $21.2 million the insurer was expecting to help pay for its Obamacare customers.
Health Republic Insurance of New Jersey will shut down for next year, forcing 35,000 people to find new insurance by Jan. 1.
The shutdown leaves just two companies doing business on HealthCare.gov, the Affordable Care Act marketplace for New Jersey. And it highlights the flaws of President Obama's signature health law, as well as the difficulties of starting a new insurance company.
"Unfortunately, Obamacare and local market conditions have proven difficult ... to survive in my beloved New Jersey," Thomas Dwyer, the company's interim CEO, wrote regulators late on the night of Sunday, Sept. 11, less than 24 hours before the state asked a judge to approve a takeover of the company. In his email consenting to the takeover, included in the court filings, Dwyer acknowledged that efforts by executives to save the company had reached a dead end.
It was the 17th plan established through the Affordable Care Act nationwide to stop selling coverage, adding to the mounting evidence that the vision of new non-profit insurers competing in the marketplace with long-established corporations had been doomed -- either by design or congressional obstruction or both. Conservative critics said the failures showed the fundamental flaw of government meddling in the insurance world.
"The history books will not be kind to the idea of CO-OPs," as the consumer oriented and operated plans established by the law are known, said Katherine Hempstead, who directs a program on health insurance coverage at the Robert Wood Johnson Foundation.
A Superior Court judge in Mercer County has set a hearing for Oct. 19 on Insurance Commissioner Richard J. Badolato's motion to "rehabilitate" Health Republic through a takeover of its operations. It is the first health insurer in New Jersey to face a state takeover since the 1990s.
"The carrier has not made a net profit during any year of its operation," Badolato's request of the court said.
Health Republic was started in 2013 with federal loans totaling $109 million to Freelancers Union, a New York-based non-profit advocate for independent workers. It was one of three companies sponsored by Freelancers; Health Republic of Oregon has closed, and Health Republic of New York is being liquidated.
In June, the federal government notified Health Republic of New Jersey that it owed $46.3 million because of another Obamacare provision, this one intended to stabilize the insurance markets in each state as insurers adapted to new rules that prevented them from charging sick people more. The funds were due in "risk adjustment" payments, because data apparently showed that Health Republic's customers were healthier than those of other insurance companies in New Jersey.
It was millions more than the company had anticipated, and the first installment -- $21.2 million -- was withheld in August from payments due Health Republic.
The main recipient of the risk-adjustment funds in New Jersey is Oxford Health Insurance, a subsidiary of the nation's largest health insurer, UnitedHealthcare.
Despite being slated to receive more than $69 million in risk-adjustment payments, Oxford, too, will withdraw from New Jersey's federal insurance marketplace in 2017.
Both Health Republic and the insurance department hold out the possibility that it will reenter the market in 2018. Dwyer, the interim chief executive, reportedly told a group of underwriters last week the company hoped to do so. But one Republican congressman predicted this summer that all the CO-OP plans will eventually fail.
The failures so far have disrupted insurance for more than 800,000 people nationwide. The government's ability to recoup nearly $2 billion in loans to the companies -- including the loans to Health Republic for its initial operations and reserve requirements -- is in question.
In a study about why many CO-OP plans have failed, Professor Sabrina Corlette of Georgetown University and others wrote: "Policymakers often talk about how important it is to encourage greater competition in health insurance markets and provide consumers with more choices.
"But actually delivering on that goal requires a much greater investment of financial resources and political capital than has been made to date," said the analysis last December for the Commonwealth Fund, a philanthropy focused on improving access, quality and efficiency in health care.
The health law's goal was to increase competition in health insurance to hold prices down, and to expand insurance coverage to those who lacked it. When Congress balked at including a "public option" -- a health plan run by the government -- CO-OPs were included in the law as a way to increase competition in the newly created health insurance markets.
Like other start-up plans, though, Health Republic had to struggle for name recognition. It had little data upon which to base its premiums, and little clout to negotiate with hospitals and doctors.
As a newcomer to a highly regulated industry, it was fined a total of $850,000 by the state in 2014 and 2015 for being out of compliance with state regulations. This year, the company's customers have used more services than expected and had higher health care bills than projected, the state's court filings said.
Its net loss at midyear was $59 million; by January, the company projects a cash shortfall of $17.3 million.
"New carriers are clearly at a disadvantage," said Hempstead, of the Robert Wood Johnson Foundation.
Health Republic's chief marketing officer, Cynthia Jay, referred all questions to the state Department of Banking and Insurance, whose spokesman would not comment beyond the information contained in the court papers.
To help insurers in the new market, the law included three new ways to stabilize premiums, dubbed the Three R's. Reinsurance, a temporary fix, buffered insurers from the effects of patients with catastrophic claims. Risk corridors, another temporary fix, helped protect insurers when they set premiums too low in the first years of the law's implementation. Congress drastically cut its funding.
Risk adjustment, a permanent part of the law, required insurers with sicker enrollees -- who are likely to have higher costs -- to receive payments from those with a smaller share of such enrollees. The insurers submitted the data about their members' diagnoses and health claims, which was used to calculate the amount of funds to be transferred.
New plans -- with less data about their members -- were at a disadvantage, compared to established plans, experts said. "The methodology in effect penalizes companies with healthy member populations," a statement from Health Republic said.
But political gridlock in Congress has prevented any tweaking in this and most other aspects of the Affordable Care Act. And Health Republic's lack of data and experience put it at a disadvantage with behemoths like Horizon Blue Cross Blue Shield of New Jersey.
Forced into a cash-flow crisis in August, Health Republic was in a "hazardous financial condition," according to the state's Sept. 12 petition to the court. Judge Paul Innes declared the insurer insolvent on Sept. 14.
Badolato's filing said an "order of rehabilitation" from the judge was urgent, because the federal government planned to withhold more funds from Health Republic on Sept. 20.
Nevertheless, the state and Health Republic have assured health care providers, and Health Republic's customers, that their claims through the end of this year will be paid.
And the company's commitment to its founding vision appears steadfast.
"We hope the novel approach we've taken to providing health insurance -- putting the best interests of our members ahead of executives and shareholders -- continues to resonate in this state and across the country," the insurance company said on its website. "Health to the People."