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United States Senate
PERMANENT SUBCOMMITTEE INVESTIGATIONS
Committee Homeland Security and Governmental Affairs
Rob Portman, Chairman
Failure the Affordable Care Act
Health Insurance CO-OPs
MAJORITY STAFF REPORT
PERMANENT SUBCOMMITTEE
INVESTIGATIONS
UNITED STATES SENATE
March 10, 2016
SENATOR ROB PORTMAN
Chairman
PERMANENT SUBCOMMITTEE INVESTIGATIONS
BRIAN CALLANAN
Staff Director General Counsel
MATTHEW OWEN
Chief Counsel
ANDREW POLESOVSKY
Counsel
WILL DARGUSCH
Investigator
JOHN KASHUBA
Legal Fellow
KELSEY STROUD
Chief Clerk
Failure the Affordable Care Act
Health Insurance CO-OPs
TABLE CONTENTS EXECUTIVE SUMMARY ........................................................................................
II. BACKGROUND ....................................................................................................... HHS Loan Decisions. ........................................................................................ CO-OPs Begin Fail. ....................................................................................... Previous Reports Concerning the CO-OP Program. ........................................ Note Terminology. ....................................................................................
III.FINDINGS AND ANALYSIS ................................................................................. HHS Approved The Failed CO-OPs Despite Problems Identified Deloitte The CO-OPs Business Plans. ...................................................................... Enrollment Strategy Weaknesses. .............................................................. Budgetary and Financial Planning Weaknesses........................................ Management Weaknesses. .......................................................................... Despite Glaring Financial Warning Signs, HHS Failed Take Any
Corrective Action Enhance Oversight Until The Second Enrollment Year.
........................................................................................................................... HHS Scarcely Used the Major Accountability and Oversight Measures
Available for Distressed CO-OPs. ............................................................... HHS Knew 2014 That The CO-OPs Were Performing Worse Than Even
The Worst-Case Net-Income Scenarios Outlined Their Business Plans.
...................................................................................................................... HHS Knew Early 2014 That Enrollment Numbers For The Failed
CO-OPs Deviated Sharply From Normal Projections. ............................... Through 2014 And 2015, The Failed CO-OPs Were Losing Money Faster
Than HHS Could Disburse It. .......................................................................... HHS Approved Additional Solvency Loans For Three The Failed CO-OPs
Despite Obvious Financial Warning Signs. ..................................................... The Kentucky CO-OP Receives $65 Million Additional Solvency Loan
Funding. ....................................................................................................... The New York CO-OP Receives $90.7 Million Additional Solvency Loan
Funding. ....................................................................................................... CoOportunity Health Receives $32.7 Million Additional Solvency Loan
Funding. ....................................................................................................... HHS Permitted The CO-OPs Rely Massive Risk Corridor Projections
With Sound Basis For Doing So. ................................................................ The Heavy Costs Failed CO-OPs Will Borne Taxpayers, Doctors,
And Other Insurers. .......................................................................................... Financial Information Obtained The Subcommittee Indicates That
Significant Share the $1.2 Billion Failed CO-OP Loans Will Likely Repaid. .................................................................................................... Doctors and Hospitals Are Risk Not Getting Paid Some States,
While Guaranty Funds Will Hard Hit Others..................................
IV. MISCONCEPTIONS CONCERNING THE CO-OP PROGRAM ......................... HHS Data Indicates That The Failed CO-OPs Had, Average, Healthier
Enrollees Than Average Health Insurers Their States. ............................. Congressional Budget Cuts Prevented The Creation New CO-OPs And
Limited Losses The Taxpayer. ....................................................................
EXECUTIVE SUMMARY
The Patient Protection and Affordable Care Act (ACA) created the Consumer
Operated and Oriented Plan Program known the CO-OP Program. Under the
CO-OP Program, the Department Health and Human Services (HHS) distributed
loans consumer-governed, nonprofit health insurance issuers. HHS ultimately
received $2.4 billion taxpayer money fund CO-OPs that participated the
program. Twelve those CO-OPs have now failed, leaving 740,000 people
states searching for new coverage and leaving the taxpayer little hope recovering
the $1.2 billion loans HHS disbursed those failed insurance businesses.
The Senate Permanent Subcommittee Investigations (PSI) has completed investigation that failure and whether HHS exercised good stewardship
public money when poured billions dollars into these insurance startups. Our
investigation revealed that did not. HHS was alerted weaknesses the failed
CO-OPs business plans and financial forecasts before approved their initial loans;
failed use major accountability and oversight tools available throughout
2014 even though knew the CO-OPs severe financial distress; continued
disburse loans failing CO-OPs despite warning signs; and allowed CO-OPs
continue book risk corridor payments assets despite credible warnings that
those payments would not materialize. summarize some our key findings
below.
First, HHS approved the failed CO-OPs despite receiving specific warnings
from third-party analyst about weaknesses their business plans. Before
approved the now-failed CO-OPs, HHS retained Deloitte Consulting LLP
evaluate the CO-OPs loan applications and business plans. Deloitte analysis,
reviewed the Subcommittee, notified HHS several significant weaknesses
the CO-OPs business proposals. Those weaknesses included:
Defective Enrollment Strategies. Deloitte identified serious
problems the enrollment strategy seven the failed CO-OPs.
Those problems ranged from inadequate actuarial analysis,
unsupported assumptions about sustainable premiums, lack
demonstrated understanding the health demographics the COOP target population.
Budgetary and Financial Planning Problems. Deloitte reports
reveal that the proposed budgets the failed CO-OPs were
incomplete, and Deloitte thought that many were unreasonable, not
cost-effective, not aligned with the CO-OP own financial
projections. Deloitte also expressed skepticism about the risk-taking
and unreasonable assumptions reflected some the CO-OPs
financial projections. The firm warned that Colorado, Utah, and
Louisiana all relied unreasonable projections their own growth. cautioned that could not trace the assumptions underlying the
budgets the Nevada, Tennessee, and Kentucky CO-OPs their
actual business plans. And, perhaps tongue-in-cheek, observed that
Iowa and Nebraska CO-OP, CoOpportunity, had target profit
much lower than the industry benchmark 4.8%: CoOportunity
stated target profit margin was zero.
Management Weaknesses. HHS required the CO-OP applicants
identify their management teams, including the qualifications and
experience its leadership. Deloitte reports HHS, the firm
identified some leadership concerns for all the failed CO-OPs.
Several prospective CO-OPs had not even identified their senior
leadership team, and others had executives for whom background
checks turned red flags.
Despite these identified weaknesses, Deloitte gave each CO-OP passing score
based grading scale set HHS, and HHS approved the loans spite the
warning signs.
Second, even though HHS was aware serious financial distress suffered
the CO-OPs 2014, failed take any corrective action enhance oversight for
more than year. The CO-OP loan agreements armed HHS with significant
accountability tools for borrowers who were missing the mark, but here HHS took
pass. Inexplicably, for over year, the agency took corrective action, nor did
put any CO-OP enhanced oversight. Five the failed CO-OPs were never
subject corrective action HHS, and HHS waited until September 2015 put
five others corrective action enhanced oversight. Two months later, all twelve
CO-OPs had failed.
That failure take action difficult understand. Throughout 2014 and
2015, HHS regularly received key financial information from the CO-OPs, including
monthly reports enrollment and financial data sufficient calculate net income,
along with audited quarterly financial statements. Those reports showed that the
failed CO-OPs experienced severe financial losses that quickly exceeded even the
worst-case loss projections they had provided HHS part the business plans their loan applications. Cumulatively, the end 2014, the failed CO-OPs
exceeded their projected worst-case-scenario losses least $263.7 million
four times greater than the expected amount. The CO-OPs enrollment numbers
were similarly alarming. According the 2014 reports they submitted HHS, five the failed CO-OPs dramatically underperformed enrollment expectations (leading insufficient income for premiums), while five others overshot their enrollment
projections (which also causes losses due underpriced premiums). HHS was
aware these problems early 2014, but took corrective action and continued disburse loans the distressed CO-OPs.
Third, despite serious financial warning signs, HHS did not withhold any
loan disbursements from the now-failed CO-OPs and many cases accelerated
planned disbursements. Instead, over the course 2014 2015, HHS disbursed
$848 million taxpayer dollars the failed CO-OPs, even those entities lost
more than $1.4 billion. For every dollar that HHS sent them over this period, the
failed CO-OPs lost about $1.65.
Fourth, HHS approved additional solvency loans for three the failed COOPs danger being shut down state regulators, despite obvious warning
signs that those CO-OPs will not able repay the taxpayer. State regulators
require health insurers maintain certain amount capital reserve called the
risk based capital requirement. HHS made solvency loans available the COOPs risk failing meet these requirements, and date has issued additional
solvency loans six CO-OPs, for total $352 million. with CO-OPs initial
loan applications, Deloitte completed the external assessment for these additional
solvency loans. But according Deloitte, HHS required truncated analysis the
applications; for example, Deloitte did not even evaluate the the likelihood that
each CO-OP would achieve sustainable operations based the revised business
plan.
Three the CO-OPs that received additional solvency funds from HHS have
since failed. The Subcommittee investigation revealed that HHS issued those
additional loans despite clear warnings that the CO-OPs were financial trouble.
Kentucky CO-OP. HHS approved $65 million additional solvency
loan the Kentucky CO-OP. did even though Deloitte review
the CO-OP application revealed several problems, including failure
provide any detail for its plans remedy enrollment difficulties;
unsupported explanation its plans raise premiums 15%;
unexplained projection that the CO-OP would reduce its medical loss
ratio 74% the coming year; and questionable income projections. Result: The Kentucky CO-OP eventually collapsed after
suffering losses $50.4 million 2014 and another $114.8
million 2015.
New York CO-OP. The New York CO-OP received $90.7 million
additional solvency funding despite severe financial difficulties
brought largely too-high enrollment 2014, after the CO-OP
dramatically underpriced its premiums. its application for
additional solvency funds, the CO-OP proposed solve this problem raising premiums 10%, but Deloitte told HHS that the CO-OP
had failed analyze the effect that would have enrollment and
failed provide any concrete data supporting the effectiveness its
proposed plan. Deloitte noted the option that the CO-OP could forego
additional loans and scale down its operation. But rather than scale
down, September 2014, HHS granted the New York CO-OP $90.7
million additional solvency loan that would allow scale
every respect but profits. Result: The New York CO-OP losses reached staggering
$544 million the end 2015. was shut down the New
York Department Financial Services near the end 2015,
leaving more than 215,000 policyholders search for new
insurance policies.
Iowa and Nebraska CO-OP (CoOpportunity). CoOpportunity, the
CO-OP serving Iowa and Nebraska, received $32.7 million
additional solvency loan funding. But given the unsupported
assumptions underlying the CO-OP proposed solutions its financial
woes, Deloitte warned HHS that the loan may not enough permit
the CO-OP maintain its solvency. addition, Deloitte cautioned
that CoOportunity financial projections depended heavily the
tune $94.6 million the availability so-called funds from
ACA risk sharing measures. Result: Less than three months after HHS approved
CoOportunity additional solvency loan, the Iowa Insurance
Division suspended and later liquidated it. CoOportunity
operating losses exceeded $163 million, and its liabilities
exceeded its assets $50 million. The CO-OP closure left
120,000 policyholders scrambling find new insurance plan
mid-year.
