CMS Official on Half of Obamacare Co-ops Failing: We Had ‘Very Little Actual Performance Information’

Melanie Arter | March 10, 2016 | 2:19pm EST
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( - During a Senate subcommittee hearing on Obamacare, Andy Slavitt, acting administrator for the Centers for Medicare and Medicaid Services (CMS), explained that there was “very limited actual performance information” for the government’s co-op oversight team to evaluate the financial positions of 12 health insurance co-ops that eventually failed, a $1.2 billion loss to taxpayers.

“During 2014, there was actually very limited actual performance information available before plans filed rates for the 2015 year and for the co-op oversight team to evaluate the financial position of the co-ops,” Slavitt testified before the Permanent Subcommittee on Investigations.


Chairman Rob Portman (R-Ohio) opened the hearing pointing out that as the result of the failure of the 12 co-ops, 740,000 people in 14 states lost their health insurance provider forcing them to “scramble to find new coverage in little to no time.”

“We are here today to discuss the Administration’s unfortunate adventure in the health insurance start-up business. The Affordable Care Act created something called the Consumer Operated and Oriented Plan (or “CO-OP”) Program as a gesture to those who favored a public option,” Portman said.

“Under that program, the Department of Health and Human Services awarded $2.4 billion of taxpayer money to 23 nonprofit health insurance CO-OPs. As of today, twelve of them have failed,” he said. “Those twelve collectively received $1.2 billion in taxpayer money that is almost certainly lost.”

Slavitt, who joined CMS in 2015, said the challenges that the co-ops faced “should not be viewed as a co-op problem but as a small business start-up problem in a very difficult industry.”

“While we were making loans to companies with 30-50 employees, they are typically competing with companies with multiple thousands of people and worth tens of billions of dollars in capital,” he said.

“Having run a start-up myself, trial and error is a part of creating success, and in this situation, with the limited capital available and competing against giants, co-ops had very little room for error,” Slavitt said.

“Unlike almost every other business, in insurance, you get to make one pricing decision per year, and you live to see the outcome. This is why our decisions to shut down the co-ops were largely made prior to the third open enrollment period,” Slavitt said. “Finally, all of the loan funding had been granted.

“Our strongest remaining tool from oversight is to call the loan, which I can tell you we did not take lightly, as it had ramifications for disrupting consumers as you know and would certainly not have increased the collectability of the co-op loans,” Slavitt added.

Portman called into question Slavitt’s explanation that the HHS did not have adequate performance information before the plans filed rates for 2015.

“You talk about not having adequate information, I think, very limited information for HHS to review. You talk about a lag in data. HHS had monthly financial data to work with,” Portman said.

“You received the quarterly financial reports – Q1 by mid-May, Q2 by mid-August – so there was plenty of time to put the failed co-ops under corrective action plan or to cut your losses before sending them into open enrollment in 2015. So I just don’t think that’s accurate,” he said.

“It’s interesting also when you say, Mr. Slavitt, our strongest tool is to call the loan. You have a lot of other tools, and Mr. Counihan just laid out some of those tools to deal with the co-ops,” Portman said, referring to Kevin Counihan, marketplace chief executive officer and deputy administrator for the Centers for Medicare and Medicaid Services.

“I know you weren’t there, but I just think it is totally inappropriate for you all to say, as Mr. Slavitt just did, they did the best job they could with the information they had and that somehow this is just a problem with start-ups,” Portman said.

“How’d this happen?” Portman asked. “Throughout 2014, HHS did not use the tools at all with respect to these failed co-ops. In fact, five of those 12 co-ops we’ve talked about were never put on a corrective action or enhanced oversight plan despite the fact again that you were receiving these regular monthly and quarterly financial reports showing massive losses.

“By the second quarter of 2014, six of the 12 failed co-ops reported net income losses that exceeded the worst case scenario in their own business plans. By the end of the year, 10 of the 12 had exceeded their projected worst case scenario losses for 2014 by at least 300 percent – $263 million,” Portman noted.

“So I just don’t think it’s accurate to say you didn’t have information and there was a lag time that made it impossible to respond. It’s just not accurate. The loan agreement says enhanced oversight plan should be used when a co-op ‘consistently underperforms relative to its business plan.’ That’s in the agreement. How could consistent monthly losses exceeding the worst case scenario by 300 percent not be considered underperformance?” Portman asked.

“Look, I’ve been in this business a long time. You don’t really get a good accurate picture – certainly, in my view, the question I ask is did the people on the co-op team have enough information to effectively shut down a co-op or call a loan? Because if they did not continue to disperse a loan, they would in effect put the plan out of compliance and then obviously, the kind of situation that we had in Nebraska and Iowa is not the kind of situation we wanted to be in,” Slavitt said.

“And I will say to be fair as I look back about things we would have done differently, I will say that Co-opportunity should never have been allowed to go into the 2015 year – either by the co-op or by ourselves, and I think that’s a very fair criticism in looking back, and I think that’s something that we would all say,” Slavitt said.

“When I look at the other co-ops, and I look at all the evaluations, not withstanding that many of them were ahead of their business plan on membership, somewhere behind, I can tell you that the expression that once you had your first customer, your business plan goes out the window is very true,” he added.

“And in this case, the team I think did the best job they could at evaluating the information they had, but three, six months into a co-op being off the ground, the start-up … I find it very difficult to criticize them with the exception of Co-opportunity for not closing those, for letting those co-ops move forward into the 2015 open enrollment year, reset their pricing, which was allotted to them and approved by the Departments of Insurance, who also though they should move in and to move forward and see what happened in 2015,” Slavitt said.

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