Administration Officials Knew Obamacare Co-ops Were Failing in 2012
Policy + Politics

Administration Officials Knew Obamacare Co-ops Were Failing in 2012

REUTERS/Lucy Nicholson

A new report by a Senate investigative panel offers a scathing assessment of the Obama administration’s handling of nearly two dozen non-profit insurance plans created under the Affordable Care Act that led to the shuttering of half of the organizations and the loss of more than $1 billion of federal loans and startup funds.

The report, released on Thursday by Sen. Rob Portman (R-OH), found that officials at the Department of Health and Human Services ignored numerous warnings in 2012 and 2014 from Deloitte Consulting LLP, an independent accounting firm retained by HHS. The consulting firms concluded that most of the 23 insurance co-ops were poorly conceived, structured and managed, and that many of them were headed for financial disaster without significant improvements.

Related: Nearly Half of Obamacare Co-Ops Are Closing

HHS awarded $2.4 billion in federal funds to 23 nonprofit health insurance co-ops even as the financial picture grew grimmer.

Twelve of those insurance organizations subsequently failed in the past year and a half, leaving 740,000 people in 14 states in the lurch and searching for new coverage while providing the government with feint hope of recovering $1.2 billion of the original loans.

“Over the last nine month, our subcommittee investigated those failures,” Portman, chair of the Senate Permanent Subcommittee on Investigations, said in his opening statement. “We wanted to see whether HHS, when it played the role of angel investor, made good or bad decisions with taxpayer money. The answer is bad decisions.”

Among Deloitte’s warnings:

Related: GOP Faults Obama and the ACA for Failure of Healthcare Co-ops

  • Defective enrollment strategies. The problems ranged from inadequate actuarial analysis and a misunderstanding of the health demographics of the targeted consumer pool to unsupported assumptions about sustainable premiums.

  • Numerous budgetary and financial planning problems. Deloitte found that 10 of the 12 co-ops that ultimately went under had incomplete budgeting plans that didn’t appear to be cost-effective or based on reasonable risk-taking assumptions. The firm warned specifically that the new co-ops in Colorado, Utah and Louisiana all relied on “unreasonable projections of their own growth.”

  • Many management weaknesses. Deloitte signaled problems with leadership for all of the 12 co-ops that subsequently failed, including a few co-ops that hadn’t even identified their leadership team.

Despite these and other problems, Deloitte gave all the fledgling co-ops a “passing grade,” based on a scoring system devised by HHS officials.

Related: Obamacare Gap Traps Millions With Coverage Who Can’t Afford Care

“Inexplicably, for over a year, the agency took no corrective action, nor did it put any co-op on enhanced oversight,” the report stated. “Five of the 12 failed co-ops were never subject to corrective action by HHS, and HHS waited until September 2015 to put five others on corrective action or enhanced oversight. Two months later, all twelve had failed.”

Andy Slavitt, the acting administrator of the Centers for Medicare and Medicaid Services (CMS), which oversees Obamacare, sought to defend the co-ops program even as he conceded the startling demise of half the co-ops and the loss of taxpayer funds.

“New entrants to any market, especially the insurance market, face numerous pressures and must overcome multiple barriers, particularly in the early stages of operation,” he said in prepared remarks.

The co-ops were approved as part of Obamacare as a consolation prize for those who had hoped for a government-provided health insurance program along with the network of private health insurers operating in all 50 states and the District of Columbia under the Affordable Care Act.

But the experimental co-ops operating in just half of the states had a rocky start from the beginning and proved to be among the more costly missteps of Obamacare. These embarrassing failures add to Obamacare’s star-crossed launch in 2014, and rising premium and co-payment costs.

Related: GOP Faults Obama and the ACA for Failure of Healthcare Co-ops

The turning point came after the administration decided last Oct. 1 to provide just 12.6 percent of the $2.87 billion that insurers were seeking to offset losses caused by unexpectedly high coverage costs. Slavitt noted today that while Obamacare authorized $6 billion for the program, Congress made “a number of substantial recessions to the initial funding level.”

That decision -- to decimate funding of a “risk corridor” program designed to reimburse insurers battered by excessive losses due to a disproportionate share of very sick or elderly enrollees – resulted in a mass exit of these co-ops from the market. Executives of some of the co-ops complained that the Republican controlled Congress undermined their ventures by sharply cutting funding that had been originally promised.

Republicans, including Marco Rubio who shepherded the bill to reduce risk payments, says the GOP prevented a taxpayer bailout of the insurance industry of $2.9 billion.

The co-op in New York State was the largest to go down, along with non-profit groups in Arizona, Colorado, Iowa, Nebraska, Louisiana, Nevada, Kentucky, West Virginia, Tennessee, Oregon, South Carolina, Utah and Michigan.