Fifth, HHS looked the CO-OPs booked, assets, massive uncertain
payments from the ACA risk corridor program. That program requires profitable
insurers pay into government fund compensate insurers suffering loss; but
because intended budget-neutral, there are not enough payments into
the fund, insurers with losses have source risk corridor income. October
2014, research arm Citibank had publicly warned that HHS would not collect
nearly enough from profitable insurers cover risk corridor payments the
unprofitable. And Deloitte specifically cautioned HHS that the struggling CO-OPs
were relying heavily uncertain risk corridor payments prop their financial
forecasts. But HHS continued predict, recently July 2015, that risk
corridor collections will sufficient pay for all risk corridor payments.
reality, HHS was able pay only 12.6 cents the dollar. That shortfall further
destabilized the CO-OPs.
Sixth, the heavy costs failed CO-OPs will borne taxpayers, doctors,
patients, and other insurers. None the failed CO-OPs have repaid single dollar,
principal interest, the $1.2 billion federal solvency and start-up loans they
received. Our investigation suggests significant share those loans ever will
repaid based the latest balance sheets obtained. the aggregate, the failed
CO-OPs non-loan liabilities exceed $1.13 billion which 93% greater than their
reported assets. All failed CO-OPs told PSI they had planned payments
any their CO-OP loans. And when the Subcommittee asked HHS for its
projections assessment the prospects for repayment, the Department could not
provide any.
The American taxpayer not the only creditor that stands suffer large
losses due the failure the CO-OP program. The closed CO-OPs currently owe
substantial amount money medical claims doctors and hospitals. least
six failed CO-OPs currently owe more medical claims than they hold assets.
Three those (Colorado, South Carolina, and CoOpportunity) will able access
funds from statewide insurance guaranty associations meaning other insurance
companies must cover the CO-OPs losses, ultimately through increased premiums their policyholders. But the other three New York, Louisiana, and Kentucky
have recourse guaranty funds, the burden unpaid medical claims may
borne doctors, hospitals, and enrolled individuals. The New York CO-OP, for
example, reported that had approximately $380 million unpaid medical claims
and $158 million assets December 31, 2015 shortfall $222 million.
***
After detailing these findings, this report briefly addresses two
misconceptions about the CO-OP program. First, HHS officials and others have
sometimes suggested that the CO-OPs financial difficulty was caused adverse
selection attracting enrollees with above-average health risks. But the
agency own data from the ACA risk adjustment program indicates otherwise.
That program redistributes money from insurers with healthier enrollees those
with less healthy enrollees. Our analysis the data shows that the failed CO-OPs
were net payors risk corridor charges (by $116 million), which indicates that
class they enrolled healthier not sicker policyholders than others their states.
Second, HHS officials have suggested publicly that series budget cuts
the CO-OP program contributed the collapse the failed CO-OPs. There
evidence support that claim. The failed CO-OPs received $350 million more than
they requested their loan applications, and HHS was aware the first two
three budget cuts before made any awards. The primary consequence CO-OP
budget cuts was prevent HHS from launching additional CO-OPs one for each
state, the law directed and thus limit future losses the taxpayer.
II.
BACKGROUND
The Patient Protection and Affordable Care Act (ACA) created the Consumer
Operated and Oriented Plan program known the CO-OP program. Under the
CO-OP program, the Department Health and Human Services (HHS) distributed
loans consumer-governed, nonprofit health insurance issuers. Congress initially
allocated billion for the CO-OP Program, with the goal establishing CO-OPs all states and the District Columbia. Subsequent legislation reduced
funding for the program, and HHS ultimately awarded $2.4 billion fund COOPs that participated the program. early 2015, CoOportunity Health, the CO-OP established Iowa and
Nebraska, failed. Since then, additional CO-OPs have failed. total, the
failed CO-OPs received $1.2 billion federal loans, and their collapse left 740,000
people states searching for new coverage. See U.S.C. 18042(a)(1) The Secretary shall establish program carry out the purposes
this section known the Consumer Operated and Oriented Plan (CO-OP) program. HHS
Centers for Medicare Medicaid Services (CMS) administered the program, but for simplicity
refer HHS throughout this report. See id. 18042(g) There are hereby appropriated, out any funds the Treasury not otherwise
appropriated, $6,000,000,000 carry out this section. See id. 18042(b)(2)(B) health insurance issuer applies qualified nonprofit health
insurance issuer within State, the Secretary may use amounts appropriated under this section for
the awarding grants encourage the establishment qualified nonprofit health insurance
issuer within the State the expansion qualified nonprofit health insurance issuer from
another State the State. Robert Pear, Most Health Insurance Co-ops Are Losing Money, Federal Audit Finds, TIMES
(Aug. 14, 2015) (explaining that the CO-OPs have received $2.4 billion federal loans help
pay start-up costs and meet state solvency requirements
http://www.nytimes.com/2015/08/15/us/most-health-insurance-co-ops-are-losing-money-federal-auditfinds.html?mtrref=www.google.comgwh=BB95458959A76808E77C498EB0AD76B9gwt=pay_r= See Anna Wilde Mathews, State Regulator Shut Down Insurer CoOportunity Health, WALL ST.
(Jan. 23, 2015) Iowa insurance regulatory plans shut down insurer CoOportunity Health,
making the first failure one the nonprofit cooperatives created under the Affordable Care
Act. http://www.wsj.com/articles/state-regulator-to-shut-down-insurer-cooportunity-health1422052829. The list failed CO-OPs follows: CoOportunity Health (Iowa and Nebraska); Louisiana
Health Cooperative, Inc.; Nevada Health Cooperative, Inc.; Health Republic Insurance New York;
Kentucky Health Care Cooperative (Kentucky and West Virginia); Community Health Alliance
Mutual Insurance Company (Tennessee); Colorado HealthOp; Health Republic Insurance Oregon;
Consumers Choice Health Insurance Company (South Carolina); Arches Mutual Insurance
Company (Utah); Meritus Health Partners (Arizona); Michigan Consumer Healthcare CO-OP. Amy Goldstein, More Than Half ACA Co-ops Now Out Insurance Marketplaces, WASH. POST
(Nov. 2015), https://www.washingtonpost.com/national/health-science/more-than-half-of-aca-co- HHS Loan Decisions.
HHS received loan applications between July 2011 and December 2012.
Among other things, organization was eligible become CO-OP was
owned and operated its customers, was nonprofit organization, and could
demonstrate HHS high probability financial viability. part the
application become CO-OP, HHS required applicants describe the proposed
CO-OP governance structure, including its plans conform with regulations
established C.F.R. 156.500-520; describe its operational, financial, and
administrative strategies; and disclose its bylaws. HHS also required applicants submit feasibility study and business plan. The feasibility study included
actuarial analysis examining the likelihood success for the CO-OP. The
business plan included information about the applicant management team; the
markets served; the plans the CO-OP would offer; description why plans
would appropriate for the target market; description the CO-OP strategy
for enrolling members; and information about the CO-OP budget and plans
repay HHS-provided loans.
HHS reviewed these applications with the assistance outside consultants
and, based its own review, decided whether make loan. HHS also decided
how large loan make, and doing so, considered four factors: (1) the results
the external review; (2) the size the loan request and the CO-OP anticipated
results; (3) the CO-OP ability repay the loan; and (4) the likelihood that the COOP would meet program objectives.
ops-now-out-of-insurance-marketplaces/2015/11/03/5ba95b86-824b-11e5-9afb0c971f713d0c_story.html. See generally Dep Health Human Servs., Centers for Medicare Medicaid Servs., Loan
Funding Opportunity Number: OO-COO-11-001 (July 28, 2011, rev. Dec. 2011),
http://apply07.grants.gov/apply/opportunities/instructions/oppOO-COO-11-001-cfda93.545instructions.pdf. Id. 43. Id. 32-33. Id. 33. Id. 33-36. Dep Health Human Servs., Office Inspector Gen., The Centers for Medicare Medicaid
Services Awarded Consumer Operated and Oriented Plan Program Loans Accordance With
Federal Requirements, and Continued Oversight Needed, (July 30, 2013),
http://oig.hhs.gov/oas/reports/region5/51200043.pdf.
There were two types available loans, both distributed pursuant Loan
Agreement between HHS and the CO-OP: start-up loans and solvency loans.
Start-up loans covered certain specified costs establishing CO-OP, including
employee salaries and benefits, consultant costs, and equipment. Solvency loans
were used cover capital reserve requirements and other solvency requirements
established and monitored state insurance regulators. Under the CO-OP loan
agreements, solvency loans were disbursed needed meet those risk-based
capital requirements well HHS own risk-based capital standard. But HHS
retained discretion withhold any disbursement if, inter alia, the CO-OP failed
meet performance levels set corrective action plan; could also terminate the
agreement.
The process for receiving loans was follows: CO-OPs applied for both
start-up loans and solvency loans the same time. HHS then decided whether and
how much award the CO-OP. Once did so, HHS distributed portion the
start-up loan; additional disbursements funds were contingent the CO-OP
meeting milestones established the Loan Agreement. With respect solvency
loans, HHS first distributed portion the funds and then distributed additional
funds needed meet risk-based capital requirements. Start-up loans were due repaid within five years; solvency loans were due within years. C.F.R. 156.520(a) Applicants may apply for the following loans under this section: Start-up
Loans and Solvency Loans. See Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Loan Funding
Opportunity Number: OO-COO-11-001, 10, (July 28, 2011, rev. Dec. 2011) Start-up Loans
are intended assist applicants with approved start-up costs associated with establishing new
health insurance issuer. http://apply07.grants.gov/apply/opportunities/instructions/oppOO-COO11-001-cfda93.545-instructions.pdf. C.F.R. 156.520(a)(2)( Solvency Loans awarded under this section will structured
manner that ensures that the loan amount recognized State insurance regulators
contributing the State-determined reserve requirements other solvency requirements (other
than debt) consistent with the insurance regulations for the States which the loan recipient will
offer CO-OP qualified health plan. See, e.g., Loan Agreement Between Michigan CO-OP and HHS (executed Aug. 29, 2012). See id. 5.3, 12.1, 16.2. See Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Loan Funding
Opportunity Number: OO-COO-11-001, (July 28, 2011, rev. Dec. 2011) After the first
drawdown Start-up Loan funds, subsequent drawdowns will conditioned the submission
evidence the loan recipient successful completion milestones described loan recipients
Business Plan and Loan Agreement.
http://apply07.grants.gov/apply/opportunities/instructions/oppOO-COO-11-001-cfda93.545instructions.pdf; id. (same for Solvency Loans). C.F.R. 156.520(b)(1), (c)(1). Id. 156.520(b)(2), (c)(2). January 2014 the date the program took effect HHS awarded $2.4
billion CO-OPs operating states. The following table summarizes loan
award amounts allotted each the CO-OPs.
CO-OP States
Health Republic Insurance New
York (New York)
Minutemen Health, Inc.
