In late October, more than 60,000 Utahns got a sudden fright: Arches Health Plan was closing.

“The Utah Insurance Department today announced that it will place Arches Health Plan in receivership,” the department stated in a press release on Oct. 27.

Because of a budget shortfall on the federal level, Arches was unable to pay the bills for its policyholders. By placing the company into receivership, the commission would effectively take over the company and liquidate its assets to pay the deficit. It was the first time a health insurance company had been placed in receivership in Utah in more than 20 years.

Closing Arches was a last resort after federal funding promises fell through and other fundraising options came up short, says Utah State Insurance Commissioner Todd Kiser.

“Arches would be standing behind an $80 million bill from the federal government [for the loan initially taken out when Arches was being formed],” he says. “It was possible for them to raise money, but anyone who would offer money to them would be standing behind this big note to the federal government. So although Arches tried to do that in the waning minutes of our negotiation, they were unable to do it.”

Risk corridor

To understand what happened to Arches requires understanding lesser-known pockets of the Affordable Care Act (ACA). In 2010, with the passing of the ACA, a space was created for member-owned nonprofit health insurance providers, a move designed to provide lower-cost insurance options for people who couldn’t necessarily afford or might not qualify for traditional insurance policies, as well as to prompt big insurance companies to lower their premiums. All participating insurance entities—nonprofits and the big guys alike—were to pay into a fund dubbed the “risk corridor” that would help pay the bills lower premiums wouldn’t cover.

Twenty-three companies in 23 states applied for licenses to start these nonprofit, co-op insurance companies, including Arches in Utah.

“They wanted to incentivize anybody, not just the co-ops, to have lower premiums, so they said if you have low premiums and high claims, you can submit claim money through the risk corridor and we will pay you for your claims,” Kiser says. “So that was the motivator for people to have low premiums for the population.”

Arches, the first new health plan in Utah since 1995, broke into the market in 2013. Although it started out at a disadvantage from big insurance companies—existing insurance companies already had a body of policyholders, many of whom took President Barak Obama up on his offer that people could keep their old health plans even amidst the launching of ACA options—it quickly gained a sturdy base of customers for its January 2014 coverage.

Its premiums were low, as were its requirements for coverage. As a result, Kiser says, many of Arches’ new policyholders were people for whom insurance had previously been out of reach, whether from pre-existing conditions (a barrier done away with in the ACA) or a suspicion of serious medical conditions that would have caused other insurance bills to skyrocket. A diagnosis of cancer, for example, could cost an insurance company $500,000 a year for a single patient, Kiser says. This “adverse selection,” as it is called in the industry, of a higher percentage of higher-cost patients was covered by the risk corridor, though it would ultimately contribute to Arches’ demise.

Premium pressures

By law, insurance companies must submit their policy costs by a certain date each year to the insurance commission, which keeps all of the information from all of the companies to its chest until after the deadline, after which it makes the information public all at once. Kiser says this makes companies set their own prices based on their own projected costs, rather than trying to battle it out with another company for the lowest premium price.

The ACA and risk corridor did encourage insurance companies to lower their prices, but Arches was still the lowest when it came on the scene. The following year, Kiser says, other insurance companies had lowered their policy prices further in an attempt to compete with Arches’ numbers.

Kiser says Arches itself was planning on raising its rock-bottom rates by about 40 percent, losing some of its poorest customers, in an attempt to protect itself from some of its higher claims.

“Their marketing strategy was changing. They didn’t want this unhealthy group so they were pricing them out,” Kiser says. “They clearly had felt some adverse selection … but still, had that risk corridor money come through, that may have given them a brighter future with that business strategy that was changing. Unfortunately, they got caught in this situation where claims were much stronger than capital and failure of risk corridor money put them in a position of not enough money to pay those claims.”

Policy pricing is still something that is in flux, Kiser says, although the ACA was supposed to stabilize it. Part of the problem with determining policy prices stemmed from a seemingly unending string of regulation changes from the federal government. A change in legislative ideology also made it more difficult to pin down policy prices.

“It was just too fluid. We were seeing regulations from the feds coming pretty frequently, at least monthly. You have one Congress who liked it and the next Congress who didn’t like it—it was very challenging for insurance companies across the nation, including Utah, to determine rating. We have a healthy, strong health insurance market. But insurance companies have still not figured out where they need to be pricing with all the challenges to figure out, and it’s going to be another couple years, I’m sure, before we see pricing stabilize.”

A crippling blow

The election of a more conservative Congress in 2014 would prove to be a crippling blow to co-op insurance companies. The passing of the Balanced Budget Act required in part that the risk corridor be revenue neutral, meaning the risk corridor would have to rely only on the funds being put into it by the companies with no federal funding assistance.

In 2015, $2.4 billion in bills were submitted to the risk corridor, but only $362 million was collected from companies—only enough to fill 12.5 percent of the claims, Kiser says. Arches submitted $10 million in claims, but only received a little over $1 million, he says.

“We were held by federal law to tell companies you’re tied in with this [risk corridor system], even though you’re not going to get that money,” Kiser says, noting that even through the fall, companies and the commission were being told that funding would be found through other avenues. “They continued to be very optimistic, leading companies and co-ops to believe they would get this funding.”

Arches wasn’t the only one in trouble—of the 23 original co-ops nationwide, 11 had already folded, eight of which closed after the announcement that the risk corridor would be revenue neutral. Kiser says when it became clear that Arches was in trouble, after it had burned through too much of its funding reserves, it tried to see if it could get more money from the pot that now had fewer companies drawing from it.

“We tried to make it work. We negotiated with [Centers for Medicare and Medicaid Services] to see if we could get concessions made, additional money. We thought, well, if all these other companies have already announced [their closing], maybe there’s additional money available that could be supplanted and given to Utah,” he says. “They couldn’t. Their hands were tied. They had 12 other states, I guess.”

With no other options, Kiser says, the commission legally had to place Arches in receivership. Individual plans ran out on Dec. 31, 2015 while some group plans will carry on until the end of October 2016. However, he says, the commission is taking all steps to ensure claims will be paid and none of the policyholders suffer as a result of the failure.

“We are optimistic that we will have a soft landing,” he says. “We hope there are adequate assets to pay off the claims and create a very soft landing, as opposed to just falling on the concrete.”

Calls and emails to Arches administration have not been returned. Kiser says workers and the previous administration of Arches—the insurance commission is technically the owner of the company as part of the receivership—have been discouraged from talking to the media.

Kiser says he believes Arches’ closure stems mainly from three contributing factors: the failure of the risk corridor due to a lack of federal budget assistance, adverse selection of the marketplace and transitional policies, and inability to raise more capital like a large insurance company could because of its nature as a co-op. Those factors have also been responsible for the difficulty and failure many of the other co-ops have faced, he says, and the hindrance of the co-op system in general.

“It was a wonderful dream,” he says. “I wish it would have worked. It just didn’t.”