[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE COSTLY FAILURES OF OBAMACARE'S CO-OP INSURANCE LOANS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 5, 2015
__________
Serial No. 114-99
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COMMITTEE ON ENERGY AND COMMERCE
FRED UPTON, Michigan
Chairman
JOE BARTON, Texas FRANK PALLONE, Jr., New Jersey
Chairman Emeritus Ranking Member
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
JOSEPH R. PITTS, Pennsylvania ELIOT L. ENGEL, New York
GREG WALDEN, Oregon GENE GREEN, Texas
TIM MURPHY, Pennsylvania DIANA DeGETTE, Colorado
MICHAEL C. BURGESS, Texas LOIS CAPPS, California
MARSHA BLACKBURN, Tennessee MICHAEL F. DOYLE, Pennsylvania
Vice Chairman JANICE D. SCHAKOWSKY, Illinois
STEVE SCALISE, Louisiana G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio DORIS O. MATSUI, California
CATHY McMORRIS RODGERS, Washington KATHY CASTOR, Florida
GREGG HARPER, Mississippi JOHN P. SARBANES, Maryland
LEONARD LANCE, New Jersey JERRY McNERNEY, California
BRETT GUTHRIE, Kentucky PETER WELCH, Vermont
PETE OLSON, Texas BEN RAY LUJAN, New Mexico
DAVID B. McKINLEY, West Virginia PAUL TONKO, New York
MIKE POMPEO, Kansas JOHN A. YARMUTH, Kentucky
ADAM KINZINGER, Illinois YVETTE D. CLARKE, New York
H. MORGAN GRIFFITH, Virginia DAVID LOEBSACK, Iowa
GUS M. BILIRAKIS, Florida KURT SCHRADER, Oregon
BILL JOHNSON, Ohio JOSEPH P. KENNEDY, III,
BILLY LONG, Missouri Massachusetts
RENEE L. ELLMERS, North Carolina TONY CARDENAS, California
LARRY BUCSHON, Indiana
BILL FLORES, Texas
SUSAN W. BROOKS, Indiana
MARKWAYNE MULLIN, Oklahoma
RICHARD HUDSON, North Carolina
CHRIS COLLINS, New York
KEVIN CRAMER, North Dakota
Subcommittee on Oversight and Investigations
TIM MURPHY, Pennsylvania
Chairman
DAVID B. McKINLEY, West Virginia DIANA DeGETTE, Colorado
Vice Chairman Ranking Member
MICHAEL C. BURGESS, Texas JANICE D. SCHAKOWSKY, Illinois
MARSHA BLACKBURN, Tennessee KATHY CASTOR, Florida
H. MORGAN GRIFFITH, Virginia PAUL TONKO, New York
LARRY BUCSHON, Indiana JOHN A. YARMUTH, Kentucky
BILL FLORES, Texas YVETTE D. CLARKE, New York
SUSAN W. BROOKS, Indiana JOSEPH P. KENNEDY, III,
MARKWAYNE MULLIN, Oklahoma Massachusetts
RICHARD HUDSON, North Carolina GENE GREEN, Texas
CHRIS COLLINS, New York PETER WELCH, Vermont
KEVIN CRAMER, North Dakota FRANK PALLONE, Jr., New Jersey (ex
JOE BARTON, Texas officio)
FRED UPTON, Michigan (ex officio)
C O N T E N T S
----------
Page
Hon. Tim Murphy, a Representative in Congress from the
Commonwealth of Pennsylvania, opening statement................ 1
Prepared statement........................................... 3
Hon. Diana DeGette, a Representative in Congress from the state
of Colorado, opening statement................................. 4
Hon. David B. McKinley, a Representative in Congress from the
State of West Virginia, opening statement...................... 5
Hon. Frank Pallone, Jr., a Representative in Congress from the
State of New Jersey, opening statement......................... 7
Hon. Fred Upton, a Representative in Congress from the state of
Michigan, prepared statement................................... 123
Witnesses
Julie McPeak, Insurance Commissioner, Tennessee.................. 9
Prepared statement........................................... 11
Answers to submitted questions............................... 135
James Donelon, Insurance Commissioner, Louisiana................. 28
Prepared statement........................................... 30
Answers to submitted questions............................... 139
Ben Sasse, a Senator from the State of Nebraska.................. 45
Prepared statement........................................... 48
Peter Beilenson, Board Of Directors, National Alliance of State
Health Co-Ops.................................................. 53
Prepared statement........................................... 55
John Morrison, Vice Chair, Montana Health Co-op.................. 59
Prepared statement........................................... 61
Mandy Cohen, Chief Of Staff, Centers for Medicare and Medicaid
Services....................................................... 92
Prepared statement........................................... 95
Answers to submitted questions............................... 146
Gloria L. Jarmon, Deputy Inspector General for Audit Services,
Office of Inspector General, U.S. Department of Health and
Human Services................................................. 104
Prepared statement........................................... 106
Submitted Material
Subcommittee memorandum.......................................... 124
Article entitled, ``Explaining `Risk Corridors,' the Next
Obamacare issue,'' Wall Street Journal, January 22, 2014....... 130
EXAMINING THE COSTLY FAILURES OF OBAMACARE'S CO-OP INSURANCE LOANS
----------
THURSDAY, NOVEMBER 5, 2015
House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:00 a.m., in
room 2322, Rayburn House Office Building, Hon. Tim Murphy
(chairman of the subcommittee) presiding.
Present: Representatives Murphy, McKinley, Burgess,
Blackburn, Griffith, Bucshon, Brooks, Collins, DeGette, Castor,
Tonko, Yarmuth, Clarke, Kennedy, Green, Welch, and Pallone (ex
officio).
Staff Present: Jessica Donlon, Counsel, O&I; Emily Felder,
Counsel, O&I; Brittany Havens, Oversight Associate, O&I;
Charles Ingebretson, Chief Counsel, O&I; Dylan Vorbach,
Legislative Clerk, CMT; Christine Brennan, Minority Press
Secretary; Ryan Gottschall, Minority GAO Detailee; Tiffany
Guarascio, Minority Deputy Staff Director and Chief Health
Advisor; Chris Knauer, Minority Oversight Staff Director; Una
Lee, Minority Chief Oversight Counsel; Elizabeth Letter,
Minority Professional Staff Member; and Arielle Woronoff,
Minority Health Counsel.
OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN
CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA
Mr. Murphy. Good morning. The subcommittee on Oversight and
Investigation of the Committee on Energy and Commerce will come
to order.
The subcommittee convenes this hearing today to examine yet
another ObamaCare failure, the CO-OP Insurance Loan Program,
the Affordable Care Act established Consumer Oriented and
Operated Plans or CO-OPs, an experimental program that awarded
government-backed loans to nonprofit health insurance issuers.
Of the 22 CO-OPs that sold health insurance plans,
unfortunately, 12 have failed to date. These failed CO-OPs
represent $1.23 billion in Federal taxpayer money. Since CO-OPs
must pay any outstanding debts or obligations before repaying
the loan funds to CMS, it is unlikely that the Federal
Government will ever recover these funds.
Originally intended to increase choice and create
competition among insurers, these CO-OPs were structurally
flawed and financially risky from the start. As early as 2011,
HHS predicted that 36 percent of the loans would go unpaid. In
2012, the Office of Management and Budget projected taxpayers
would lose 43 percent of loans offered through the program. The
following year, an HHS OIG report expressed concerns about CO-
OPs' financial stability and ability to repay loans. Even
staunch supporters of the Affordable Care Act predicted the CO-
OP programs would fail. Back in 2009, Senator Rockefeller
wrote, quote, ``There's been no significant research into
consumer CO-OPs as a model for the broad expansion of health
insurance.'' What we do know however is that this model was
tried in the earliest part of the 20th century and largely
failed. The Senator also called CO-OPs a, quote, ``dying
business model for health insurance,'' unquote.
Despite these widespread concerns CMS awarded $2.4 billion
in Federal loans to 23 CO-OPs operating 23 States. This total
does not include the CO-OP that failed before it enrolled a
single person. CMS awarded a CO-OP in Vermont, over 30 million
taxpayer dollars. However, in 2013, Vermont's State insurance
commissioner denied the CO-OP a license, calling its
application fatally flawed. The Federal funds that had already
been spent to establish Vermont's CO-OPs, about $4.5 million
taxpayer, were never recovered. The next CO-OP to fail was
CoOpportunity, a CO-OP operating in Iowa and Nebraska. At
first, CoOpportunity seemed to be a success. It enrolled over
120,000 individuals, which amounted to one-fifth of CO-OP
enrollees nationally. However, CoOpportunity premiums were too
low, and it was concerned about its ability to pay claims to
providers. CoOpportunity received $145 million in Federal
loans, but upon liquidation, it had operating losses over $163
million.
We are grateful today we will be joined later by Senator
Ben Sasse, who had to run out to a vote on the Senate side. He
will be here to talk about the CO-OP programs in Nebraska. Near
the end of 2014, CMS awarded $315 million in last-minute loans
to bolster six CO-OPs in dire financial situations, and of
those six CO-OPs, three have since closed. It is doubtful that
CMS will recover any of these additional funds.
Several factors have caused the CO-OPs to fail. In some
cases, low enrollment was to blame. In other cases, CO-OPs set
premiums too low. A July 2015 HHS OIG audit issued before the
rush of CO-OP closures found that 21 of 23 CO-OPs incurred net
losses. In 2014, it anticipated that low enrollments and net
losses might limit the ability of some CO-OPs to repay loans.
Additionally, some CO-OPs have cited low-risk corridor
payments from CMS as the reason for their demise because less
money was paid into the risk corridor program than was
expected. Insurers ended up with 12.6 percent of the payments
they were anticipating. Given the CO-OPs' dismal financial
situation, CO-OPs inappropriately hoped risk corridor payments
would bail them out. However, the risk corridor program was
always intended to be budget neutral. Only what was paid into
the program would be paid out. In fact, in early 2014, a
spokesman from CMS confirmed the risk corridor policy modelled
on the risk corridor provision in Part D that was supported on
a bipartisan basis was estimated to be budget neutral, and we
intend to implement it as designed, unquote.
We are here today to understand what went wrong. We will
hear from individuals who were on the ground implementing and
regulating CO-OPs from day one. We will hear from State
regulators faced with difficult decisions about how to best
protect consumers in their States. We will hear from
individuals who have established CO-OPs and the challenges they
faced to balance CMS requirements in keeping CO-OPs afloat. We
will hear from the auditors of CO-OPs. We will speak to the
financial challenges CO-OPs face to pay back their Federal
loans. And, lastly, we will hear from CMS about not only what
went wrong, but how we can fix it with the goal of recovering
taxpayer dollars awarded to the CO-OPs.
I thank all the witnesses for testifying today, and now
magically appearing, the Ranking Member Diana DeGette.
[The prepared statement of Mr. Murphy follows:]
Prepared statement of Hon. Tim Murphy
The Subcommittee convenes this hearing today to examine yet
another Obamacare failure: the CO-OP insurance loan program.
The Affordable Care Act established ``Consumer-Oriented and
Operated Plans'' or CO-OPs, an experimental program that
awarded government-backed loans to non-profit health insurance
issuers.
Of the 23 CO-OPs that sold health insurance plans, 12 have
failed to date. These failed COOPs represent $1.23 billion in
federal taxpayer dollars. Since CO-OPs must pay any outstanding
debts or obligations before repaying the loan funds to CMS, it
is unlikely that the federal government will recoup these
funds.
Originally intended to increase choice and create
competition among insurers, these CO-OPs were structurally
flawed and financially risky from the start.
As early as 2011, HHS predicted that 36 percent of the
loans would go unpaid. In 2012, the Office of Management and
Budget projected taxpayers would lose 43 percent of loans
offered through the program. The following year, a HHS OIG
report expressed concern about CO-OPs' financial sustainability
and ability to repay loans.
Even staunch supporters of the Affordable Care Act
predicted the CO-OP program would fail. Back in 2009, Senator
Rockefeller wrote: ``There has been no significant research
into consumer co-ops as a model for the broad expansion of
health insurance. What we do know, however, is that this model
was tried in the early part of the 20th century and largely
failed.'' The Senator also called CO-OPs a ``dying business
model for health insurance.''
Despite these widespread concerns, CMS awarded $2.4 billion
in federal loans to 23 CO-OPs operating in 23 states. This
total does not include the CO-OP that failed before it enrolled
a single person. CMS awarded a CO-OP in Vermont over $30
million taxpayer dollars. However, in 2013, Vermont's state
insurance commissioner denied the CO-OP a license to sell
health insurance, calling its application ``fatally flawed.''
The federal funds that had already been spent to establish
Vermont's CO-OP-about $4.5 million taxpayer dollars-were never
recovered.
The next CO-OP to fail was CoOportunity, a CO-OP operating
in Iowa and Nebraska. At first, CoOportunity seemed to be a
success. It enrolled over 120,000 individuals, which amounted
to one fifth of CO-OP enrollees nationally. However,
CoOportunity's premiums were too low and it was concerned about
its ability to pay claims to providers. CoOportunity received
$145 million in federal loans, but upon liquidation, it had
operating losses over $163 million. We are grateful that
Senator Ben Sasse is here today to testify about the failure of
the CO-OP program, and how it has negatively affected
Nebraskans.
Near the end of 2014, CMS awarded $350 million in last-
minute loans to bolster six CO-OPs in dire financial
situations. Of those six CO-OPs, three have since closed. It is
doubtful that CMS will recover any of these additional federal
funds.
Several factors have caused the CO-OPs to fail. In some
cases, low enrollment was to blame. In other instances, CO-OPs
set premiums too low. A July 2015 HHS OIG audit, issued before
the rush of CO-OP closures, found that 21 of the 23 CO-OPs
incurred net losses in 2014, and anticipated that ``low
enrollments and net losses might limit the ability of some CO-
OPs to repay loans.'' Additionally, some CO-OPs have cited low
risk corridor payments from CMS as the reason for their demise.
Because less money was paid into the risk corridor program than
was expected, insurers ended up with 12.6% of the payment they
were anticipating. Given the CO-OPs' dismal financial
situation, CO-OPs inappropriately hoped risk corridor payments
would bail them out. However, the risk corridor program was
always intended to be budget neutral-only what was paid into
the program would be paid out.
In fact, in early 2014, a spokesman from CMS confirmed,
``The [risk corridor] policy, modeled on the risk corridor
provision in Part D that was supported on a bipartisan basis,
was estimated to be budget neutral, and we intend to implement
it as designed.''
We are here today to understand what went wrong. We will
hear from individuals who were on the ground, implementing and
regulating CO-OPs from day one. We will hear from state
regulators faced with difficult decisions about how to best
protect consumers in their states. We will hear from
individuals who have established CO-OPs, and face challenges to
balance CMS requirements and keep CO-OPs afloat. We will hear
from the auditors of CO-OPs, who will speak to the financial
challenges CO-OPs face to pay back their federal loans.
And lastly, we will hear from CMS about not only what went
wrong, but how we can fix it--with the goal of recovering
taxpayer dollars awarded to the CO-OPs.
I thank all the witnesses for testifying today.
OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF COLORADO
Mr. DeGette. Thank you, Mr. Chairman.
I am sorry this important hearing has been impacted by the
votes today because it is an important hearing. From day one I
have worked with the State of Colorado and the administration
to help our CO-OPs succeed. Across the country, the CO-OPs have
provided consumer-focused coverage options and have injected
competition into the health insurance market. Yet a number of
CO-OPs are facing financial challenges and, unfortunately, will
not be able to compete in the 2016 marketplace. We have all
seen announcements in the last few weeks about CO-OPs closing
their doors, including the CO-OP in my home State of Colorado.
I am very disappointed that the Colorado Division of
Insurance was compelled to shut down the CO-OP. Yes, it faced
challenges. But it also served the critical needs of 83,000
Coloradoans for 2 years, and the company was well on its way to
fiscal sustainability in 2016. I am also disappointed at the
way CMS has managed this problem, which I will get to later.
But you know something, equally to blame is us, Congress. I
believe Congress has not worked as a partner to support the
emerging CO-OP market that is attempting to bring more
competition and choice to a market frequently dominated by one
or two insurers. Mr. Chairman, I do wish that we had saved the
CO-OP in Colorado, but if we can't do that, I hope we will use
our time productively today to make sure the remaining CO-OPs
are successful. Unfortunately, I know better than that. I know
that a hearing before this subcommittee with the title
Affordable Care Act or ObamaCare in the title somehow won't be
a productive endeavor. We won't spend the next several hours
learning from the experts before us about the challenges faced
by the CO-OPs and what we can do to improve them. We could be
doing meaningful oversight instead of taking 61 votes to
abolish the Affordable Care Act. And, instead, my colleagues on
the other side of the aisle prefer to sit on the sidelines and
root for the law to fail.
