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99–624 2016

EXAMINING THE COSTLY FAILURES OF 

OBAMACARE’S CO–OP INSURANCE LOANS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT AND 

INVESTIGATIONS 

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

NOVEMBER 5, 2015 

Serial No. 114–99 

( 

Printed for the use of the Committee on Energy and Commerce 

energycommerce.house.gov 

(II) 

COMMITTEE ON ENERGY AND COMMERCE 

FRED UPTON, Michigan 

Chairman 

JOE BARTON, Texas 

Chairman Emeritus 

ED WHITFIELD, Kentucky 

JOHN SHIMKUS, Illinois 

JOSEPH R. PITTS, Pennsylvania 

GREG WALDEN, Oregon 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

Vice Chairman 

STEVE SCALISE, Louisiana 

ROBERT E. LATTA, Ohio 

CATHY MCMORRIS RODGERS, Washington 

GREGG HARPER, Mississippi 

LEONARD LANCE, New Jersey 

BRETT GUTHRIE, Kentucky 

PETE OLSON, Texas 

DAVID B. MCKINLEY, West Virginia 

MIKE POMPEO, Kansas 

ADAM KINZINGER, Illinois 

H. MORGAN GRIFFITH, Virginia 

GUS M. BILIRAKIS, Florida 

BILL JOHNSON, Ohio 

BILLY LONG, Missouri 

RENEE L. ELLMERS, North Carolina 

LARRY BUCSHON, Indiana 

BILL FLORES, Texas 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

CHRIS COLLINS, New York 

KEVIN CRAMER, North Dakota 

FRANK PALLONE, JR., New Jersey 

Ranking Member 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

ELIOT L. ENGEL, New York 

GENE GREEN, Texas 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

JANICE D. SCHAKOWSKY, Illinois 

G.K. BUTTERFIELD, North Carolina 

DORIS O. MATSUI, California 

KATHY CASTOR, Florida 

JOHN P. SARBANES, Maryland 

JERRY MCNERNEY, California 

PETER WELCH, Vermont 

BEN RAY LUJA ́ N, New Mexico 

PAUL TONKO, New York 

JOHN A. YARMUTH, Kentucky 

YVETTE D. CLARKE, New York 

DAVID LOEBSACK, Iowa 

KURT SCHRADER, Oregon 

JOSEPH P. KENNEDY, III, Massachusetts 

TONY CA ́ RDENAS, California 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

TIM MURPHY, Pennsylvania 

Chairman 

DAVID B. MCKINLEY, West Virginia 

Vice Chairman 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

H. MORGAN GRIFFITH, Virginia 

LARRY BUCSHON, Indiana 

BILL FLORES, Texas 

SUSAN W. BROOKS, Indiana 

MARKWAYNE MULLIN, Oklahoma 

RICHARD HUDSON, North Carolina 

CHRIS COLLINS, New York 

KEVIN CRAMER, North Dakota 

JOE BARTON, Texas 

FRED UPTON, Michigan (ex officio) 

DIANA DEGETTE, Colorado 

Ranking Member 

JANICE D. SCHAKOWSKY, Illinois 

KATHY CASTOR, Florida 

PAUL TONKO, New York 

JOHN A. YARMUTH, Kentucky 

YVETTE D. CLARKE, New York 

JOSEPH P. KENNEDY, III, Massachusetts 

GENE GREEN, Texas 

PETER WELCH, Vermont 

FRANK PALLONE, JR., New Jersey (ex 

officio) 

(III) 

C O N T E N T S 

Page 

Hon. Tim Murphy, a Representative in Congress from the Commonwealth 

of Pennsylvania, opening statement ................................................................... 1 

Prepared statement .......................................................................................... 3 

Hon. Diana DeGette, a Representative in Congress from the state of Colorado, 

opening statement ................................................................................................ 4 

Hon. David B. McKinley, a Representative in Congress from the State of 

West Virginia, opening statement ...................................................................... 5 

Hon. Frank Pallone, Jr., a Representative in Congress from the State of 

New Jersey, opening statement .......................................................................... 7 

Hon. Fred Upton, a Representative in Congress from the state of Michigan, 

prepared statement .............................................................................................. 123 

WITNESSES

Julie McPeak, Insurance Commissioner, Tennessee ............................................ 9 

Prepared statement .......................................................................................... 11 

Answers to submitted questions ...................................................................... 135 

James Donelon, Insurance Commissioner, Louisiana .......................................... 28 

Prepared statement .......................................................................................... 30 

Answers to submitted questions ...................................................................... 139 

Ben Sasse, a Senator from the State of Nebraska ................................................ 45 

Prepared statement .......................................................................................... 48 

Peter Beilenson, Board Of Directors, National Alliance of State Health CoOps ........................................................................................................................ 53 

Prepared statement .......................................................................................... 55 

John Morrison, Vice Chair, Montana Health Co-op ............................................. 59 

Prepared statement .......................................................................................... 61 

Mandy Cohen, Chief Of Staff, Centers for Medicare and Medicaid Services ..... 92 

Prepared statement .......................................................................................... 95 

Answers to submitted questions ...................................................................... 146 

Gloria L. Jarmon, Deputy Inspector General for Audit Services, Office of 

Inspector General, U.S. Department of Health and Human Services ............. 104 

Prepared statement .......................................................................................... 106 

SUBMITTED MATERIAL

Subcommittee memorandum .................................................................................. 124 

Article entitled, ‘‘Explaining ‘Risk Corridors,’ the Next Obamacare issue,’’ 

Wall Street Journal, January 22, 2014 .............................................................. 130 

(1) 

EXAMINING THE COSTLY FAILURES OF 

OBAMACARE’S CO–OP INSURANCE LOANS 

THURSDAY, NOVEMBER 5, 2015 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. 

The subcommittee met, pursuant to call, at 10:00 a.m., in room 

2322, Rayburn House Office Building, Hon. Tim Murphy (chairman 

of the subcommittee) presiding. 

Present: Representatives Murphy, McKinley, Burgess, 

Blackburn, Griffith, Bucshon, Brooks, Collins, DeGette, Castor, 

Tonko, Yarmuth, Clarke, Kennedy, Green, Welch, and Pallone (ex 

officio). 

Staff Present: Jessica Donlon, Counsel, O&I; Emily Felder, Counsel, O&I; Brittany Havens, Oversight Associate, O&I; Charles 

Ingebretson, Chief Counsel, O&I; Dylan Vorbach, Legislative Clerk, 

CMT; Christine Brennan, Minority Press Secretary; Ryan 

Gottschall, Minority GAO Detailee; Tiffany Guarascio, Minority 

Deputy Staff Director and Chief Health Advisor; Chris Knauer, Minority Oversight Staff Director; Una Lee, Minority Chief Oversight 

Counsel; Elizabeth Letter, Minority Professional Staff Member; and 

Arielle Woronoff, Minority Health Counsel. 

OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA 

Mr. MURPHY. Good morning. The subcommittee on Oversight and 

Investigation of the Committee on Energy and Commerce will come 

to order. 

The subcommittee convenes this hearing today to examine yet 

another ObamaCare failure, the CO–OP Insurance Loan Program, 

the Affordable Care Act established Consumer Oriented and Operated Plans or CO–OPs, an experimental program that awarded 

government-backed loans to nonprofit health insurance issuers. Of 

the 22 CO–OPs that sold health insurance plans, unfortunately, 12 

have failed to date. These failed CO–OPs represent $1.23 billion in 

Federal taxpayer money. Since CO–OPs must pay any outstanding 

debts or obligations before repaying the loan funds to CMS, it is 

unlikely that the Federal Government will ever recover these 

funds. 

Originally intended to increase choice and create competition 

among insurers, these CO–OPs were structurally flawed and financially risky from the start. As early as 2011, HHS predicted that 

2 

36 percent of the loans would go unpaid. In 2012, the Office of 

Management and Budget projected taxpayers would lose 43 percent 

of loans offered through the program. The following year, an HHS 

OIG report expressed concerns about CO–OPs’ financial stability 

and ability to repay loans. Even staunch supporters of the Affordable Care Act predicted the CO–OP programs would fail. Back in 

2009, Senator Rockefeller wrote, quote, ‘‘There’s been no significant 

research into consumer CO–OPs as a model for the broad expansion of health insurance.’’ What we do know however is that this 

model was tried in the earliest part of the 20th century and largely 

failed. The Senator also called CO–OPs a, quote, ‘‘dying business 

model for health insurance,’’ unquote. Despite these widespread concerns CMS awarded $2.4 billion in 

Federal loans to 23 CO–OPs operating 23 States. This total does 

not include the CO–OP that failed before it enrolled a single person. CMS awarded a CO–OP in Vermont, over 30 million taxpayer 

dollars. However, in 2013, Vermont’s State insurance commissioner 

denied the CO–OP a license, calling its application fatally flawed. 

The Federal funds that had already been spent to establish 

Vermont’s CO–OPs, about $4.5 million taxpayer, were never recovered. The next CO–OP to fail was CoOpportunity, a CO–OP operating in Iowa and Nebraska. At first, CoOpportunity seemed to be 

a success. It enrolled over 120,000 individuals, which amounted to 

one-fifth of CO–OP enrollees nationally. However, CoOpportunity 

premiums were too low, and it was concerned about its ability to 

pay claims to providers. CoOpportunity received $145 million in 

Federal loans, but upon liquidation, it had operating losses over 

$163 million. 

We are grateful today we will be joined later by Senator Ben 

Sasse, who had to run out to a vote on the Senate side. He will 

be here to talk about the CO–OP programs in Nebraska. Near the 

end of 2014, CMS awarded $315 million in last-minute loans to bolster six CO–OPs in dire financial situations, and of those six CO– 

OPs, three have since closed. It is doubtful that CMS will recover 

any of these additional funds. 

Several factors have caused the CO–OPs to fail. In some cases, 

low enrollment was to blame. In other cases, CO–OPs set premiums too low. A July 2015 HHS OIG audit issued before the rush 

of CO–OP closures found that 21 of 23 CO–OPs incurred net losses. 

In 2014, it anticipated that low enrollments and net losses might 

limit the ability of some CO–OPs to repay loans. 

Additionally, some CO–OPs have cited low-risk corridor payments from CMS as the reason for their demise because less money 

was paid into the risk corridor program than was expected. Insurers ended up with 12.6 percent of the payments they were anticipating. Given the CO–OPs’ dismal financial situation, CO–OPs inappropriately hoped risk corridor payments would bail them out. 

However, the risk corridor program was always intended to be 

budget neutral. Only what was paid into the program would be 

paid out. In fact, in early 2014, a spokesman from CMS confirmed 

the risk corridor policy modelled on the risk corridor provision in 

Part D that was supported on a bipartisan basis was estimated to 

be budget neutral, and we intend to implement it as designed, unquote. 

3 

We are here today to understand what went wrong. We will hear 

from individuals who were on the ground implementing and regulating CO–OPs from day one. We will hear from State regulators 

faced with difficult decisions about how to best protect consumers 

in their States. We will hear from individuals who have established 

CO–OPs and the challenges they faced to balance CMS requirements in keeping CO–OPs afloat. We will hear from the auditors 

of CO–OPs. We will speak to the financial challenges CO–OPs face 

to pay back their Federal loans. And, lastly, we will hear from 

CMS about not only what went wrong, but how we can fix it with 

the goal of recovering taxpayer dollars awarded to the CO–OPs. 

I thank all the witnesses for testifying today, and now magically 

appearing, the Ranking Member Diana DeGette. 

[The prepared statement of Mr. Murphy follows:] 

PREPARED STATEMENT OF HON. TIM MURPHY

The Subcommittee convenes this hearing today to examine yet another 

Obamacare failure: the CO–OP insurance loan program. The Affordable Care Act established ‘‘Consumer-Oriented and Operated Plans’’ or CO–OPs, an experimental 

program that awarded government-backed loans to non-profit health insurance 

issuers. 

Of the 23 CO–OPs that sold health insurance plans, 12 have failed to date. These 

failed COOPs represent $1.23 billion in federal taxpayer dollars. Since CO–OPs 

must pay any outstanding debts or obligations before repaying the loan funds to 

CMS, it is unlikely that the federal government will recoup these funds. 

Originally intended to increase choice and create competition among insurers, 

these CO–OPs were structurally flawed and financially risky from the start. 

