The rapid rise and costly fall of Health Republic Insurance of New York, the largest nonprofit health insurance “co-op” established under President Obama’s Affordable Care Act, is a cautionary tale.

Put simply, state officials squeezed insurers so hard for lower rates — likely for the political goal of making health reform look good — that they helped sink the co-op’s finances.

Despite heavy federal subsidies and robust enrollment growth, the company lost money so fast state regulators forced it to shut down by Nov. 30, on barely two months’ notice. The collapse disrupted coverage for 215,000 customers, stuck hospitals and other health providers with hundreds of millions of dollars in unpaid claims and left federal taxpayers with a quarter-billion dollars of uncollectible debt.

It wasn’t an isolated case. Of 23 insurance co-ops launched under President Obama’s health-reform law, 12 will be out of business by Jan. 1. That failure rate of more than 50 percent raises obvious questions about the workability of the co-op model and Washington’s management.

Yet of more direct concern for New York is an apparent breakdown in state oversight.

Health Republic’s growing financial troubles should’ve been no surprise to insurance regulators at the Department of Financial Services. The company’s filings showed steep operating losses, mounting debt, unanticipated costs and heavy reliance on a federal subsidy Congress slashed in 2014.

Yet the state didn’t intervene to order an increase in Health Republic’s premiums, as other states did in similar situations. Instead, it repeatedly cut the company’s premiums below what the insurer had requested, aggravating the co-op’s losses. The department’s most recent cut was announced in July, less than two months before Albany moved to shut the insurer down.

Aside from the political implications, it highlights a conflict between the department’s longstanding regulatory role — which is to assure that health plans are financially sound — and rate-setting authority granted by the Legislature in 2010.

A look at the trendline of annual premiums before and after enactment of that law, known as “prior approval,” suggests it’s having no clear impact on New York’s health-insurance costs compared to national averages. So consumers might be better off if Albany kept its entire regulatory focus on the financial health of insurance companies while leaving price-setting to market forces.

In fact, the numbers show the affordability gap between insurance costs in New York and those in the rest of the country dropped markedly after a previous prior-approval statute was fully repealed in 2000.

Since 2011, when the reinstated law took effect, the gap has returned to double digits in three of four years. So far, there’s no clear trend up or down, but certainly no justification for price controls.

The full story of Health Republic’s failure remains murky. After initially ordering the company to close by December, the DFS accelerated the closure to Nov. 30, saying it had learned the company’s finances were “substantially worse than the company previously reported to the state” and promising an investigation of the plans’ “inaccurate representations.”

Still, what Health Republic did report was worrisome enough: steady losses, heavy debt and mushrooming dependence on a federal subsidy that was slashed by Congress. Moreover, it was a brand-new company, built on an untested model, navigating the unpredictable tides of a rapidly changing health-care system.

If Albany spotted these red flags, it took no obvious steps to address them. What it did do was further reduce Health Republic’s inadequate premiums in an attempt to prioritize affordability.

A DFS spokesman declined to comment on these decisions or the ongoing investigation.

As regulators, officials and legislators study what went wrong, they should recognize that price-setting is a dangerous distraction from what should be their primary mission — preventing the next insurance-plan collapse.

If the goal is making health coverage more affordable, the surest way to achieve that isn’t for the state to impose price controls, but for it to roll back its own high taxes and costly coverage mandates.

Bill Hammond has two decades of experience covering New York government and health policy. This is adapted from a report issued today by the Empire Center for Public Policy.

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About the Author

Bill Hammond

As the Empire Center’s senior fellow for health policy, Bill Hammond tracks fast-moving developments in New York’s massive health care industry, with a focus on how decisions made in Albany and Washington affect the well-being of patients, providers, taxpayers and the state’s economy.

Read more by Bill Hammond

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