Frankly, Congress has squandered the last 5 years by
celebrating every bump in the road as we implemented the law,
rather than focusing on how to make it better. Even worse, some
of my colleagues have intentionally placed road blocks that
have actually made it harder for their own constituents to
access care.
Now, look, I am not suggesting the Affordable Care Act has
been perfect, far from it, but I think that the important thing
from these bumps in the road is to recognize the problems and
to try to move the ball forward. If we could do that, we could
work together to improve health care coverage for millions of
Americans. In his op-ed, the Senator--I guess he is not going
to testify--he said in an op-ed last weekend, quote, this isn't
about spreadsheets. It is about people. And, frankly, I
couldn't agree more. It is about people who, before the
Affordable Care Act, faced skyrocketing health care costs. It
is about people who were at the mercy of health insurance
companies that could raise rates or deny coverage for arbitrary
reasons to protect their profits. It is about people who feared
that an unexpected medical cost would bankrupt them. But thanks
to the Affordable Care Act, they don't have to face these
uncertainties anymore. Americans are no longer one accident or
illness way from financial ruin.
So, Chairman, our constituents should be able to depend on
Congress to work productively in a bipartisan manner to improve
the healthcare landscape in this country. That is what I hope
to do today. I am going to use my time to hear from the experts
before us about how we can make the remaining CO-OPs succeed.
Frankly, as I said earlier, I have some hard questions for CMS.
I want to know what went wrong with the risk mitigation
mechanisms that were designed to promote competition and ensure
stability in the insurance marketplace. I want answers about
how the CO-OPs wound up owing money to the big insurance
companies through risk-adjustment programs. I want to
understand why CMS said over the summer that risk corridor
collections would be sufficient to cover all risk corridor
payments while less than 3 months later, they revealed they
would only be able to pay 13 percent of the requested amounts
to insurers. In short, I want to know whether CMS is thinking
outside the box and coming up with a path forward to support
this important competitive ingredient in today's health
insurance market.
Thanks again to all of our witnesses for coming today.
Thanks for waiting while we went to vote. I think you are going
to be waiting again in a minute while we go back to vote, but
your expertise will improve the law and the lives of our
constituents. And I hope that members on both sides of the
aisle have come ready to hear your ideas so we can finally have
a productive hearing on the Affordable Care Act. I yield back.
Mr. Murphy. Thank you.
Mr. McKinley is recognized for 5 minutes.
OPENING STATEMENT OF HON. DAVID B. MCKINLEY, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF WEST VIRGINIA
Mr. McKinley. Thank you, Mr. Chairman, and I agree with the
lady from Colorado that this is about people. Failure of these
CO-OPs have had real-life consequences. People are hurting.
They are confused. The collapse of the West Virginia-Kentucky
CO-OP leaves 56,000 policyholders frantically searching for new
coverage before the close of the enrollment period. Seven years
ago, the coal industry in West Virginia was booming, and we
enjoyed the seventh best unemployment rate in the country. But
now fast forward to 2015, the unemployment rate is the worst in
the Nation: 45 percent of our coal miners have lost their jobs
in the last 3 years, and thousands more affiliated with the
coal industry have lost their paychecks. These individuals and
their families, they are hurting.
But they found a peace of mind in knowing that at least
their family's health care was secure. Unfortunately, that
comfort did not last long. Families enrolled in the West
Virginia-Kentucky CO-OP have had that rug jerked right out from
under them, all because CMS did not do its job and vet those
CO-OPs properly or address the red flags that were raised after
the Iowa-Nebraska CO-OP failed. Instead of hitting the pause
button, the CMS continued to award $350 million in additional
funding. Twelve of the 24 CO-OPs have already failed. At this
hearing, I intend to ask now, who will be responsible for the
medical bills that have been incurred by families all across?
Who is going to pick up those costs when the CO-OPs are not
there? Will CMS give flexibility to families confronting the
crisis of their lost health care? What about with only one
Statewide exchange available in West Virginia, one Statewide
exchange? Failure of this CO-OP will now result in our families
in West Virginia paying 120 percent higher premiums than they
were last year. Is that fair?
This issue is not just about another failed ObamaCare
program costing taxpayers in excess of billions of dollars. It
is an opportunity for us in this room and in Congress to
express our compassion and empathy for the hardworking families
that have lost their sense of security. I look forward to the
presentations today, and I yield back the balance of my time.
Mr. Murphy. Dr. Burgess will take the rest of that time.
Mr. Burgess. Thank you, Mr. Chairman, and thanks for the
recognition. I think it is important that we are having this
hearing today. There is a lot of policy in the Affordable Care
Act. A lot of it was bad policy, and the CO-OP program is no
exception. It has wasted millions of taxpayer dollars. It has
suffered from a lack of oversight, and it has created
instability for millions of patients. The model was
fundamentally unsound from the start and was another example of
the administration's desire to conduct dangerous experiments
with our Nation's health care. Let us not forget that the
ultimate patient protection is the assurance that their
insurance carrier will not simply evaporate in the night,
leaving patients without the coverage on which they rely. At
last count, 12 of the CO-OPs have shut down, accounting for
over a billion dollars in taxpayer dollars lost. The rate of
failure continues to accelerate. In fact, the subcommittee
staff struggled to finalize materials for this hearing because
CO-OPs were failing and announcing failures faster than they
could finalize the memoranda.
We will hear from witnesses today that the Center for
Medicare and Medicaid Services continues to stand in the way of
flexibility that the remaining CO-OPs need to become
sustainable. We should not stand by as more and more taxpayer
dollars are lost, more taxpayer dollars are invested in failed
experiments, and millions remain at risk of losing their
insurance as CO-OPs continue to close their doors.
So thank you, Mr. Chairman, and I yield to Mrs. Blackburn.
Mrs. Blackburn. Thank you, Mr. Chairman.
I want to thank our witnesses. Especially I want to thank
Commissioner McPeak from Tennessee for joining us. We are
fortunate to have you in our state, and we are fortunate to
have your guidance, and we look forward to what you will tell
us about the failed CO-OP that we have had in our state. We
also appreciate CMS taking the time to be here today. There are
answers that we need as we conduct our oversight and due
diligence on the system.
And, Mr. Chairman, I yield the time back to you.
Mr. Murphy. Thank you. I now recognize Mr. Pallone for 5
minutes.
OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Pallone. Thank you, Mr. Chairman.
When we passed the Affordable Care Act into law over 5
years ago, we dramatically changed the healthcare landscape in
this country. The law has been a historic success. It has made
access to comprehensive health care a reality for the American
people. Before the Affordable Care Act was passed, the
insurance system in this country was broken. It was a system
with rapidly rising costs, gross inefficiencies, and painful
inequalities. A February 2010 headline just a month before the
ACA was passed declared, and I quote, ``Soaring Premiums
Reflect Unsustainable Health System.'' Up to 129 million
Americans, nearly one in two people, could be discriminated
against for a preexisting medical condition, ranging from
diabetes to breast cancer to pregnancy. Many insurance plans
lacked important benefits and limited coverage.
These things are no longer true. Because of the Affordable
Care Act, people who were previously deemed uninsurable because
of a preexisting condition are finally getting coverage. Today,
insurers cannot cancel a woman's policy just because she
becomes ill. Women are no longer discriminated against, and
people who could not afford insurance before are now able to do
so. The CO-OPs fill a critical role in this new post-ACA world.
They put healthcare choices in consumers' hands. They
prioritize their customers instead of their company overhead.
They foster competition in the marketplace by bringing down
prices. They do exactly what we had in mind when we passed the
Affordable Care Act into law. And today's hearing should be an
opportunity to examine how we can ensure the remaining CO-OPs
succeed. We should be talking about how to infuse competition
into the marketplace to bring premiums down. We should be
figuring out ways to help our constituents have access to high-
quality affordable health care.
But I am worried that is not what today is going to be
about here. This committee has had dozens of hearings on the
Affordable Care Act since it was passed into law, and those
hearings have had only one purpose, to undermine the Affordable
Care Act, regardless of how many people it is actually helping.
These hearings have more often served to highlight only the
flaws in the program, and I look forward to you one day having
a hearing, Mr. Chairman, where experts can talk about what is
working, and there is much to applaud in that regard.
Moreover, we should be taking this opportunity to do
valuable oversight. The Affordable Care Act oversight of the
last 5 years has neither served to enlighten the committee nor
improve the law. It has done the opposite. In short it is
incredibly frustrating to hear Republicans criticize the law
time and time again without offering productive ways to improve
it and get better health care to more Americans who need it.
With over 60 votes to repeal or undermine the law, I think the
record is clear that most of the majority would rather root for
failure than help move the law forward.
Finally, Mr. Chairman, I have suddenly heard many of my
colleagues on the other side of the aisle lament that in the
closing of the CO-OPs, many beneficiaries will now have to find
new policies. Oh, my Republican colleagues are crying. Mr.
Burgess in Texas, well, why don't you try to get the Governor
and the State Legislature to expand Medicaid? That might help a
lot of people. Or, Mrs. Blackburn, well, she didn't bring up
TennCare today, but I usually hear about that. The fact of the
matter is many of the people that signed up for the CO-OPs
today had no insurance prior to their existence. Where were the
voices of concern when people couldn't afford insurance or were
uninsurable because their child had a preexisting condition? I
think it is time to have a productive conversation about how we
can improve the Affordable Care Act and the lives of all our
constituents. Let this committee get to the place where it can
work together to improve the law. I yield back.
Mr. Murphy. The gentleman yields back. So they called
votes. We are going to get through this as much as possible. We
will swear you in, get your testimony. If you don't need the
full 5 minutes, you don't have to give the full 5 minutes
because we want to hear from you, and then we will come back
and ask questions.
You are aware the committee is holding an investigative
hearing and when so doing has a practice of taking testimony
under oath.
Do any of you have any objections to taking testimony under
oath?
They have all answered no. The chair advises you that under
the rules of the House and the rules of the committee, you are
entitled to be advised by counsel. Do any of you desire to be
advised by counsel today?
Dr. Beilenson. [Nonverbal response.]
Mr. Murphy. You desire to be advised by counsel. Could you
identify your counsel, please?
Dr. Beilenson. Steve Ross and Tom Moyer.
Mr. Murphy. Will they be testifying?
OK, thank you.
Anyone else have counsel today? In that case, would you all
please rise and raise your right hand. I will swear you in.
[Witnesses sworn.]
Mr. Murphy. Thank you. You are now under oath and subject
to the penalties set forth in Title 18, section 1001, of the
United States Code.
We will start with Ms. McPeak, the insurance commissioner
from Tennessee. You may give a 5-minute summary of your
statement.
STATEMENTS OF JULIE MCPEAK, INSURANCE COMMISSIONER, TENNESSEE;
JAMES DONELON, INSURANCE COMMISSIONER, LOUISIANA; PETER
BEILENSON, BOARD OF DIRECTORS, NATIONAL ALLIANCE OF STATE
HEALTH CO-OPS; AND JOHN MORRISON, VICE CHAIR, MONTANA HEALTH
CO-OP
STATEMENT OF JULIE MCPEAK
Ms. McPeak. Thank you. Good morning, Chairman Murphy,
Ranking Member DeGette, Representative Blackburn, and members
of the subcommittee. Thank you for inviting me to testify. I am
Julie Mix McPeak, commissioner of the Tennessee Department of
Commerce and Insurance. In addition to my responsibilities in
Tennessee, I serve in committee leadership roles at the
National Association of Insurance Commissioners, and as
executive committee member of the International Association of
Insurance Supervisors, and as a member of the Federal Advisory
Committee on insurance. I've spent most of my career in
insurance regulation, previously serving as the commissioner of
the Kentucky Department of Insurance. And I have a strong
affinity for the country's State-based system of insurance
oversight.
My testimony today will highlight the history of
Tennessee's CO-OP, Community Health Alliance Mutual Insurance
Company or CHA. My comments will focus on events this year that
ultimately led to CHA voluntarily entering runoff on October
14. CHA was awarded $73.3 million in loans and advances from
CMS to launch the company. CHA first offered plans on the
federally facilitated marketplace in 2014, with plans in five
of Tennessee's eight service areas. The company achieved
minimal membership in 2014 due in large part to having plans
priced significantly above the FFM leader and having limited
network options. The company's membership and rate challenges
were compounded by a population that was less healthy and
sought more medical services than projected. CHA recorded a net
loss of approximately $22 million at year end 2014.
In 2015, CHA saw its enrollment grow exponentially during
the open enrollment period. And during the same period of time,
projected medical costs continued to significantly increase.
The department and CHA quickly recognized that such growth was
too much too fast. Our department wrote a letter, which you
have as exhibit 1, to HHS Secretary Burwell on January 8
requesting that HHS place an immediate enrollment freeze on CHA
due to the company triggering the department's hazardous
financial condition standard. The decision to freeze enrollment
was and remains the right decision for the company and, most
importantly, for Tennessee insurance consumers.
In mid-2015, the department conducted a thorough actuarial
review of the company's proposed 2016 rates. After conducting
our review, the department approved a rate increase of almost
45 percent for 2016. Throughout 2015, CHA peaked at more than
40,000 covered lives, but reducing down to almost 25,000 lives
on the FFM where they remain today. Though we approved the
rates to meet the CMS deadlines, we were not going to formally
unfreeze the company until we reviewed initial results from a
targeted financial examination called to evaluate the company's
expenses, projections, and financial viability, and until CMS
released Federal final guidance on the risk corridor program.
In late September, the department was notified by CMS, and
I think you have that as exhibit 2 to my testimony, that CHA
was being placed on an enhanced oversight plan. That
announcement was followed by risk corridor guidance that
provided for significantly reduced risk corridor payments. The
announcement immediately created a net worth deficiency for
CHA. CHA asked the department if the $18.5 million startup loan
could be counted as surplus if the loan terms were changed to
be identical to the terms of the CMS solvency contribution. The
department did not think that option was appropriate but told
CHA--and I think you have that as exhibit 3--that statutory
accounting principles would require the loan money to be
classified as surplus if CMS and CHA bilaterally agreed to the
loan agreement terms. After review at the department, CMS
ultimately concluded that the loan conversion was not prudent.
CHA voluntarily entered runoff on October 14. The Tennessee
Department of Commerce and Insurance, CMS and its contractors,
and CHA are working in close cooperation to ensure successful
runoff. Our focus is on Tennesseeans first and foremost. My
staff will continue to monitor the situation closely.
The runoff will continue well into 2016. And there may be
additional surprises. But as of today, cooperation between the
three entities has helped ensure a smooth transition.
Thank you for the opportunity to discuss the Tennessee
experience with the subcommittee. I look forward to your
questions.
[The prepared statement of Ms. McPeak follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Murphy. Thank you.
I now recognize Mr. Donelon, the commissioner from the
Louisiana Department of Insurance.
STATEMENT OF JAMES DONELON
Mr. Donelon. Thank you, Mr. Chairman and Ranking Member,
for the invitation and the opportunity to be here today to
speak briefly about our experience in Louisiana with the
creation and now the demise of our CO-OP. Let me start at the
outset by telling you a little bit about myself and emphasizing
the point that I am here on behalf of my State of Louisiana and
not as a representative of the National Association of
Insurance Commissioners, though I am an active participant at
that level as well, having served as its president during the
year 2013. But I have been insurance commissioner in Louisiana
since 2006 and was recently, last month, reelected for the
third time, beginning my next 4-year term as we speak.
The creation of the Louisiana Health Cooperative, along
with cooperatives in 23 states around the U.S., was a welcome
part, from my perspective, although I have said repeatedly
throughout my time as commissioner that if I had been here, I
would have voted ``no'' on final passage of the Affordable Care
Act for other concerns, but not for the opposition to the
creation of CO-OPs. I saw that as a mechanism to address
competition, which I believe is the most important aspect of
consumer protection in my State, where my top insurer, Blue
Cross, has 70 percent of the individual, small group, and large
group market. My friends next door in Mississippi have a more
dominant Blue than that, and the one next to them in Alabama is
even more dominant, so that the well-intentioned purpose of the
creation of these CO-OPs, to put consumers in control of an
insurer and also to create more competition in our states, I
welcomed at the outset.
Having said that, I now have described the effort to create
insurers, health insurers, in the environment that existed as
the rollout occurred of the Affordable Care Act, in hindsight,
I have analogized it to being similar to learning how to sail
in a hurricane. It truly was not possible, in my judgment, to
succeed under those circumstances.
