Concerns Raised About Land Of Lincoln Health

Oct. 24--The recent demise of several Obamacare-spawned health insurers across the country has raised concerns about the future of Land of Lincoln Health as it enters its third year of open enrollment Nov. 1.

Jason Montrie, president of the Chicago-based startup, emphatically offered assurances in an interview this week that the company is not in danger of shutting down. But the plan includes some short-term pain.

The company will limit how many policies it writes for next year to ease some financial pressures. Montrie acknowledged that capping enrollment is a tough pill to swallow after the company experienced explosive growth this year, as membership rose from less than 4,000 people in 2014 to 54,000 this year.

It is not welcome news for Illinois consumers. Land of Lincoln was set up by the federal government to provide an alternative for individuals and small businesses in Illinois, one of the least competitive health insurance markets in the country, according to the American Medical Association.

A hobbled Land of Lincoln will create more disruption in the Illinois marketplace. Blue Cross and Blue Shield of Illinois, the state's dominant player, is taking drastic actions to reduce costs. It's dropping the most popular plan it sold on Healthcare.gov, the federal online insurance exchange, which gave policyholders access to the broadest network of doctors and hospitals in the state. The decision leaves 173,000 people looking for a new health plan.

Insurance brokers were counting on Land of Lincoln to help fill the gap because the company offers a variety of affordable plans, including a traditional PPO with a broad network similar to the plan Blue Cross eliminated. Land of Lincoln risks a consumer backlash especially if current customers can't renew.

"It's the middle class who suffers," said Mark Gurda, president of Castle Group Health, a Northbrook-based insurance agency. "It's frustrating."

The challenges Land of Lincoln faces are partly out of its control, Montrie said. Under President Barack Obama's health care law, insurance companies must sell policies equally to everyone, regardless of medical history. The Affordable Care Act established three programs to protect insurers, including giants like Blue Cross, UnitedHealth Group and Aetna, from the financial risk of ending up with an unhealthy pool of customers.

But one of the programs known as risk corridors became the subject of political debate last year after some Republican lawmakers called it a massive bailout that could cost taxpayers billions of dollars. In a 2015 budget bill, Congress specified that the risk corridors program had to be self-financing, meaning that the payments to the insurers could not exceed collections from those that made money on their marketplace business.

The problem is most insurers lost money in the first year of selling policies on the federal and state exchanges. On Oct. 1, the federal government said insurers submitted $2.87 billion in risk corridor claims based on their 2014 results, but there were only $362 million in contributions. Insurers would get only 12.6 percent of the money they requested.

Land of Lincoln requested about $4.5 million for 2014. It is going to receive $566,023. For 2015, the company estimated it would be owed $47.4 million, but Montrie said he doesn't expect to see a dime.

"That's a significant amount of money for any company, let alone a startup," he said.

The shortfall pushed a number of the startups, known as Consumer Operated and Oriented Plans (co-ops), over the cliff. This month alone, four co-ops in Colorado, Kentucky, Tennessee and Oregon have announced that they were folding. They join four others in Iowa, Louisiana, Nevada and New York that had already collapsed or planned to shut down. The eight co-ops, which received nearly $900 million in federal loans, had more than 500,000 customers.

It's no surprise that co-ops became insolvent when all of the risk corridor funds didn't materialize. The co-ops are relatively small and losing money, making them more vulnerable to a financial squeeze than established insurers that have deeper pockets to withstand volatility, said Joseph Zazzera, an analyst at A.M. Best, an insurance rating agency.

The failures are a blow to Obamacare because the nonprofit, member-owned co-ops were designed to inject choice, lower prices and a more consumer-friendly approach to an industry dominated by a handful of for-profit players. A total of about $2.4 billion was given in low-interest loans to 23 co-ops. Land of Lincoln received $160 million.

It was the last co-op to be funded, which led to a slow start in the first year of Healthcare.gov. In the second year, Land of Lincoln introduced health plans in partnership with hospital networks like Advocate Health Care and Presence Health that offered monthly premiums as much as 30 percent lower than its broad PPO. Customers could go outside their preferred hospital system but got the best benefits when they stayed in network.

The strategy brought in more than 50,000 new members, the kind of growth the company needed to be successful, Montrie said. More than 80 percent of the company's members bought individual plans, and the rest are primarily small businesses with an average of eight to 10 employees, he said.

But like most insurers, Land of Lincoln has lost money on its exchange business. In the first six months of 2015, the company's claims outpaced premiums by $26 million, according to a regulatory filing.

Despite the underwriting losses, Land of Lincoln doesn't confront the same financial stress as the co-ops that folded because it took a cautious approach to budgeting the risk corridor money, Montrie said.

"Because we had started to gather some intelligence long ago that this risk corridor program may not be fully funded, we only expected to receive 10 percent of what we were owed," Montrie said. "What you've seen with other co-ops across the country is that they were counting on the full amount."

Without the federal backstop, Land of Lincoln has to scale down its ambitions heading into the third season of open enrollment on the exchange. The company would like to end 2016 with between 65,000 and 70,000 members, which would be an increase of about 30 percent.

"We have to run the business differently, most notably that not everyone who wants to buy Land of Lincoln will be able to, which as president is a tough thing to say," Montrie said.

If it added more customers, Land of Lincoln would need more capital to meet regulatory requirements, Montrie said. As startups and nonprofit companies, co-ops are finding it very challenging to raise additional money. The federal loans they received also make it hard to attract outside money, said Kelly Crowe, CEO of the National Alliance of State Health Co-ops.

"We're in a very unique situation where our banker also happens to be our regulator," Crowe said. "There are competing forces and competing priorities within that relationship."

The Illinois Department of Insurance said it is working with Land of Lincoln "in pursuing various strategic initiatives for 2016 and 2017 in order to raise its capital to levels that will accommodate future enrollment growth."

Land of Lincoln's conservative strategy is not altogether unusual in the first years of the Affordable Care Act. UnitedHealth Group, the nation's largest insurer, stayed out of most of the Obamacare exchanges in the first year before diving in during year two. Aetna, another national insurer, will return to the Illinois exchange this year after taking a year off.

"If Land of Lincoln is trying to survive by capping enrollment and managing a smaller population instead of closing their doors, it seems like a viable strategy," said Zazzera of A.M. Best.

Brokers aren't so sure. "Growth is bad in the insurance business only when you've got a product that you're losing money on," said John Jaggi, who runs an insurance agency near Decatur.

Land of Lincoln has raised premiums for products it will sell on the Illinois exchange, but Montrie can't disclose the rate increases until federal government gives the OK . He maintains that the company will offer competitive prices.

"We're not trying to price ourselves out of the market," Montrie said.

The company also is taking steps to reduce administrative costs. It has moved some functions to internal roles that were previously handled by consultants, like marketing, customer service and information technology. It has also renegotiated contracts with several vendors.

In the meantime, Land of Lincoln is working closely with state and federal regulators to figure out how it will stop sales on the exchange if the company hits its membership target before open enrollment ends on Jan. 31. Montrie said the company will do everything it can for current customers who want to renew.

He said he knows the decision to limit enrollment will not be popular, but he said it's the right one for the future health of the company.

"If we took on too much business the chance for us to not be a long-term company would increase," Montrie said. "We don't even want to have that conversation."

Would Castle Group Health's Gurda like to see Land of Lincoln survive? "Oh my gosh, yes," he said. "We need an alternative here."

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