As early as 2011, HHS predicted that 36 percent of the loans would go unpaid. 

In 2012, the Office of Management and Budget projected taxpayers would lose 43 

percent of loans offered through the program. The following year, a HHS OIG report 

expressed concern about CO–OPs’ financial sustainability and ability to repay loans. 

Even staunch supporters of the Affordable Care Act predicted the CO–OP program would fail. Back in 2009, Senator Rockefeller wrote: ‘‘There has been no significant research into consumer co-ops as a model for the broad expansion of health 

insurance. What we do know, however, is that this model was tried in the early part 

of the 20th century and largely failed.’’ The Senator also called CO–OPs a ‘‘dying 

business model for health insurance.’’ 

Despite these widespread concerns, CMS awarded $2.4 billion in federal loans to 

23 CO–OPs operating in 23 states. This total does not include the CO–OP that 

failed before it enrolled a single person. CMS awarded a CO–OP in Vermont over 

$30 million taxpayer dollars. However, in 2013, Vermont’s state insurance commissioner denied the CO–OP a license to sell health insurance, calling its application 

‘‘fatally flawed.’’ The federal funds that had already been spent to establish 

Vermont’s CO–OP-about $4.5 million taxpayer dollars-were never recovered. 

The next CO–OP to fail was CoOportunity, a CO–OP operating in Iowa and Nebraska. At first, CoOportunity seemed to be a success. It enrolled over 120,000 individuals, which amounted to one fifth of CO–OP enrollees nationally. However, 

CoOportunity’s premiums were too low and it was concerned about its ability to pay 

claims to providers. CoOportunity received $145 million in federal loans, but upon 

liquidation, it had operating losses over $163 million. We are grateful that Senator 

Ben Sasse is here today to testify about the failure of the CO–OP program, and how 

it has negatively affected Nebraskans. 

Near the end of 2014, CMS awarded $350 million in last-minute loans to bolster 

six CO–OPs in dire financial situations. Of those six CO–OPs, three have since 

closed. It is doubtful that CMS will recover any of these additional federal funds. 

Several factors have caused the CO–OPs to fail. In some cases, low enrollment 

was to blame. In other instances, CO–OPs set premiums too low. A July 2015 HHS 

OIG audit, issued before the rush of CO–OP closures, found that 21 of the 23 CO– 

OPs incurred net losses in 2014, and anticipated that ‘‘low enrollments and net 

losses might limit the ability of some CO–OPs to repay loans.’’ Additionally, some 

CO–OPs have cited low risk corridor payments from CMS as the reason for their 

demise. Because less money was paid into the risk corridor program than was expected, insurers ended up with 12.6% of the payment they were anticipating. Given 

4 

the CO–OPs’ dismal financial situation, CO–OPs inappropriately hoped risk corridor 

payments would bail them out. However, the risk corridor program was always intended to be budget neutral-only what was paid into the program would be paid out. 

In fact, in early 2014, a spokesman from CMS confirmed, ‘‘The [risk corridor] policy, modeled on the risk corridor provision in Part D that was supported on a bipartisan basis, was estimated to be budget neutral, and we intend to implement it as 

designed.’’ 

We are here today to understand what went wrong. We will hear from individuals 

who were on the ground, implementing and regulating CO–OPs from day one. We 

will hear from state regulators faced with difficult decisions about how to best protect consumers in their states. We will hear from individuals who have established 

CO–OPs, and face challenges to balance CMS requirements and keep CO–OPs 

afloat. We will hear from the auditors of CO–OPs, who will speak to the financial 

challenges CO–OPs face to pay back their federal loans. 

And lastly, we will hear from CMS about not only what went wrong, but how we 

can fix it—with the goal of recovering taxpayer dollars awarded to the CO–OPs. 

I thank all the witnesses for testifying today. 

OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF COLORADO 

Mr. DEGETTE. Thank you, Mr. Chairman. 

I am sorry this important hearing has been impacted by the 

votes today because it is an important hearing. From day one I 

have worked with the State of Colorado and the administration to 

help our CO–OPs succeed. Across the country, the CO–OPs have 

provided consumer-focused coverage options and have injected competition into the health insurance market. Yet a number of CO– 

OPs are facing financial challenges and, unfortunately, will not be 

able to compete in the 2016 marketplace. We have all seen announcements in the last few weeks about CO–OPs closing their 

doors, including the CO–OP in my home State of Colorado. 

I am very disappointed that the Colorado Division of Insurance 

was compelled to shut down the CO–OP. Yes, it faced challenges. 

But it also served the critical needs of 83,000 Coloradoans for 2 

years, and the company was well on its way to fiscal sustainability 

in 2016. I am also disappointed at the way CMS has managed this 

problem, which I will get to later. 

But you know something, equally to blame is us, Congress. I believe Congress has not worked as a partner to support the emerging CO–OP market that is attempting to bring more competition 

and choice to a market frequently dominated by one or two insurers. Mr. Chairman, I do wish that we had saved the CO–OP in Colorado, but if we can’t do that, I hope we will use our time productively today to make sure the remaining CO–OPs are successful. 

Unfortunately, I know better than that. I know that a hearing before this subcommittee with the title Affordable Care Act or 

ObamaCare in the title somehow won’t be a productive endeavor. 

We won’t spend the next several hours learning from the experts 

before us about the challenges faced by the CO–OPs and what we 

can do to improve them. We could be doing meaningful oversight 

instead of taking 61 votes to abolish the Affordable Care Act. And, 

instead, my colleagues on the other side of the aisle prefer to sit 

on the sidelines and root for the law to fail. 

Frankly, Congress has squandered the last 5 years by celebrating 

every bump in the road as we implemented the law, rather than 

focusing on how to make it better. Even worse, some of my colVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
5 

leagues have intentionally placed road blocks that have actually 

made it harder for their own constituents to access care. 

Now, look, I am not suggesting the Affordable Care Act has been 

perfect, far from it, but I think that the important thing from these 

bumps in the road is to recognize the problems and to try to move 

the ball forward. If we could do that, we could work together to improve health care coverage for millions of Americans. In his op-ed, 

the Senator—I guess he is not going to testify—he said in an oped last weekend, quote, this isn’t about spreadsheets. It is about 

people. And, frankly, I couldn’t agree more. It is about people who, 

before the Affordable Care Act, faced skyrocketing health care 

costs. It is about people who were at the mercy of health insurance 

companies that could raise rates or deny coverage for arbitrary reasons to protect their profits. It is about people who feared that an 

unexpected medical cost would bankrupt them. But thanks to the 

Affordable Care Act, they don’t have to face these uncertainties 

anymore. Americans are no longer one accident or illness way from 

financial ruin. 

So, Chairman, our constituents should be able to depend on Congress to work productively in a bipartisan manner to improve the 

healthcare landscape in this country. That is what I hope to do 

today. I am going to use my time to hear from the experts before 

us about how we can make the remaining CO–OPs succeed. Frankly, as I said earlier, I have some hard questions for CMS. I want 

to know what went wrong with the risk mitigation mechanisms 

that were designed to promote competition and ensure stability in 

the insurance marketplace. I want answers about how the CO–OPs 

wound up owing money to the big insurance companies through 

risk-adjustment programs. I want to understand why CMS said 

over the summer that risk corridor collections would be sufficient 

to cover all risk corridor payments while less than 3 months later, 

they revealed they would only be able to pay 13 percent of the requested amounts to insurers. In short, I want to know whether 

CMS is thinking outside the box and coming up with a path forward to support this important competitive ingredient in today’s 

health insurance market. 

Thanks again to all of our witnesses for coming today. Thanks 

for waiting while we went to vote. I think you are going to be waiting again in a minute while we go back to vote, but your expertise 

will improve the law and the lives of our constituents. And I hope 

that members on both sides of the aisle have come ready to hear 

your ideas so we can finally have a productive hearing on the Affordable Care Act. I yield back. 

Mr. MURPHY. Thank you. 

Mr. McKinley is recognized for 5 minutes. 

OPENING STATEMENT OF HON. DAVID B. MCKINLEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WEST 

VIRGINIA 

Mr. MCKINLEY. Thank you, Mr. Chairman, and I agree with the 

lady from Colorado that this is about people. Failure of these CO– 

OPs have had real-life consequences. People are hurting. They are 

confused. The collapse of the West Virginia-Kentucky CO–OP 

leaves 56,000 policyholders frantically searching for new coverage 

6 

before the close of the enrollment period. Seven years ago, the coal 

industry in West Virginia was booming, and we enjoyed the seventh best unemployment rate in the country. But now fast forward 

to 2015, the unemployment rate is the worst in the Nation: 45 percent of our coal miners have lost their jobs in the last 3 years, and 

thousands more affiliated with the coal industry have lost their 

paychecks. These individuals and their families, they are hurting. 

But they found a peace of mind in knowing that at least their 

family’s health care was secure. Unfortunately, that comfort did 

not last long. Families enrolled in the West Virginia-Kentucky CO– 

OP have had that rug jerked right out from under them, all because CMS did not do its job and vet those CO–OPs properly or address the red flags that were raised after the Iowa-Nebraska CO– 

OP failed. Instead of hitting the pause button, the CMS continued 

to award $350 million in additional funding. Twelve of the 24 CO– 

OPs have already failed. At this hearing, I intend to ask now, who 

will be responsible for the medical bills that have been incurred by 

families all across? Who is going to pick up those costs when the 

CO–OPs are not there? Will CMS give flexibility to families confronting the crisis of their lost health care? What about with only 

one Statewide exchange available in West Virginia, one Statewide 

exchange? Failure of this CO–OP will now result in our families in 

West Virginia paying 120 percent higher premiums than they were 

last year. Is that fair? 

This issue is not just about another failed ObamaCare program 

costing taxpayers in excess of billions of dollars. It is an opportunity for us in this room and in Congress to express our compassion and empathy for the hardworking families that have lost their 

sense of security. I look forward to the presentations today, and I 

yield back the balance of my time. 

Mr. MURPHY. Dr. Burgess will take the rest of that time. 

Mr. BURGESS. Thank you, Mr. Chairman, and thanks for the recognition. I think it is important that we are having this hearing 

today. There is a lot of policy in the Affordable Care Act. A lot of 

it was bad policy, and the CO–OP program is no exception. It has 

wasted millions of taxpayer dollars. It has suffered from a lack of 

oversight, and it has created instability for millions of patients. The 

model was fundamentally unsound from the start and was another 

example of the administration’s desire to conduct dangerous experiments with our Nation’s health care. Let us not forget that the ultimate patient protection is the assurance that their insurance carrier will not simply evaporate in the night, leaving patients without 

the coverage on which they rely. At last count, 12 of the CO–OPs 

have shut down, accounting for over a billion dollars in taxpayer 

dollars lost. The rate of failure continues to accelerate. In fact, the 

subcommittee staff struggled to finalize materials for this hearing 

because CO–OPs were failing and announcing failures faster than 

they could finalize the memoranda. 

We will hear from witnesses today that the Center for Medicare 

and Medicaid Services continues to stand in the way of flexibility 

that the remaining CO–OPs need to become sustainable. We should 

not stand by as more and more taxpayer dollars are lost, more taxpayer dollars are invested in failed experiments, and millions reVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
7 

main at risk of losing their insurance as CO–OPs continue to close 

their doors. 

So thank you, Mr. Chairman, and I yield to Mrs. Blackburn. 

Mrs. BLACKBURN. Thank you, Mr. Chairman. 

I want to thank our witnesses. Especially I want to thank Commissioner McPeak from Tennessee for joining us. We are fortunate 

to have you in our state, and we are fortunate to have your guidance, and we look forward to what you will tell us about the failed 

CO–OP that we have had in our state. We also appreciate CMS 

taking the time to be here today. There are answers that we need 

as we conduct our oversight and due diligence on the system. 

And, Mr. Chairman, I yield the time back to you. 

Mr. MURPHY. Thank you. I now recognize Mr. Pallone for 5 minutes. 

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY 

Mr. PALLONE. Thank you, Mr. Chairman. 

When we passed the Affordable Care Act into law over 5 years 

ago, we dramatically changed the healthcare landscape in this 

country. The law has been a historic success. It has made access 

to comprehensive health care a reality for the American people. Before the Affordable Care Act was passed, the insurance system in 

this country was broken. It was a system with rapidly rising costs, 

gross inefficiencies, and painful inequalities. A February 2010 

headline just a month before the ACA was passed declared, and I 

quote, ‘‘Soaring Premiums Reflect Unsustainable Health System.’’ 