Much happened in my state that affected that. We licensed
our CO-OP in April of 2013. And they began signing up enrollees
in accordance with their loan agreement with CMS in October of
2013. That loan agreement called for them to sign up 28,000
lives. They ended up with 9,000 lives instead. In the several
months between their approval and the beginning of their doing
business, they had the challenges of the issues presented by
guaranty issue, no lifetime limits, age caps, et cetera, not to
mention the need for them to go out and rent a network of
providers in a not very friendly to a purchaser of such service
environment. They had to hire a TPA to do claims, to do their
premium collection and payments on. They had to build a
marketing network of agents, all of that in a relatively short,
5-month period of time that, frankly, in hindsight, was not
functional.
The next challenge came with the rollout on June 30 by CMS
of the transitional reinsurance program numbers and the risk
adjustment program numbers. And where the CO-OP would receive
$10 million under the reinsurance payments, it would owe $7.5
million under the risk adjustment program. That represented a
$5 million hit to their bottom line and triggered our calling
them in on July 1, the leadership of our CO-OP, to tell them
they should actually make the decision to go into runoff before
the enrollment period began this October 1.
On July 7, their board voted to accommodate that request
from our folks, and they began doing that. The Louisiana CO-
OP's financial situation is dire. And we are doing everything
we can to preserve its network of providers and to make sure
that their policy holders will continue to have coverage
through the end of 2015.
Now, us state regulators have the unenviable task, as I
have, of trying to wind down a company while at the same time
conserving it and doing so in my state, unlike Tennessee,
without the protection of a guaranty fund to assure those
healthcare providers that their bills would be paid. Let me
talk for a few minutes about our relationship----
Mr. Murphy. We don't have a few minutes. You're out of
time.
Mr. Donelon. I'm out?
Mr. Murphy. Yes.
Mr. Donelon. I'm sorry.
[The prepared statement of Mr. Donelon follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Murphy. That's OK. Here's the thing. We have one vote.
We also have Senator Sasse who is here, so the question is, we
have one vote on the floor.
Ms. DeGette. Mr. Chairman, the problem is they are down to
about 2 or 3 minutes left in the vote. And I don't think
they're going to hold it open for us, unfortunately. So, with
all due respect, I am going to ask my members to go down and
vote.
Mr. Murphy. So unless some person wants to remain, we are
going to have to hold off. This will be very quick. So we'll
run down, vote, and come back. So if members just do that, come
back as quickly as possible, we should be able to reconvene in
about 10 minutes. Thank you.
[Recess.]
Mr. Murphy. We are joined here and bringing back in the
junior Senator from Nebraska Senator Ben Sasse, who we
understand taught Jeff Fortenberry everything he knows in
Congress, so we are thankful.
Senator, you are recognized for 5 minutes.
STATEMENT OF THE HON. BEN SASSE, A SENATOR FROM THE STATE OF
NEBRASKA
Senator Sasse. Chairman Murphy, Ranking Member DeGette, and
members of the subcommittee. Thank you for inviting me to
testify today. I appreciate the opportunity to think along with
you about how we should respond to the failure of the CO-OPs in
now 13 states. I am tempted to joke after that voting moment
that two more CO-OPs have failed while you were off voting. It
is an urgent problem that has left hundreds of thousands of
Americans scrambling to find new health plans this fall.
Before we dive into the details on the CO-OPs, I would
suggest that we should take our partisan hats off. I am a
fierce opponent of the Affordable Care Act, and I know that
many of you in this room night be strong supporters of the ACA,
but I don't think that is what your hearing is about today. I
think this is about getting to the bottom of what is actually
going on and why so many of our neighbors are losing their
healthcare coverage.
The tumultuous failure ACA's CO-OPs began in my own
backyard. It began with CoOpportunity, which is actually
headquartered in Nebraska but had a majority of its subscribers
in Nebraska. The goal of today's hearing is to get to the
bottom of what is happening with the CO-OPs, and I want to
speak to two issues. First, while there is much more that we
need to understand, what we know so far would suggest a
systematic failure of the CO-OP program and an even greater
example of bureaucratic incompetence more generally. Secondly,
the lack of transparency on this issue is harmful, and the
Department of Health and Human Services owes the American
public answers.
Republican or Democrat our constituents deserve nothing
less than a full accounting for what has happened with this
program. The CO-OP program was included in the ACA to
purportedly foster competition in the new exchanges by
federally funding the start-up of 23 nonprofit health insurers.
To get them off the ground, taxpayers loaned these insurers
$2.4 billion. After less than 2 years of operation, 12 of the
CO-OPs are down and the program has a failure rate over 50
percent.
The first failure, CoOpportunity Health, as I mentioned
headquartered in Iowa but with a majority of its subscribers in
Nebraska, was arguably the messiest, because the members of the
coopportunity program lost their health plan in the middle of a
plan year.
CoOpportunity had been awarded it, $145 million of
taxpayer-funded loans. The new insurer had garnered about 10
times the numbers of enrollees that they had originally
anticipated and was seemingly successful. However, despite
ample funding and, obviously, far more enrollees than
anticipated, on December 16th of last year, 2014, about a month
into the new open enrollment season, the Iowa insurance
commissioner placed CoOpportunity under a supervision order. By
January 23rd of this year, 2015, the Iowa insurance
commissioner deemed rehabilitation of CoOpportunity impossible
and sought a court order for liquidation.
After just one year of operation, the new not-for-profit
health insurer abruptly collapsed. This was a terrible midyear
shock to the 120,000 CoOpportunity enrollees, again, a majority
of them in my State. These people were forced out of their
insurance plans and had to go through the grueling process of
signing up for coverage on healthcare.gov all over again with
lots of uncertainty and fear about how their families might be
covered or might not be covered during the transition.
So why did could CoOpportunity fail? Curiously, 9 months
later, we don't really have any answers. Sadly, CoOpportunity's
messy demise was just the first of the CO-OP dominos to fall
this fall. Now, a total of 12 CO-OPs and 13 States will be
closed by the end of this year. These 12 CO-OPs were awarded
more than $1.1 billion in taxpayer-funded loans and had more
than half a million enrollees. Another noteworthy failure is
Health Republic of New York, the largest CO-OP in the Nation.
It received more in taxpayer loans than any other CO-OP,
totaling about $265 million. In late September, they announced
they would be ceasing operations at the end of this year, but
just last Friday, the State's health insurance regulatory body
revealed that the situation was actually much worse than it had
even been understood 6 weeks ago. Apparently, a review
conducted in conjunction with CMS now finds that the previously
reported filings were not an accurate representation of Health
Republic's financial condition. Now, that CO-OP is planning to
close down as fast as possible instead of being in business
until the end of the year.
That means that more than 200,000 enrollees in Health
Republic will have to pick a new insurer and plan in order to
maintain health coverage for the month of December as well as
planning for next year. Their new coverage, which they will now
have to sign up for, will be expiring at the end of the next
month, and then they will have to begin the process all over
again of trying to find a health insurer.
The sudden disruption and subsequent consumer confusion is
eerily similar to what happened to Nebraskans and Iowans
earlier this year with CoOpportunity's closure. This brings me
to a second point. We still don't have any good answers. With
12 out of 23 insurers rapidly going under, with inaccurate
filings on the New York CO-OP, and with more than $1 billion in
taxpayer loans out the door, there are more questions than
ever, regarding the CO-OP program at large, and if they, those
who are responsible for regulating it, knew what they were
doing. I believe it is essential that HHS answer some basic
questions, and all of us, Republican and Democrat, should be
demanding that.
For instance, CMS awarded additional solvency loans to
CoOpportunity to Health Republic in New York and to the
Kentucky Health Cooperative, all of which have since closed or
are now closing, with CMS doubling down on their initial
misjudgments by awarding additional loans. How did they decide
to make these additional loans? Did they have any expectation
that they were going to be paid back, or are they only going to
be used to pay immediate claims?
At the time of these awards, these three insurers were
operating at substantial losses that seemingly stemmed from
poorly pricing their products. One analysis measured the
percentage difference between the CO-OPs' average silver plan
premium for a 27-year-old single person in the State, to the
corresponding overall insurance market for all other carriers.
Here's what they found. CoOpportunity in Nebraska, Health
Republic in New York, and the Health Cooperative of Kentucky
were all pricing their products more than 20 percent below
their competitors. How could this be possible?
Should HHS have given these companies more taxpayer money,
given the anomalies of their pricing models? Moreover, HHS has
yet to address if and when taxpayers will be repaid for any of
the more than $1 billion that have been loaned to these 12 CO-
OPs that have closed or are closing. These are the types of
questions and the information that HHS should be providing to
the American people through the Congress. Why are they not?
The lack of transparency thus far has been terribly
disappointing. I started asking questions right after
CoOpportunity failed in my State in May. Without receiving a
sufficient response to my questions, I asked more questions
when a second CO-OP, Louisiana, failed. By the time eight more
CO-OPs had gone under, I elevated my effort to try to get
answers to these questions. These are good governance, not
partisan questions. I elevated my question by pledging that we
will oppose the fast-tracking of all HHS nominations before the
U.S. Senate.
Since that announcement less than 3 weeks ago, four more
CO-OPs are closing, cementing further that this is a systematic
problem, and still, we don't hear from HHS. Consumers who face
this coverage disruption and the taxpayers who footed this bill
deserve answers. CMS needs to provide a complete accounting of
what has gone wrong within this program, and I hope that that
starts today with your important hearing. Thank you for the
invitation to testify.
Mr. Murphy. I thank you so much, Senator.
[The prepared statement of Senator Sasse follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Murphy. I think you are going to be leaving now and
head back over to the Senate. We do appreciate your insights
and your persistence on this, and we want to continue to work
with you.
Ms. DeGette. And let me just add, Senator. You didn't hear
my opening statement, but I pretty much said the same thing as
you did in terms of this should not be a partisan issue. We all
need to figure out what's going on with these CO-OPs closing.
Senator Sasse. Congress needs to do better in oversight,
not just in health care but in life in general. But that is a
conversation for another day.
Mr. Murphy. Thank you. All the best.
We'll now continue with our panel. Next up is Dr. Peter
Beilenson. I got it right?
Dr. Beilenson. Yes, sir.
Mr. Murphy. The President, CEO, of Evergreen Health
Cooperative. Doctor, you are recognized for 5 minutes.
STATEMENT OF PETER BEILENSON
Dr. Beilenson. Thank you, sir.
Chairman Murphy, Ranking Member DeGette, and members of the
subcommittee, thank you for inviting me to testify before you
today. As the Chairman said, my name is Peter Beilenson, and I
am president and CEO of Evergreen Health CO-OP, the Maryland-
based CO-OP, founded in 2012. I also serve, as do all the CEOs
of the CO-OPs, as a board member for the National Alliance of
State Health Cooperatives, called NASHCO, and I appreciate the
opportunity to appear before you today to discuss the issues
affecting Evergreen and the other CO-OPs of NASHCO.
As several of you have already said, while many elements of
the ACA have engendered significant partisan disagreement, the
notion of establishing local consumer-driven and innovative
healthcare options while enhancing competition on the
marketplace should be appealing across the ideological
spectrum. The question now that we confront with the remaining
11 CO-OPs is how can we succeed? How can they succeed? And how
can taxpayer investment be preserved?
Unlike the difficulties experienced by many other state
cooperatives in their first 2 years, Evergreen Health
Maryland's current fiscal condition is strong due to our quick
and nimble response to unforeseen conditions in our first year
of operations. Going into the current open enrollment, which
just started a few days ago, we have a healthier than average
enrolled population, due to a diversified book of business; we
have greater than $35 million in assets; we have risk-based
capital, a measure of solvency adequacy of almost 800 percent,
and for the last 3 months, each month we have been turning a
profit. So this can be a profitable mechanism.
In addition, our strong relationship with Maryland Governor
Larry Hogan's new insurance commissioner, Al Redmer, and his
staff continues to provide us with significant support.
Evergreen, like all other CO-OPs, take very seriously our
obligation to pay back the loan funds granted to us by the
Federal Government. However, several requirements in
regulations developed by CMS and CCIIO at their discretion, not
as required by provisions of the ACA, are significantly
impeding the ability of the 11 remaining CO-OPs, including
Evergreen, to successfully innovate and compete with the few
carriers left on each state's respective insurance markets.
In light of these concerns, I would like to highlight three
solutions that could forge a successful path forward for the
remaining CO-OPs. And let me be clear, these do not require an
act of Congress; they do not require additional appropriations
by the Congress.
First, as the CO-OP successfully market themselves and
capture larger enrollments, they will need additional solvency
dollars to continue to meet state regulatory requirements, put
aside CMS's requirements. However, as you know, CMS has no
additional funds to assist with the solvency needs of the
growing CO-OPs. The solution to this issue is to allow
individual CO-OPs to raise capital to meet these solvency
needs. In fact, as you may remember, the ability to obtain
private capital in Section 1322, which established the CO-OPs,
was one of the measures by which the original CO-OP
applications were judged. CMS should amend the loan agreements
to allow flexibility in raising capital, because the
restrictions on obtaining additional capital, are not required
under the ACA Section 1322.
Second, risk adjustment under the ACA creates additional
issues for the CO-OPs as formulas applied by CMS are skewed to
the benefit of large preexisting insurers with enhanced
administrative capabilities and years of claims experience with
data for their members. The solution: CMS must revise the risk
adjustment formula to create a level playing field for all
carriers.
Third, and finally, the risk-corridor payments represent
another issue for the CO-OPs. The solution: A swift resolution
to the current funding deficit for this program will go a long
way towards improving CO-OPs' balance sheets and long-term
outlook.
Finally, we at Evergreen Health hope that both sides of the
aisle and Congress will recognize that the nonprofit member-
governed CO-OPs are trying to forge a new and innovative path
for health insurance and give consumers increased choices in
their coverage. This competition in consumer choice has had
demonstrable effects. CO-OPs have brought innovative approaches
to the marketplace and, thus, additional choices to consumers.
For example, Evergreen Health offers a value-base insurance
design product for diabetics, unique in the State of Maryland,
which push the marketplace considerably, which removes
virtually all financial barriers, co-pays, co-insurance, and
deductibles to services, medications, and care that is needed
to keep a diabetic patient from developing a myriad of
complications of the disease.
In conclusion, I share the Congress' concern with
protecting the Federal Government's initial investment in CO-
OPs. The solutions I have proposed today, again, do not entail
an act of Congress or any additional congressional
appropriations. They simply require CMS, the Congress, and the
CO-OPs to work together to make sure that the remaining 11 CO-
OPs are preserved and that taxpayer dollars are preserved as
well. Thank you very much.
Mr. Murphy. Thank you very much, Doctor.
[The prepared statement of Dr. Beilenson follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Murphy. And now finally we hear from Mr. John Morrison,
the vice chairman of Montana Health Cooperative. You are
recognized for 5 minutes.
STATEMENT OF JOHN MORRISON
Mr. Morrison. Thank you, Chairman Murphy, Ranking Member
DeGette, members of the subcommittee. Thank you for inviting me
to testify. My name is John Morrison. I was Montana's insurance
commissioner, in 2001 to 2008, and I chaired NEIC's health
insurance committee. I am the founder and past president of the
National Alliance of State Health CO-OPs and vice-chair of the
Montana Health CO-OP.
CO-OPs entered the marketplace in 22 States in 2014 and are
now providing coverage to a million Americans. CO-OPs have
brought much needed competition to the marketplaces, giving
consumers more choice, introducing innovations and saving
consumers and taxpayers money.
Montana, where I live, has a CO-OP. Wyoming does not. Both
States are on the FFM. In 2013, Montana's average monthly
premium was 18 percent lower than Wyoming. In 2015, with the
Montana Health CO-OP in the picture, based on the second lowest
silver plan, Montana is now 40 percent lower.
In 2014, states with CO-OPs had average silver plan rates 8
percent lower than states without CO-OPs. In 2015, among FFM
states, the Delta was about 13 percent and over $500 per person
for the year. Based on the roughly 3.7 million Americans
enrolled in CO-OP states in 2015, consumers in those states
have already saved more than the total cost of the CO-OP
program.
Moreover, when rates are lower, subsidy costs to the
Federal Government are lower. Taxpayers have already saved at
least hundreds of millions in subsidies and would have saved
billions over the decade ahead. One study published in Health
Affairs, projected that if CO-OPs held rates down by just 2 to
5 percent, the savings to taxpayers over the next 10 years
would be $7 billion to $17 billion. So the question is not how
much CO-OP loans have cost the taxpayer. Rather, the better
question is this, how much has the closing of CO-OPs and their
removal from the marketplaces cost the consumer and the
taxpayer for years to come? This question should be studied
carefully.