(Massachusetts/New Hampshire)
Kentucky Health Care Cooperative
(Kentucky/West Virginia)
CoOportunity Health
(Iowa/Nebraska)
Maine Community Health Options
(Maine)
InHealth Mutual Ohio
(Ohio)
HealthyCT
(Connecticut)
Health Republic Insurance New
Jersey (New Jersey)
Common Ground Healthcare
Cooperative (Wisconsin)
Land Lincoln Health
(Illinois)
Meritus Health Partners
(Arizona)
Arches Mutual Insurance Company
(Utah)
Consumers Choice Health Insurance
Co. (South Carolina)
Montana Health Cooperative
(Montana/Idaho)
New Mexico Health Connections (New
Mexico)
Community Health Alliance Mutual
Insurance Co. (Tennessee)
Colorado HealthOp
(Colorado)
Start-up Loan
Award
Solvency Loan
Award
Total Award
Amount
$241,366,000
$265,133,000
$25,091,995
$131,351,000
$156,442,995
$21,996,872
$124,497,900
$146,494,772
$14,700,000
$130,612,100
$145,312,100
$12,506,124
$119,810,000
$132,316,124
$15,977,304
$113,248,300
$129,225,604
$21,011,768
$106,969,000
$127,980,768
$14,757,250
$94,317,300
$109,074,550
$7,635,155
$100,104,199
$107,739,354
$15,940,412
$144,214,400
$160,154,812
$20,890,333
$72,422,900
$93,313,233
$10,106,003
$79,544,300
$89,650,303
$18,709,800
$68,868,408
$87,578,208
$8,556,488
$76,463,200
$85,019,688
$13,050,282
$64,267,500
$77,317,782
$18,504,700
$54,802,000
$73,306,700
$15,205,529
$57,129,600
$72,335,129
$23,767,000
U.S. Gov Accountability Off., GAO-15-304, Private Health Insurance: Premiums and Enrollment
for New Nonprofit Health Insurance Issuers Varied Significantly 2014, (Apr. 2015),
http://www.gao.gov/assets/670/669945.pdf.
Consumer Mutual Insurance
Michigan (Michigan)
Louisiana Health Cooperative, Inc.
(Louisiana)
Nevada Health Cooperative, Inc.
(Nevada)
Evergreen Health Cooperative, Inc.
(Maryland)
Health Republic Insurance Oregon
(Oregon)
Oregon Health CO-OP
(Oregon)
TOTAL award amounts:
$18,687,000
$52,847,300
$71,534,300
$13,176,560
$52,614,100
$65,790,660
$17,105,047
$48,820,349
$65,925,396
$13,341,700
$52,109,200
$65,450,900
$10,252,005
$50,396,500
$60,648,505
$7,156,900
$49,500,000
$56,656,900
$358,126,227
$2,086,275,556
$2,444,455,783 CO-OPs Begin Fail. the CO-OPs, have already failed. this section, provide brief
summaries each the failed CO-OPs. Throughout this report, for simplicity,
generally refer the failed CO-OPs below their state (e.g., The Louisiana COOP) rather than their formal names.
CoOportunity Health (Iowa and Nebraska). CoOportunity Health was
awarded initial $112 million HHS loan February 2012, followed
additional $32 million solvency loan award September 2014. Less than
three months later, December 16, 2014, was placed under supervision
the Iowa Insurance Division. was liquidated February 28, 2015.
According the Insurance Division, liquidation was necessary because
rehabilitation CoOportunity [was] not possible and medical claims Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Id. Id. Pet. for Order Liquidation, Iowa Gerhart, Equity Case No. EQCE077579, 14,
http://www.iid.state.ia.us/sites/default/files/press_release/2015/01/29/petition_pdf_11438.pdf. Insurers Should Learn From CoOportunity Health Collapse, LAW360 (Mar. 18, 2015) (noting that
CoOportunity Health was ordered into liquidation March 2015
http://www.law360.com/articles/631678/insurers-should-learn-from-cooportunity-health-collapse.
currently exceed cash hand. the time, CoOportunity had operating
losses over $163 million and $50 million more liabilities than assets.
Louisiana Health Cooperative, Inc. The Louisiana CO-OP was awarded $65 million HHS loan September 2012 and additional $750,000 loan December 2013. July 2015, the CO-OP Board Directors agreed wind down its activities. the Louisiana Insurance Commission
explained, the continued operation and further transaction business
[Louisiana Health Cooperative] would hazardous policy holders,
subscribers, members, enrollees, creditors, and/or the public.
Nevada Health Cooperative, Inc. The Nevada CO-OP was awarded $66
million HHS loan May 2012. August 21, 2015, the Nevada Division
Insurance suspended the CO-OP operations. According the Division
Insurance, the previous six months, the CO-OP operating loss [wa]s
greater than percent [its] surplus and the CO-OP likely could not
satisfy the state capital and reserve requirements.
Health Republic Insurance New York. HHS awarded the New York
CO-OP initial $175 million loan February 2012 and additional $91
Press Release, Iowa Insurance Division, http://www.iid.state.ia.us/node/10074702.
Final Order Liquidation, Iowa rel. Gerhart, Comm. Ins. CoOportunity Health, Inc.,
Equity No. EQCE077579, (Mar. 2015),
http://www.doi.nebraska.gov/legal/cooportunity/FINAL%20ORDER%20OF%20LIQUIDATION.pdf. Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Pet. for Rehabilitation, Injunctive Relief, and Rule Show Cause Louisiana Health
Cooperative, Inc., Donelon Louisiana Health Cooperative, Inc., No. 641928, (Sept. 2015),
https://www.ldi.la.gov/docs/default-source/documents/financialsolvency/receivership/LouisianaHealth-Cooperative/petition-for-rehabilitation.pdf?sfvrsn=0. Id. Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Pet. for Appointment Commissioner Receiver and Other Permanent Relief, Case No. A-15725244-C, (Sept. 25, 2015) August 21, 2015, the Commissioner issued Order
Voluntary Suspension. http://doi.nv.gov/uploadedFiles/doinvgov/_public-documents/NewsNotes/2015-09-25%20File%20Stamped%20Appointment%20Petition%20re%20COOP%20Receivership.pdf. Id. Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
million loan September 2014. September 25, 2015, the New York
Department Financial Services (NYDFS) directed the CO-OP cease
writing new health insurance policies and announced that the CO-OP would
commence orderly wind down after the expiration its existing policies.
When the CO-OP began its wind down, the NYDFS had ongoing
investigation specifically focused the New York CO-OP inaccurate
financial reporting with particular focus collecting and reviewing
evidence related the New York CO-OP substantial underreporting [the
NYDFS] its financial obligations.
Kentucky Health Care Cooperative (Kentucky and West
Virginia). HHS awarded the Kentucky CO-OP initial $58.5 million loan June 19, 2012. 2013 and 2014, received additional $85 million
loans, including $65 million solvency loan late 2014. The CO-OP
announced October 2015 that would stop offering health plans the
ACA marketplace. court order liquidating the CO-OP concluded that the
further transaction business would hazardous, financially otherwise, its policy holders and the public.
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Press Release, House Energy Commerce Committee (Nov. 25, 2015),
https://energycommerce.house.gov/news-center/press-releases/committee-leaders-pressadministration-status-remaining-1-billion. Press Release, New York Dep Fin. Servs. (Oct. 30, 2015),
http://www.dfs.ny.gov/about/press/pr1510301.htm. Press Release, New York Dep Fin. Servs. (Nov. 13, 2015),
http://www.dfs.ny.gov/about/press/pr1511131.htm. Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Id.; see Adam Beam, Health Insurer Receives $65 Million Federal Loan, WASH. TIMES (Dec. 18,
2014) Kentucky nonprofit that one the largest insurance providers the state health
exchange received $65 million federal loan last month keep afloat just days before the second
open enrollment period began. http://www.washingtontimes.com/news/2014/dec/18/health-insurerreceives-65-million-federal-loan/. Press Release, Kentucky Health Cooperative, Inc. (Oct. 2015),
http://www.prnewswire.com/news-releases/kentucky-health-cooperative-not-offering-plans-in-2016300157384.html. Order Liquidation, Maynard Kentucky Health Cooperative, Inc.,
Community Health Alliance Mutual Insurance Company (Tennessee).
HHS awarded $73 million loan the Tennessee CO-OP August 2012. October 14, 2015, announced its plans wind down and not sell health
plans 2016. The Tennessee Department Insurance stated that the
risk the [Tennessee CO-OP potential failure 2016 was too great
allow continue operations.
Colorado HealthOp. HHS awarded the Colorado CO-OP $69 million loan July 2012 and additional million loan October 2013. October
16, 2015, the Colorado Division Insurance announced that would bar the
Colorado CO-OP from selling health plans 2016. approving
liquidation plan, court concluded that the CO-OP such condition that
the further transaction business would hazardous, financially
otherwise, the CO-OP policy holders, its creditors, the public.
Health Republic Insurance Oregon. HHS awarded $59 million loan the Oregon CO-OP February 2012 and additional million loan
November 2013. October 16, 2015, the CO-OP announced was
longer offering new health insurance policies and would not participating open enrollment for 2016. The CO-OP explained that [i]n 2014 and
2015 [it] had medical expenses that exceeded the amount money [it] Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Tennessee Dep Commerce and Insurance, Tennessee CO-OP Community Health Alliance
Voluntarily Enters Runoff (Oct. 14, 2015), https://tn.gov/commerce/news/18562. Id. Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Colorado Dep Regulatory Agencies, Division Insurance Moves Protect Colorado
Consumers, Takes Action Against HealthOp (Oct. 16, 2015),
https://www.colorado.gov/pacific/dora/Division-of-Insurance-action-HealthOP. Order Liquidation and Finding Insolvency, Salazar Colorado HealthOp, Case No. 2015-CV33680 (Jan. 2016), http://cohealthop.org/wp-content/uploads/2016/01/Certified-Copy-ofOrder-of-Liquidation-and-Finding-of-Insolvency.pdf.
50Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Statement, Oregon Dep Consumer and Business Services,
http://www.oregon.gov/DCBS/Insurance/news/Pages/2015/oct162015.aspx.
received premiums. Moreover, explained that the only way would able continue operations was HHS guaranteed pay for some its
losses.
Consumers Choice Health Insurance Company (South
Carolina). The South Carolina CO-OP was awarded $87 million HHS
loan March 2012. October 21, 2015, was placed under supervision the South Carolina Insurance Department. The next day, the CO-OP
agreed wind down its operations and announced that would not offer
health insurance coverage 2016. The Insurance Department determined
that the CO-OP was hazardous financial condition rendering its continued
operation hazardous the public and/or its insureds, warranting
supervision.
Arches Mutual Insurance Company (Utah). The Utah CO-OP was
awarded $85 million HHS loan July 2012 and additional million
loan September 2013. announced was withdrawing from the 2016
marketplace October 27, 2015, and was placed into receivership
November 2015. press release announcing the decision close the
CO-OP, the Utah Insurance Commission cited low capital resulting from
failure federal payments the reason for its closure. Health Republic Insurance, Goodbye and Good Luck Oregon: Closure Announcement FAQ,
http://healthrepublicinsurance.org/. Id. Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Consent Order Commencing Rehabilitation Proceedings Granting Injunction Automatic
Stay Proceedings, Farmer Consumers Choice Health Insurance Company, Civil Action No. 2016CP-40-00034, (Jan. 2016), http://www.cchpsc.org/wpcontent/uploads/2016/01/CCHP_receivershipdetails.pdf. Id. Id. Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Kristen Moulton, Utah Shuts Down Arches, The State Nonprofit Insurance CO-OP, THE SALT
LAKE TRIBUNE (Oct. 28, 2015), http://www.sltrib.com/home/3108049-155/utah-shuts-down-archesutahs-nonprofit. Rehabilitation Order, Arches Mutual Insurance Co., Civil No. 150907803, 1-2 (Nov.
2015), https://archeshealth.org/media/pdf/Arches%20Rehabilitation%20Order.pdf. Utah Insurance Dep Arches Health Plan Cease Operation (Oct. 27, 2015),
https://insurance.utah.gov/news/documents/PR-ArchesCeasesOperation10-27-2015.pdf.