Up to 129 million Americans, nearly one in two people, could be 

discriminated against for a preexisting medical condition, ranging 

from diabetes to breast cancer to pregnancy. Many insurance plans 

lacked important benefits and limited coverage. 

These things are no longer true. Because of the Affordable Care 

Act, people who were previously deemed uninsurable because of a 

preexisting condition are finally getting coverage. Today, insurers 

cannot cancel a woman’s policy just because she becomes ill. 

Women are no longer discriminated against, and people who could 

not afford insurance before are now able to do so. The CO–OPs fill 

a critical role in this new post-ACA world. They put healthcare 

choices in consumers’ hands. They prioritize their customers instead of their company overhead. They foster competition in the 

marketplace by bringing down prices. They do exactly what we had 

in mind when we passed the Affordable Care Act into law. And today’s hearing should be an opportunity to examine how we can ensure the remaining CO–OPs succeed. We should be talking about 

how to infuse competition into the marketplace to bring premiums 

down. We should be figuring out ways to help our constituents 

have access to high-quality affordable health care. 

But I am worried that is not what today is going to be about 

here. This committee has had dozens of hearings on the Affordable 

Care Act since it was passed into law, and those hearings have had 

only one purpose, to undermine the Affordable Care Act, regardless 

of how many people it is actually helping. These hearings have 

more often served to highlight only the flaws in the program, and 

8 

I look forward to you one day having a hearing, Mr. Chairman, 

where experts can talk about what is working, and there is much 

to applaud in that regard. 

Moreover, we should be taking this opportunity to do valuable 

oversight. The Affordable Care Act oversight of the last 5 years has 

neither served to enlighten the committee nor improve the law. It 

has done the opposite. In short it is incredibly frustrating to hear 

Republicans criticize the law time and time again without offering 

productive ways to improve it and get better health care to more 

Americans who need it. With over 60 votes to repeal or undermine 

the law, I think the record is clear that most of the majority would 

rather root for failure than help move the law forward. 

Finally, Mr. Chairman, I have suddenly heard many of my colleagues on the other side of the aisle lament that in the closing of 

the CO–OPs, many beneficiaries will now have to find new policies. 

Oh, my Republican colleagues are crying. Mr. Burgess in Texas, 

well, why don’t you try to get the Governor and the State Legislature to expand Medicaid? That might help a lot of people. Or, Mrs. 

Blackburn, well, she didn’t bring up TennCare today, but I usually 

hear about that. The fact of the matter is many of the people that 

signed up for the CO–OPs today had no insurance prior to their existence. Where were the voices of concern when people couldn’t afford insurance or were uninsurable because their child had a preexisting condition? I think it is time to have a productive conversation about how we can improve the Affordable Care Act and the 

lives of all our constituents. Let this committee get to the place 

where it can work together to improve the law. I yield back. 

Mr. MURPHY. The gentleman yields back. So they called votes. 

We are going to get through this as much as possible. We will 

swear you in, get your testimony. If you don’t need the full 5 minutes, you don’t have to give the full 5 minutes because we want to 

hear from you, and then we will come back and ask questions. 

You are aware the committee is holding an investigative hearing 

and when so doing has a practice of taking testimony under oath. 

Do any of you have any objections to taking testimony under 

oath? 

They have all answered no. The chair advises you that under the 

rules of the House and the rules of the committee, you are entitled 

to be advised by counsel. Do any of you desire to be advised by 

counsel today? 

Dr. BEILENSON. [Nonverbal response.] 

Mr. MURPHY. You desire to be advised by counsel. Could you 

identify your counsel, please? 

Dr. BEILENSON. Steve Ross and Tom Moyer. 

Mr. MURPHY. Will they be testifying? 

OK, thank you. 

Anyone else have counsel today? In that case, would you all 

please rise and raise your right hand. I will swear you in. 

[Witnesses sworn.] 

Mr. MURPHY. Thank you. You are now under oath and subject to 

the penalties set forth in Title 18, section 1001, of the United 

States Code. 

We will start with Ms. McPeak, the insurance commissioner from 

Tennessee. You may give a 5-minute summary of your statement. 

9 

STATEMENTS OF JULIE MCPEAK, INSURANCE COMMISSIONER, TENNESSEE; JAMES DONELON, INSURANCE COMMISSIONER, LOUISIANA; PETER BEILENSON, BOARD OF DIRECTORS, NATIONAL ALLIANCE OF STATE HEALTH CO–OPS; 

AND JOHN MORRISON, VICE CHAIR, MONTANA HEALTH CO– 

OP 

STATEMENT OF JULIE MCPEAK 

Ms. MCPEAK. Thank you. Good morning, Chairman Murphy, 

Ranking Member DeGette, Representative Blackburn, and members of the subcommittee. Thank you for inviting me to testify. I 

am Julie Mix McPeak, commissioner of the Tennessee Department 

of Commerce and Insurance. In addition to my responsibilities in 

Tennessee, I serve in committee leadership roles at the National 

Association of Insurance Commissioners, and as executive committee member of the International Association of Insurance Supervisors, and as a member of the Federal Advisory Committee on insurance. I’ve spent most of my career in insurance regulation, previously serving as the commissioner of the Kentucky Department 

of Insurance. And I have a strong affinity for the country’s Statebased system of insurance oversight. 

My testimony today will highlight the history of Tennessee’s CO– 

OP, Community Health Alliance Mutual Insurance Company or 

CHA. My comments will focus on events this year that ultimately 

led to CHA voluntarily entering runoff on October 14. CHA was 

awarded $73.3 million in loans and advances from CMS to launch 

the company. CHA first offered plans on the federally facilitated 

marketplace in 2014, with plans in five of Tennessee’s eight service 

areas. The company achieved minimal membership in 2014 due in 

large part to having plans priced significantly above the FFM leader and having limited network options. The company’s membership 

and rate challenges were compounded by a population that was 

less healthy and sought more medical services than projected. CHA 

recorded a net loss of approximately $22 million at year end 2014. 

In 2015, CHA saw its enrollment grow exponentially during the 

open enrollment period. And during the same period of time, projected medical costs continued to significantly increase. The department and CHA quickly recognized that such growth was too much 

too fast. Our department wrote a letter, which you have as exhibit 

1, to HHS Secretary Burwell on January 8 requesting that HHS 

place an immediate enrollment freeze on CHA due to the company 

triggering the department’s hazardous financial condition standard. 

The decision to freeze enrollment was and remains the right decision for the company and, most importantly, for Tennessee insurance consumers. 

In mid-2015, the department conducted a thorough actuarial review of the company’s proposed 2016 rates. After conducting our review, the department approved a rate increase of almost 45 percent 

for 2016. Throughout 2015, CHA peaked at more than 40,000 covered lives, but reducing down to almost 25,000 lives on the FFM 

where they remain today. Though we approved the rates to meet 

the CMS deadlines, we were not going to formally unfreeze the 

company until we reviewed initial results from a targeted financial 

examination called to evaluate the company’s expenses, projections, 

10 

and financial viability, and until CMS released Federal final guidance on the risk corridor program. 

In late September, the department was notified by CMS, and I 

think you have that as exhibit 2 to my testimony, that CHA was 

being placed on an enhanced oversight plan. That announcement 

was followed by risk corridor guidance that provided for significantly reduced risk corridor payments. The announcement immediately created a net worth deficiency for CHA. CHA asked the department if the $18.5 million startup loan could be counted as surplus if the loan terms were changed to be identical to the terms of 

the CMS solvency contribution. The department did not think that 

option was appropriate but told CHA—and I think you have that 

as exhibit 3—that statutory accounting principles would require 

the loan money to be classified as surplus if CMS and CHA bilaterally agreed to the loan agreement terms. After review at the department, CMS ultimately concluded that the loan conversion was 

not prudent. CHA voluntarily entered runoff on October 14. The 

Tennessee Department of Commerce and Insurance, CMS and its 

contractors, and CHA are working in close cooperation to ensure 

successful runoff. Our focus is on Tennesseeans first and foremost. 

My staff will continue to monitor the situation closely. 

The runoff will continue well into 2016. And there may be additional surprises. But as of today, cooperation between the three entities has helped ensure a smooth transition. 

Thank you for the opportunity to discuss the Tennessee experience with the subcommittee. I look forward to your questions. 

[The prepared statement of Ms. McPeak follows:] 

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Mr. MURPHY. Thank you. 

I now recognize Mr. Donelon, the commissioner from the Louisiana Department of Insurance. 

STATEMENT OF JAMES DONELON 

Mr. DONELON. Thank you, Mr. Chairman and Ranking Member, 

for the invitation and the opportunity to be here today to speak 

briefly about our experience in Louisiana with the creation and 

now the demise of our CO–OP. Let me start at the outset by telling 

you a little bit about myself and emphasizing the point that I am 

here on behalf of my State of Louisiana and not as a representative 

of the National Association of Insurance Commissioners, though I 

am an active participant at that level as well, having served as its 

president during the year 2013. But I have been insurance commissioner in Louisiana since 2006 and was recently, last month, reelected for the third time, beginning my next 4-year term as we 

speak. 

The creation of the Louisiana Health Cooperative, along with cooperatives in 23 states around the U.S., was a welcome part, from 

my perspective, although I have said repeatedly throughout my 

time as commissioner that if I had been here, I would have voted 

‘‘no’’ on final passage of the Affordable Care Act for other concerns, 

but not for the opposition to the creation of CO–OPs. I saw that 

as a mechanism to address competition, which I believe is the most 

important aspect of consumer protection in my State, where my top 

insurer, Blue Cross, has 70 percent of the individual, small group, 

and large group market. My friends next door in Mississippi have 

a more dominant Blue than that, and the one next to them in Alabama is even more dominant, so that the well-intentioned purpose 

of the creation of these CO–OPs, to put consumers in control of an 

insurer and also to create more competition in our states, I welcomed at the outset. 

Having said that, I now have described the effort to create insurers, health insurers, in the environment that existed as the rollout 

occurred of the Affordable Care Act, in hindsight, I have analogized 

it to being similar to learning how to sail in a hurricane. It truly 

was not possible, in my judgment, to succeed under those circumstances. 

Much happened in my state that affected that. We licensed our 

CO–OP in April of 2013. And they began signing up enrollees in 

accordance with their loan agreement with CMS in October of 

2013. That loan agreement called for them to sign up 28,000 lives. 

They ended up with 9,000 lives instead. In the several months between their approval and the beginning of their doing business, 

they had the challenges of the issues presented by guaranty issue, 

no lifetime limits, age caps, et cetera, not to mention the need for 

them to go out and rent a network of providers in a not very friendly to a purchaser of such service environment. They had to hire a 

TPA to do claims, to do their premium collection and payments on. 

They had to build a marketing network of agents, all of that in a 

relatively short, 5-month period of time that, frankly, in hindsight, 

was not functional. 

The next challenge came with the rollout on June 30 by CMS of 

the transitional reinsurance program numbers and the risk adjustVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
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ment program numbers. And where the CO–OP would receive $10 

million under the reinsurance payments, it would owe $7.5 million 

under the risk adjustment program. That represented a $5 million 

hit to their bottom line and triggered our calling them in on July 

1, the leadership of our CO–OP, to tell them they should actually 

make the decision to go into runoff before the enrollment period 

began this October 1. 

On July 7, their board voted to accommodate that request from 

our folks, and they began doing that. The Louisiana CO–OP’s financial situation is dire. And we are doing everything we can to 

preserve its network of providers and to make sure that their policy holders will continue to have coverage through the end of 2015. 

Now, us state regulators have the unenviable task, as I have, of 

trying to wind down a company while at the same time conserving 

it and doing so in my state, unlike Tennessee, without the protection of a guaranty fund to assure those healthcare providers that 

their bills would be paid. Let me talk for a few minutes about our 

relationship—— 

Mr. MURPHY. We don’t have a few minutes. You’re out of time. 

Mr. DONELON. I’m out? 

Mr. MURPHY. Yes. 

Mr. DONELON. I’m sorry. 

[The prepared statement of Mr. Donelon follows:] 

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Mr. MURPHY. That’s OK. Here’s the thing. We have one vote. We 

also have Senator Sasse who is here, so the question is, we have 

one vote on the floor. 