So I thank you for holding this hearing today. Senator Kent
Conrad recently said, the long knives came out to kill the CO-
OPs in their cribs. We need to get to the bottom of this, as
Senator Sasse said, and find out who killed these CO-OPs and
how much Americans will pay for that mistake.
I got involved in the CO-OP project at the request of
others, because I believe CO-OPs can break the endless
inflationary spiral in our health insurance system. In my
opinion, the following conduct of Congress and the
administration has contributed significantly to the recent CO-
OP closures.
One, the $6 billion in capitalization grants were changed
to loans. Two, the CO-OPs were prohibited from using loan funds
from marketing. Three, in 2011 when dozens of groups began
meeting to turn the CO-OP concept into a nationwide reality,
Congress slashed CO-OP loan funding from $6 billion to $3.4
billion. Four, OMB directed CMS to cap CO-OP loans to prevent
CO-OPs from achieving more than 5 percent market share. Five,
in late 2012, 24 CO-OPs had signed loan agreements, and more
than 40 additional groups were awaiting review.
Congress responded in the year-end fiscal cliff deal by
rescinding the remaining lending authority and prohibiting CMS
from authorizing additional CO-OPs.
Six, although CO-OPs had not yet opened their doors,
congressional committees attacked them in hearings and press
releases and tied the CO-OPs up with burdensome and expensive
document demands.
Seven, CO-OPs reserve requirements were more than twice as
high as other insures. Eight, existing insures were allowed to
early renew their ACA noncompliant policies and preselected
good risk, degrading the marketplace pool. Nine, CO-OPs were
prohibited from offering necessary terms to outside investors
to access private capital. Ten, in year one, CO-OPs were
prohibited from limiting their enrollment on State exchanges
and the FFM despite, limited capital.
Eleven, many CO-OPs were forced to pay risk adjustment to
large existing carriers without consideration of the effect of
early renewals or the CO-OP solvency requirements.
Twelve, most recently, Congress and the administration
reneged on risk-corridor commitment, paying less than 13 cents
on the dollar for 2014. For some CO-OPs, this was the fatal
blow.
Americans will pay billions of dollars more in the years
ahead, because these CO-OPs are closing. There are eleven CO-
OPs remaining in 13 States. In my written statement, I make
recommendations for measures that should be taken to maximize
these CO-OPs' chance of long-term survival. I hope we can
discuss some of these options today.
Thank you, and I look forward to your questions.
Mr. Murphy. Thank you, Mr. Morrison.
[The prepared statement of Mr. Morrison follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Murphy. Let me start off with some questions here and I
recognize myself for 5 minutes.
The CO-OPs and state regulators have cited many factors
that contributed to the failure of the CO-OPs. Lower and hire
expected enrollments, restrictions on investors, CMS blames
risk adjustment formula, low risk corridor payments, lots of
those. Let me start off, and Ms. McPeak, what are the top
reasons that the CO-OP failed in your state?
Ms. McPeak. Thank you for your question, Mr. Chairman.
Our CO-OP had challenges from inception in that, as
Commissioner Donelon mentioned, going into a state without
provider networks caused the company to have to lease those.
There were administrative costs that were due to the startup
that any startup company would have. But then in 2014, we had
disastrously low enrollment. Truly, at most, maybe 1,000 people
signed up for the CO-OP plan. Mostly because the rates were
somewhat higher than the FFM leader, a well establish a company
in the State of Tennessee.
So overcoming those challenges became extremely difficult,
and that's why we saw significant rate increases for 2015 and
beyond because of the enrollees across the market and
Tennessee. We had higher than expected utilization, high claims
costs, and insufficient premiums.
Mr. Murphy. Did the other plan also lose money, then, too
when they had lower costs for the premiums?
Ms. McPeak. Yes. Actually, every plan on our federally
facilitated marketplace on the exchange lost----
Mr. Murphy. That's what I understand. Kind of nationwide,
whether they would cost others in the bid to get enrollees,
they had to underbid, and then we find out many of them
realized the next year, they had to make up for the losses by
charging more. And some survived and some didn't.
Ms. McPeak. That's our experience in Tennessee. We didn't
have any company accurately project the claims costs that were
going to be coming from these enhanced benefit plans that were
sold in the state and mandated under the Affordable Care Act.
And so some of our larger established companies could withstand
those companies and offer plans, but the CO-OPs just didn't
have those resources available.
Mr. Murphy. Dr. Beilenson and Mr. Morrison, what would you
say are the top reasons that 12 out of the 23 CO-OPs failed? I
think, Mr. Morrison just read off a list, but internal problems
too, so not just external. But, Dr. Beilenson, do you have some
insight into what are the top reasons why they failed?
Dr. Beilenson. I don't really know specially what happened
with the other groups, although the risk corridor was clearly
an issue and as John said, the risk adjustment was a big issue
as well, because they were surprising payments instead of
receivables on risk adjustment and vice versa on risk corridor.
Mr. Murphy. Mr. Morrison?
Mr. Morrison. I don't mean to suggest that there were no
mistakes made by management in CO-OPs, but if you look across
the marketplace, what you see is that this was a very
competitive marketplace, and insurance companies all priced
aggressively. Everybody lost money. The difference was that CO-
OPs were new entrants. They did not have other business and
surplus to be able to offset the losses, and their capital was
continuously reduced and capped.
So when Commissioner Donelon talks about learning to sail
in a hurricane, that's especially apt in a situation where we
were prohibited from building a big boat, and we were not only
put into a hurricane, but in some cases given money to build a
boat for 50 people----
Mr. Murphy. As the rollout occurred, we heard this, whether
it was the Web site or other aspects, too, there was just not a
lot that was clearly thought out. It was rolled out, pushed out
and maybe is more like it. I know with the Web enrollment and
other things, which we found out wasn't ready, they knew wasn't
ready. Would you say it wasn't ready when this started up?
Should more foresight have gone into setting this up before the
CO-OPs were thrown into the hurricane?
Mr. Morrison. To my knowledge, there has never been the
situation where 22 new health insurance companies entered the
health insurance market across the country in the same year, 2
years after they chartered their business. And so that was
certainly a challenging situation. But it was much more
challenging, and indeed, fatal for some, because they did not
have adequate capital to deal with the risks that they were put
into.
Mr. Murphy. Mr. Donelon, can you comment on that, too, how
in your state that happened?
Mr. Donelon. Absolutely. Thank you.
Mr. Murphy. Microphone.
Mr. Donelon. I'm sorry. Thank you, Mr. Chairman. And again,
thank you for the invitation to be here today. My situation was
even worse. We were one of the last CO-OPs to be approved
before the termination of the program.
And so the timeframe from licensing in May to selling in
October was so constrained that building our company was quite
a challenge. I was initially very encouraged, because the group
that got approval from CMS for CO-OP loans and from us for
licensing, was closely associated with our optional health plan
back in New Orleans. A maybe 100-year-old hospital and clinic
operation, internationally respected and had been in the health
insurance business until the 1990s when they sold off their
health plan to Humana. So with their credibility and their
experience and expertise, I was hopeful and optimistic that
we'd be successful. In hindsight, it was too much in too short
a period of time, plus all the other problems that have been
described here in testimony today.
Mr. Murphy. Thank you.
Ms. DeGette is recognized for 5 minutes.
Ms. DeGette. Well, this is what I was talking about in my
opening statement, because the ACA started in 2010, then these
CO-OPs started a couple of years later, and then they had a
couple of years to get going. So it wasn't like we were trying
to stand up 22 companies all at the same time we were doing the
enrollment on the Web site and all that. This was staggered. Is
that right, Mr. Morrison? Yes or no will work. It wasn't all at
the same time?
Mr. Morrison. The awarding of the loans was staggered.
Ms. DeGette. Right.
Mr. Morrison. That's true.
Ms. DeGette. So really, part of the problem we have--yes,
there were problems with the capitalization from the beginning,
but part of the big problem is that there was no support as it
went along. Wouldn't that be a fair assessment?
Mr. Morrison. Inadequate capital was the problem.
Ms. DeGette. Right. That's what I want to talk about. The
CO-OP program was initially conceived as a grant program, but
then the startup funding ultimately ended up being in the form
of loans; is that right?
Mr. Morrison. Yes.
Ms. DeGette. And then Congress cut the CO-OP loan funding
program from $6 billion to $3.4 billion; is that right?
Mr. Morrison. And then to $2.4.
Ms. DeGette. Right. And then in the 2012 fiscal cliff deal,
Congress--which by the way I voted against, Congress rescinded
the remaining lending authority for CO-OPs, which essentially
blocked the establishment of further CO-OPs even though 40
additional groups had submitted applications; is that correct?
Mr. Morrison. Very correct.
Ms. DeGette. Now, irrespective of that, 23 CO-OPs got
established. And the CO-OPs, like all the other insurers in the
health marketplaces, took into account the Affordable Care Act
risk stabilization programs, to help insurers mitigate the risk
of insuring new populations who had potential losses, the law
offered the 3Rs; the reinsurance, risk adjustment, and risk
quarter programs, but those don't seem to have worked.
So I wanted to ask you, Dr. Beilenson, the risk adjustment
formula has been problematic, as we've been discussing. In
fact, a lot of the small CO-OPs are writing checks to large
insurance companies under the risk adjustment formula. Does
that seem fair to you?
Dr. Beilenson. It does not. And it was actually 21 of the
23 that were writing checks.
Ms. DeGette. Twenty-one of the 23 writing checks to big
insurance companies.
I also understand because of Congress' rule of budget
neutrality, the risk-corridor program has failed to help the
CO-OPs. This was the problem with the Colorado CO-OP failure,
and we recently learned that the program lacked sufficient
funds to reimburse for 2014 claims.
Now, Mr. Morrison, the risk-corridor program is only
reimbursing the CO-OP claims at 12.6 percent of what they're
owed; is that correct?
Mr. Morrison. That's correct.
Ms. DeGette. And if Congress had not made this program
budget neutral, would it be fair to say that the payments from
the risk-corridor program would have likely made a difference
in keeping a lot of these CO-OPs solvent?
Mr. Morrison. I have read news accounts from a half a dozen
or so CO-OPs before the most recent closures, that specifically
attributed their closures to the government reneging on the
risk-corridor payments.
Ms. DeGette. Now, Dr. Beilenson and Mr. Morrison, what
additional--let's start with you, Dr. Beilenson. What
additional steps do you think that we can take to ensure the
continued viability of the CO-OP?
Dr. Beilenson. Well, I think as I was talking about before,
revising the risk adjustment formula. And by the way, Medicare
advantage's risk-adjustment formula was tweaked several times
over a 10-year period.
Ms. DeGette. Right.
Dr. Beilenson. Secondly, pay the risk corridor that was
required. And third and probably as important, is allow us to
have the flexibility to go after private capital as any truly
free market allows you to do.
Ms. DeGette. Mr. Morrison?
Mr. Morrison. I made recommendations in my written
statement, but the ones that Peter has suggested are important.
I just want to say about the risk corridor, that when you send
these little boats into a hurricane to learn how to sail, it's
critically important that there be a Federal backstop, because
they don't have any other business to balance things against.
And that's why the risk-corridor payments are very important.
The other thing I want to say is that the risk-corridor
payments and full payment of it was promised repeatedly to the
CO-OPs. And so the CO-OPs and their actuaries took that into
account from the very beginning with rating.
Ms. DeGette. Now, you said we needed a Federal backstop for
these. What's the public interest in having that Federal
backstop for these small boats?
Mr. Morrison. Because it takes a few years. We didn't know
until 2016 what this risk pool looked like. That's why you had
big rate increases this year. And so the Federal backstop
allows room for aggressive competition. The CO-OPs come in and
add to that competition. Now everybody lost money. $2.5
billion, Wall Street Journal said 2 days ago from the McKinsey
report on how much all the insurers had lost in those----
Ms. DeGette. But the CO-OPs didn't have any way to recoup
that. I'm out of time.
Mr. Morrison. The CO-OPs were not outliers in pricing. The
CO-OPs were pricing competitively. Everybody lost money, but
the CO-OP needed the Federal back stop, because they did not
have the corporate depth to do it.
Ms. DeGette. Right. To do it. Thank you very much.
Mr. Murphy. Thank you.
Mrs. Blackburn is recognized for 5 minutes.
Mrs. Blackburn. Thank you, Mr. Chairman.
Thank you, all, for being here.
Mr. Morrison, I think it's important to note that any
business in the country can be you can successful if it had a
Federal backstop and somebody that was going to be there, and
people have grown quite weary of bailouts.
Ms. McPeak, I want to come to you and talk about the CMS
enhanced oversight plans. Was the Tennessee CO-OP under an
enhanced oversight plan?
Ms. McPeak. The first notification we had about the
enhanced oversight plan for the Tennessee CO-OP was on
September 29 when we received a letter that I think I've
attached to my testimony. What's problematic about that day is
that we were also in discussions with CMS to lift the
enrollment freeze for 2016 without any knowledge that the
enhanced oversight plan was going to be coming our way.
Mrs. Blackburn. So you were getting conflicting information
from CMS. The enhanced oversight plan for the Tennessee CO-OP
included what?
Ms. McPeak. There were five pages of issues in the letter
that were identified that were areas that the CO-OP needed to
focus on to create greater financial stability and create
better viability for the plan going forward.
Mrs. Blackburn. So they were giving you conflicting
information; on one hand you had this, and on one hand the
other?
Ms. McPeak. We were under the impression that CMS felt much
more comfortable with the financial stability of the CO-OP, and
that's why we were requested to lift the enrollment freeze by
October 1, so that the programming could be effectuated to be
available for open enrollment starting November 1. So we were
surprised by the notification of the enhanced oversight plan.
Mrs. Blackburn. OK. Now, let's talk about the solvency,
because they converted the solvency loans, the startup loans
and seven CO-OPs, so that the loans would artificially appear
more financially secure. So did CMS approach you about
converting those loans so that the CO-OP would appear to have
more capital on its books?
Ms. McPeak. CMS had indicated that they were in agreement
with that approach, and so the actual request came from our CO-
OP itself, CHA----
Mrs. Blackburn. To recharacterize----
Ms. McPeak. Yes, ma'am.
Mrs. Blackburn [continuing]. To recharacterize those loans.
Did you think it made sense to convert those loans?
Ms. McPeak. In my analysis, we decided that was not a
prudent course of action, because, in fact, you are not adding
any capital or revenue to the benefit of the company. You're
creating the impression on the balance sheet that the debt
could be subordinated and the company would appear more
financially healthy than we felt that it was.
Mrs. Blackburn. So it's kind of a smoke screen type
practice?
Ms. McPeak. Well, it certainly doesn't add any additional
dollars to pay claims for the company.
Mrs. Blackburn. Right. Let's see, is it true that you were
instrumental in relegating the Tennessee CO-OP so that the
premium prices were appropriate and that consumers were
protected?
Ms. McPeak. Yes. It's difficult to look at premium
increases that have been approved in Tennessee. We took that
very, very seriously. But as has been mentioned here today, we
need companies to be able to make good on the claims, and the
losses were more problematic for all companies. And so, yes, we
definitely took an interest in making sure that our premiums
were appropriate for the CHA in 2016.
Mrs. Blackburn. Let me ask you this: Does the CO-OP have
enough money to support consumers and pay its claims through
the end of the year?
Ms. McPeak. Because we took the decisive action of going
into runoff, we do believe that the claims will be paid for all
services rendered through the end of the year.
Mrs. Blackburn. Through the end of the year.
OK. And let me go back to Dr. Murphy's questions. You were
talking about the enrollment and it didn't hit a thousand. What
was the projected enrollment from the CO-OP, and what did CMS
project that enrollment to be for 2016?
Ms. McPeak. I would have to research the number, but I do
believe that it was probably close to the 12- to 15,000
enrollee range for the first year growing to something more
along the 20,000 enrollee range for 2015.
Mrs. Blackburn. So their projection was 12- to 15,000
people, and what they actually got was about a thousand?
Ms. McPeak. At its highest point.
Mrs. Blackburn. So they were that far off their mark?
Ms. McPeak. Yes, that's correct.
Mrs. Blackburn. OK. Thank you very much for that.
Mr. Chairman, I will yield back 30 seconds of my time.
Mr. Murphy. There you go. Thank you.
I now recognize Mr. Pallone, if he's ready it, for 5
minutes.
Mr. Pallone. Let me get my questions out here, Mr.
Chairman, if I can find them.