Meritus Health Partners (Arizona). The Arizona CO-OP was awarded
$93 million HHS loan June 2012. October 30, 2015, was placed
under the supervision the Arizona Insurance Commission. According
the Insurance Commission, the Arizona CO-OP had yet make profit and
[has] lost over $78 million since [its] inception.
Michigan Consumer Healthcare CO-OP. The Michigan CO-OP was
awarded $71 million HHS loan May 2012. was placed
rehabilitation November 2015 two days after the start Open
Enrollment for 2016. court granted the Michigan state insurance
regulator petition for liquidation and declaration insolvency
February 10, 2016. Previous Reports Concerning the CO-OP Program.
HHS Office Inspector General and the Government Accountability Office
(GAO) have released several studies reviewing HHS application and selection
process, examining HHS early implementation the program, and conducting
performance reviews CO-OPs. July 2013 five months before any CO-OPs
began operating the Inspector General released two reports the CO-OP
Program. the first report, the Inspector General found that the CO-OPs
reported estimated startup expenditures that exceeded the total startup funding
provided CMS. The Inspector General found that, despite this funding Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Press Release, Arizona Dep Insurance, Meritus Health Placed Under Supervision (Oct. 30,
2015), https://insurance.az.gov/press-release-meritus-health-placed-under-supervision. Id. Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html. Michigan Places Consumers Mutual Insurance Rehabilitation, INSURANCE JOURNAL. (Nov. 25,
2015), http://www.insurancejournal.com/news/midwest/2015/11/25/390170.htm. See generally Order Liquidation and Declaration Insolvency, Case No. 15-948 (Feb. 10,
2016), http://www.michigan.gov/documents/difs/Liquidation_Order_2.10.16_514365_7.pdf. See Dep Health Human Servs., Office Inspector Gen., The Centers for Medicare
Medicaid Services Awarded Consumer Operated and Oriented Plan Program Loans Accordance
With Federal Requirements, and Continued Oversight Needed, (July 30, 2013),
http://oig.hhs.gov/oas/reports/region5/51200043.pdf.
shortfall, the CO-OPs had received limited private funding. solve this issue,
the Inspector General recommended that HHS ensure that CO-OPs not exhaust
their startup funds before becoming fully operational and that HHS monitor efforts obtain private funding. the second report, the Inspector General found that,
while CO-OPs were making significant progress meeting milestones, CO-OPs
were struggling hire staff, obtain[] licensure, and build[] necessary
infrastructure such provider network arrangements and technology systems.
The Inspector General also concluded that, ultimately, success meeting program
goals depended number unpredictable factors, including the State
Exchange operations, the number people who enroll the CO-OP and their
medical costs, and the way which competing plans will affect the CO-OP market
share.
The Inspector General issued third report July 2015. The Inspector
General found that, [a]lthough CMS awarded CO-OP loans applicants the
basis their ability become financially viable, many CO-OPs have lower-thanexpected enrollment numbers and significant net losses, with more than half
the CO-OPs suffering net losses least $15 million. The Inspector General
noted that these low enrollment numbers and high losses limited the ability the
CO-OPs repay loans and remain viable.
GAO published review CO-OP enrollment and premium costs 2014.
GAO review found that the CO-OPs operating 2014 failed meet their
enrollment projections 559,000 and the CO-OPs failed meet their
enrollment projections. Moreover, GAO found that the average premium costs for
Id.
Id. Dep Health Human Servs., Office Inspector Gen., Early Implementation the Consumer
Operated and Oriented Plan Loan Program, (July 30, 2013), http://oig.hhs.gov/oei/reports/oei01-12-00290.pdf. Id. Dep Health Human Servs., Office Inspector General, Actual Enrollment and Profitability
Was Lower than Projections Made the Consumer Operated and Oriented Plans and Might Affect
Their Ability Repay Loans Provided under the Affordable Care Act, 5-6 (July 2015),
http://oig.hhs.gov/oas/reports/region5/51400055.pdf. Id. 11. Id. Id. See U.S. Gov Accountability Off., GAO-15-304, Private Health Insurance: Premiums and
Enrollment for New Nonprofit Health Insurance Issuers Varied Significantly 2014, (Apr.
2015), http://www.gao.gov/assets/670/669945.pdf. Id. 18.
CO-OP plans varied relative health insurance plans offered the private
market perhaps suggesting that CO-OPs struggled accurately price plans. Note Terminology.
Throughout this report, refer three risk-spreading mechanisms utilized the ACA: reinsurance, risk corridors, and risk adjustment. briefly
explain those concepts here, which sometimes refer the 3Rs. The ACA
established reinsurance temporary measure, place between 2014 2016,
order safeguard insurers against claim payments high risk people who have
purchased health insurance the individual market. works the following
way: Once insurance policyholder has incurred certain amount medical
costs, the government begins reimburse the insurer some the costs
specified threshold. Although each state permitted establish and administer
its own reinsurance plan, practice the federal government has the job
administering reinsurance most states. 2014, for example, only two states
had their own reinsurance plans. Funds for reinsurance payments are collected
through fees levied all health insurance plans.
Risk corridors another temporary mechanism place between 20142016 limit insurers allowable losses from qualified health plans the individual
and small group markets. The program requires insurers calculate risk
corridor ratio using established formula. the ratio below certain
amount, means that the insurer has likely made profit and must share some
the profit with HHS; contrast, the ratio above certain amount, means
that the insurer has likely suffered loss, and HHS must cover portion that
loss. See id. The percentage rating areas where the average premium for CO-OP health plans
was lower than the average premium for other issuers varied significantly each state and tier. Angela Booth Brittany Couture, The ACA Risk Spreading Mechanisms: Primer
Reinsurance, Risk Corridors and Risk Adjustment, AMERICAN ACTION FORUM (Jan. 2015),
http://americanactionforum.org/research/the-acas-risk-spreading-mechanisms-a-primer-onreinsurance-risk-corridors-a. Id. Id. Id. Id. Id. Id. Id.
Unlike reinsurance and risk corridors, the ACA risk adjustment provision permanent. During the risk adjustment process, either the state the
federal government compares the actuarial risk the insurance pool within each
qualified health plan purchased the individual and small group markets with the
average actuarial risk the state for all qualified plans. Insurance pools with
lower than average actuarial risk must make payments insurance pools with
higher than average actuarial risk.
III.
FINDINGS AND ANALYSIS
The Subcommittee investigation focused HHS decision approve the
failed CO-OPs and HHS management and monitoring its multibillion-dollar
CO-OP loan portfolio. The investigation reveals that HHS approved the failed
CO-OPs notwithstanding flaws their business plans. Once the CO-OPs began
losing money rates far worse than their worst-case projections, HHS barely used
the corrective action enhanced oversight tools available it. HHS eventually
approved additional solvency loans attempt save failing CO-OPs, but again
did despite obvious warning signs. The end result was exacerbate losses that
will now shouldered taxpayers, doctors, and others even more than
700,000 consumers were forced find new health insurance plans.
The financial toll this failed experiment much steeper than has been
previously reported. The twelve closed CO-OPs ran more than $1.4 billion
losses over just the two years they sold plans. Based the latest balance sheets
obtained the Subcommittee, the failed CO-OPs currently estimated non-loan
liabilities (including unpaid medical bills) exceed $1.13 billion which 93%
greater than their $585 million reported assets. addition, the CO-OPs debt
the U.S. government stands over $1.2 billion. Prospects for repayment are dim.
HHS Approved The Failed CO-OPs Despite Problems Identified Deloitte The CO-OPs Business Plans.
HHS retained Deloitte Consulting LLP evaluate loan applications and
business plans submitted health insurance CO-OPs seeking federal award.
Deloitte reviewed each Grant Application for compliance with the essential CO-OP
Program [Funding Opportunity Announcement] criteria established CMS for
funding. According the funding announcement, CMS relied the ACA, the
CO-OP final rule, the proposed rule for exchanges standards for qualified health
Id.
Id. Id. Deloitte Review Utah
Once submitted HHS, Deloitte evaluations were reviewed HHS
Selection Committee that made final decisions about CO-OP approval. The
Selection Committee was made internal subject-matter experts, internal
actuaries, and others. The Selection Committee reviewed the prospective COOP application, considered Deloitte reports, and conducted its own interviews
with CO-OP officials.
According HHS, the Deloitte reports were important part this review
and approval process. Indeed, Deloitte reports were the only written reviews
the applications; HHS did not create comparable written review its own. 100 Nor
did the Selection Committee produce formal review report memorializing the
basis for its approval recommendation for particular CO-OP application. 101
The Subcommittee obtained and reviewed Deloitte evaluations each
the approved CO-OPs, with particular attention the failed CO-OPs. Each the
failed CO-OPs received pass based the criteria that HHS instructed Deloitte consider. Those evaluations reveal that Deloitte identified and, some extent,
foreshadowed problems that contributed the failure the CO-OPs.
For some CO-OPs, HHS issued Requests for Additional Information (RAIs) effort obtain missing documents, seek clarifications, ask follow-up
questions inform its review application. According documents received the Subcommittee, HHS sent RAIs six the failed CO-OPs. evidence was
provided the Subcommittee showing that HHS formally requested any additional
information consider its application process for the other half the failed
CO-OPs. The weaknesses described detail below take into account HHS
documented attempts fill missing insufficient information through its RAI
process. explained below, Deloitte called HHS attention weaknesses three
crucial evaluation criteria across all plans. First, Deloitte identified substantial
weaknesses enrollment strategy and enrollment forecasts. Second, Deloitte
identified many budget-planning and financial-projection deficiencies. Third,
Deloitte raised concerns about the proposed management (and some cases, the
sponsors) the now-failed CO-OPs.
Interview with Kelly Brien, CO-OP Division Dir., Ctrs. for Medicare Medicaid Serv. (Mar.
2016). Interview with Kevin Counihan, Dir., Ctr. for Consumer Information and Insurance Oversight
(CCIIO) (Mar. 2016).
100 Id.; Interview with Kelly Brien, CO-OP Division Dir., Ctrs. for Medicare Medicaid Serv. (Mar. 2016).
101 Id. Enrollment Strategy Weaknesses.
Enrollment central component any health insurer business plan.
outlined Part III, the enrollment projections for all but two the failed CO-OPs
business plans diverged dramatically from reality. Based our review Deloitte
evaluations, clear that HHS knew that there were significant problems the
enrollment plans the failed CO-OPs well before HHS approved their loan
applications. 102
Those problems ranged from inadequate actuarial analysis, unsupported
assumptions about sustainable premiums, lack demonstrated understanding the health demographics the target patient population. Overall, HHS knew
that nearly half the now failed CO-OPs expected gain market share
underpricing competitors but were unable provide sufficient documentation and
evidence that those lower premiums would financially sustainable. 103 According Deloitte, when its employees discovered informational gaps insufficient detail, sought the missing information from HHS, and Deloitte wrote its reports based all records provided. 104
Deloitte raised especially pointed concerns about two failed CO-OPs that
ultimately missed their 2014 enrollment projections extreme margins: Arizona
and Tennessee. 105 Deloitte advised HHS that the Arizona CO-OP enrollment
forecasts were aggressive, particularly for start-up and that the CO-OP
strategy was unlikely achieve the target enrollment figures accordance with
its timeline. 106 According Deloitte, the CO-OP financial projections related
enrollment appear[ed] unreasonable and lacking thoroughness based the
actuarial review [the CO-OP feasibility study. 107 The Arizona CO-OP
responded HHS request for additional information its aggressive enrollment
strategy restating its projections and stating was the process developing
detailed staffing plans and expanding its provider network, among other steps. 108
The Tennessee CO-OP suffered from similar problem. proposed
enrollment strategy that counted underpricing its competitors and attracting
new customers seeking escape the individual mandate penalty, but fail[ed]
explain how competitive price [would] achieved and can offered recognizing
See Deloitte Review Kentucky Louisiana Tennessee Arizona Colorado Michigan
and Nevada
103 See Deloitte Review Kentucky Louisiana Tennessee Utah Oregon
104 Interview with Deloitte (Mar. 2016).
105 See Part III.B.2, infra. The Arizona CO-OP and Tennessee CO-OPs missed their base-case
enrollment projections for 2014 85%, 64%, and 91%, respectively. See id.