Ms. DEGETTE. Mr. Chairman, the problem is they are down to 

about 2 or 3 minutes left in the vote. And I don’t think they’re 

going to hold it open for us, unfortunately. So, with all due respect, 

I am going to ask my members to go down and vote. 

Mr. MURPHY. So unless some person wants to remain, we are 

going to have to hold off. This will be very quick. So we’ll run 

down, vote, and come back. So if members just do that, come back 

as quickly as possible, we should be able to reconvene in about 10 

minutes. Thank you. 

[Recess.] 

Mr. MURPHY. We are joined here and bringing back in the junior 

Senator from Nebraska Senator Ben Sasse, who we understand 

taught Jeff Fortenberry everything he knows in Congress, so we 

are thankful. 

Senator, you are recognized for 5 minutes. 

STATEMENT OF THE HON. BEN SASSE, A SENATOR FROM THE 

STATE OF NEBRASKA 

Senator SASSE. Chairman Murphy, Ranking Member DeGette, 

and members of the subcommittee. Thank you for inviting me to 

testify today. I appreciate the opportunity to think along with you 

about how we should respond to the failure of the CO–OPs in now 

13 states. I am tempted to joke after that voting moment that two 

more CO–OPs have failed while you were off voting. It is an urgent 

problem that has left hundreds of thousands of Americans scrambling to find new health plans this fall. 

Before we dive into the details on the CO–OPs, I would suggest 

that we should take our partisan hats off. I am a fierce opponent 

of the Affordable Care Act, and I know that many of you in this 

room night be strong supporters of the ACA, but I don’t think that 

is what your hearing is about today. I think this is about getting 

to the bottom of what is actually going on and why so many of our 

neighbors are losing their healthcare coverage. 

The tumultuous failure ACA’s CO–OPs began in my own backyard. It began with CoOpportunity, which is actually 

headquartered in Nebraska but had a majority of its subscribers in 

Nebraska. The goal of today’s hearing is to get to the bottom of 

what is happening with the CO–OPs, and I want to speak to two 

issues. First, while there is much more that we need to understand, what we know so far would suggest a systematic failure of 

the CO–OP program and an even greater example of bureaucratic 

incompetence more generally. Secondly, the lack of transparency on 

this issue is harmful, and the Department of Health and Human 

Services owes the American public answers. 

Republican or Democrat our constituents deserve nothing less 

than a full accounting for what has happened with this program. 

The CO–OP program was included in the ACA to purportedly foster competition in the new exchanges by federally funding the 

start-up of 23 nonprofit health insurers. To get them off the 

ground, taxpayers loaned these insurers $2.4 billion. After less 

46 

than 2 years of operation, 12 of the CO–OPs are down and the program has a failure rate over 50 percent. 

The first failure, CoOpportunity Health, as I mentioned 

headquartered in Iowa but with a majority of its subscribers in Nebraska, was arguably the messiest, because the members of the coopportunity program lost their health plan in the middle of a plan 

year. CoOpportunity had been awarded it, $145 million of taxpayerfunded loans. The new insurer had garnered about 10 times the 

numbers of enrollees that they had originally anticipated and was 

seemingly successful. However, despite ample funding and, obviously, far more enrollees than anticipated, on December 16th of 

last year, 2014, about a month into the new open enrollment season, the Iowa insurance commissioner placed CoOpportunity under 

a supervision order. By January 23rd of this year, 2015, the Iowa 

insurance commissioner deemed rehabilitation of CoOpportunity 

impossible and sought a court order for liquidation. 

After just one year of operation, the new not-for-profit health insurer abruptly collapsed. This was a terrible midyear shock to the 

120,000 CoOpportunity enrollees, again, a majority of them in my 

State. These people were forced out of their insurance plans and 

had to go through the grueling process of signing up for coverage 

on healthcare.gov all over again with lots of uncertainty and fear 

about how their families might be covered or might not be covered 

during the transition. 

So why did could CoOpportunity fail? Curiously, 9 months later, 

we don’t really have any answers. Sadly, CoOpportunity’s messy 

demise was just the first of the CO–OP dominos to fall this fall. 

Now, a total of 12 CO–OPs and 13 States will be closed by the end 

of this year. These 12 CO–OPs were awarded more than $1.1 billion in taxpayer-funded loans and had more than half a million enrollees. Another noteworthy failure is Health Republic of New 

York, the largest CO–OP in the Nation. It received more in taxpayer loans than any other CO–OP, totaling about $265 million. In 

late September, they announced they would be ceasing operations 

at the end of this year, but just last Friday, the State’s health insurance regulatory body revealed that the situation was actually 

much worse than it had even been understood 6 weeks ago. Apparently, a review conducted in conjunction with CMS now finds that 

the previously reported filings were not an accurate representation 

of Health Republic’s financial condition. Now, that CO–OP is planning to close down as fast as possible instead of being in business 

until the end of the year. 

That means that more than 200,000 enrollees in Health Republic 

will have to pick a new insurer and plan in order to maintain 

health coverage for the month of December as well as planning for 

next year. Their new coverage, which they will now have to sign 

up for, will be expiring at the end of the next month, and then they 

will have to begin the process all over again of trying to find a 

health insurer. 

The sudden disruption and subsequent consumer confusion is eerily similar to what happened to Nebraskans and Iowans earlier 

this year with CoOpportunity’s closure. This brings me to a second 

point. We still don’t have any good answers. With 12 out of 23 inVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
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surers rapidly going under, with inaccurate filings on the New 

York CO–OP, and with more than $1 billion in taxpayer loans out 

the door, there are more questions than ever, regarding the CO– 

OP program at large, and if they, those who are responsible for 

regulating it, knew what they were doing. I believe it is essential 

that HHS answer some basic questions, and all of us, Republican 

and Democrat, should be demanding that. 

For instance, CMS awarded additional solvency loans to CoOpportunity to Health Republic in New York and to the Kentucky 

Health Cooperative, all of which have since closed or are now closing, with CMS doubling down on their initial misjudgments by 

awarding additional loans. How did they decide to make these additional loans? Did they have any expectation that they were going 

to be paid back, or are they only going to be used to pay immediate 

claims? 

At the time of these awards, these three insurers were operating 

at substantial losses that seemingly stemmed from poorly pricing 

their products. One analysis measured the percentage difference 

between the CO–OPs’ average silver plan premium for a 27-yearold single person in the State, to the corresponding overall insurance market for all other carriers. Here’s what they found. CoOpportunity in Nebraska, Health Republic in New York, and the 

Health Cooperative of Kentucky were all pricing their products 

more than 20 percent below their competitors. How could this be 

possible? 

Should HHS have given these companies more taxpayer money, 

given the anomalies of their pricing models? Moreover, HHS has 

yet to address if and when taxpayers will be repaid for any of the 

more than $1 billion that have been loaned to these 12 CO–OPs 

that have closed or are closing. These are the types of questions 

and the information that HHS should be providing to the American 

people through the Congress. Why are they not? 

The lack of transparency thus far has been terribly disappointing. I started asking questions right after CoOpportunity 

failed in my State in May. Without receiving a sufficient response 

to my questions, I asked more questions when a second CO–OP, 

Louisiana, failed. By the time eight more CO–OPs had gone under, 

I elevated my effort to try to get answers to these questions. These 

are good governance, not partisan questions. I elevated my question by pledging that we will oppose the fast-tracking of all HHS 

nominations before the U.S. Senate. 

Since that announcement less than 3 weeks ago, four more CO– 

OPs are closing, cementing further that this is a systematic problem, and still, we don’t hear from HHS. Consumers who face this 

coverage disruption and the taxpayers who footed this bill deserve 

answers. CMS needs to provide a complete accounting of what has 

gone wrong within this program, and I hope that that starts today 

with your important hearing. Thank you for the invitation to testify. 

Mr. MURPHY. I thank you so much, Senator. 

[The prepared statement of Senator Sasse follows:] 

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Mr. MURPHY. I think you are going to be leaving now and head 

back over to the Senate. We do appreciate your insights and your 

persistence on this, and we want to continue to work with you. 

Ms. DEGETTE. And let me just add, Senator. You didn’t hear my 

opening statement, but I pretty much said the same thing as you 

did in terms of this should not be a partisan issue. We all need to 

figure out what’s going on with these CO–OPs closing. 

Senator SASSE. Congress needs to do better in oversight, not just 

in health care but in life in general. But that is a conversation for 

another day. 

Mr. MURPHY. Thank you. All the best. 

We’ll now continue with our panel. Next up is Dr. Peter Beilenson. I got it right? 

Dr. BEILENSON. Yes, sir. 

Mr. MURPHY. The President, CEO, of Evergreen Health Cooperative. Doctor, you are recognized for 5 minutes. 

STATEMENT OF PETER BEILENSON 

Dr. BEILENSON. Thank you, sir. 

Chairman Murphy, Ranking Member DeGette, and members of 

the subcommittee, thank you for inviting me to testify before you 

today. As the Chairman said, my name is Peter Beilenson, and I 

am president and CEO of Evergreen Health CO–OP, the Marylandbased CO–OP, founded in 2012. I also serve, as do all the CEOs 

of the CO–OPs, as a board member for the National Alliance of 

State Health Cooperatives, called NASHCO, and I appreciate the 

opportunity to appear before you today to discuss the issues affecting Evergreen and the other CO–OPs of NASHCO. 

As several of you have already said, while many elements of the 

ACA have engendered significant partisan disagreement, the notion of establishing local consumer-driven and innovative 

healthcare options while enhancing competition on the marketplace 

should be appealing across the ideological spectrum. The question 

now that we confront with the remaining 11 CO–OPs is how can 

we succeed? How can they succeed? And how can taxpayer investment be preserved? 

Unlike the difficulties experienced by many other state cooperatives in their first 2 years, Evergreen Health Maryland’s current 

fiscal condition is strong due to our quick and nimble response to 

unforeseen conditions in our first year of operations. Going into the 

current open enrollment, which just started a few days ago, we 

have a healthier than average enrolled population, due to a diversified book of business; we have greater than $35 million in assets; 

we have risk-based capital, a measure of solvency adequacy of almost 800 percent, and for the last 3 months, each month we have 

been turning a profit. So this can be a profitable mechanism. 

In addition, our strong relationship with Maryland Governor 

Larry Hogan’s new insurance commissioner, Al Redmer, and his 

staff continues to provide us with significant support. Evergreen, 

like all other CO–OPs, take very seriously our obligation to pay 

back the loan funds granted to us by the Federal Government. 

However, several requirements in regulations developed by CMS 

and CCIIO at their discretion, not as required by provisions of the 

ACA, are significantly impeding the ability of the 11 remaining 

54 

CO–OPs, including Evergreen, to successfully innovate and compete with the few carriers left on each state’s respective insurance 

markets. 

In light of these concerns, I would like to highlight three solutions that could forge a successful path forward for the remaining 

CO–OPs. And let me be clear, these do not require an act of Congress; they do not require additional appropriations by the Congress. 

First, as the CO–OP successfully market themselves and capture 

larger enrollments, they will need additional solvency dollars to 

continue to meet state regulatory requirements, put aside CMS’s 

requirements. However, as you know, CMS has no additional funds 

to assist with the solvency needs of the growing CO–OPs. The solution to this issue is to allow individual CO–OPs to raise capital to 

meet these solvency needs. In fact, as you may remember, the ability to obtain private capital in Section 1322, which established the 

CO–OPs, was one of the measures by which the original CO–OP 

applications were judged. CMS should amend the loan agreements 

to allow flexibility in raising capital, because the restrictions on obtaining additional capital, are not required under the ACA Section 

1322. 

Second, risk adjustment under the ACA creates additional issues 

for the CO–OPs as formulas applied by CMS are skewed to the 

benefit of large preexisting insurers with enhanced administrative 

capabilities and years of claims experience with data for their 

members. The solution: CMS must revise the risk adjustment formula to create a level playing field for all carriers. 

Third, and finally, the risk-corridor payments represent another 

issue for the CO–OPs. The solution: A swift resolution to the current funding deficit for this program will go a long way towards improving CO–OPs’ balance sheets and long-term outlook. 

Finally, we at Evergreen Health hope that both sides of the aisle 

and Congress will recognize that the nonprofit member-governed 

CO–OPs are trying to forge a new and innovative path for health 

insurance and give consumers increased choices in their coverage. 