Congress established CO-OPs to do a number of things that
the private market had not done, and specifically, CO-OPs were
created to compete with large for-profit insurance companies
and hopefully, put downward pressure on premium prices and
serve parts of the country that had fewer, no-good insurance
options.
So I wanted to ask Mr. Morrison, remind us of what the
landscaped looked like for the consumer prior to the arrival of
CO-OPs, particularly in rural regions. Is it accurate to say
that there was minimal competition and the policies were often
prohibitively expensive?
Mr. Morrison. All of those things are true, Ranking Member
Pallone. In Montana the uninsured rate was about 20 percent. As
I said, with the introduction of the CO-OP, the difference in
average premiums between Montana and Wyoming went from Montana
being 13 percent lower to being 40 percent lower. We now have
an uninsured rate that's, I think, closer to 11 or 12 percent
in our state. Many, many thousands of people are now covered,
who didn't use to have insurance. Many, many thousands of
people are now able to afford insurance, who were not able to
afford insurance before. And with the CO-OP, consumers now have
more choices.
Mr. Pallone. All right. Let me read a passage from a
January 2015 study by the Commonwealth Fund, regarding what the
landscape looked like prior to the passage of the Affordable
Care Act. And it says, and I quote, ``Most States' markets for
individual health insurance were dominated by one or two
carriers that competed primarily on how well they will they
were table to screen and select people based on the risk of
incurring medical claims. They had little incentive to compete
by providing efficient services. Instead, their focus was on
reducing their risk of covering people who might have a very
high medical cost.''
So, Mr. Morrison, that sounds look a rather bleak insurance
landscape. Did insurance companies compete largely by denying
coverage?
Mr. Morrison. There's no question that segmenting the
market and cherry picking to provide health insurance to the
healthy people and exclude or price up the people with health
issues was what was going on before the ACA, and that was
certainly happening in Montana. In my experience, as the chair
of the health insurance committee of NAIC, I saw it across
rural America.
Mr. Pallone. And, Mr. Beilenson, would you agree with that,
what he just said?
Dr. Beilenson. I believe so, but it's not my area of
expertise.
Mr. Pallone. OK. Let me go back to Mr. Morrison. Is it also
accurate to say that prior to the passage of the ACA and the
establishment of CO-OPs, many rural areas were underserved? And
what did that mean for Montana residents?
Mr. Morrison. What it meant for Montana residents was that
if they were unable to get health insurance, in many cases,
they were unable to get the health care that they needed. And
access to health care has improved because access to health
insurance has improved.
The other thing that's happened is although BlueCross
BlueShield, which is now owned by Health Care Service
Corporation, one of the BlueCross corporate groups, still is
the dominant carrier in the State of Montana. Their market
share is somewhat smaller now, and consumers have the choice of
the CO-OP, and so there's more competition.
Mr. Pallone. Well, before the ACA, were there many rural
residents being rejected for insurance or only being offered
excessively costly policies?
Mr. Morrison. We found, when I was insurance commissioner,
that most of the uninsured were people who worked full time for
a small business. And the greatest area of difficulty in
delivering health coverage to people was through small
businesses that wanted very much to provide health coverage to
their employees, but they couldn't afford what the coverage
cost in the market. That's why we undertook a program called
Insure Montana, before the ACA, before the Massachusetts plan,
that provided refundable tax credits to help those small
businesses afford health insurance.
Mr. Pallone. All right. Just one more question. Based on
your experience, how have CO-OPs served the rural West and
States such as Montana? Has it provided important competition
and access to health care that previously didn't exist?
Mr. Morrison. Well, CO-OPs have a great tradition in rural
America. I think Senator Conrad, when he introduced the idea of
a CO-OP at the time of the ACA's enactment, talked about those.
But people in our part of the country and across the great
expanse between the coasts in the United States have long used
the CO-OP model for credit, for electricity, for agriculture,
and for other kinds of needs where they want to spread risk and
spread expense to be able to deliver the goods and services
that they need.
Mr. Pallone. All right. Well, I'm obviously concerned that
if we don't shore up the remaining CO-OPs, we may again find
ourselves lacking adequate competition and choices in rural
areas. But thank you.
And thank you, Mr. Chairman.
Mr. Murphy. Thank you.
Dr. Bucshon, you are recognized for 5 minutes.
Mr. Bucshon. Thank you, Mr. Chairman.
I just would like to say at the outset, I'm a strong
believer in competition is the way to drive down healthcare
costs. And I was a provider before I was a heart surgeon, so
I'm also a believer in provider competition, including price
transparency, quality transparency, and other measures that
help consumers know what product they are getting and help to
drive down healthcare costs, and I'm working towards those
ideas.
And I think it's unfortunate that we are in the situation
we are now with the CO-OPs and we need to figure out why and
what we can do to prevent the others from going under.
Mr. Morrison, CMS is--well let me see--yes. I'll say this.
CMS has cited enhanced oversight plans is a measure to evaluate
troubled CO-OPs. These plans are being critiqued as ineffective
and burdensome to CO-OPs. This would be for Mr. Beilenson
first. Has your CO-OP been placed under an enhanced oversight
plan from CMS?
Dr. Beilenson. Yes, as far as we know, most of the CO-OPs
have been put----
Mr. Bucshon. Most of them have.
And what kind of requirements have they put upon you based
on that?
Dr. Beilenson. There are only two. One is enrollment
getting to 30,000. We are at 26,500 today. Clearly, we'll hit
that by the end of December. December is a big month. And,
second, there's a resolve transition of our TPA, which we've
already done. So we expect to come off of the corrective action
plan.
Mr. Bucshon. Great. And do you believe that these oversight
plans can be effective?
Dr. Beilenson. I think the oversight plans can be
effective, yes.
Mr. Bucshon. Mr. Morrison, you have some comments on any of
this?
Mr. Morrison. I would just say that it has certainly been a
challenge for CO-OPs to face, not only state regulation, but
several levels of CMS regulation and congressional oversight
investigation, which began before the CO-OPs ever opened their
doors. And so there's no question that administrative resources
in these CO-OPs have been distracted and diverted to comply
with multiple levels of regulation that far exceed the
regulation of other carriers.
And at the same time, I understand that the Federal
Government needs to look after its money.
Mr. Bucshon. Understood.
And just a personal kind of question, unrelated, really, to
CO-OPs. I mean, creating more competition, and anyone can
answer this. Is expanding the traditional healthcare private
insurance market across the country rather than having,
essentially, state-based or regionally based, is that a concept
that would work to create more competition? I think the state
regulators would probably want to commend on that. Mr. Donelon?
Mr. Donelon. May I? Thank you very much, Congressman. And
great question, doctor.
And I would caution my Republican colleagues, who have made
a strong push toward authorizing companies to sell health
insurance on a national basis, which they can do already, but
subject to the individual State's regulation.
I would be concerned about a race to the bottom and the
least regulation, similar to what happened with the AIG
failure. And that concern is truly--I had a meeting with one of
my delegation members before coming here this morning and
passed on that advice and caution to him.
I do want to point out one other thing when Congresswoman
Blackburn and Commissioner McPeak were discussing, Tennessee is
better served than Louisiana at this point. Their HMOs are
protected by a guarantee fund safety net, unlike Louisiana,
where we have tried that in the past but unsuccessfully.
The Ranking Member DeGette, was talking about a Federal
backstop. That has traditionally been done at the state level
and should be done at the state level.
Mr. Bucshon. OK.
Mr. Donelon. In closing I would say, please, support state-
based regulation. It has served all forms of insurance
extremely well for over 100 years. When I was NAIC president 3
years ago and was asked to come the Oval Office and meet with
the President, he strongly expressed his continued support for
regulation of insurance at the state level.
Mr. Bucshon. OK. Fair enough. I expected that you and Ms.
McPeak would probably have a similar comment. So I would go to
the others.
Any other conceptual thoughts on that? Because the whole
idea is to create competition for consumers to have more
choice, to know what the product they're getting, and to help
the consumers drive down the costs of health care.
Mr. Morrison, then we'll----
Mr. Morrison. I'm a former commissioner, too, and I
testified in 2005 in the Senate Small Business Committee about
the AHP bill, and I opposed it for the same reasons that
Commissioner Donelon articulated.
Mr. Bucshon. Ms. McPeak.
Ms. McPeak. The only point that I would want to add to your
question, that I think we would have more interest in companies
selling across state lines if we had uniform essential health
benefit plan designs. Because each state has their own
essential health benefits, it's very difficult for a company to
sell across state lines and program their systems to pay for
different benefits and different benefit levels in Kentucky as
opposed to Tennessee as opposed to Mississippi or Georgia.
Mr. Bucshon. Yes, and whose state laws apply, right? If you
live in California and have a plan from a company owned in New
York, which state's laws would apply? I know there's some
challenges. And my time is up.
Ms. McPeak. OK.
Mr. Bucshon. So, I appreciate all your comments.
I yield back.
Mr. Murphy. Thank you.
Ms. Castor, you are recognized for 5 minutes.
Ms. Castor. Thank you, all, very much for being here today.
Under the Affordable Care Act, Congress wanted to foster
more competition among insurance providers to benefit
consumers. This was one of the primary reasons behind the
formation of the CO-OPs. And to some extent, as we've heard
here this morning, they have achieved their goal, somewhat.
However, the CO-OPs have faced headwinds. And I would like
to understand from our witnesses how CO-OPs can continue to
meet the original goals of providing the public with more
insurance choices and benefits achieved through greater
competition?
Mr. Morrison, for those who may not closely follow
healthcare economics, why are CO-OPs an important ingredient in
today's insurance market?
Mr. Morrison. The insurance markets were lacking
competition to begin with, and now we see in the news that
there is increasing mergers of the largest health insurance
companies in the country. There's mergers of the largest
hospitals in the country. What's happening is consolidation,
and the need for competition has never been more greater than
it is today.
CO-OPs can come into the marketplace and have a
fundamentally different kind of motive. Their motive is not to
make as much money as they can. Their motive is to deliver
quality health care at an affordable price, and that guides
corporate decisions in a different kind of way. And that kind
of competitive influence can be very positive in the
marketplace.
And in short, to answer your question, what they need in
order to succeed in the future, eventually, they will stand on
their own, but they need adequate capital until they can get
their sea legs in this new marketplace.
Ms. Castor. OK. Mr. Beilenson, similar question for the lay
person, how do CO-OPs foster competition? How can they keep
premium prices in check?
Dr. Beilenson. Well, I think as a new competitor on the
market and additional competitor, we as, Mr. Donelon, state,
have a big insurance company that's 75 percent of the
marketplace, and so adding a new competitor is very important.
And I want to point out a couple of things about a CO-OP.
First of all, we are member governed. I actually sort of pooh-
poohed that when we started the company, but it really makes a
difference having members enrolled in your insurance company as
the board of directors. We've gotten all sorts of great ideas,
and it's very consumer-driven, consumer friendly, as the CO-OP
program was meant to be.
Secondly, it allows for innovation. We're nimble; we're
quick. We're like a, sort of like--a Titanic I shouldn't use.
Sort of like the giganto ship, Lake Erie or whatever. Instead,
we're sort of a nimble PT boat, if you will, for Mr. Kennedy
over there. And we can do innovative things like our diabetic
program, where we get rid of all co-pays, co-insurance,
deductibles for proven practices to keep diabetics under
control so we get rid of financial barriers to have them
staying healthy. That's sort of the sweet spot of healthcare
reform.
Ms. Castor. How many Americans are enrolled in CO-OPs
today? Do you know?
Dr. Beilenson. Depends on how many are left. I'm not sure,
500----
Ms. Castor. Does anyone know?
Dr. Beilenson. 400,000 something in the remaining 11.
Ms. Castor. In March 25th, 2015, press release from the
National Alliance of State Health CO-OPs, said for the second
year in a row, average premium rates in the states with CO-OPs
are lower than those without.
Mr. Beilenson, can you explain how, in reality, what has
actually happened? How have the CO-OPs affected the premium
prices and plan choices in those states where they are still
operating?
Dr. Beilenson. Well, predominantly, it was actually being a
new competitor in a generally staunchly over the market--for
example, in Maryland, we were the first new commercial insurer
in 25 years, and that was the case in many different states.
Ms. Castor. And that same release cites another analysis
from 2014 that showed that CO-OP states have premiums that are
8 to 9 percent lower than in non CO-OP states. Is that
accurate? Were CO-OPs able to drive down the premium rates in
2014?
Mr. Morrison. The delta between the CO-OP states and the
non CO-OP states in 2014 was, as you said, about 8 percent, a
little more than that. And apparently, in 2015, it was more
like 13 percent. We believe that CO-OPs played a significant
role in that, and, frankly, there have been other insurance
executives who have commented in the media that they thought
that the CO-OPs were responsible for the rates being lower in
those states. But as the question requires further study
because, obviously, there are other factors at work.
Ms. Castor. And there are other trends right now, as Mr.
Beilenson mentioned. The health insurance industry is facing a
wave of consolidation such as Aetna and Anthem are considering
merger and purchasing their smaller rivals.
Mr. Morrison, if additional consolidation between large
insurance companies occurs, what will this do to prices? Will
we expect higher premiums as a result?
Mr. Morrison. Generally, competition drives lower prices.
And so if there's less competition, there's higher prices. And
so we think that's one of the reasons that the CO-OPs were
created, and we take that mission pretty seriously--the CO-OPs
I should say do.
Ms. Castor. Thank you. We have work to do on this for
consumers in the country. Thank you very much.
Mr. Morrison. Thank you.
Mr. Donelon. Mr. Chairman, may I be excused? I have a
flight that leaves in 38 minutes.
Mr. Murphy. Good luck getting to the airport. You are
excused.
Mr. Collins is recognized for 5 minutes.
Mr. Collins. Thank you, Mr. Chairman. And thank the
witnesses for coming in today. I'm a private-sector guy that
understands how you're supposed to make money in business, how
you capitalize companies, and how you either fail or succeed
based on your pricing and your product, and what you've
delivered to your customers. And basically, if you make money,
you succeed; and if you lose money, you don't.
So, we're here today talking about CO-OPs in particular.
And I'm from New York, where the New York CO-OP and its failure
cost the American taxpayers over $250 million. Well, somebody
asked me if I'd be surprised we're here today. Well, no, I
predicted this over 2 years ago. I remember sitting down with
some insurance executives, health insurance people, in early
2013 and asked them how they were going to be pricing their
products for ObamaCare and for the enhanced benefits. And what
basically came out of those meetings is they were going to
underprice their products because of the risk corridors, and
they were confident they would get the money back.
Because I said, well, what are you presuming for the number
of healthy subscribers under age 30? Well, a third of our
subscribers will be young and healthy. And I said, what are you
guys smoking? That's not gonna happen. And what's going to
happen when it doesn't? Well, we are going to lose money, then
the government is going to make it up to us. This was set up
for failure from day one. The insurance companies knew it was
going to fail. They released a product that was underpriced.
They could not make money.
So, Mr. Morrison, when you talk about it being not
capitalized properly, would you agree with me if the CO-OPs
made money, we wouldn't be having this discussion? You don't
need more capital if you start with X and you make money. Isn't
that just fundamental common sense?
Mr. Morrison. I would agree with that.
Mr. Collins. So----
Mr. Morrison. All the companies lost money.
Mr. Collins. So we are here because ObamaCare was set up
for failure. It was set up to encourage low premiums, to
deceive the American public.
You know the saying, you can put lipstick on a pig, but
it's still a pig. That's what we've got here. Everyone knew
these products were underpriced and they were going to make it
up on the backs of the taxpayers, and that's why we're here
today. This problem here is a product that was underpriced,
knowingly underpriced, meant you lost money, and now the
complaint is we cut the money from $2.4--from $6 to $2.4
billion, but the $6 billion was based on 50 CO-OPs. The 23 got
$2.4 billion. They got every dollar they were supposed to get.
Had we not cut from $6 to $2.4, there would be 50 CO-OPs.
So I kind of have to just categorically disregard your
comment that had we thrown $6 billion, but I think you're
suggesting throwing $6 billion at 23 CO-OPs would have shored
them up. But that was never the intention. The $6 billion was
for 50 CO-OPs. The 23 were not harmed in any way. They failed
because the product was underpriced. It was knowingly
underpriced.
ObamaCare was meant to deceive the public, and all I can
say is, as now we're a couple of years in, the deception is
obvious. And I don't know what the polls would say, and I'm not
a guy to poll, but I think ObamaCare now would be probably in
the 20 percent range.