106 Deloitte Review Arizona
107 Deloitte Review Arizona
108 HHS RAI Arizona 58.
102
that affordability may challenge growth. 109 CO-OP executives did not explain how
they would able offer price competitive product how savings would
achieved. 110
Deloitte also noted during their application evaluation process that number the now extinct CO-OPs failed identify and analyze the types enrollees their
plans would attract that is, their target market. That weakness was significant: insurer largest expenditure the cost paying medical claims, and insurer
can accurately forecast its claims costs without understanding its target market and
its risk profile. For example, Deloitte concluded that both Kentucky enrollment
forecasts and the likelihood that [its] enrollment will sufficient create
financially viable CO-OP were difficult determine since the market highly
concentrated and [the CO-OP] has not provided thorough enough enrollment
forecast analysis details why their plans will attractive its target
market. 111 Likewise, the Louisiana CO-OP did not provide any relevant health
demographics related illnesses. 112 Nor did the Tennessee CO-OP address why
the plans they intend offer would appropriate for their target market. 113 explained Part III.B, infra, unexpected enrollment levels and higher
than expected claims costs contributed significantly financial difficulties the
failed CO-OPs. Although Deloitte evaluations foreshadowed those problems,
HHS nevertheless approved the applications. Budgetary and Financial Planning Weaknesses. part their applications, all prospective CO-OPs submitted operating
budgets and pro forma financial statements (that is, long-term projections
revenue, profit, assets, liabilities, etc.). HHS instructed Deloitte evaluate the
proposed budgets for completeness well reasonableness and costeffectiveness. 114 The Department told Deloitte review the pro forma financial
statements for completeness, clarity assumptions, and consistency with each COOP business plan. 115 its review, Deloitte identified numerous problems ranging
Deloitte Review Tennessee
Deloitte Review Tennessee
111 Deloitte Review Kentucky response RAI concerning its enrollment strategy, the
Kentucky CO-OP answered vaguely that would seek understand fully the diverse
Commonwealth-wide population through community meetings and market research and develop
benefit plans based understanding the diverse target markets. HHS RAI Kentucky
112 Deloitte Review Louisiana
113 Deloitte Review Tennessee
114 Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., CO-OP Program Loan
Funding Opportunity Announcement, (Dec. 2011).
115 Id. 34.
109
110
from comparatively minor issues, such omitting needed expenses, more
significant concerns, like presenting unreasonable budget.
Deloitte reported that the budgets submitted the failed CO-OPs
were incomplete varying degrees, and only one them fully remedied those
concerns through supplemental information. 116 The Michigan and Nevada CO-OPs,
for example, failed account for all uses their requested loan funds, 117 while the
Colorado CO-OP failed link its loan drawdowns milestones (such building
out provider network) required. 118 Several the budgets also suffered from
inconsistencies. For example, the Arizona CO-OP application contradicted itself
concerning when the CO-OP would spend its start-up loan funds, and Deloitte noted
that inconsistencies such this are common throughout the [Arizona CO-OP
budget. 119 The Louisiana CO-OP similarly listed conflicting start-up costs and
filled out several sections [its budget form] incorrectly. 120 addition inconsistencies, Deloitte noted that many the CO-OPs
budgets appeared unreasonable did not align with their own financial
projections. The Arizona CO-OP budget lack[ed] reasonableness and costeffectiveness, and its loan drawdown schedule was also unreasonable due the
risk involved using premiums 2014 fund start-up costs. 121 The Utah
CO-OP budget narrative also may not reasonable cost-effective, Deloitte
warned, because the budget does not link their loan funding and repayment
schedule pro forma financials. 122 The Nevada CO-OP budget may not
reasonable, they not clearly lay out how start-up costs will funded, and
their loan requests conflicted with their budget and other parts their
application. 123 The Kentucky CO-OP start-up costs did not appear well
thought out, and the timing its loan drawdown cannot tied any the
financial[] projections. 124 Similarly, the budget for Iowa and Nebraska
CoOportunity CO-OP did not align with its financial statements. 125
116 See Deloitte Review New York South Carolina Colorado Michigan Nevada 10;
Louisiana CoOportunity Health Arizona and Oregon Deloitte expressed similar concerns
about the Tennessee CO-OP, but the CO-OP addressed those concerns fully its response
HHS request for additional information. See HHS RAI Tennessee 15.
117 Deloitte Review Michigan Nevada
118 Deloitte Review Colorado
119 Deloitte Review Arizona response RAI, Arizona stated that its 2014 operational
costs would covered premiums for three quarters and loan dollars for one quarter. HHS RAI
Arizona
120 Deloitte Review Louisiana
121 Deloitte Review Arizona
122 Deloitte Review Utah
123 Deloitte Review Nevada
124 Deloitte Review Kentucky
125 Deloitte Review CoOportunity
Deloitte also expressed skepticism about the risk-taking and unreasonable
assumptions reflected some the CO-OPs financial projections. The Colorado
CO-OP, for example, assumed potentially unreasonable level growth
revenue compared growth membership using growth rate that far exceeds
the average annual premium increase for individuals and families without
justification. 126 Deloitte also warned that the Colorado CO-OP planned
overleveraged, with debt-to-equity ratio that more than triple the health
insurance industry average and raises the risk that the applicant may have
potential loan repayment problems. 127 Deloitte noted that both the Louisiana COOP and Utah CO-OP might counting unreasonable level growth
revenue compared growth membership, and the Utah CO-OP planned
operate loss until 2018. 128 Turning CoOportunity financial projections,
Deloitte noted that the CO-OP target profit margin was much lower than the
industry benchmark 4.8% and substantially low even for nonprofit
company. 129 That was perhaps tongue-in-cheek: CoOportunity target profit
margin was zero. 130 HHS requested additional information from the CO-OP
regarding its low profitability, but CoOportunity did not change its projections. 131 addition, many the CO-OPs financial projections did not align with their
business plans and budgets. Colorado income statement, for example, could not
tied the applicant start-up budget and Deloitte could not determine whether not the applicant income statement ties the business plan/operations
forecast. 132 The Nevada CO-OP, Tennessee CO-OP, and Kentucky CO-OP each
produced financial projections using key assumptions that Deloitte was unable
trace their actual business plans. 133 Management Weaknesses.
Each CO-OP loan applicant was required identify its management team,
explain their qualifications and experience, and submit organizational chart and
detailed position descriptions, including the qualifications required for each
position. 134 Based its review this portion the CO-OP business plans,
Deloitte Review Colorado 11.
Id.
128 Deloitte Review Utah Louisiana
129 Deloitte Review CoOportunity
130 Id.
131 HHS RAI CoOportunity 15.
132 Deloitte Review Colorado 11.
133 Deloitte Review Nevada 10; Tennessee 10; Kentucky
134 Dep Health Human Servs., Funding Opportunity Announcement OO-COO-11-001, (Dec. 2011).
126
127
Deloitte consultants expressed concern over key leadership position gaps thin
industry expertise for all the failed CO-OPs. 135
For starters, despite the HHS requirement, several prospective CO-OPs had
not even identified their senior leadership team. The Kentucky CO-OP interim
management team had adequate health plan experience, but had identified
permanent CEO and its description job responsibilities did not adequately
describe organization capable leading, managing, and implementing the [COOP] project. 136 The Louisiana CO-OP management team was limited just
three individuals and its application failed identify most key management
positions. 137 The Nevada CO-OP, too, had chief operating officer medical
director, and its application lack[ed] strong vetting process. 138 The Tennessee
CO-OP also had openings for leadership positions, but had strong vetting
process for applicants. 139 Colorado had identified medical director. 140 Michigan
had assembled complete team, but its senior executives had limited direct
commercial experience managing health plan the core work CO-OP
management and would relying external advisors. 141
Deloitte conducted background checks proposed CO-OP executives
identified loan applications. That vetting turned red flags more than half the failed CO-OPs problems that, Deloitte view could influence the
likelihood the CO-OP success and should brought the attention CMS. 142
The problems varied but included insider trading, personal bankruptcy,
racketeering lawsuits, labor disputes, and various liens and unpaid money
judgments. The top executive who ran both the Louisiana CO-OP and the Kentucky
CO-OP, for example, had been charged the SEC with unlawful insider trading
his previous role CEO health care management firm. That 1998 case
resulted permanent injunction and court order requiring the executive
disgorge ill-gotten gains and pay civil penalty. 143 one case, proposed Chief
Financial Officer had declared personal bankruptcy. After Deloitte brought this the HHS attention, the individual withdrew his name for consideration. 144
Deloitte Review New York South Carolina Tennessee Colorado Michigan Nevada
Louisiana CoOportunity Health Arizona Oregon Utah Kentucky
136 Deloitte Review Kentucky
137 Deloitte Review Louisiana
138 Deloitte Review Nevada
139 Deloitte Review Tennessee
140 Deloitte Review Colorado
141 Deloitte Review Michigan
142 Deloitte Review Utah Arizona Tennessee Kentucky Louisiana Michigan
143 Deloitte Review Louisiana Kentucky
144 HHS RAI Tennessee 19.
135
Deloitte background check the CO-OPs sponsoring organizations also
turned problems. For example, sponsors and personnel the Nevada CO-OP
demonstrate[d] record involvement multiple federal civil cases, liens and
judgments. 145 total, Deloitte identified 285 ongoing, completed, dismissed
federal cases involving one the Nevada CO-OP sponsors. Deloitte provided
additional detail the records some cases due the significant nature the
matters involving the sponsor. 146 addition, Deloitte noted that the sponsor was
the subject nine outstanding liens unpaid monetary judgments nationwide,
ranging $96,000. 147
Adhering HHS criteria and scoring methodology, Deloitte gave passing
score each the now-failed CO-OPs. HHS approved their awards between
February and September 2012. Despite Glaring Financial Warning Signs, HHS Failed Take
Any Corrective Action Enhance Oversight Until The Second
Enrollment Year.
The loan agreements with the CO-OPs gave HHS several valuable tools
monitor and ensure the viability CO-OPs financial distress. Yet, this
section explains, even after became apparent that the failed CO-OPs were
suffering losses well beyond worst-case projections and deviating dangerously from
their enrollment targets, the agency took corrective action, nor did put any COOP enhanced oversight. Five the failed CO-OPs were never subject these
measures, and HHS waited until September 2015 put five others corrective
action enhanced oversight. Two months later, all twelve CO-OPs had failed. HHS Scarcely Used the Major Accountability and Oversight
Measures Available for Distressed CO-OPs.