This competition in consumer choice has had demonstrable effects. 

CO–OPs have brought innovative approaches to the marketplace 

and, thus, additional choices to consumers. For example, Evergreen 

Health offers a value-base insurance design product for diabetics, 

unique in the State of Maryland, which push the marketplace considerably, which removes virtually all financial barriers, co-pays, 

co-insurance, and deductibles to services, medications, and care 

that is needed to keep a diabetic patient from developing a myriad 

of complications of the disease. 

In conclusion, I share the Congress’ concern with protecting the 

Federal Government’s initial investment in CO–OPs. The solutions 

I have proposed today, again, do not entail an act of Congress or 

any additional congressional appropriations. They simply require 

CMS, the Congress, and the CO–OPs to work together to make 

sure that the remaining 11 CO–OPs are preserved and that taxpayer dollars are preserved as well. Thank you very much. 

Mr. MURPHY. Thank you very much, Doctor. 

[The prepared statement of Dr. Beilenson follows:] 

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Mr. MURPHY. And now finally we hear from Mr. John Morrison, 

the vice chairman of Montana Health Cooperative. You are recognized for 5 minutes. 

STATEMENT OF JOHN MORRISON 

Mr. MORRISON. Thank you, Chairman Murphy, Ranking Member 

DeGette, members of the subcommittee. Thank you for inviting me 

to testify. My name is John Morrison. I was Montana’s insurance 

commissioner, in 2001 to 2008, and I chaired NEIC’s health insurance committee. I am the founder and past president of the National Alliance of State Health CO–OPs and vice-chair of the Montana Health CO–OP. 

CO–OPs entered the marketplace in 22 States in 2014 and are 

now providing coverage to a million Americans. CO–OPs have 

brought much needed competition to the marketplaces, giving consumers more choice, introducing innovations and saving consumers 

and taxpayers money. 

Montana, where I live, has a CO–OP. Wyoming does not. Both 

States are on the FFM. In 2013, Montana’s average monthly premium was 18 percent lower than Wyoming. In 2015, with the Montana Health CO–OP in the picture, based on the second lowest silver plan, Montana is now 40 percent lower. 

In 2014, states with CO–OPs had average silver plan rates 8 percent lower than states without CO–OPs. In 2015, among FFM 

states, the Delta was about 13 percent and over $500 per person 

for the year. Based on the roughly 3.7 million Americans enrolled 

in CO–OP states in 2015, consumers in those states have already 

saved more than the total cost of the CO–OP program. 

Moreover, when rates are lower, subsidy costs to the Federal 

Government are lower. Taxpayers have already saved at least hundreds of millions in subsidies and would have saved billions over 

the decade ahead. One study published in Health Affairs, projected 

that if CO–OPs held rates down by just 2 to 5 percent, the savings 

to taxpayers over the next 10 years would be $7 billion to $17 billion. So the question is not how much CO–OP loans have cost the 

taxpayer. Rather, the better question is this, how much has the 

closing of CO–OPs and their removal from the marketplaces cost 

the consumer and the taxpayer for years to come? This question 

should be studied carefully. 

So I thank you for holding this hearing today. Senator Kent 

Conrad recently said, the long knives came out to kill the CO–OPs 

in their cribs. We need to get to the bottom of this, as Senator 

Sasse said, and find out who killed these CO–OPs and how much 

Americans will pay for that mistake. 

I got involved in the CO–OP project at the request of others, because I believe CO–OPs can break the endless inflationary spiral 

in our health insurance system. In my opinion, the following conduct of Congress and the administration has contributed significantly to the recent CO–OP closures. 

One, the $6 billion in capitalization grants were changed to 

loans. Two, the CO–OPs were prohibited from using loan funds 

from marketing. Three, in 2011 when dozens of groups began meeting to turn the CO–OP concept into a nationwide reality, Congress 

slashed CO–OP loan funding from $6 billion to $3.4 billion. Four, 

60 

OMB directed CMS to cap CO–OP loans to prevent CO–OPs from 

achieving more than 5 percent market share. Five, in late 2012, 24 

CO–OPs had signed loan agreements, and more than 40 additional 

groups were awaiting review. 

Congress responded in the year-end fiscal cliff deal by rescinding 

the remaining lending authority and prohibiting CMS from authorizing additional CO–OPs. 

Six, although CO–OPs had not yet opened their doors, congressional committees attacked them in hearings and press releases 

and tied the CO–OPs up with burdensome and expensive document 

demands. 

Seven, CO–OPs reserve requirements were more than twice as 

high as other insures. Eight, existing insures were allowed to early 

renew their ACA noncompliant policies and preselected good risk, 

degrading the marketplace pool. Nine, CO–OPs were prohibited 

from offering necessary terms to outside investors to access private 

capital. Ten, in year one, CO–OPs were prohibited from limiting 

their enrollment on State exchanges and the FFM despite, limited 

capital. 

Eleven, many CO–OPs were forced to pay risk adjustment to 

large existing carriers without consideration of the effect of early 

renewals or the CO–OP solvency requirements. 

Twelve, most recently, Congress and the administration reneged 

on risk-corridor commitment, paying less than 13 cents on the dollar for 2014. For some CO–OPs, this was the fatal blow. 

Americans will pay billions of dollars more in the years ahead, 

because these CO–OPs are closing. There are eleven CO–OPs remaining in 13 States. In my written statement, I make recommendations for measures that should be taken to maximize 

these CO–OPs’ chance of long-term survival. I hope we can discuss 

some of these options today. 

Thank you, and I look forward to your questions. 

Mr. MURPHY. Thank you, Mr. Morrison. 

[The prepared statement of Mr. Morrison follows:] 

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Mr. MURPHY. Let me start off with some questions here and I 

recognize myself for 5 minutes. 

The CO–OPs and state regulators have cited many factors that 

contributed to the failure of the CO–OPs. Lower and hire expected 

enrollments, restrictions on investors, CMS blames risk adjustment 

formula, low risk corridor payments, lots of those. Let me start off, 

and Ms. McPeak, what are the top reasons that the CO–OP failed 

in your state? 

Ms. MCPEAK. Thank you for your question, Mr. Chairman. 

Our CO–OP had challenges from inception in that, as Commissioner Donelon mentioned, going into a state without provider networks caused the company to have to lease those. There were administrative costs that were due to the startup that any startup 

company would have. But then in 2014, we had disastrously low 

enrollment. Truly, at most, maybe 1,000 people signed up for the 

CO–OP plan. Mostly because the rates were somewhat higher than 

the FFM leader, a well establish a company in the State of Tennessee. 

So overcoming those challenges became extremely difficult, and 

that’s why we saw significant rate increases for 2015 and beyond 

because of the enrollees across the market and Tennessee. We had 

higher than expected utilization, high claims costs, and insufficient 

premiums. 

Mr. MURPHY. Did the other plan also lose money, then, too when 

they had lower costs for the premiums? 

Ms. MCPEAK. Yes. Actually, every plan on our federally facilitated marketplace on the exchange lost—— 

Mr. MURPHY. That’s what I understand. Kind of nationwide, 

whether they would cost others in the bid to get enrollees, they had 

to underbid, and then we find out many of them realized the next 

year, they had to make up for the losses by charging more. And 

some survived and some didn’t. 

Ms. MCPEAK. That’s our experience in Tennessee. We didn’t have 

any company accurately project the claims costs that were going to 

be coming from these enhanced benefit plans that were sold in the 

state and mandated under the Affordable Care Act. And so some 

of our larger established companies could withstand those companies and offer plans, but the CO–OPs just didn’t have those resources available. 

Mr. MURPHY. Dr. Beilenson and Mr. Morrison, what would you 

say are the top reasons that 12 out of the 23 CO–OPs failed? I 

think, Mr. Morrison just read off a list, but internal problems too, 

so not just external. But, Dr. Beilenson, do you have some insight 

into what are the top reasons why they failed? 

Dr. BEILENSON. I don’t really know specially what happened with 

the other groups, although the risk corridor was clearly an issue 

and as John said, the risk adjustment was a big issue as well, because they were surprising payments instead of receivables on risk 

adjustment and vice versa on risk corridor. 

Mr. MURPHY. Mr. Morrison? 

Mr. MORRISON. I don’t mean to suggest that there were no mistakes made by management in CO–OPs, but if you look across the 

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body lost money. The difference was that CO–OPs were new entrants. They did not have other business and surplus to be able to 

offset the losses, and their capital was continuously reduced and 

capped. 

So when Commissioner Donelon talks about learning to sail in a 

hurricane, that’s especially apt in a situation where we were prohibited from building a big boat, and we were not only put into a 

hurricane, but in some cases given money to build a boat for 50 

people—— 

Mr. MURPHY. As the rollout occurred, we heard this, whether it 

was the Web site or other aspects, too, there was just not a lot that 

was clearly thought out. It was rolled out, pushed out and maybe 

is more like it. I know with the Web enrollment and other things, 

which we found out wasn’t ready, they knew wasn’t ready. Would 

you say it wasn’t ready when this started up? Should more foresight have gone into setting this up before the CO–OPs were 

thrown into the hurricane? 

Mr. MORRISON. To my knowledge, there has never been the situation where 22 new health insurance companies entered the health 

insurance market across the country in the same year, 2 years 

after they chartered their business. And so that was certainly a 

challenging situation. But it was much more challenging, and indeed, fatal for some, because they did not have adequate capital to 

deal with the risks that they were put into. 

Mr. MURPHY. Mr. Donelon, can you comment on that, too, how 

in your state that happened? 

Mr. DONELON. Absolutely. Thank you. 

Mr. MURPHY. Microphone. 

Mr. DONELON. I’m sorry. Thank you, Mr. Chairman. And again, 

thank you for the invitation to be here today. My situation was 

even worse. We were one of the last CO–OPs to be approved before 

the termination of the program. 

And so the timeframe from licensing in May to selling in October 

was so constrained that building our company was quite a challenge. I was initially very encouraged, because the group that got 

approval from CMS for CO–OP loans and from us for licensing, 

was closely associated with our optional health plan back in New 

Orleans. A maybe 100-year-old hospital and clinic operation, internationally respected and had been in the health insurance business 

until the 1990s when they sold off their health plan to Humana. 

So with their credibility and their experience and expertise, I was 

hopeful and optimistic that we’d be successful. In hindsight, it was 

too much in too short a period of time, plus all the other problems 

that have been described here in testimony today. 

Mr. MURPHY. Thank you. 

Ms. DeGette is recognized for 5 minutes. 

Ms. DEGETTE. Well, this is what I was talking about in my opening statement, because the ACA started in 2010, then these CO– 

OPs started a couple of years later, and then they had a couple of 

years to get going. So it wasn’t like we were trying to stand up 22 

companies all at the same time we were doing the enrollment on 

the Web site and all that. This was staggered. Is that right, Mr. 

Morrison? Yes or no will work. It wasn’t all at the same time? 

Mr. MORRISON. The awarding of the loans was staggered. 

80 

Ms. DEGETTE. Right. 

Mr. MORRISON. That’s true. 

Ms. DEGETTE. So really, part of the problem we have—yes, there 

were problems with the capitalization from the beginning, but part 

of the big problem is that there was no support as it went along. 

Wouldn’t that be a fair assessment? 

Mr. MORRISON. Inadequate capital was the problem. 

Ms. DEGETTE. Right. That’s what I want to talk about. The CO– 

OP program was initially conceived as a grant program, but then 

the startup funding ultimately ended up being in the form of loans; 

is that right? 

Mr. MORRISON. Yes. 

Ms. DEGETTE. And then Congress cut the CO–OP loan funding 

program from $6 billion to $3.4 billion; is that right? 

Mr. MORRISON. And then to $2.4. 

Ms. DEGETTE. Right. And then in the 2012 fiscal cliff deal, Congress—which by the way I voted against, Congress rescinded the 

remaining lending authority for CO–OPs, which essentially blocked 

the establishment of further CO–OPs even though 40 additional 

groups had submitted applications; is that correct? 

Mr. MORRISON. Very correct. 

Ms. DEGETTE. Now, irrespective of that, 23 CO–OPs got established. And the CO–OPs, like all the other insurers in the health 

marketplaces, took into account the Affordable Care Act risk stabilization programs, to help insurers mitigate the risk of insuring 

new populations who had potential losses, the law offered the 3Rs; 

the reinsurance, risk adjustment, and risk quarter programs, but 

those don’t seem to have worked. 