And now we've got these problems. New York, 150,000 members
on the New York plan lose their insurance in 2 weeks. And you
know what we're doing, we're forcing the private companies to
take those policyholders for 30 days who have all hit their
deductibles. So the BlueCross BlueShield, Independent Health,
they are going to have to take these 150,000 people for 30
days, eat those losses, and then have those folks set up a new
plan. This is ObamaCare at its worst. It's not surprising to
me. I saw this coming 3 years ago, only because I have a
certain level of common sense and know in the private sector,
if you underprice your product, there will be a price to pay.
And this product was deliberately underpriced from day one.
And then when people say, woe is me, the risk corridor didn't
give me as much money as I expected, that's because you
expected to lose a lot of money and thought the taxpayers
should shore that up, and it didn't happen. So I can't say I
feel sorry for the American taxpayers who are bearing this
financial burden who were deceived from day one, and it's all
coming home to roost. And we see it every day with the price
increases and policies, the turmoil within the American public
trying to find doctors day in and day out.
So, again, private sector, you make money, you do fine. You
lose money, you don't do fine. Not a surprise we're not doing
fine here. The product was never priced correctly.
Mr. Murphy. Mr. Collins----
Mr. Collins. And with that, I yield back.
Mr. Murphy. I was asking, can you give an answer with
regard to would you have priced it differently if there were
not risk corridors from the onset? Would you price it a higher?
Yes or no? Just in response to what he said.
Dr. Beilenson. No, we actually priced conservatively, and
we were actually making a profit the last 3 months.
Mr. Murphy. Ms. McPeak, was that a backstop that you saw
that would cover those losses and it didn't work?
Ms. McPeak. I don't know that I would characterize as a
backstop. But certainly, the incentive to appropriately price
was eliminated when any excess profit of needed to be paid back
to the other insurers. So unless the entire market priced
appropriately, you were going to be pricing yourself out of the
market not having the enrollment.
Mr. Murphy. And that's what you're saying. Got it. Thank
you.
OK. Mr. Yarmuth, 5 minutes.
Mr. Yarmuth. Thank you, very much, Mr. Chairman.
I thank the witnesses. I actually think this has been a
very constructive hearing, and the dialogue has been good. It
seems to me that what we've heard today is that there are a lot
of different experiences with CO-OPs and a lot of different
reasons some have had problems.
My CO-OP in Kentucky did not have an enrollment problem. As
a matter of fact, the initial projection was about 30,000
enrollees. It peaked at 57,000 and was insuring 51,000 when it
announced that because of the risk-corridor deductions it
cannot sustain itself. But, in fact, it had gone from losing
$50 million in its first year to losing $4 million in 2015 and
was on track to make a profit in 2016. So not every experience
has been right.
And I think looking at the various factors that could
affect this, Commissioner McPeak, Tennessee didn't expand
Medicaid.
Ms. McPeak. That's right.
Mr. Yarmuth. And this is not a partisan statement, but
Tennessee did not have an administration that supported,
necessarily, the Affordable Care Act. So as opposed to
Kentucky's experience, where you had an administration that was
very much supportive in marketing it and running a PR campaign
and alerting the population to the options that were available
to them, that experience was going to be different than
Tennessee's or Louisiana's, where, it seems to me, you had an
enrollment problem first and foremost.
Would that be a fair statement that all of these factors
would affect how the CO-OPs operated and whether they had a
better or worse chance of succeeding?
Ms. McPeak. Certainly. And I will say statewide, we had a
very positive enrollment through the federally facilitated
marketplace. So we did not expand Medicaid. But the skewed
enrollment of less than 1,000 people for the CO-OP made it
extremely difficult to survive.
Mr. Yarmuth. Exactly. And, obviously, we have different
health conditions as well. Montana probably has a lot healthier
population than Kentucky and Tennessee. I know Kentucky, we
have serious challenges in that regard.
But one of the things that impresses me, and this relates
to just Mr. Collins' statements, is that while our CO-OP is
going out of business, we have three new private insurers who
have joined our exchange. We now have seven insurers who are
offering insurance and not relying on risk corridors. So they
have seen opportunity in Kentucky and not a disastrous
situation.
And so our consumers are going to, as a result partially of
the CO-OPs competition and their activities, we're going to see
enhanced competition in the private market through our
exchange. So it could have an ancillary benefit as well. Would
that not be true, Mr. Morrison?
Mr. Morrison. That's very encouraging, and I think that the
benefits of introducing a CO-OP into the dynamics of the
marketplace has lots of ripple effects, and that was one that I
wasn't even aware of. So glad to know about that.
Mr. Yarmuth. And one other thing. Senator just asked, we
talked about the question of how can you offer insurance
policies of 20 percent less than commercial insurance company
can? Well, if there's no profit margin involved, so you can. I
don't know whether it would be a 20 percent different as to the
profit versus a nonprofit CO-OP, but there's some factor there
that would allow a CO-OP to offer pricing that even apples to
apples would be below what a commercial for-profit insurance
company could offer. Would that be correct?
Mr. Morrison. Yes, that's true. But I want to make the
point that the CO-OPs generally were not outliers on the low
end in price. And McKinsey did a report in late 2013 about
those initial prices, and CO-OPs were toward the bottom. They
were within 10 percent of the lowest 42 percent of the time.
But the point is, when these companies set their prices and
file them with the commissioner, they don't know what the other
companies are doing. And so the mere fact that the CO-OPs were
there caused the other companies to price more aggressively.
Mr. Yarmuth. So what I'm taking away from this is that
there are lot of different reasons the CO-OPs have either
succeeded or not succeeded, and I think this is a very useful
hearing to analyze that, not necessarily to ascribe blame, but
to take about the factors that are involved. I think what I
would conclude is there was not a fundamental flaw in the
Affordable Care Act that caused any of those CO-OPs to fail.
They were different factors, just as there is in any business
situation.
With that, Mr. Chairman, I yield back.
And thanks again to the witnesses.
Mr. Collins [presiding]. I thank the gentleman for
questions and certainly thank all the witnesses. This will
conclude our second panel, and you can rush to the airport if
you've got any tight flights. I want to thank the members that
did stay. It is a flyout day. We had so many members that had
flights to connect. We had two vote series, so to some extent,
I apologize for the attendance.
Thank the members that did stay, and your testimony, which
is on the record, is very helpful. Thank you very much
So we are now going to bring on our third panel, which is
our representative from CMS and our representative from OIG.
We will begin our third panel here. I want to thank the
witnesses, Dr. Cohen and Ms. Jarmon, for joining us today.
Before we get going on this committee, we want to make sure the
witnesses are aware that we are holding an investigating
hearing, and when doing so, we have the practice of taking
testimony under oath. Do you have any objection to testifying
under oath?
The chair then advises you that under the rules of the
House and the rules of the committee, you are entitled to be
advised by counsel. Do you desire to be advised by counsel
during your testimony today?
No. In that case, if you would, please rise, raise your
right hand. I will swear you in.
[Witnesses sworn.]
Mr. Collins. Thank you very much. Be seated. You are now
under oath and subject to the penalties set forth in title 18,
section 1001, of the United States Code.
We now recognize you to give a 5-minute summary of your
written testimony beginning with Dr. Cohen, chief of staff for
CMS.
Dr. Cohen?
STATEMENTS OF MANDY COHEN, CHIEF OF STAFF, CENTERS FOR MEDICARE
AND MEDICAID SERVICES; AND GLORIA L. JARMON, DEPUTY INSPECTOR
GENERAL FOR AUDIT SERVICES, OFFICE OF INSPECTOR GENERAL, U.S.
DEPARTMENT OF HEALTH AND HUMAN SERVICES
STATEMENT OF MANDY COHEN
Dr. Cohen. Thank you. Good afternoon, and thank you for
inviting me here. Chairman Murphy, who I know has gone, but Mr.
Collins, Ranking Member DeGette, and other members of the
subcommittee. We appreciate the opportunity to talk about the
CO-OP program. CMS takes its commitment to both the CO-OP
consumers and taxpayers very seriously. Our priority is to make
sure that consumers have access to quality affordable coverage.
In the years since the passage of the Affordable Care Act,
we have seen an increase in competition and more choices for
consumers. In today's dynamic market, consumers can choose from
on average 50 plans and five issuers for 2016 coverage. Nearly
9 out of 10 returning consumers will have three or more issuers
to choose from, which research shows has typically intensified
price competition in the market. New entrance to any market,
especially the insurance market, can face pressures
particularly in early stages.
CO-OPs entered the insurance market with a number of
challenges including building a prior network; no previous
claims experience on which to base pricing; and competition
from larger, more experienced issuers; as well as the
uncertainty that a company is in the early years of a new
market. As with any new business venture, some CO-OPs have
succeeded while others have encountered more challenges. There
have been successful CO-OPs which have provided consumers in
their states an additional choice of health insurance and have
improved competition. There have also been CO-OPs that for a
number of reasons have faced technical, operational, or
financial difficulties. In addition, Congress has made a
substantial rescission to the initial $6 billion for funding
for CO-OPs, impacting program operations and available funding.
In the face of multiple pressures, it is not surprising that
some new entrants have struggled to succeed.
CMS plays a dual role with the CO-OP program, providing
both oversight and support. CMS works to give CO-OPs tools to
succeed, including sharing best practices amongst CO-OPs, and
looking for additional regulatory flexibilities. At the request
of CO-OPs, CMS has approved conversion of surplus notes, and we
have approved the infusion of outside capital consistent with
legal and regulatory framework of the CO-OP program. CMS also
plays an oversight role. CMS, along with state departments of
insurance, which serve as the primary regulator of insurance in
a state, work to ensure that the CO-OPs are well run and
financially sound. CMS has implemented the CO-OP program as
required by statute and with the funds available, evaluating
applications, monitoring financial performance, and conducting
oversight. All CO-OPs are subject to standardized, ongoing
oversight activities, including calls to monitor goals and
challenges, periodic onsite visits, performance and financial
auditing, reporting obligations, and a host of additional
measures employed as needed on a case-specific basis, such as
the evaluation of CO-OP sustainability. CMS increased the data
and financial reporting requirements for CO-OPs required for
them to provide quarterly statements saying that they are in
compliance with state licensure requirements. If a CO-OP has
experienced compliance issues with state regulators, the CO-OP
was required to describe the steps being taken to resolve
those.
Financial data collection has helped CMS to identify CO-OPs
with financial issues and give CMS the opportunity to work with
state insurance regulators to help correct issues that are
identified. As part of our oversight efforts, CMS has put some
CO-OPs on enhanced oversight schedules or corrective action
plans. Despite this support and oversight, some new entrants to
the insurance market have struggled to succeed.
When states and CMS determine that a CO-OP should wind
down, our first responsibility is to make sure current
policyholders are able to retain coverage to the end of the
year. CMS' priority is to make sure that customers have access
to quality, affordable coverage. We're working with local
officials to do everything possible to make sure consumers stay
covered and retain access to high quality choices of issuers.
Like other consumers, CO-OP enrollees are able to shop for 2016
coverage on the marketplace right now.
In 2016, nearly 8 in 10 returning marketplace consumers
will be able to buy a plan with premiums less than $100 a month
after tax credits. We continue to encourage those consumers
already enrolled in the marketplace coverage to come back to
the marketplace, update their information, compare their
options, and make sure they're enrolled in the plan that best
meets their family's needs. Since the enactment of the
Affordable Care Act, CMS has worked to increase access to
quality, affordable coverage through the marketplace while
being responsible stewards of taxpayer dollars. The CO-OP
program was designed to give consumers more choice, promote
competition, and improve quality in the insurance market and
has done so in a number of states. CMS will closely work with
the CO-OPs and state departments of insurance to provide the
best outcomes for consumers. We appreciate the subcommittee's
interest and be happy to answer more questions.
[The prepared statement of Ms. Cohen follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Collins. Thank you, Dr. Cohen.
Now we'll hear from Ms. Jarmon.
STATEMENT OF GLORIA L. JARMON
Ms. Jarmon. Good afternoon, Mr. Collins, Ranking Member
DeGette, and other distinguished members of the committee. I am
Gloria Jarmon, Deputy Inspector General for Audit Services,
Department of Health and Human Services, Office of Inspector
General. Thank you for the opportunity to testify today about
OIG's work as it relates to CMS' oversight of financial loans
and the financial solvency of the Consumer Operatedand Oriented
Plans.
As part of our strategic plan to oversee implementation of
ACA programs, OIG has performed three reviews related to CO-
OPs. My testimony today focuses on OIG's most recent report
issued in July 2015 that reviewed whether enrollment and
profitability met the CO-OPs projections on their initial loan
applications. Understanding that CO-OPs face numerous
challenges, we conducted this audit work to assess the
financial and operational status of the CO-OPs once they had
experience operating as a health insurer. We reviewed the
status of the 23 CO-OPs as of December 31, 2014. We found that
most CO-OPs had lower than expected enrollment numbers and
significant net losses and that these financial concerns might
limit some CO-OPs' ability to repay loans.
Based on these findings, OIG issued four recommendations to
CMS to improve financial oversight and solvency of the CO-OPs.
These recommendations include: One, continue to place
underperforming CO-OPs on enhanced oversight or corrective
action plans; two, providing guidance or establishing criteria
to determine when a CO-OP is no longer viable or sustainable;
three, working closely with state insurance regulators to
identify and correct underperforming CO-OPs; and, four,
pursuing available remedies for recovery of funds from
terminated CO-OPs. I will briefly discuss each of these
recommendations in more detail.
With respect to enhanced oversight, with the 2011 funding
opportunity announcement and loan agreements, CMS has the
ability to place underperforming CO-OPs on enhanced oversight
plans. This vehicle provides authority to CMS to conduct
thorough reviews of the CO-OPs' operations and financial
status.
With respect to guidance, to ensure that CMS can
appropriately identify CO-OPs that pose a high risk of failure,
CMS should establish criteria to assess whether a CO-OP is
viable or sustainable. With respect to state insurance
regulators, CMS should enhance its oversight by working closely
with State insurance regulators who are the primary regulatory
entities that oversee CO-OPs as health insurance issuers. By
doing this, CMS can obtain timely insights as to the CO-OP's
performance and can work with CO-OPs to address and fix ongoing
financial and operational problems earlier.
Finally, if CMS no longer believes that a CO-OP is viable
and sustainable, CMS should then pursue all available remedies
for recovery of funds from CO-OPs. This would include the
option to terminate loan agreements which would require the CO-
OP to forfeit all unused loan funds. This may allow CMS to
recover some portion of the loan with the recognition that a
CO-OP must resolve any outstanding debts or other claim
obligations before paying the loan funds to CMS.
In closing, we appreciate the subcommittee's interest in
this important issue and continue to urge CMS to fully address
OIG's recommendations related to improving oversight and
financial solvency within the CO-OP program. OIG is committed
to providing continued oversight of this program. Our ongoing
work will assess whether CO-OPs were in compliance with Federal
regulations and program requirements in managing Federal funds.
In addition, OIG will reassess the CO-OPs 2015 financial status
and identify CMS actions to oversee the loan program and
monitoring underperforming CO-OPs. We anticipate issuing these
reports in 2016, and we look forward to sharing those results
with the committee at that time.
This concludes my testimony. I will be happy to answer any
questions. Thank you.
[The prepared statement of Ms. Jarmon follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Collins. Thank you.
I'll now recognize myself for 5 minutes, and I guess, Ms.
Cohen, I'm just going to start and accept you at face value
when you say CMS does consider themselves responsible stewards
of taxpayer dollars. Today's hearing kind of begs the question
whether that's totally accurate or not. Before I get into a
couple of other questions, there have been comments made that
would somehow try to correlate states that did not increase,
expand Medicaid to some of these failures on CO-OPs, and I
guess I would just point out for the record, New York State
absolutely aggressively expanded Medicaid, actively promoted
ObamaCare, probably more so than most any other state in the
country, and the hearing today is recognizing the failure of a
CO-OP that was oversubscribed--not undersubscribed--and cost
the taxpayers over $250 million, which is almost 25 percent. So
I don't know that some of these other comments would accurately
portray the problem. I'll just go back to the products were
underpriced from day one, and if you underprice your product,
there will be a price to pay.
So, Ms. Cohen, my worry now about New York and the loss of
$250 million plus--Dr. Cohen, sorry--that it appeared that the
New York CO-OP was in distress right from the beginning, lost
over $35 million in the first year. I'm assuming you're aware
that there was an additional loan of $91 million after they
lost $35 million, so could you speak to what that rationale was
that the taxpayers now lost another $91 million?