The CO-OP loan agreements armed HHS with powerful tools heighten its
monitoring CO-OPs financial distress and require reforms needed. Beyond
routine monitoring, three key instruments available HHS were corrective action
plans, enhanced oversight plans, and termination the loan agreement. 148
Deloitte Review Nevada
Deloitte Review Nevada
147 Deloitte Review Nevada
148 Dep Health Human Servs., Funding Opportunity Announcement OO-COO-11-001, (Dec. 2011). See, e.g., Loan Agreement Between Louisiana CO-OP and HHS, 11.1 (executed June 19,
2012) Loan Agreement
145
146
The first tool, the corrective action plan, allows HHS direct CO-OP not
compliance with program requirements develop and implement plan specifying
the actions that the loan recipient will take correct any deficiencies and
remain compliance with program requirements. 149 During corrective action
plan, HHS monitors the CO-OP ensure deficiencies are corrected. 150 HHS also
has authority place financially distressed CO-OPs enhanced oversight plan,
which would consist detailed and more frequent review the loan recipient
operations and financial status. 151 Under the CO-OPs loan agreements,
enhanced oversight plan could imposed when CO-OP consistently
underperforms relative the [CO-OP Business Plan. 152 The loan agreements
provided that HHS could supply technical assistance correct the problems that
gave rise corrective action plan enhanced oversight. 153 Finally, HHS had the
authority cut its losses terminating the loan agreements and cease all loan
disbursements longer believed that the loan recipient could establish
viable and sustainable CO-OP that serves the interests its community and the
goals the CO-OP program. 154
Although each the failed CO-OPs dramatically underperformed their
business plans, HHS made sparing use these accountability tools. Indeed, five
the failed CO-OPs were never subject corrective action enhanced oversight
measures, 155 and despite severe industry-wide financial distress beginning
January 2014, HHS did not place any the others corrective action plan
enhanced oversight plan for over year. Two the failed CO-OPs were placed
corrective action enhanced oversight plans the first quarter 2015
reaction dire warnings from state insurance commissioners concerning
hazardous financial condition[s] one case 156 and violation state and federal
Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., CO-OP Program Loan
Funding Opportunity Announcement, (Dec. 2011).
150 Id.
151 Id.
152 Id. see also Loan Agreement.
153 Dep Health Human Servs., Centers for Medicare Medicaid Servs., CO-OP Program Loan
Funding Opportunity Announcement, (Dec. 2011).
154 See Loan Agreement 16.2 Lender may elect terminate this Agreement determines its
sole and absolute discretion that Borrower will not likely able establish viable and
sustainable CO-OP that serves the interests its community and the goals the CO-OP
Program.
155 Specifically, the Utah, New York, Nevada, South Carolina, and Iowa/Nebraska CO-OPs were
never placed enhanced oversight corrective action plan.
156 Letter from Kelly Brien, Dep Health Human Servs. Ron Bramm, Community Health
Alliance (Feb. 2015); Letter from Commissioner Julie McPeak, Tennessee Dep Ins.,
Secretary Burwell, Dep Health Human Servs. (Jan. 2015).
149
law the other. 157 for the remaining five failed CO-OPs, the agency waited
until September 2015 place them corrective action enhanced oversight
plan; within less than two months, all five had gone under. 158
The CMS CO-OP Program Director, Kelly Brien, told the Subcommittee
that both corrective action and enhanced oversight plans were valuable tools. 159
But according Brien, despite receiving information about the CO-OPs financial
performance monthly basis, the agency never developed standard for when
enhanced oversight would triggered. 160 Based our review financial data
available the time each corrective action plan enhanced oversight plan was
implemented, difficult discern any objective basis for whether CO-OP was
consistently underperform[ing] such that enhanced oversight plan was
advisable. 161
The Subcommittee also sought determine how frequently HHS made use
two other important tools audits and site visits but HHS has not responded
the Subcommittee request for that information despite repeated efforts. HHS Knew 2014 That The CO-OPs Were Performing
Worse Than Even The Worst-Case Net-Income Scenarios
Outlined Their Business Plans. part their 2011 loan applications HHS, 162 each CO-OP provided HHS
with feasibility study outlining financial projections for number potential
scenarios such variations enrollment and variation claims costs. 163 The
actuarial consulting firm Milliman prepared the feasibility studies for the
Letter from Kelly Brien, Dep Health Human Servs. William Oliver, Louisiana Health
Cooperative (Jan. 2015); Letter from Louisiana Insurance Commissioner Kelly Brien, Dep
Health Human Servs. (Dec. 11, 2015).
158 See Letter from Kevin Counihan, CCIIO Director, Thomas Zumtobel, Meritus Health Partners
(Sept. 28, 2015) (advising Arizona CO-OP placement EOP); Letter from Kevin Counihan,
CCIIO Director, Dennis Litos, Consumers Mutual Michigan (Sept. 22, 2015) (advising Michigan
CO-OP placement CAP and EOP); Letter from Kevin Counihan, CCIIO Director, Julia
Hutchins, CEO, Colorado CO-OP (Sept. 10, 2015) (advising Colorado CO-OP placement
EOP); Letter from Kevin Counihan, CCIIO Director, Glenn Jennings, CEO, Kentucky Health
Cooperative (Sept. 18, 2015); Letter from Kevin Counihan, CCIIO Director, Dawn Bonder, CEO,
Oregon Health Republic Insurance Company (Sept. 22, 2015).
159 Interview with Kevin Counihan, Director, CCIIO (Mar. 2016); Interview with Kelly Brien,
CO-OP Division Dir., Ctrs. for Medicare Medicaid Serv. (Mar. 2016).
160 Id.
161 Id.
162 See Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., CO-OP Program Loan
Funding Opportunity Announcement (Dec. 2011).
163 See, e.g., Milliman Feasibility Study Prepared for New York CO-OP (Oct. 15, 2011).
157
failed CO-OPs. 164 Milliman studies were based number key assumptions
provided the CO-OPs, including enrollment projections. 165 Two other actuarial
consulting firms, Wakely Consulting Group and Optum, prepared similar feasibility
studies for the other three failed CO-OPs. 166 All the Milliman feasibility studies
included projected net income under different enrollment and pricing scenarios. 167
The feasibility studies reveal that every failed CO-OP underperformed their worstcase net-income expectations 2014 (except for the two that did not provide worstcase projections). 168
The losses came fast. One the failed CO-OPs experienced losses greater
than even its worst-case year-end projection within the first quarter 2014. 169
That trend continued: the second quarter 2014, six the failed CO-OPs
had exceeded their worst-case year-end net income projections. 170 the third
quarter 2014, that number was seven; 171 the fourth quarter, ten. 172
Cumulatively, the failed CO-OPs exceeded their projected worst-case scenario net
income losses for 2014 least $263.7 million four times greater than the
expected amount. 173
164 Milliman Feasibility Study Prepared for New York CO-OP (Oct., 15, 2011); Milliman Feasibility
Study Certification and Analysis Prepared for Arizona CO-OP (Oct. 23, 2011); Milliman Feasibility
Study Certification and Business Plan Prepared for Nevada CO-OP (Dec. 21, 2011); Milliman
Feasibility Study Certification and Business Plan Support Prepared for Kentucky CO-OP (Dec. 28,
2011); Milliman Feasibility Study Certification and Business Plan Support Prepared for Louisiana
CO-OP (March 30, 2012); Milliman Feasibility Study Certification and Business Plan Support
Prepared for Michigan CO-OP (Dec. 23, 2011); Milliman Feasibility Study Certification and Business
Plan Support Prepared for Oregon CO-OP (Oct. 14, 2011); Milliman Feasibility Study Certification
and Business Plan Support Prepared for Iowa CO-OP (Oct. 14, 2011); Milliman Feasibility Study
Certification and Business Plan Support Prepared for Utah CO-OP (March 20, 2012);
165 Interview with Milliman (Dec. 21, 2015). Milliman reviewed the enrollment forecasts for
reasonableness but relied the CO-OPs assumptions.
166 Optum Feasibility Study for Tennessee CO-OP (Mar. 31, 2012); Optum Feasibility Study for
South Carolina CO-OP (Mar. 27, 2012); Wakely Feasibility Study Prepared for Colorado CO-OP
(Mar. 30, 2012).
167 Interview with Milliman (Dec. 21, 2015).
168 Appendix data spreadsheet that available the PSI website
http://www.hsgac.senate.gov/subcommittees/investigations/hearings/review-of-the-affordable-careact-health-insurance-co-op-program. All original sources for the data are identified. For worstcase net income projections, identified the feasibility study scenarios that resulted the largest
projected net loss 2014.
169 Id. The CO-OP Nevada.
170 Id. The six CO-OPs are Arizona, Colorado, Iowa, Kentucky, Louisiana, and Nevada.
171 Id. The seven are Arizona, Colorado, Iowa, Kentucky, Louisiana, Nevada, and Oregon.
172 Id. The ten are Arizona, Colorado, Iowa, Kentucky, Louisiana, Nevada, Oregon, Michigan, New
York, and Tennessee.
173 Id.
HHS also received copies the CO-OPs standard audited quarterly financial
statements required all health insurers. 178 Those statements were generally
submitted within two months after the end each quarter. 179 The first quarterly
reports for 2014 were submitted HHS mid-May 2014. 180 that point, all but one
failed CO-OP reported negative net income $1.7 million worse. 181 the end June 2014, 182 the failed CO-OPs had negative net incomes million worse. 183 And the end 2014, all but two failed CO-OPs had negative net
income least $14 million. 184
Despite these financial warning signs, HHS entered 2015 open enrollment
season with corrective action enhanced oversight plans place. Worse, the
pace HHS large disbursements start-up and solvency loans the failed COOPs did not abate. Indeed, described Part III.D, infra, throughout 2014 and
2015, HHS disbursed money the CO-OPs almost fast they were losing it. HHS Knew Early 2014 That Enrollment Numbers For The
Failed CO-OPs Deviated Sharply From Normal Projections.
Enrollment key determinant health insurer financial performance
and viability, and sharp deviation (in either direction) from the insurer planned
enrollment can spell trouble. 185 Low enrollment can weaken insurer
reducing expected premium income. Higher-than-expected enrollment can even
more destabilizing for insurers who underprice their premiums setting their
rates too low cover claims and expenses. 186 one leading health insurance
scholar has explained, [r]apid customer growth with inadequate prices and adverse
claims experience has played major role historically insurance company
insolvencies. 187
Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., CO-OP Program
Guidance Manual, (July 29, 2015), https://www.cms.gov/CCIIO/Resources/Regulations-andGuidance/Downloads/CO-OP-Guidance-Manual-7-29-15-final.pdf.
179 Id.
180 Id.
181 Appendix
182 Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., CO-OP Program
Guidance Manual, (July 29, 2015), https://www.cms.gov/CCIIO/Resources/Regulations-andGuidance/Downloads/CO-OP-Guidance-Manual-7-29-15-final.pdf.
183 Appendix
184 Id.
185 Scott Harrington, The Financial Condition and Performance CO-OP Plans, Univ. Penn.
Leonard Davis Institute Health Economics, Data Brief, (Feb. 2015).
186 Id.
187 Id.
178
The failed CO-OPs were plagued both varieties enrollment trouble, and
HHS knew early 2014. Throughout 2014, the CO-OPs submitted regular
monthly and quarterly reports HHS that showed that their enrollment
projections were widely off the mark many cases, financially hazardous
margins. comparison between projected and actual enrollment tells the story.