So I wanted to ask you, Dr. Beilenson, the risk adjustment formula has been problematic, as we’ve been discussing. In fact, a lot 

of the small CO–OPs are writing checks to large insurance companies under the risk adjustment formula. Does that seem fair to 

you? 

Dr. BEILENSON. It does not. And it was actually 21 of the 23 that 

were writing checks. 

Ms. DEGETTE. Twenty-one of the 23 writing checks to big insurance companies. 

I also understand because of Congress’ rule of budget neutrality, 

the risk-corridor program has failed to help the CO–OPs. This was 

the problem with the Colorado CO–OP failure, and we recently 

learned that the program lacked sufficient funds to reimburse for 

2014 claims. 

Now, Mr. Morrison, the risk-corridor program is only reimbursing the CO–OP claims at 12.6 percent of what they’re owed; is that 

correct? 

Mr. MORRISON. That’s correct. 

Ms. DEGETTE. And if Congress had not made this program budget neutral, would it be fair to say that the payments from the riskcorridor program would have likely made a difference in keeping a 

lot of these CO–OPs solvent? 

Mr. MORRISON. I have read news accounts from a half a dozen 

or so CO–OPs before the most recent closures, that specifically attributed their closures to the government reneging on the risk-corridor payments. 

81 

Ms. DEGETTE. Now, Dr. Beilenson and Mr. Morrison, what additional—let’s start with you, Dr. Beilenson. What additional steps do 

you think that we can take to ensure the continued viability of the 

CO–OP? 

Dr. BEILENSON. Well, I think as I was talking about before, revising the risk adjustment formula. And by the way, Medicare advantage’s risk-adjustment formula was tweaked several times over a 

10-year period. 

Ms. DEGETTE. Right. 

Dr. BEILENSON. Secondly, pay the risk corridor that was required. And third and probably as important, is allow us to have 

the flexibility to go after private capital as any truly free market 

allows you to do. 

Ms. DEGETTE. Mr. Morrison? 

Mr. MORRISON. I made recommendations in my written statement, but the ones that Peter has suggested are important. I just 

want to say about the risk corridor, that when you send these little 

boats into a hurricane to learn how to sail, it’s critically important 

that there be a Federal backstop, because they don’t have any 

other business to balance things against. And that’s why the riskcorridor payments are very important. 

The other thing I want to say is that the risk-corridor payments 

and full payment of it was promised repeatedly to the CO–OPs. 

And so the CO–OPs and their actuaries took that into account from 

the very beginning with rating. 

Ms. DEGETTE. Now, you said we needed a Federal backstop for 

these. What’s the public interest in having that Federal backstop 

for these small boats? 

Mr. MORRISON. Because it takes a few years. We didn’t know 

until 2016 what this risk pool looked like. That’s why you had big 

rate increases this year. And so the Federal backstop allows room 

for aggressive competition. The CO–OPs come in and add to that 

competition. Now everybody lost money. $2.5 billion, Wall Street 

Journal said 2 days ago from the McKinsey report on how much 

all the insurers had lost in those—— 

Ms. DEGETTE. But the CO–OPs didn’t have any way to recoup 

that. I’m out of time. 

Mr. MORRISON. The CO–OPs were not outliers in pricing. The 

CO–OPs were pricing competitively. Everybody lost money, but the 

CO–OP needed the Federal back stop, because they did not have 

the corporate depth to do it. 

Ms. DEGETTE. Right. To do it. Thank you very much. 

Mr. MURPHY. Thank you. 

Mrs. Blackburn is recognized for 5 minutes. 

Mrs. BLACKBURN. Thank you, Mr. Chairman. 

Thank you, all, for being here. 

Mr. Morrison, I think it’s important to note that any business in 

the country can be you can successful if it had a Federal backstop 

and somebody that was going to be there, and people have grown 

quite weary of bailouts. 

Ms. McPeak, I want to come to you and talk about the CMS enhanced oversight plans. Was the Tennessee CO–OP under an enhanced oversight plan? 

82 

Ms. MCPEAK. The first notification we had about the enhanced 

oversight plan for the Tennessee CO–OP was on September 29 

when we received a letter that I think I’ve attached to my testimony. What’s problematic about that day is that we were also in 

discussions with CMS to lift the enrollment freeze for 2016 without 

any knowledge that the enhanced oversight plan was going to be 

coming our way. 

Mrs. BLACKBURN. So you were getting conflicting information 

from CMS. The enhanced oversight plan for the Tennessee CO–OP 

included what? 

Ms. MCPEAK. There were five pages of issues in the letter that 

were identified that were areas that the CO–OP needed to focus on 

to create greater financial stability and create better viability for 

the plan going forward. 

Mrs. BLACKBURN. So they were giving you conflicting information; on one hand you had this, and on one hand the other? 

Ms. MCPEAK. We were under the impression that CMS felt much 

more comfortable with the financial stability of the CO–OP, and 

that’s why we were requested to lift the enrollment freeze by October 1, so that the programming could be effectuated to be available 

for open enrollment starting November 1. So we were surprised by 

the notification of the enhanced oversight plan. 

Mrs. BLACKBURN. OK. Now, let’s talk about the solvency, because 

they converted the solvency loans, the startup loans and seven CO– 

OPs, so that the loans would artificially appear more financially secure. So did CMS approach you about converting those loans so 

that the CO–OP would appear to have more capital on its books? 

Ms. MCPEAK. CMS had indicated that they were in agreement 

with that approach, and so the actual request came from our CO– 

OP itself, CHA—— 

Mrs. BLACKBURN. To recharacterize—— 

Ms. MCPEAK. Yes, ma’am. 

Mrs. BLACKBURN [continuing]. To recharacterize those loans. 

Did you think it made sense to convert those loans? 

Ms. MCPEAK. In my analysis, we decided that was not a prudent 

course of action, because, in fact, you are not adding any capital 

or revenue to the benefit of the company. You’re creating the impression on the balance sheet that the debt could be subordinated 

and the company would appear more financially healthy than we 

felt that it was. 

Mrs. BLACKBURN. So it’s kind of a smoke screen type practice? 

Ms. MCPEAK. Well, it certainly doesn’t add any additional dollars 

to pay claims for the company. 

Mrs. BLACKBURN. Right. Let’s see, is it true that you were instrumental in relegating the Tennessee CO–OP so that the premium 

prices were appropriate and that consumers were protected? 

Ms. MCPEAK. Yes. It’s difficult to look at premium increases that 

have been approved in Tennessee. We took that very, very seriously. But as has been mentioned here today, we need companies 

to be able to make good on the claims, and the losses were more 

problematic for all companies. And so, yes, we definitely took an interest in making sure that our premiums were appropriate for the 

CHA in 2016. 

83 

Mrs. BLACKBURN. Let me ask you this: Does the CO–OP have 

enough money to support consumers and pay its claims through 

the end of the year? 

Ms. MCPEAK. Because we took the decisive action of going into 

runoff, we do believe that the claims will be paid for all services 

rendered through the end of the year. 

Mrs. BLACKBURN. Through the end of the year. 

OK. And let me go back to Dr. Murphy’s questions. You were 

talking about the enrollment and it didn’t hit a thousand. What 

was the projected enrollment from the CO–OP, and what did CMS 

project that enrollment to be for 2016? 

Ms. MCPEAK. I would have to research the number, but I do believe that it was probably close to the 12- to 15,000 enrollee range 

for the first year growing to something more along the 20,000 enrollee range for 2015. 

Mrs. BLACKBURN. So their projection was 12- to 15,000 people, 

and what they actually got was about a thousand? 

Ms. MCPEAK. At its highest point. 

Mrs. BLACKBURN. So they were that far off their mark? 

Ms. MCPEAK. Yes, that’s correct. 

Mrs. BLACKBURN. OK. Thank you very much for that. 

Mr. Chairman, I will yield back 30 seconds of my time. 

Mr. MURPHY. There you go. Thank you. 

I now recognize Mr. Pallone, if he’s ready it, for 5 minutes. 

Mr. PALLONE. Let me get my questions out here, Mr. Chairman, 

if I can find them. 

Congress established CO–OPs to do a number of things that the 

private market had not done, and specifically, CO–OPs were created to compete with large for-profit insurance companies and 

hopefully, put downward pressure on premium prices and serve 

parts of the country that had fewer, no-good insurance options. 

So I wanted to ask Mr. Morrison, remind us of what the 

landscaped looked like for the consumer prior to the arrival of CO– 

OPs, particularly in rural regions. Is it accurate to say that there 

was minimal competition and the policies were often prohibitively 

expensive? 

Mr. MORRISON. All of those things are true, Ranking Member 

Pallone. In Montana the uninsured rate was about 20 percent. As 

I said, with the introduction of the CO–OP, the difference in average premiums between Montana and Wyoming went from Montana 

being 13 percent lower to being 40 percent lower. We now have an 

uninsured rate that’s, I think, closer to 11 or 12 percent in our 

state. Many, many thousands of people are now covered, who didn’t 

use to have insurance. Many, many thousands of people are now 

able to afford insurance, who were not able to afford insurance before. And with the CO–OP, consumers now have more choices. 

Mr. PALLONE. All right. Let me read a passage from a January 

2015 study by the Commonwealth Fund, regarding what the landscape looked like prior to the passage of the Affordable Care Act. 

And it says, and I quote, ‘‘Most States’ markets for individual 

health insurance were dominated by one or two carriers that competed primarily on how well they will they were table to screen and 

select people based on the risk of incurring medical claims. They 

had little incentive to compete by providing efficient services. InVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
84 

stead, their focus was on reducing their risk of covering people who 

might have a very high medical cost.’’ 

So, Mr. Morrison, that sounds look a rather bleak insurance 

landscape. Did insurance companies compete largely by denying 

coverage? 

Mr. MORRISON. There’s no question that segmenting the market 

and cherry picking to provide health insurance to the healthy people and exclude or price up the people with health issues was what 

was going on before the ACA, and that was certainly happening in 

Montana. In my experience, as the chair of the health insurance 

committee of NAIC, I saw it across rural America. 

Mr. PALLONE. And, Mr. Beilenson, would you agree with that, 

what he just said? 

Dr. BEILENSON. I believe so, but it’s not my area of expertise. 

Mr. PALLONE. OK. Let me go back to Mr. Morrison. Is it also accurate to say that prior to the passage of the ACA and the establishment of CO–OPs, many rural areas were underserved? And 

what did that mean for Montana residents? 

Mr. MORRISON. What it meant for Montana residents was that 

if they were unable to get health insurance, in many cases, they 

were unable to get the health care that they needed. And access 

to health care has improved because access to health insurance has 

improved. 

The other thing that’s happened is although BlueCross 

BlueShield, which is now owned by Health Care Service Corporation, one of the BlueCross corporate groups, still is the dominant 

carrier in the State of Montana. Their market share is somewhat 

smaller now, and consumers have the choice of the CO–OP, and so 

there’s more competition. 

Mr. PALLONE. Well, before the ACA, were there many rural residents being rejected for insurance or only being offered excessively 

costly policies? 

Mr. MORRISON. We found, when I was insurance commissioner, 

that most of the uninsured were people who worked full time for 

a small business. And the greatest area of difficulty in delivering 

health coverage to people was through small businesses that wanted very much to provide health coverage to their employees, but 

they couldn’t afford what the coverage cost in the market. That’s 

why we undertook a program called Insure Montana, before the 

ACA, before the Massachusetts plan, that provided refundable tax 

credits to help those small businesses afford health insurance. 

Mr. PALLONE. All right. Just one more question. Based on your 

experience, how have CO–OPs served the rural West and States 

such as Montana? Has it provided important competition and access to health care that previously didn’t exist? 

Mr. MORRISON. Well, CO–OPs have a great tradition in rural 

America. I think Senator Conrad, when he introduced the idea of 

a CO–OP at the time of the ACA’s enactment, talked about those. 

But people in our part of the country and across the great expanse 

between the coasts in the United States have long used the CO– 

OP model for credit, for electricity, for agriculture, and for other 

kinds of needs where they want to spread risk and spread expense 

to be able to deliver the goods and services that they need. 

85 

Mr. PALLONE. All right. Well, I’m obviously concerned that if we 

don’t shore up the remaining CO–OPs, we may again find ourselves 

lacking adequate competition and choices in rural areas. But thank 

you. 