Dr. Cohen. Sure. As we looked at the CO-OP program over the
first few years, I think you have heard a lot about the early
years having uncertainty. We're still in that. We're only in
the second year of the program in terms of folks facing a
number of challenges. When any CO-OP approached us with any
additional requests for funds, we evaluated that on an
individual basis as we did even the startup of any one of these
companies. We looked at their financial health at that time,
their projection of where they were going to go, how they
intended to get to a place of good standing, again, to say that
we want to be good stewards of taxpayer dollars and want to be
sure that if we are going to be further investing in a company,
that we are going to be seeing those dollars. So we can only
look at the information we have on hand at that time. At that
time, our independent expert panel who reviews these felt that
a further investment in New York, in the New York CO-OP, was
the right decision. And we moved forward with that investment.
We continue oversight and information, and facts on the ground
change, and we make different decisions as we move forward.
Mr. Collins. With that said, I would appreciate if you
could provide the committee with the analysis that you indicate
did occur that after losing $35 million in their first year, I
have to presume that analysis would include such things as the
difference in the, I would hope, much higher rates charged in
2015? Let me just start with that. They lost a lot of money in
2014, based on rates that weren't adequate to cover losses.
Were the rates substantially increased the next year, like 20
percent or more?
Dr. Cohen. It's important to remember that CMS shares in
partnership the oversight responsibility here, but the
responsibility for rate setting is done at the State level in
the New York Department of Insurance, or DFS, in New York is
the one primarily responsible for saying, are these rates
adequate to cover the expenses?
Mr. Collins. And was that done?
Dr. Cohen. So they do their own rate review in New York. As
you know, New York also runs its own exchange. So from our
perspective at CMS, we do do oversight in terms of the
financial stability of the program, according actually with how
OIG recommended our additional enhanced oversight. But the
rates themselves are set by New York, by the company, and then
approved by the State Department of Insurance.
Mr. Collins. So do you know much the rates were increased
for 2015?
Dr. Cohen. I don't have off the top of my head, but I know
that they did request and were granted a rate increase for
2015.
Mr. Collins. I think it's just important to note again that
it's a little concerning that CMS is making a $91 million loan
based on what sounds like an analysis done by the New York
State Department of Insurance, which ultimately was proven, by
the fact that they're now shutting down, to have been totally
bogus. So if you could share that information back with the
committee, I think we could learn something from that.
Dr. Cohen. I would be happy to provide that.
Mr. Collins. I certainly appreciate that.
And Ms. Jarmon, my office will be sending you a letter to
ask for even a more thorough investigation of what happened in
New York State and what we may learn from the failures of the
New York state CO-OP, and again thank you for that.
And, with that, I would recognize Ranking Member DeGette
for 5 minutes.
Mr. DeGette. Thank you so much, Mr. Chairman.
I want to thank our witnesses for coming today, and I want
to start with the risk-mitigation mechanisms in the law, which
we commonly refer to as the three Rs, as I mentioned earlier.
Those were designed to promote competition and ensure stability
in the insurance marketplace. Is that correct, Dr. Cohen?
Dr. Cohen. That's right.
Mr. DeGette. And yet some would argue that those programs
are what have led to the insolvency of the CO-OPs. I don't
really understand how programs that were designed to help the
CO-OPs could wind up hurting them. Let me go into that a little
bit. The risk adjustment program is designed to transfer funds
from lower risk programs to higher risk programs. Is that
correct, Dr. Cohen?
Dr. Cohen. The risk adjustment program is designed to again
make sure that companies are taking care of the people who
really need the care, those that are sick, and making sure
they're not just cherry picking the healthy folks but really
offering coverage to anyone who walks through the door.
Mr. DeGette. What that does then is it transfers money then
from lower risk plans, where there aren't so many severely sick
people, to higher risk plans. Right?
Dr. Cohen. That's right.
Mr. DeGette. Given that, how is it that the CO-OPs wound up
owing money to big insurance companies through the risk
adjustment program?
Dr. Cohen. Right. So the risk adjustment program is not
based on size. It's agnostic to size, but as you point out,
what it's really looking at the math formulas focused on the
total risk and the health of the population.
Mr. DeGette. So there was nothing in the statute to target
not for profit or profit?
Dr. Cohen. No. It's agnostic as to----
Mr. DeGette. Was that the intention of the program. Do you
know?
Mr. DeGette. It was intended to be a risk program for all
of the insurers that participated in the marketplace.
Mr. DeGette. Now, the risk corridor program also ended up
not coming through to the CO-OPs as we learned very painfully
in Colorado in the last couple of weeks, and some State
insurance commissioners, including mine, made management
decisions based on the CO-OP's inability to deal with losses,
so I want to ask you some questions about that. The 2015 CR/
Omnibus legislation made it so insurer payments into the risk
corridor program are the only source of funding to reimburse
claims, effectively making the program budget neutral. Is that
correct, Dr. Cohen?
Dr. Cohen. It is a mathematical formula that decides the
proration rates or the ins and outs of that program, but yes,
you're correct.
Mr. DeGette. I'm correct. Thank you. Now, in July of 2015,
couple months ago, CMS reiterated to state insurance
commissioners that they, ``anticipate that risk corridor
corrections will be sufficient to pay for all risk corridor
payments.'' Is that correct, Dr. Cohen?
Dr. Cohen. That's correct.
Mr. DeGette. And yet just a few weeks ago, CMS revealed it
would only be able to pay 13 percent of the reimbursements that
the CO-OPs are owed. Is that correct?
Dr. Cohen. That's right.
Mr. DeGette. So why is that?
Dr. Cohen. As I mentioned, that formula is based on
information that we got from the issuers themselves. That was
not information that CMS had prior to the month of September.
Originally, that data came in, as you may know, over the course
of the month of July, and it was actually so messy we needed
issuers to resubmit it.
Mr. DeGette. But see, here's the problem. In July, you're
saying it's going to be sufficient to cover all risk corridor
payments, and then, in October, you're saying, oh, it's only 13
percent. So irrespective of whether you had the data, you had
CO-OPs like the one in my State with 83,000 people in it, who
were relying on that. I guess it was bad information.
Dr. Cohen. I think it's important to remember that the risk
corridor is one of three, ours as you mention, and in the
reinsurance program, we actually paid 25 percent more than we
thought we would be able to pay. Again----
Mr. DeGette. But, again, if you have a CO-OP that's on the
edge, that didn't solve that problem. I'm running out of time.
I just want to ask you a couple of questions. Do you think that
you can do anything to give more certainty to this program
without statutory changes? Yes or no?
Dr. Cohen. Could we give more certainty to the program?
Mr. DeGette. Can you make changes that would give more
certainty to these CO-OPs so they could stay in business
without statutory changes?
Dr. Cohen. I think we are always looking for opportunities.
Mr. DeGette. If you can supplement your responses by giving
us the ideas. Do you believe that there are statutory changes
that Congress could pass to give more certainty?
Dr. Cohen. I think that there are opportunities, yes, for--
--
Ms. DeGette. And that would be helpful if you would
supplement that too.
Thank you very much, Mr. Chairman.
Mr. Collins. Yes. I thank the ranking member for her
comments.
We'll now turn to Dr. Bucshon for 5 minutes.
Mr. Bucshon. Thank you, Mr. Chairman.
And I thank the witnesses for being here.
So, Dr. Cohen, who ultimately made the decision to give out
$91 million to New York, as was said; $66 million to Minutemen
Health; $65 million to Kentucky Health CO-OP? I can go on, but
three of--there's a few more, but three of the six that I have
listed here failed. So I want to know the person that made the
decision to give them the money.
Ms. Cohen. So we had a very rigorous process with an
outside----
Mr. Bucshon. Here's the thing. I know you've already
described your process. I understand you have outside people
that look at all the data. But what I want to know is someone
put their signature on the loan from CMS and said: We're giving
them this money. Who did that?
Ms. Cohen. I don't know who signed the loan agreements, but
I can get back to you----
Mr. Bucshon. Was it you?
Ms. Cohen. It wasn't me, sir.
Mr. Bucshon. I didn't expect it would be.
Ms. Cohen. I can let you know and----
Mr. Bucshon. Yes, I'm sure you'll have every intention of
doing that, but I can tell you as a Member of Congress with
experience asking these questions that I'll never find the
answer to that because no one's going to take that
responsibility, and I understand that. But do you know if it
was a political appointee or a full-time CMS staff?
Ms. Cohen. I don't know who signed the loan agreements,
but, again, I can talk more about the process that we went
through in terms of evaluating the information that we had
understanding the----
Mr. Bucshon. Yes, I understand.
Ms. Cohen. But we can get you that information.
Mr. Bucshon. Dr. Cohen, you also testified before Ways and
Means, and they asked when CMS knew the CO-OPs would fail. And
it says you didn't really give a clear answer. So I'm going to
ask it. When did CMS know these CO-OPs would fail?
Ms. Cohen. We have been doing oversight of the CO-OP
program since its inception. And each circumstance is very
unique. And there were different periods of time where we had
information in front of us. When we knew folks were potentially
going down the wrong path, we put folks in enhanced oversight,
on corrective action plans, and as information presented
itself, again, we took action. We really are still in the very
early stages of this program. And I think from the discussion
today you could see that we have taken our oversight
responsibilities very seriously. We do feel like we are trying
to be the best stewards of taxpayer dollars as possible.
Mr. Bucshon. I am going to run out of time. Is there
political pressure to keep these CO-OPs alive?
Ms. Cohen. Sir, I would say we are trying to do our best
job possible to make sure that consumers can know that if they
go to the marketplace now and want to sign you for the CO-OP,
that they are strong and stable. And that we have done a tough
job here. I think if there was another way that we could have
arrived here, we would have. But we've been doing some tough
work. Again----
Mr. Bucshon. OK. That doesn't answer the question, but I
understand that.
Why do we need the three Rs?
Ms. Cohen. So----
Mr. Bucshon. Because, like I think Mr. Collins pointed out,
if I was going to start a business out there somewhere, I
wouldn't rely on the three Rs to make sure that if something
didn't work out, I all of a sudden got a check from the Federal
Government. So fundamentally I get it, but, first of all,
answer this question real quickly: CMS has always said they
intended the risk corridor Program to be budget neutral. Is
that correct?
Ms. Cohen. So all of the three R programs----
Mr. Bucshon. No. That question specifically. Did CMS always
intend for the risk corridor to be----
Ms. Cohen. I don't know if always. I would have to get back
to you on that. I don't know if----
Mr. Bucshon. OK. Because that's what it says here on my
paper.
Ms. Cohen. I don't know if that wasn't something----
Mr. Bucshon. So then you can go into why we need the three
Rs in the first place. And I may know that may--I understand
you didn't make these decisions, but you're here and so----
Ms. Cohen. Happy to answer. So the programs were based on
our experience with the Medicare part D program, the drug
program in Medicare that had those three similar programs. As
you stand up any new market, there is uncertainty. We've been
hearing about a lot of that uncertainty earlier today. And so,
again, those programs, one, we wanted to make sure that sick
people weren't somehow not covered by the insurance. We want
those folks to be covered. The reinsurance program specifically
was to cover the cost of any high-cost enrollees in early
years. We know there may have been pent-up demand as----
Mr. Bucshon. So it's basically to capitalize the business.
Right? So that they have the capital to get off the ground.
Ms. Cohen. I think it's to keep premiums stable for
consumers----
Mr. Bucshon. OK. And following up on what Ms. DeGette said,
you thought earlier in the year that you were going to be able
to make the payments, and then you found out in October that
you couldn't. And basically what's the reason for that?
Ms. Cohen. Honestly, it's the math formula. It's the way
the data came in from the issuers. And that's the way the math
worked out. And so we were able to pay at 12 percent, which is
the dollars coming in, dollars going out. And that's the way we
move forward for this program. We've always said that we will
take from next year's collections and pay back to this year. It
is a 3-year temporary program.
Mr. Bucshon. OK. Thank you.
And I yield back.
Mr. Collins. Thank the gentleman for his questions.
Now recognize Mr. Yarmuth for 5 minutes.
Mr. Yarmuth. Thank you very much, Mr. Chairman. Welcome to
the witnesses.
I can help Dr. Bucshon out a little bit on the background
of the CO-OPs. One of the problems, we faced when we were
drafting legislation was that in certain states, the
availability of private insurance was limited to one provider.
Or I think, in Alabama, there was Blue Cross Blue Shield
dominated over 90 percent of the market. And in many states,
that was the situation--maybe not that high. But the idea was
to create competition, and the only way you could do it was to
create a new entity. We chose CO-OPs as a nonprofit. And the
idea was that you could that way create the kind of price
competition that was meaningful.
But we knew, and we knew in Kentucky when the CO-OP was
established--and I talked with them many times as they were
getting started--that they had no idea what kind of an insured
population they were going to have. They didn't know what the
age was going to be. They had no data to predict that. They
didn't know how many would enroll. They didn't know how many
would have never had any healthcare, so automatically once they
became insured, they would have a rush of care. They would try
to get tests and because they--or treat things that they had
never been able to treat before or whether they were going to
get people who had had medical care but just lost their
insurance. So the unpredictability of it was certainly the
rationale for that. And I'm really proud of the experience with
ACA in Kentucky. We have led the country in the reduction and
in the amount of uninsured. More than 50 percent of our
previously uninsured are now covered, more than 520,000 people
in a state of 4.4 million. And in my district alone, in
Louisville, we've reduced the uninsured rate by 81 percent, an
astounding accomplishment. And more importantly than that, I
think, is that every day I'm hearing from people who now have
insurance and had a family member or a neighbor or friend whose
life has been saved because they had insurance that they
otherwise wouldn't have. And I could talk about that for a long
time.
But the focus of this hearing is on the CO-OPs. And I want
to try and set the record straight about what happened with
Kentucky.
Ms. Jarmon, unlike most of the CO-OPs reviewed by your
office, is it your understanding that the Kentucky Health
Cooperative had far higher enrollment than expected, nearly
double their original projections?
Ms. Jarmon. We actually have a chart in our report on the
enrollment projections as of 2014, and for Kentucky, yes, it
was like 183 percent. So that was right. It was one of the few
that was----
Mr. Yarmuth. And is it your understanding that a very high
percentage of those enrollees were much sicker or utilized much
more care than--and therefore were more expensive to ensure
than the general population?
Ms. Jarmon. I don't have that----
Mr. Yarmuth. You don't have that information.
Well, again, that's why we established this risk corridor
program and why it was so important. And that's what happened
to Kentucky's CO-OP. They relied on this. Kentucky's CO-OP, as
I mentioned before the earlier panel, lost $50 million in its
first year. In the second--first half of 2015 that loss had
slowed down to a rate of 4 million. They were on track to make
a profit in 2016, and unfortunately, when the risk corridor
program was by that 87 percent, they were unable to continue.
Dr. Cohen, is it your understanding that had Congress not
capped the payments for the risk corridor program, that
Kentucky Health Cooperative would still be open for business?
Ms. Cohen. No. I think that there were a number of factors
that contributed. Obviously, that was one of the last and
certainly we have heard was an important factor for them. But
you have to know that there were many factors, as we've been
talking about all along in terms of the uncertainty and the
challenges for the CO-OP program.
Mr. Yarmuth. And as I mentioned before, that having been
said, is it your understanding that even without the CO-OP,
Kentucky residents will still have more health insurers to
choose from in 2016 than they had----
Ms. Cohen. Yes.
Mr. Yarmuth [continuing]. In prior years?
Ms. Cohen. Yes, very exciting.
Mr. Yarmuth. Yes. So, again, I think I could talk for a
long time about the success of the Affordable Care Act in
Kentucky. We're a much healthier state because of it. And I
know somebody threw around a figure that maybe the approval
rating of the Affordable Care Act is down near 20 percent. In
Kentucky, it's well over 50 percent.
Ms. Cohen. And I'll give you a new number that the CDC just
put out today for a new reduction in the uninsured rate to 9
percent historic. So I appreciate your leadership on that.
Mr. Yarmuth. Thank you, Dr. Cohen.
I yield back, Mr. Chairman.
Ms. DeGette. Mr. Chairman, can I take a moment of personal
privilege?
Mr. Collins. Yes. Absolutely.
Ms. DeGette. You might have noticed this is not one of the
new Members of Congress here. This is a dear, dear friend of
mine and Chairman Upton's, Max. And Max has been helping us
with our 21st Century Cures bill. Most of the staff and members
have met him. Last night, Max was very honored to receive an
award at the Every Life Foundation for Rare Diseases, Rare
Voice Awards gala reception. And also Chairman Upton and I
received awards, but Max is the one. He's why we're doing this.
So thanks for letting me----
Mr. Collins. Oh, no. Thank you. And we all welcome Max.
