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September 30, 2015

Opinion: Economics of Insurance Doom Obamacare Co-ops

A Bloomberg columnist writes that the economics of health insurance stack the odds against financial sustainability for the nonprofit coverage co-ops established under the Affordable Care Act, four of which have gone under since the start of the year.

Megan McArdle, who writes about economics and public policy for the Bloomberg View opinion section, says health insurers closely base premiums on what they expect to pay out in claims, meaning margins are modest even for established providers. The 23 state-level co-ops were seeded with federal loans to compete with traditional insurers on health exchanges but, without brand recognition, could do so only by offering lower prices, she says.

Though the co-ops could quickly build client bases this way, Ms. McArdle adds, they lack "the kind of massive capital reserves that incumbents can use to survive a few years of mispricing." While the co-op program is not central to the Affordable Care Act, she writes, its difficulties highlight "one of the central fallacies of the entire Obamacare debate: the belief, cherished by most people, that there is a magic pot of money somewhere in the health care system that can be painlessly tapped to provide people cheaper, better health care."