And thank you, Mr. Chairman. 

Mr. MURPHY. Thank you. 

Dr. Bucshon, you are recognized for 5 minutes. 

Mr. BUCSHON. Thank you, Mr. Chairman. 

I just would like to say at the outset, I’m a strong believer in 

competition is the way to drive down healthcare costs. And I was 

a provider before I was a heart surgeon, so I’m also a believer in 

provider competition, including price transparency, quality transparency, and other measures that help consumers know what product they are getting and help to drive down healthcare costs, and 

I’m working towards those ideas. 

And I think it’s unfortunate that we are in the situation we are 

now with the CO–OPs and we need to figure out why and what we 

can do to prevent the others from going under. 

Mr. Morrison, CMS is—well let me see—yes. I’ll say this. CMS 

has cited enhanced oversight plans is a measure to evaluate troubled CO–OPs. These plans are being critiqued as ineffective and 

burdensome to CO–OPs. This would be for Mr. Beilenson first. Has 

your CO–OP been placed under an enhanced oversight plan from 

CMS? 

Dr. BEILENSON. Yes, as far as we know, most of the CO–OPs 

have been put—— 

Mr. BUCSHON. Most of them have. 

And what kind of requirements have they put upon you based on 

that? 

Dr. BEILENSON. There are only two. One is enrollment getting to 

30,000. We are at 26,500 today. Clearly, we’ll hit that by the end 

of December. December is a big month. And, second, there’s a resolve transition of our TPA, which we’ve already done. So we expect to come off of the corrective action plan. 

Mr. BUCSHON. Great. And do you believe that these oversight 

plans can be effective? 

Dr. BEILENSON. I think the oversight plans can be effective, yes. 

Mr. BUCSHON. Mr. Morrison, you have some comments on any of 

this? 

Mr. MORRISON. I would just say that it has certainly been a challenge for CO–OPs to face, not only state regulation, but several levels of CMS regulation and congressional oversight investigation, 

which began before the CO–OPs ever opened their doors. And so 

there’s no question that administrative resources in these CO–OPs 

have been distracted and diverted to comply with multiple levels 

of regulation that far exceed the regulation of other carriers. 

And at the same time, I understand that the Federal Government needs to look after its money. 

Mr. BUCSHON. Understood. 

And just a personal kind of question, unrelated, really, to CO– 

OPs. I mean, creating more competition, and anyone can answer 

this. Is expanding the traditional healthcare private insurance 

market across the country rather than having, essentially, statebased or regionally based, is that a concept that would work to creVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
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ate more competition? I think the state regulators would probably 

want to commend on that. Mr. Donelon? 

Mr. DONELON. May I? Thank you very much, Congressman. And 

great question, doctor. 

And I would caution my Republican colleagues, who have made 

a strong push toward authorizing companies to sell health insurance on a national basis, which they can do already, but subject to 

the individual State’s regulation. 

I would be concerned about a race to the bottom and the least 

regulation, similar to what happened with the AIG failure. And 

that concern is truly—I had a meeting with one of my delegation 

members before coming here this morning and passed on that advice and caution to him. 

I do want to point out one other thing when Congresswoman 

Blackburn and Commissioner McPeak were discussing, Tennessee 

is better served than Louisiana at this point. Their HMOs are protected by a guarantee fund safety net, unlike Louisiana, where we 

have tried that in the past but unsuccessfully. 

The Ranking Member DeGette, was talking about a Federal 

backstop. That has traditionally been done at the state level and 

should be done at the state level. 

Mr. BUCSHON. OK. 

Mr. DONELON. In closing I would say, please, support state-based 

regulation. It has served all forms of insurance extremely well for 

over 100 years. When I was NAIC president 3 years ago and was 

asked to come the Oval Office and meet with the President, he 

strongly expressed his continued support for regulation of insurance at the state level. 

Mr. BUCSHON. OK. Fair enough. I expected that you and Ms. 

McPeak would probably have a similar comment. So I would go to 

the others. 

Any other conceptual thoughts on that? Because the whole idea 

is to create competition for consumers to have more choice, to know 

what the product they’re getting, and to help the consumers drive 

down the costs of health care. 

Mr. Morrison, then we’ll—— 

Mr. MORRISON. I’m a former commissioner, too, and I testified in 

2005 in the Senate Small Business Committee about the AHP bill, 

and I opposed it for the same reasons that Commissioner Donelon 

articulated. 

Mr. BUCSHON. Ms. McPeak. 

Ms. MCPEAK. The only point that I would want to add to your 

question, that I think we would have more interest in companies 

selling across state lines if we had uniform essential health benefit 

plan designs. Because each state has their own essential health 

benefits, it’s very difficult for a company to sell across state lines 

and program their systems to pay for different benefits and different benefit levels in Kentucky as opposed to Tennessee as opposed to Mississippi or Georgia. 

Mr. BUCSHON. Yes, and whose state laws apply, right? If you live 

in California and have a plan from a company owned in New York, 

which state’s laws would apply? I know there’s some challenges. 

And my time is up. 

Ms. MCPEAK. OK. 

87 

Mr. BUCSHON. So, I appreciate all your comments. 

I yield back. 

Mr. MURPHY. Thank you. 

Ms. Castor, you are recognized for 5 minutes. 

Ms. CASTOR. Thank you, all, very much for being here today. 

Under the Affordable Care Act, Congress wanted to foster more 

competition among insurance providers to benefit consumers. This 

was one of the primary reasons behind the formation of the CO– 

OPs. And to some extent, as we’ve heard here this morning, they 

have achieved their goal, somewhat. 

However, the CO–OPs have faced headwinds. And I would like 

to understand from our witnesses how CO–OPs can continue to 

meet the original goals of providing the public with more insurance 

choices and benefits achieved through greater competition? 

Mr. Morrison, for those who may not closely follow healthcare economics, why are CO–OPs an important ingredient in today’s insurance market? 

Mr. MORRISON. The insurance markets were lacking competition 

to begin with, and now we see in the news that there is increasing 

mergers of the largest health insurance companies in the country. 

There’s mergers of the largest hospitals in the country. What’s happening is consolidation, and the need for competition has never 

been more greater than it is today. 

CO–OPs can come into the marketplace and have a fundamentally different kind of motive. Their motive is not to make as much 

money as they can. Their motive is to deliver quality health care 

at an affordable price, and that guides corporate decisions in a different kind of way. And that kind of competitive influence can be 

very positive in the marketplace. 

And in short, to answer your question, what they need in order 

to succeed in the future, eventually, they will stand on their own, 

but they need adequate capital until they can get their sea legs in 

this new marketplace. 

Ms. CASTOR. OK. Mr. Beilenson, similar question for the lay person, how do CO–OPs foster competition? How can they keep premium prices in check? 

Dr. BEILENSON. Well, I think as a new competitor on the market 

and additional competitor, we as, Mr. Donelon, state, have a big insurance company that’s 75 percent of the marketplace, and so adding a new competitor is very important. 

And I want to point out a couple of things about a CO–OP. First 

of all, we are member governed. I actually sort of pooh-poohed that 

when we started the company, but it really makes a difference having members enrolled in your insurance company as the board of 

directors. We’ve gotten all sorts of great ideas, and it’s very consumer-driven, consumer friendly, as the CO–OP program was 

meant to be. 

Secondly, it allows for innovation. We’re nimble; we’re quick. 

We’re like a, sort of like—a Titanic I shouldn’t use. Sort of like the 

giganto ship, Lake Erie or whatever. Instead, we’re sort of a nimble 

PT boat, if you will, for Mr. Kennedy over there. And we can do 

innovative things like our diabetic program, where we get rid of all 

co-pays, co-insurance, deductibles for proven practices to keep diaVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
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betics under control so we get rid of financial barriers to have them 

staying healthy. That’s sort of the sweet spot of healthcare reform. 

Ms. CASTOR. How many Americans are enrolled in CO–OPs 

today? Do you know? 

Dr. BEILENSON. Depends on how many are left. I’m not sure, 

500—— 

Ms. CASTOR. Does anyone know? 

Dr. BEILENSON. 400,000 something in the remaining 11. 

Ms. CASTOR. In March 25th, 2015, press release from the National Alliance of State Health CO–OPs, said for the second year 

in a row, average premium rates in the states with CO–OPs are 

lower than those without. 

Mr. Beilenson, can you explain how, in reality, what has actually 

happened? How have the CO–OPs affected the premium prices and 

plan choices in those states where they are still operating? 

Dr. BEILENSON. Well, predominantly, it was actually being a new 

competitor in a generally staunchly over the market—for example, 

in Maryland, we were the first new commercial insurer in 25 years, 

and that was the case in many different states. 

Ms. CASTOR. And that same release cites another analysis from 

2014 that showed that CO–OP states have premiums that are 8 to 

9 percent lower than in non CO–OP states. Is that accurate? Were 

CO–OPs able to drive down the premium rates in 2014? 

Mr. MORRISON. The delta between the CO–OP states and the non 

CO–OP states in 2014 was, as you said, about 8 percent, a little 

more than that. And apparently, in 2015, it was more like 13 percent. We believe that CO–OPs played a significant role in that, 

and, frankly, there have been other insurance executives who have 

commented in the media that they thought that the CO–OPs were 

responsible for the rates being lower in those states. But as the 

question requires further study because, obviously, there are other 

factors at work. 

Ms. CASTOR. And there are other trends right now, as Mr. Beilenson mentioned. The health insurance industry is facing a wave 

of consolidation such as Aetna and Anthem are considering merger 

and purchasing their smaller rivals. 

Mr. Morrison, if additional consolidation between large insurance 

companies occurs, what will this do to prices? Will we expect higher premiums as a result? 

Mr. MORRISON. Generally, competition drives lower prices. And 

so if there’s less competition, there’s higher prices. And so we think 

that’s one of the reasons that the CO–OPs were created, and we 

take that mission pretty seriously—the CO–OPs I should say do. 

Ms. CASTOR. Thank you. We have work to do on this for consumers in the country. Thank you very much. 

Mr. MORRISON. Thank you. 

Mr. DONELON. Mr. Chairman, may I be excused? I have a flight 

that leaves in 38 minutes. 

Mr. MURPHY. Good luck getting to the airport. You are excused. 

Mr. Collins is recognized for 5 minutes. 

Mr. COLLINS. Thank you, Mr. Chairman. And thank the witnesses for coming in today. I’m a private-sector guy that understands how you’re supposed to make money in business, how you 

capitalize companies, and how you either fail or succeed based on 

89 

your pricing and your product, and what you’ve delivered to your 

customers. And basically, if you make money, you succeed; and if 

you lose money, you don’t. 

So, we’re here today talking about CO–OPs in particular. And 

I’m from New York, where the New York CO–OP and its failure 

cost the American taxpayers over $250 million. Well, somebody 

asked me if I’d be surprised we’re here today. Well, no, I predicted 

this over 2 years ago. I remember sitting down with some insurance executives, health insurance people, in early 2013 and asked 

them how they were going to be pricing their products for 

ObamaCare and for the enhanced benefits. And what basically 

came out of those meetings is they were going to underprice their 

products because of the risk corridors, and they were confident they 

would get the money back. 

Because I said, well, what are you presuming for the number of 

healthy subscribers under age 30? Well, a third of our subscribers 

will be young and healthy. And I said, what are you guys smoking? 

That’s not gonna happen. And what’s going to happen when it 

doesn’t? Well, we are going to lose money, then the government is 

going to make it up to us. This was set up for failure from day one. 

The insurance companies knew it was going to fail. They released 

a product that was underpriced. They could not make money. 

So, Mr. Morrison, when you talk about it being not capitalized 

properly, would you agree with me if the CO–OPs made money, we 

wouldn’t be having this discussion? You don’t need more capital if 

you start with X and you make money. Isn’t that just fundamental 

common sense? 

Mr. MORRISON. I would agree with that. 

Mr. COLLINS. So—— 

Mr. MORRISON. All the companies lost money. 

Mr. COLLINS. So we are here because ObamaCare was set up for 

failure. It was set up to encourage low premiums, to deceive the 

American public. 