When I look back to the unanimous vote out of our committee on
21st Century Cures, I can tell you Max whipped more than one
vote.
Ms. DeGette. Max is our secret weapon.
Mr. Collins. We may be looking at a future majority whip
here sitting next to us.
With that, I'd like to recognize Mrs. Blackburn for 5
minutes.
Mrs. Blackburn. Thank you so much.
And thank you for our witnesses and for your patience
today. We appreciate it.
I'm sorry that Mr. Yarmuth left. I think it's important to
note in Kentucky, when Tennessee had TennCare, a lot of
Kentucky residents were coming into the state to try to get
healthcare. And the Kentucky CO-OP did close. And the Kentucky
approval rating of the ObamaCare products that are in the
marketplace is really quite low, as was evidenced in that state
this week.
Ms. Cohen, I want to come to you. I had Commissioner McPeak
here. I don't know, were you in the room for the first panel?
Ms. Cohen. I was.
Mrs. Blackburn. OK. I'm really concerned about what has
happened with taxpayers and the liability there with what took
place with the loans and then the solvency grants. And we all
should be concerned with that. That is not your money to give
away. It is taxpayer money. And this is just money down the
hole it appears because this didn't work. And to go in here and
hear from the CO-OPs that they now have these loan conversion
options and that these startup loans classified as assets
rather than debt, and I don't see how you get there. Doesn't
that type loan conversion really give a false picture of what
is going on in that CO-OP? Is that not a falsehood?
Ms. Cohen. So, when talking about those conversions, which
is what some of the CO-OPs have approached CMS with, we
evaluated each of those on an individual basis. And I think you
heard Ms. McPeak mention that in that case that was not the
right step forward. And we did not go----
Mrs. Blackburn. To have suggested that, is that not giving
an inappropriate picture of the financial stability of that CO-
OP?
Ms. Cohen. So that was a request by the CO-OP to CMS. We
did evaluate whether or not that was the right----
Mrs. Blackburn. So you looked at whether they could call
debt an asset.
Ms. Jarmon, let me ask you. In the business world, the
private business world, I think if you did that, you'd be
accused of fraud, if you started re-characterizing your debts
as assets and putting them on your balance sheet as an asset. I
have just never even heard of somebody saying that the Federal
Government would approve such a process. How do you all view
that?
Ms. Jarmon. I believe that came out in guidance in July of
this year. So it was after we had done our work. We will be
looking at it, but----
Mrs. Blackburn. You're going to go back in and review that?
Ms. Jarmon. Yes, we will look at it as part of our follow-
up. It was part----
Mrs. Blackburn. Well, we will appreciate getting that. Is
that not an odd business practice? I've never seen this type
characterization viewed as being a standard operating
procedure.
Ms. Jarmon. It appears unusual. Right.
Mrs. Blackburn. It does appear unusual. And I think that it
leads us, Ms. Cohen, to wonder if there are other unusual
business practices that are surrounding the stability of the
CO-OPs or the lack of stability of the CO-OPs and the entire
lack of stability of the Affordable Care Act programs. This is
highly unusual.
Vermont Health CO-OP, $33 million in Federal loans had been
awarded to the Vermont Health CO-OP. How much, if any, of the
money for the Vermont Health CO-OP has been or will be returned
to the Federal Treasury?
Ms. Cohen. We work aggressively, if we are winding down any
CO-OP, to return funds back to the taxpayer.
Mrs. Blackburn. How much has been returned?
Ms. Cohen. I don't have the number----
Mrs. Blackburn. Would you get that number for us?
Ms. Cohen. I will do what I can.
Mrs. Blackburn. When money is awarded and then they don't
get the license to stand up the CO-OP, every penny of that
ought to be coming back to the Federal Treasury. And I think
you know that.
Ms. Cohen. We work aggressively to recover the loan funds
in----
Mrs. Blackburn. I can imagine what the IRS would say if
people would: Well, we're going to work to get that money back
to you, IRS. We're really working on it.
So we want to see that that comes back. Because I think it
is inconceivable that the taxpayers are going to be held
responsible for this.
And when should we expect that money? What's your timeline
for getting that money back in?
Ms. Cohen. So we're working through that process right now.
I don't have----
Mrs. Blackburn. So you've got all this money out here. Ms.
Cohen, listen to yourself. You got all this money out here. It
is being wasted. Half of your CO-OPs are insolvent, and you've
got this re-characterization process going to take your debts
and make them appear to be assets. That is highly unusual. And
you want to sit here and say: Well, we're looking at it?
When are you doing it? Are you continuing to meet on it
every week? Do you have a timeline for coming up with getting
this money back? Is it a top priority?
Ms. Cohen. So my team----
Mrs. Blackburn. Yes. Please read the note that's been
passed to you.
Ms. Cohen. So we got all of the money back from Vermont,
which--I would say the rest of the CO-OPs that we've been
working with over the last several months, obviously, are still
in business. They continue to provide coverage for consumers
until the end of the year. And then we'll work through the
process at that point in accordance with the loan agreement to
recover funds for the taxpayer.
Mrs. Blackburn. OK. So there is something in process. Thank
you.
Ms. Cohen. Thank you.
Mrs. Blackburn. And if you will continue to provide that
type of information for us, that is what we need to know, the
specifics. It does not help us in doing our due diligence and
being certain that people have coverage, it does not help us if
you come into a hearing and you cannot say: This is where we
are, exactly where we are, and what we're going to do. It is
helpful when Ms. Jarmon says: This happened after our July
review, and then we're going to come back in and we're going to
look at this very unusual business practice and have a
recommendation for you. That's the kind of thing that is
helpful.
I am way over my time. I yield back.
Mr. Collins. That's OK. We are missing a lot of our
members. So we'll actually maybe ask a few more questions, to
dig down a little bit deeper.
And, again, I'd like to kind of just set the stage. All of
us up here agree we need to be good stewards of taxpayer money.
And that's the purpose of this hearing. Learning from what's
happened the last 2 years, and losses have occurred, it sounds
like a few CO-OPs are doing OK. Half of them failed. There's
lessons to be learned here. And I think the purpose of this
hearing and our requests for more information will be: How can
we take all of that and hopefully not continue to lose taxpayer
money?
But, Ms. Jarmon, there is a question for OIG that the loan
agreements, as I understand it, between CMS and the CO-OPs do
have provisions in them, enforcement provisions, and I just
wondered, could you explain what some of those provisions might
be. And then a very direct question would be, to the best of
your knowledge, and then I'll go to Dr. Cohen, have we taken
any of these enforcement measures against any CO-OPs?
Ms. Jarmon. Right. The loan agreements do allow--there's an
option to terminate the loan agreements which would require the
CO-OP to forfeit all unused loan funds. And there's also within
the loan agreement and the funding opportunity, there's the
issue of the enhanced oversight plans and corrective action
plans, which CMS has actually put several of the CO-OPs under
enhanced plans and corrective action plans. So those are all
part of the loan agreement.
Mr. Collins. Has CMS terminated any loan agreements?
Ms. Jarmon. I am not aware.
Dr. Cohen. So we have terminated the loan agreements for
those 12 CO-OPs that you have heard that are shutting down. So
we have terminated all of those, and we will----
Mr. Collins. Did we get any money back?
Ms. Cohen. So let me clarify, and I want to make sure for
the record I have it right. So, in Vermont, we did get the vast
majority of the money. There was some funding that was used in
their startup funds that was not recovered. On a go-forward
basis, we are making sure that consumers have coverage through
the end of the year. These entities will be operating through
the end of the year. And at that time, we will do a run-out of
claims and understand the financial health of the organization
and then use all of our ability with the terms of the loan
agreement to recover----
Mr. Collins. Now, but that's not the case in New York.
They're not running--it's my understanding--the CO-OP in New
York, which lost $250 million in fact is shutting down in 2
weeks' time. So that doesn't----
Ms. Cohen. That's right.
Mr. Collins [continuing]. Line up with what your testimony
just was.
Ms. Cohen. That is right. So that is why we are doing so
much of the hard work right now before this open enrollment
period started on November 1 to make sure we understood the
financial health of any one of these CO-OPs, is because we want
consumers to be confident that there wouldn't be a midyear
closure of any one of these CO-OPs.
In the case of New York, we went to wind them down and
terminate their loan agreement back in the September timeframe
when we sent in our audit team after we even decided to wind
them down. We went and found out that their financial situation
was even more dire than we understood it to be when we made the
decision to wind them down, and that is why we are in this
unfortunate situation. I will say that the folks in New York,
the Governor's Office, the Department of Insurance, has jumped
on this problem and is working it very aggressively to make
sure consumers have a smooth transition. And this is exactly
why we're doing all of this tough work right now so this
doesn't happen in other places.
Mr. Collins. I purchased a lot of distressed companies in
my private sector career. And let me tell you, a bank who then
loans money in many cases in what you might call workout or
asset-based lending agreements, there's literally daily and
weekly reports. And you are under a magnifying glass until that
bank who has money at risk is confident that they're going to
be able to be paid back. And it, quite frankly, sounds as
though CMS has accepted a lot of information at face value, and
not dug very deeply into those details to say: OK, 2 months
later, we're totally shocked the finances are much worse. If
somebody was really watching a $250 million loan, day by day
and week by week, I don't think you would wake up 2 months
later you would have found out 2 months earlier, and maybe we
would have lost $200 million instead of $250 million. I think
there's lessons learned in that, when you're good stewards of
taxpayer money, the taxpayers expect a level of scrutiny at
least consistent with what big banks do when they make loans.
And, in fact, you could argue maybe it should even be more than
that.
So my last few seconds here, another question, I know that
there's going to be outstanding claims, as these CO-OPs are
shutting down, including New York. I'm assuming there's no
money. Who's going to pay those claims?
Ms. Cohen. So, as I said, the CO-OPs continue to wind down
over the course of this year, and they do have funding that----
Mr. Collins. So like take New York. Is there enough money
in----
Ms. Cohen. So New York is a different circumstance where
they need to wind down by November 30 and then run out those
claims after----
Mr. Collins. And they'll have enough money to pay all
those?
Ms. Cohen. So one of the big things that we did in
partnership with the State Department of Insurance is make sure
that they go into receivership. And by doing that, we are able
to have better control over their finances and the claims
payout as well as----
Mr. Collins. Do you feel as though there will be enough
money to pay out? If there's not, is the government going to
make the provider, that--now there's no money. How do they get
paid?
Ms. Cohen. So we're working--and as you said, it's a day-
by-day type of situation. We're watching very closely to make
sure we can----
Mr. Collins. Could there be more taxpayer moneys having to
go in as this is wound down?
Ms. Cohen. Our primary goal is to protect the consumer and
the----
Mr. Collins. It should be. Right.
Ms. Cohen [continuing]. And the taxpayer. So we're going to
do everything possible to make sure that we can have a smooth
transition. That's a partnership between ourselves and the New
York State Department of Insurance. We're working
collaboratively in that process to make sure that that----
Mr. Collins. Well, and we would encourage you to continue
to do that. And thank you for your testimony.
I'd like to see if Ranking Member DeGette has a few follow-
on questions.
Ms. DeGette. Thank you, Mr. Chairman. I want to go back to
something that Mr. Morrison said in the previous panel. When we
set up the insurance CO-OPs under the ACA, we set them up to
help give people who were sicker, who were poorer, who had less
of a choice, a choice of an insurance plan. And as we all know
quite clearly, the CO-OPs don't have a lot of the same benefits
as private insurance companies. They don't have the kind of
capitalization from other products and so on. Wouldn't that be
a fair statement, Dr. Cohen?
Ms. Cohen. Yes. They face a number of those challenges.
Ms. DeGette. Right. And so when you're just starting up
some CO-OPs, it's not like you're a private company saying: OK,
let's offer this new product and if it takes us a few years, we
can do that. So I really think that the comparison of the CO-
OPs to a private business is a little unfair. And that's why I
think we set up these three Rs, to try to help the CO-OPs get
established and then the concept, Dr. Cohen, was that they
would become self-sufficient and they would be able to sustain
their business model. Is that right?
Dr. Cohen. I think that those programs were set up to help
the entire market transition, CO-OPs among them.
Ms. DeGette. OK. And so I guess I was a little concerned
when I heard you say earlier that you were reviewing all of the
states' situations on an individual basis. And here's why. And
I saw this from my end being in Congress where my state thinks
in July that the money's going to be sufficient for risk
corridor payments. Then they hear in October that, no, that's
not going to happen. And they have a real degree of uncertainty
with how CMS is viewing that state CO-OP, whether it's--how
they're viewing their capitalization, how they're viewing their
viability. And they don't know day to day whether they're going
to be able to offer a product in open enrollment period that
starts on November 1. So the concern that a lot of us have is
where you don't have some kind of a bright line rule, the
uncertainty in those states is really contributing to
instability in the whole insurance market in those states. I
assume you understand those points I'm making.
Ms. Cohen. Absolutely.
Ms. DeGette. And so I'm hoping that you and your staff
would be willing to continue to meet with our committee staff
on both sides of the aisle to help us figure out how we can
help you get some certainty so that we don't have situations
where states like New York and Colorado are suddenly going out
of business just a few weeks before the open enrollment period,
the other providers, including private insurance companies, are
scrambling to try to figure out how to absorb this, and the
83,000 people in Colorado, I'm sure it was--I don't know how
many it was in New York, but, you know, this is affecting real
lives. And I know you realize that, but I think it would be
really helpful if we could get much more clear standards going
forward.
Ms. Cohen. Understand.
Ms. DeGette. Thank you, Mr. Chairman.
I yield back.
Mr. Collins. Thank you. And it was 155,000 in New York.
As we conclude this hearing. I would ask Dr. Cohen if we
could get a commitment out of CMS to provide that analysis that
resulted in the CMS awarding additional funds to New York's CO-
OP and some others the end of 2014.
Ms. Cohen. I will work with the staff to get it confirmed.
Mr. Collins. Thank you. And also if you could commit that
CMS will provide us any CO-OP corrective action plans that may
exist. I mean, as you've done this analysis, could you forward
those to the committee?
Ms. Cohen. I'll have to look and see. Some of those are
market-sensitive. But we will do our best to get what we can to
the committee.
Mr. Collins. I thank you for that. And then also I'd like
to enter into the record a Wall Street Journal article that
does have a quote from CMS that risk corridors were intended to
be budget neutral. And I'd ask unanimous consent to enter this
into the record.
So moved.
[The information appears at the conclusion of the hearing.]
Mr. Collins. As we conclude our hearing, again, I want to,
first of all, also say that we would ask unanimous consent that
members' written opening statements be introduced into the
record.
And, without objection, those documents will be entered
into the record.
And I'd like to thank our two witnesses for your comments,
as we all want to work together to, again, be good stewards of
taxpayer money.
And I would like to remind members they have 10 business
days to submit questions for the record. And I ask that the
witnesses all agree to respond promptly to those questions.
And, with that, this meeting is adjourned.
[Whereupon, at 2:03 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Prepared statement of Hon. Fred Upton
Hardworking taxpayers loaned $2.4 billion to Obamacare's
CO-OP program, which was intended to create new non-profit
health insurance insurers to increase choice and competition.
Unfortunately for both taxpayers and consumers, it has been a
mess with 12 out of the 23 COOPs having failed. That's a
success rate of 48 percent. Sadly, taxpayers are once again on
the losing end as the 12 failed CO-OPs cost $1.23 billion.
The CO-OP program faced an uphill battle from the outset.
In fact, as early as 2011, HHS predicted that only 65 percent
of the solvency loans and 60 percent of the start-up loans
would be repaid. And those predictions might be considered rosy
since they have done far worse. The statute and CMS regulations
and policies have seemed to hamper the CO-OPs ability to
succeed. For example, CMS has prohibited CO-OPs from raising
capital from outside investors and capping enrollment numbers.
We have witnesses today who will offer valuable testimony,
sharing unique perspectives and experiences with the CO-OP
program, including state insurance regulators, CMS, OIG, and of
course, the CO-OPs. We have many questions, and the American
public deserves answers. The committee wants to understand why
do these CO-OPs continue to shut their doors? What can CMS do
to help COOPs succeed? What can the administration do to recoup
these vital taxpayer dollars from the failed CO-OPs? And what
plans did the administration have in place to protect taxpayer
dollars in light of HHS' initial pessimistic predictions for
the program?
Regardless of one's view of the president's health law, the
law itself and its implementation demand oversight. It seems
that the news gets worse by the day, with more and more
taxpayer dollars squandered. The CO-OP program has sadly
followed the same script. With 12 out of 23 having failed at a
loss of over $1.23 billion, who is taking responsibility and
being held accountable?
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