The CO-OPs business plans included annual enrollment projections, 188 and those
enrollment projections were built into feasibility studies that projected financial
performance three enrollment scenarios: low, normal (also called base and
high. 189
The failed CO-OPs 2014 enrollment reports HHS showed dramatic
deviation from their plans and key financial assumptions. 190 Five the failed COOPs underperformed their base enrollment projections 40% more with one
CO-OP missing its projection 90%. 191 Two the failed CO-OPs did not even
achieve half their low enrollment scenarios forecast the feasibility studies. 192
Another five CO-OPs overshot their base enrollment projections 81% more,
with CoOportunity enrolling eight times more consumers than projected. 193
Over-Enrollment 2014
900%
800%
700%
600%
500%
400%
Actual Enrollment Projected Base
Enrollment (2014)
300%
200%
100%
Supra, note 90.
Id.
190 This based comparison the start-up loan disbursement schedules set forth the loan
agreements, solvency loan disbursement schedules set forth the business plans, and actual
disbursement records.
191 Appendix
192 Id.
193 Id.
188
189
These deviations manifested themselves early 2014. March 2014, two
CO-OPs (CoOportunity and the New York CO-OP) had already exceeded their high
enrollment projections for the year. 194 CoOportunity exceeded its high enrollment
scenario more than 150% within the first month enrollment. 195 And the
end March 2014, the New York CO-OP attracted 89,577 enrollees more than
double the high enrollment scenario its feasibility study. 196 Because both fastgrowing CO-OPs had mispriced their plans, that dramatic enrollment growth
multiplied the CO-OPs losses rather than gains HHS was seeing monthly
and quarterly basis throughout 2014. 197
CO-OPs with low enrollment also manifested problems early. the end
the fourth month 2014 open enrollment (January 2014), was evident that many
CO-OPs had seriously failed attract their projected enrollees. that point, five
CO-OPs enrolled less than 2,000 members, and two CO-OPs enrolled less than
1,000 members. 198 Because open enrollment was the prime period for surge
sign-ups, failure perform well during that period was important warning sign deepening financial difficulties.
Under-Enrollment 2014
-10%
-20%
-30%
-40%
-50% Difference Between Base
Enrollment Projection
Actual Enrollment (2014)
-60%
-70%
-80%
-90%
-100%
Id.
Id.
196 Id.
197 See Deloitte Additional Solvency Loan Review CoOportunity; Deloitte Additional Solvency Loan
Review New York.
198 Appendix
194
195
Because the CO-OPs reported enrollment data HHS monthly basis,
the Department was aware these deviations from targets early 2014 even
HHS continued make multimillion-dollar start-up and solvency loan
disbursements. Enrollment reports did not prompt HHS corrective action place
any failed CO-OP enhanced oversight plan throughout 2014. the CO-OPs with weak enrollment struggled generate revenue, the COOPs with dangerously high enrollment racked massive losses throughout 2014
losses reported regular basis HHS. 199 CoOportunity and the New York COOP lost $39.8 million and $77.5 million, respectively, 2014; they would
lose another $60 million and $544 million, respectively, 2015. 200 Rapid
enrollment growth, combined with underpriced premiums, contributed the
demise both CO-OPs. 201 the case CoOportunity, 120,000 enrollees were sent
searching for new insurance beginning December 14, 2014, when the CO-OP was
placed under supervision the Iowa Insurance Division. 202 Likewise, New
York, 150,000 enrollees were informed that they would need find new health
insurance for 2016. 203 Through 2014 And 2015, The Failed CO-OPs Were Losing Money
Faster Than HHS Could Disburse It.
Despite serious financial warning signs, HHS did not withhold any planned
disbursements from the now-failed CO-OPs every dollar was paid, many
accelerated basis compared the CO-OPs business plans. 204 Nor did terminate
Appendix the case CoOportunity, cumulative net income was -$3,700,252 for Q1,
-$13,421,327 for Q2, and -$39,847,903 for Q3. the case the Kentucky CO-OP, cumulative net
income was -$1,720,156 for Q1, -$23,531,532 for Q2, -$24,033,077 for Q3, and -$50,445,923 the end 2014.
200 Appendix
201 Final Order Liquidation, Iowa rel. Gerhart, Comm. Ins. CoOportunity Health, Inc.,
Equity No. EQCE077579, (Mar. 2015),
http://www.doi.nebraska.gov/legal/cooportunity/FINAL%20ORDER%20OF%20LIQUIDATION.pdf.;
Scott Harrington, The Financial Condition and Performance CO-OP Plans, Penn. Leonard
Davis Institute Health Economics, Data Brief, (Feb. 2015).
202 Pet. for Order Liquidation, Iowa Gerhart, Equity Case No. EQCE077579, 14,
http://www.iid.state.ia.us/sites/default/files/press_release/2015/01/29/petition_pdf_11438.pdf.
203 Grace Marie-Turner, 400,000 Citizens Lose Health Insurance (Again) Because Obamacare
CO-OP Failures, GALEN INSTITUTE (Oct. 13, 2015).
204 For example, the Michigan CO-OP received $19.4 million solvency loan disbursements 2014
against million planned its business plan. Similarly, the Arizona CO-OP received $26.9 million 2015 solvency loans against $15.4 million projected. See Disbursement Spreadsheets
Submitted PSI Arizona CO-OP Response Nov. 23, 2015 Request; Michigan CO-OP StartUp and Solvency Loan Disbursement Schedule, Ex. 1.0d (May 15, 2012); Arizona CO-OP Start-Up
and Solvency Loan Disbursement Schedule.
199
any loan agreements. Instead, the agency continued disburse taxpayer-backed
loans entities despite alarming signs financial deterioration and, ultimately,
inability repay the taxpayer. The Subcommittee analyzed the annual net
incomes identified the quarterly and annual financial statements the nowfailed CO-OPs and compared them quarterly basis the HHS disbursement
records provided the CO-OPs. 205 Over the course 2014 and 2015, HHS
disbursed approximately $840 million 206 federal loan dollars the failed
CO-OPs, even they lost more than $1.5 billion. 207 For every that HHS sent
them during this period, the failed CO-OPs lost more than $1.65.
$1,500,000,000.00
Good Money After Bad: Loan Disbursements vs.
Net Losses Failed CO-OPs
$1,000,000,000.00
$500,000,000.00
Nov-15
Dec-15
Sep-15
Oct-15
Aug-15
Jun-15
Jul-15
Apr-15
May-15
Feb-15
Mar-15
Jan-15
Nov-14
Dec-14
Sep-14
Oct-14
Aug-14
Jun-14
Jul-14
Apr-14
May-14
Feb-14
Mar-14
Jan-14
-$500,000,000.00
Dec-13
$0.00
-$1,000,000,000.00
-$1,500,000,000.00
-$2,000,000,000.00
Total Federal Loans
Disbursed This Month
Total Cumulative Net Income Failed COOPs-Quarterly
Appendix data spreadsheet that available the PSI website
http://www.hsgac.senate.gov/subcommittees/investigations/hearings/review-of-the-affordable-careact-health-insurance-co-op-program. All original sources for the data are identified.
206 Id.
207 Appendix Net income losses are based annual and quarterly NAIC filings the CO-OPs, addition the 2015 year-end balance sheets provided the Subcommittee. The 2015 year-end
balance sheets have not yet been filed and finalized. Actual losses are likely significantly
larger several CO-OPs have not yet reported provided their losses for the second half 2015.
205
Indeed, HHS disbursements taxpayer loans continued well after several the CO-OPs had announced their plans close. The Utah CO-OP received
$10.25 million November 23, 2015 about month after announced its
closure. 208 July 2015, the Louisiana CO-OP Board Directors agreed
wind down its activities, yet received $9.2 million November 27, 2015. 209 And
Michigan received $5.4 million two weeks after was placed rehabilitation. 210 HHS Approved Additional Solvency Loans For Three The
Failed CO-OPs Despite Obvious Financial Warning Signs. financial reports poured into HHS, soon became apparent that many
the CO-OPs were running out money some projecting cash shortfalls that could
place them conflict with risk-based capital requirements set state regulators. CO-OP failed meet those capital requirements, its state insurance regulator
could effectively shut down. response, HHS moved forward with awarding large additional solvency
loans, well excess what was previously requested the CO-OPs applications
and business plans. According HHS, these additional solvency loans were
intended assist applicants with meeting the capital reserve requirements
states which the applicants sought licensed issue health insurance. 211
After the start coverage January 2014, HHS started application and
award process for additional funds specifically assist with these state solvency
requirements. 212 this report, six CO-OPs (three failed and three surviving)
received additional solvency loan awards totaling more than $350 million. 213
Kristen Moulton, Utah Shuts Down Arches, The State Nonprofit Insurance CO-OP, THE SALT
LAKE TRIBUNE (Oct. 28, 2015), available http://www.sltrib.com/home/3108049-155/utah-shutsdown-arches-utahs-nonprofit.
209 Pet. for Rehabilitation, Injunctive Relief, and Rule Show Cause Louisiana Health
Cooperative, Inc., Donelon Louisiana Health Cooperative, Inc., No. 641928, (Sept. 2015),
https://www.ldi.la.gov/docs/default-source/documents/financialsolvency/receivership/LouisianaHealth-Cooperative/petition-for-rehabilitation.pdf?sfvrsn=0.
210 Michigan Places Consumers Mutual Insurance Rehabilitation, INSURANCE JOURNAL (Nov. 25,
2015), http://www.insurancejournal.com/news/midwest/2015/11/25/390170.htm.
211 Dep Health Human Servs., Office Inspector Gen., Actual Enrollment and Profitability
Was Lower than Projections Made the Consumer Operated and Oriented Plans and Might Affect
Their Ability Repay Loans Provided under the Affordable Care Act, 5-6 (July 2015),
http://oig.hhs.gov/oas/reports/region5/51400055.pdf.
212 Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer Information Insurance Oversight,
Loan Program Helps Support Customer-Driven Non-Profit Health Insurers (Dec. 16, 2014),
https://www.cms.gov/CCIIO/Resources/Grants/new-loan-program.html.
213 Id.
208
each CO-OP business plan the likelihood each CO-OP achieving sustainable
operations based the revised business plan. 219 Further, Deloitte did not provide
any comment the reasonableness the propriety any the amounts the
3Rs provided the CO-OPs. 220 That meant neither Deloitte nor HHS analyzed
whether the CO-OPs were correct rely funds from reinsurance, risk corridors,
and risk adjustment.
The findings that Deloitte did express were troubling. This section examines
Deloitte reviews the three approved additional solvency funding requests the
failed CO-OPs operating Kentucky, New York, and Iowa and Nebraska. The Kentucky CO-OP Receives $65 Million Additional
Solvency Loan Funding. October 2014, Deloitte submitted its report the Kentucky CO-OP
additional solvency loan request HHS. The CO-OP had previously been awarded
$20.2 million expansion funding November 2013 and additional start-up
funding $2.5 million December 2013. 221 According its application, the
Kentucky CO-OP requested additional solvency loan funding because higher
than expected enrollment and primarily address solvency issues caused the
treatment the risk corridors receivable nonadmitted asset. 222 Deloitte found
that without further solvency loans and its receivables were not treated
admitted assets, the CO-OP will have both critical liquidity and solvency issues. 223
Notwithstanding these serious outcomes the Kentucky CO-OP did not
receive additional solvency awards, the documents provided Deloitte were
incomplete several key areas leaving the firm without sufficient information
analyze many the proposed strategies. with the initial loan application review
process, when Deloitte found there was inadequate information, sought the
information from HHS. 224
The Kentucky CO-OP failed provide sufficient information all four key
categories examined Deloitte. First, with respect enrollment, the CO-OP had
experienced greater than predicted total enrollment, but fell dramatically short
See, e.g., Deloitte Additional Solvency Loan Review Kentucky
Id.
