New York's Health Republic nonprofit health insurance co-op can offer cheaper policies and undercut its commercial rivals, thanks to “luxurious” federal subsidies

Daniel T. McGowan, Health Republic's former president and CEO, attributed the low rates to “a very luxurious kind of backing” from the federal government.

That backing is a $174 million tax-free loan from the U.S. Department of Health and Human Services that "doesn't have to start being paid back until I believe 2018 or 2019. So we have about a four- to six-year period to try to turn things around,” he said.

“So I guess the philosophy we used in trying to put together a plan for network and for pricing was to try to come in with the lowest price possible fee given the fact that we had a couple of advantages in that regard,” he said.

Health Republic is the largest of 24 state-level co-ops funded by a $2 billion Obamacare provision designed to provide competition to private insurers.

Last July, after serving a 14-month stint at the helm of the co-op, Health Republic Insurance of New York, McGowan was succeeded by Debra Friedman, a former Medicare specialist.

McGowan said Health Republic faced numerous regulatory and economic barriers as it struggled to launch Oct. 1 along with and other Obamacare web sites.

The new co-op had a hard time attracting high quality talent, setting prices and establishing a reliable provider network, despite having the advantages that came with federal funding.

Liberal congressional Democrats crafted the co-ops as a compromise. They are intended to compete against for-profit insurance companies.

Although much national attention has been riveted to the botched health care website,, less attention has been paid to the 23 nonprofits.

McGowan said one of the most difficult things the co-op faced was in setting prices before it had established its provider network of hospitals, labs, clinics and doctors.

Setting up a price structure before knowing the real costs could be a financial disaster if the co-op miscalculated its income. Still, it was stuck, as the co-op was an untested entity without any real relationship with provider networks.

“It’s a major disadvantage relative to other insurers because they have relationships with networks and individual providers already,” he said.

As a result, few wanted to negotiate. “The co-op was not in a position to do that because we have no business with anyone,” he said.

New York’s insurance department requires all insurers to have a working board of directors that meets state requirements, to establish a provider network and to set premiums before issuing an operating license.

None of those required elements was in place when HHS approved its $174 million loan to Health Republic.

McGowan said that in his meetings with state regulators, “We had to say who our network was before we reached final agreement with them on all the pricing.”

In the end, "a lot of pricing was not negotiated,” he said. “So you’re putting the cart before the horse on a repeated basis when you’re in that situation. And you’re at a major disadvantage.”

Even so, state regulators ultimately approved a license for the co-op, which McGowan said he believes now offers the lowest prices in the health exchange.

Even with the advantages of substantial federal startup funding and not having to repay it for several years, there are risks for Health Republic, McGowan said.

“It’s a chancy thing to do. You don’t want to develop a plan that has you losing money in perpetuity or unable to ‘catch up’ once you have enough of a membership to begin deciding where you can relax pricing more and step up a little,” he said.

McGowan said he and his colleagues relied on the Freelancers Union, a left-of-center advocacy group founded by a Sara Horowitz, a friend and colleague of President Obama. The union sponsored the co-op.

McGowan said attracting good talent was difficult as Congress tried to close down Obamacare and the co-ops.

In January, as part of the fiscal cliff negotiations, Congress cut off future funding to the co-op program, capping it at $2 billion.

“Hiring people of competence and goodwill, finding people like that while Congress is trying to kill the act that you’re being funded under, is a little tricky,” he said.

Now, with the Oct. 1 launch date behind them, Health Republic officials can focus on growing the co-op.

“We’re sort of in the Demilitarized Zone, that unknown area where you can’t really how well you’re doing until it gets a little closer to January 1 and you actually have people to be insured,” he said.