221 Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html.
222 Deloitte Additional Solvency Loan Review Kentucky
223 Id.
224 Interview with Deloitte (Mar. 2016).
219
220
its plans enroll 10,000 members outside the ACA Marketplace (it enrolled
none). 225 But its revised enrollment strategy did not provide any detail how
plans achieve its target enrollment its planned new markets. 226 Additionally,
according Deloitte, was unclear how the CO-OP plans would actually increase
small-group enrollment (i.e., small business employer plans) key market that
Kentucky failed previously engage. 227
Second, with respect the key issue pricing, Deloitte expressed skepticism
and noted gaps the Kentucky CO-OP proposal. The CO-OP planned raise
premiums average 15% 2015 for individual products. 228 According
Deloitte, the CO-OP claimed that its additional solvency needs [were] not due
inadequate inappropriate pricing 2014, but Deloitte noted that [t]his
statement appears contradictory the fact that [the Kentucky CO-OP] will remain
5-25% below the lowest priced competitor even after adopting its premium
increases. 229 Deloitte explained that remains unclear how [the Kentucky COOP] intends avoid adverse selection remains the lowest priced competitor
the Kentucky Marketplace, and that the CO-OP did not provide sufficient
information determine how [its proposed] premium increase will affect[
individual enrollment levels Kentucky. 230 yet another important gap, the COOP failed explain how would raise its small group rates while also closing the
price gap between [the Kentucky CO-OP] and the lowest priced competitor. 231
Third, the Kentucky CO-OP told HHS that high medical claims costs also
posed financial threat and were running higher than its 2014 projections. Yet
according Deloitte, there [was] information provided the application
detailing how [the CO-OP] intends return normal level [of medical
claims]. 232 Deloitte noted that Kentucky did not reduce its medical loss ratio
(i.e., share premium insurer spends medical claims), would continue
lose money. 233 The Kentucky CO-OP projected ambitious 74% reduction
medical loss ratio from 2014 (161.3%) 2015 (86.8%), but there was not enough
Deloitte Additional Solvency Loan Review Kentucky
Id.
227 Id.
228 Id.
229 Id.
230 Id.
231 Id.
232 Id. 12.
233 Id.
225
226
detail within the application for Deloitte even analyze the reasonableness that
decrease. 234
Fourth, the Kentucky CO-OP pro forma financial statements showed
troubling projections number levels. Even the CO-OP realized its
projected recoveries, the Kentucky CO-OP was effectively requesting one
government loan pay another government loan. Deloitte analysis found that
the CO-OP was not projected earn enough net income through 2017 repay its
initial start-up loan payments $6.3 million. Therefore, appears [Kentucky] may
need use solvency loans make the start-up loan repayment 2017. 235
The Kentucky CO-OP precarious financial health depended largely
receivables including projected $115.5 million for 2014. Deloitte noted that,
without those receivables, the CO-OP was projecting have losses $139.3
million, $63 million, and $7.2 million 2014, 2015, and 2016, respectively. 236
those 3Rs did not materialize full, they were not paid until the third quarter 2015, Deloitte warned that CMS may want consider that [the Kentucky COOP] could suffer significant liquidity issues. 237 Deloitte noted the alternative: The
Kentucky CO-OP had stated that, its solvency loan request was denied, could
transition its members other insurers and remove the health plan from [2015]
open enrollment. 238
Instead, HHS chose prolong the Kentucky CO-OP operations, fueled
$65 million additional solvency loan approved November 10, 2014. 239 One year
and $65 million federal disbursements later, the Kentucky CO-OP was placed
rehabilitation due insolvency risk and its health plan was removed from the 2016
open enrollment. 240 that point, the CO-OP had deepened its losses $50.4
million for 2014 and another $114.8 million 2015. 241 Ultimately, more than
50,000 Kentucky CO-OP members would need find new health insurance when
the CO-OP collapsed. 242
Id.
Id. 14.
236 Id.
237 Id. 14.
238 Id.
239 Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html.
240 Order Liquidation, Maynard Kentucky Health Cooperative, Inc.,
241 Kentucky CO-OP, Statutory Balance Sheet (Dec. 31, 2015).
242 See Appendix
234
235 The New York CO-OP Receives $90.7 Million Additional
Solvency Loan Funding. June 18, 2014, the New York CO-OP requested $90.7 million maintain
solvency the face far greater enrollment than expected and underpriced
premiums. 243 The CO-OP reported financially precarious position that required infusion additional funds maintain solvency. Deloitte warned that
estimating the 3Rs receivables was difficult and may create issues relied upon
generate profit, 244 yet without those receivable the CO-OP was projecting losses
$68.2 million and $23.1 million for 2014 and 2015, respectively. 245 Losses would
swell $77.5 million and estimated $544 million 2014 and 2015,
respectively. 246
The New York CO-OP 2014 enrollment was dramatically higher than
anticipated due its rates being among the lowest most products and markets
across the state. 247 The CO-OP principal solution was increase premiums
10% above market trend, but Deloitte noted that the CO-OP failed include
estimates the sensitivities demand prices that is, the effect that proposed
premium increases would have consumer demand for its health plans. 248
addition, the effectiveness its proposed plan raise premiums was only
substantiated [the CO-OP assertion that performed in-depth analysis,
but concrete data was provided from the study the business plan the
Milliman feasibility study. 249 More broadly, Deloitte found that while the CO-OP
had laid out strategy for maintaining its enrollment figures and market
competitiveness, failed quantify the impact this business strategy will have
enrollment projects and financial sustainability. 250
The CO-OP also appeared seeking enrollment growth some respects.
Unplanned enrollment growth had been main driver the CO-OP financial
difficulties, but the New York CO-OP projected grow substantially 2015 and
2016 levels 319% and 339% (respectively) greater than original projections. 251 fact, the CO-OP told HHS that planned expand its offering into the
243 Deloitte Additional Solvency Loan Review New York Letter from Debra Friedman, President
and CEO, Health Republic Insurance New York Nicole Gordon, Dep Health Human
Servs. (June 18, 2014).
244 Deloitte Additional Solvency Loan Review New York
245 Deloitte Additional Solvency Loan Review New York
246 New York CO-OP, Statement Financial Performance (Dec. 31, 2015).
247 Deloitte Additional Solvency Loan Review New York
248 Id.
249 Id. (emphasis added).
250 Id.
251 Id.
remaining New York counties which does not currently serve. 252 The COOP planned move into the large group market starting 2015 order
diversify its business, among other goals, but provided substantiation for
its enrollment projections that more profitable market. 253
Finally, there were obvious concerns about the New York CO-OP ability
meet state and federal capital requirements. previously discussed, the
governing loan agreements required CO-OPs maintain risk-based capital (RBC)
level 500% its authorized control level (ACL). According HHS, RBC
method measuring the minimum amount capital appropriate for issuer
support its overall business operations consideration its size and risk. 254 But
HHS decided deviate from its recommended capital requirements. 255 Deloitte
wrote: Based discussions with CMS, Deloitte confirmed that CMS has chosen
fund [the New York CO-OP] based state solvency requirements rather than
risk-based capital (RBC) level 500% authorized control level (ACL) normally
recommended CMS. 256 According Deloitte, The amount funding required meet the recommended RBC level 500% ACL greater than the amount
required [by the New York state standard] meaning that HHS lowered its own
standard accommodate the New York CO-OP. 257
Deloitte summarized the contingency plan submitted the New York COOP the event did not receive its solvency loan. [the New York CO-OP] does
not receive the requested solvency loan funding, may identify outside financing
scale down operations order meet solvency requirements. However, [the COOP] still projects that will able repay both the start-up and current solvency
loan funding this scenario. 258 Deloitte explained that, failing private financing,
Id.
Id.
254 Dep Health Human Servs., Ctrs. for Medicaid and Medicaid Servs., CO-OP Program
Guidance Manual (July 29, 2015), https://www.cms.gov/CCIIO/Resources/Regulations-andGuidance/Downloads/CO-OP-Guidance-Manual-7-29-15-final.pdf.
255 Deloitte Additional Solvency Loan Review New York
256 Id.
257 Id.; New York CO-OP, CMS First Amended Loan Agreement, (Feb. 17, 2012). The New York
State Department Financial Services (NYDFS) later effectively reversed HHS decision lower
the bar for the New York CO-OP. NYDFS required the CO-OP revert the 500% RBC level, and
that prompted the New York CO-OP ask for additional $70.5 million second request for
additional solvency loan funding September 2014. HHS denied that second request midDecember 2014 which point had exhausted its CO-OP loan award authority.
258 Deloitte Additional Solvency Loan Review New York
252
253
the CO-OP intended scale down its operation increasing its rates, reducing
its membership and eliminating all non-essential administrative costs. 259
But rather than scale down, September 2014, the New York CO-OP sought
and obtained from HHS $90.7 million additional solvency loan that would allow scale every respect but profits. 260 Twelve months and $109 million
federal loan disbursements later, the New York Department Financial Services
directed the CO-OP cease writing new health insurance policies and announced
that the CO-OP will commence orderly wind down after the expiration its
existing policies December 2015. 261 that point, the CO-OP had deepened its
net losses $77.5 million 2014 and more than $544 million 2015, 262 while
adding 58,208 enrollees 2015. All those enrollees were sent searching for new
health insurance policies when the New York CO-OP became insolvent. CoOportunity Health Receives $32.7 Million Additional
Solvency Loan Funding. May 2014, CoOportunity applied for additional $32.7 million
solvency loan funds top the $112 million HHS originally awarded. 263 The COOP told HHS that needed the infusion cash head off cash flow and liquidity
problems driven unexpectedly high losses, rapid growth and higher risk
profile than expected. 264 slow its losses, the CO-OP planned increase its
rates and focus urban areas and other markets had not penetrated (among
other steps). But given the unsupported assumptions underlying the CO-OP
proposed solutions, Deloitte warned that the additional funds sought
CoOportunity may not enough maintain its solvency for long. Due the
uncertainty its enrollment projections and the risk profile future enrollees,
Deloitte wrote, unclear that the requested amount additional solvency loan
Id. 14.
Dep Health Human Servs., Ctrs. for Medicare Medicaid Servs., Ctr. for Consumer
Information Insurance Oversight, Loan Program Helps Support Customer-Driven Non-Profit
Health Insurers (Dec. 16, 2014), https://www.cms.gov/CCIIO/Resources/Grants/new-loanprogram.html.
261 Appendix data spreadsheet that available the PSI website
http://www.hsgac.senate.gov/subcommittees/investigations/hearings/review-of-the-affordable-careact-health-insurance-co-op-program. All original sources for the data are identified; see Press
Release, New York Dep Fin. Servs. (Oct. 30, 2015),
http://www.dfs.ny.gov/about/press/pr1510301.htm.
262 Appendix
263 Letter from Comm. Stephen Ringlee, Dir. and Chief Fin. Officer, CoOportunity Health CO-OP
Program Division, Dep Health Human Servs. (May 2014).
264 Deloitte Additional Solvency Loan