You know the saying, you can put lipstick on a pig, but it’s still 

a pig. That’s what we’ve got here. Everyone knew these products 

were underpriced and they were going to make it up on the backs 

of the taxpayers, and that’s why we’re here today. This problem 

here is a product that was underpriced, knowingly underpriced, 

meant you lost money, and now the complaint is we cut the money 

from $2.4—from $6 to $2.4 billion, but the $6 billion was based on 

50 CO–OPs. The 23 got $2.4 billion. They got every dollar they 

were supposed to get. Had we not cut from $6 to $2.4, there would 

be 50 CO–OPs. 

So I kind of have to just categorically disregard your comment 

that had we thrown $6 billion, but I think you’re suggesting throwing $6 billion at 23 CO–OPs would have shored them up. But that 

was never the intention. The $6 billion was for 50 CO–OPs. The 

23 were not harmed in any way. They failed because the product 

was underpriced. It was knowingly underpriced. 

ObamaCare was meant to deceive the public, and all I can say 

is, as now we’re a couple of years in, the deception is obvious. And 

I don’t know what the polls would say, and I’m not a guy to poll, 

but I think ObamaCare now would be probably in the 20 percent 

range. 

90 

And now we’ve got these problems. New York, 150,000 members 

on the New York plan lose their insurance in 2 weeks. And you 

know what we’re doing, we’re forcing the private companies to take 

those policyholders for 30 days who have all hit their deductibles. 

So the BlueCross BlueShield, Independent Health, they are going 

to have to take these 150,000 people for 30 days, eat those losses, 

and then have those folks set up a new plan. This is ObamaCare 

at its worst. It’s not surprising to me. I saw this coming 3 years 

ago, only because I have a certain level of common sense and know 

in the private sector, if you underprice your product, there will be 

a price to pay. 

And this product was deliberately underpriced from day one. And 

then when people say, woe is me, the risk corridor didn’t give me 

as much money as I expected, that’s because you expected to lose 

a lot of money and thought the taxpayers should shore that up, and 

it didn’t happen. So I can’t say I feel sorry for the American taxpayers who are bearing this financial burden who were deceived 

from day one, and it’s all coming home to roost. And we see it every 

day with the price increases and policies, the turmoil within the 

American public trying to find doctors day in and day out. 

So, again, private sector, you make money, you do fine. You lose 

money, you don’t do fine. Not a surprise we’re not doing fine here. 

The product was never priced correctly. 

Mr. MURPHY. Mr. Collins—— 

Mr. COLLINS. And with that, I yield back. 

Mr. MURPHY. I was asking, can you give an answer with regard 

to would you have priced it differently if there were not risk corridors from the onset? Would you price it a higher? Yes or no? Just 

in response to what he said. 

Dr. BEILENSON. No, we actually priced conservatively, and we 

were actually making a profit the last 3 months. 

Mr. MURPHY. Ms. McPeak, was that a backstop that you saw 

that would cover those losses and it didn’t work? 

Ms. MCPEAK. I don’t know that I would characterize as a backstop. But certainly, the incentive to appropriately price was eliminated when any excess profit of needed to be paid back to the other 

insurers. So unless the entire market priced appropriately, you 

were going to be pricing yourself out of the market not having the 

enrollment. 

Mr. MURPHY. And that’s what you’re saying. Got it. Thank you. 

OK. Mr. Yarmuth, 5 minutes. 

Mr. YARMUTH. Thank you, very much, Mr. Chairman. 

I thank the witnesses. I actually think this has been a very constructive hearing, and the dialogue has been good. It seems to me 

that what we’ve heard today is that there are a lot of different experiences with CO–OPs and a lot of different reasons some have 

had problems. 

My CO–OP in Kentucky did not have an enrollment problem. As 

a matter of fact, the initial projection was about 30,000 enrollees. 

It peaked at 57,000 and was insuring 51,000 when it announced 

that because of the risk-corridor deductions it cannot sustain itself. 

But, in fact, it had gone from losing $50 million in its first year 

to losing $4 million in 2015 and was on track to make a profit in 

2016. So not every experience has been right. 

91 

And I think looking at the various factors that could affect this, 

Commissioner McPeak, Tennessee didn’t expand Medicaid. 

Ms. MCPEAK. That’s right. 

Mr. YARMUTH. And this is not a partisan statement, but Tennessee did not have an administration that supported, necessarily, 

the Affordable Care Act. So as opposed to Kentucky’s experience, 

where you had an administration that was very much supportive 

in marketing it and running a PR campaign and alerting the population to the options that were available to them, that experience 

was going to be different than Tennessee’s or Louisiana’s, where, 

it seems to me, you had an enrollment problem first and foremost. 

Would that be a fair statement that all of these factors would affect how the CO–OPs operated and whether they had a better or 

worse chance of succeeding? 

Ms. MCPEAK. Certainly. And I will say statewide, we had a very 

positive enrollment through the federally facilitated marketplace. 

So we did not expand Medicaid. But the skewed enrollment of less 

than 1,000 people for the CO–OP made it extremely difficult to survive. 

Mr. YARMUTH. Exactly. And, obviously, we have different health 

conditions as well. Montana probably has a lot healthier population 

than Kentucky and Tennessee. I know Kentucky, we have serious 

challenges in that regard. 

But one of the things that impresses me, and this relates to just 

Mr. Collins’ statements, is that while our CO–OP is going out of 

business, we have three new private insurers who have joined our 

exchange. We now have seven insurers who are offering insurance 

and not relying on risk corridors. So they have seen opportunity in 

Kentucky and not a disastrous situation. 

And so our consumers are going to, as a result partially of the 

CO–OPs competition and their activities, we’re going to see enhanced competition in the private market through our exchange. So 

it could have an ancillary benefit as well. Would that not be true, 

Mr. Morrison? 

Mr. MORRISON. That’s very encouraging, and I think that the 

benefits of introducing a CO–OP into the dynamics of the marketplace has lots of ripple effects, and that was one that I wasn’t even 

aware of. So glad to know about that. 

Mr. YARMUTH. And one other thing. Senator just asked, we 

talked about the question of how can you offer insurance policies 

of 20 percent less than commercial insurance company can? Well, 

if there’s no profit margin involved, so you can. I don’t know whether it would be a 20 percent different as to the profit versus a nonprofit CO–OP, but there’s some factor there that would allow a 

CO–OP to offer pricing that even apples to apples would be below 

what a commercial for-profit insurance company could offer. Would 

that be correct? 

Mr. MORRISON. Yes, that’s true. But I want to make the point 

that the CO–OPs generally were not outliers on the low end in 

price. And McKinsey did a report in late 2013 about those initial 

prices, and CO–OPs were toward the bottom. They were within 10 

percent of the lowest 42 percent of the time. But the point is, when 

these companies set their prices and file them with the commissioner, they don’t know what the other companies are doing. And 

92 

so the mere fact that the CO–OPs were there caused the other 

companies to price more aggressively. 

Mr. YARMUTH. So what I’m taking away from this is that there 

are lot of different reasons the CO–OPs have either succeeded or 

not succeeded, and I think this is a very useful hearing to analyze 

that, not necessarily to ascribe blame, but to take about the factors 

that are involved. I think what I would conclude is there was not 

a fundamental flaw in the Affordable Care Act that caused any of 

those CO–OPs to fail. They were different factors, just as there is 

in any business situation. 

With that, Mr. Chairman, I yield back. 

And thanks again to the witnesses. 

Mr. COLLINS [presiding]. I thank the gentleman for questions 

and certainly thank all the witnesses. This will conclude our second 

panel, and you can rush to the airport if you’ve got any tight 

flights. I want to thank the members that did stay. It is a flyout 

day. We had so many members that had flights to connect. We had 

two vote series, so to some extent, I apologize for the attendance. 

Thank the members that did stay, and your testimony, which is 

on the record, is very helpful. Thank you very much 

So we are now going to bring on our third panel, which is our 

representative from CMS and our representative from OIG. 

We will begin our third panel here. I want to thank the witnesses, Dr. Cohen and Ms. Jarmon, for joining us today. Before we 

get going on this committee, we want to make sure the witnesses 

are aware that we are holding an investigating hearing, and when 

doing so, we have the practice of taking testimony under oath. Do 

you have any objection to testifying under oath? 

The chair then advises you that under the rules of the House and 

the rules of the committee, you are entitled to be advised by counsel. Do you desire to be advised by counsel during your testimony 

today? 

No. In that case, if you would, please rise, raise your right hand. 

I will swear you in. 

[Witnesses sworn.] 

Mr. COLLINS. Thank you very much. Be seated. You are now 

under oath and subject to the penalties set forth in title 18, section 

1001, of the United States Code. 

We now recognize you to give a 5-minute summary of your written testimony beginning with Dr. Cohen, chief of staff for CMS. 

Dr. Cohen? 

STATEMENTS OF MANDY COHEN, CHIEF OF STAFF, CENTERS 

FOR MEDICARE AND MEDICAID SERVICES; AND GLORIA L. 

JARMON, DEPUTY INSPECTOR GENERAL FOR AUDIT SERVICES, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT 

OF HEALTH AND HUMAN SERVICES 

STATEMENT OF MANDY COHEN 

Dr. COHEN. Thank you. Good afternoon, and thank you for inviting me here. Chairman Murphy, who I know has gone, but Mr. Collins, Ranking Member DeGette, and other members of the subcommittee. We appreciate the opportunity to talk about the CO–OP 

program. CMS takes its commitment to both the CO–OP conVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
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sumers and taxpayers very seriously. Our priority is to make sure 

that consumers have access to quality affordable coverage. 

In the years since the passage of the Affordable Care Act, we 

have seen an increase in competition and more choices for consumers. In today’s dynamic market, consumers can choose from on 

average 50 plans and five issuers for 2016 coverage. Nearly 9 out 

of 10 returning consumers will have three or more issuers to choose 

from, which research shows has typically intensified price competition in the market. New entrance to any market, especially the insurance market, can face pressures particularly in early stages. 

CO–OPs entered the insurance market with a number of challenges including building a prior network; no previous claims experience on which to base pricing; and competition from larger, more 

experienced issuers; as well as the uncertainty that a company is 

in the early years of a new market. As with any new business venture, some CO–OPs have succeeded while others have encountered 

more challenges. There have been successful CO–OPs which have 

provided consumers in their states an additional choice of health 

insurance and have improved competition. There have also been 

CO–OPs that for a number of reasons have faced technical, operational, or financial difficulties. In addition, Congress has made a 

substantial rescission to the initial $6 billion for funding for CO– 

OPs, impacting program operations and available funding. In the 

face of multiple pressures, it is not surprising that some new entrants have struggled to succeed. 

CMS plays a dual role with the CO–OP program, providing both 

oversight and support. CMS works to give CO–OPs tools to succeed, including sharing best practices amongst CO–OPs, and looking for additional regulatory flexibilities. At the request of CO– 

OPs, CMS has approved conversion of surplus notes, and we have 

approved the infusion of outside capital consistent with legal and 

regulatory framework of the CO–OP program. CMS also plays an 

oversight role. CMS, along with state departments of insurance, 

which serve as the primary regulator of insurance in a state, work 

to ensure that the CO–OPs are well run and financially sound. 

CMS has implemented the CO–OP program as required by statute 

and with the funds available, evaluating applications, monitoring 

financial performance, and conducting oversight. All CO–OPs are 

subject to standardized, ongoing oversight activities, including calls 

to monitor goals and challenges, periodic onsite visits, performance 

and financial auditing, reporting obligations, and a host of additional measures employed as needed on a case-specific basis, such 

as the evaluation of CO–OP sustainability. CMS increased the data 

and financial reporting requirements for CO–OPs required for 

them to provide quarterly statements saying that they are in compliance with state licensure requirements. If a CO–OP has experienced compliance issues with state regulators, the CO–OP was required to describe the steps being taken to resolve those. 

Financial data collection has helped CMS to identify CO–OPs 

with financial issues and give CMS the opportunity to work with 

state insurance regulators to help correct issues that are identified. 

As part of our oversight efforts, CMS has put some CO–OPs on enhanced oversight schedules or corrective action plans. Despite this 

94 

support and oversight, some new entrants to the insurance market 

have struggled to succeed. 

When states and CMS determine that a CO–OP should wind 

down, our first responsibility is to make sure current policyholders 

are able to retain coverage to the end of the year. CMS’ priority 

is to make sure that customers have access to quality, affordable 

coverage. We’re working with local officials to do everything possible to make sure consumers stay covered and retain access to 

high quality choices of issuers. Like other consumers, CO–OP enrollees are able to shop for 2016 coverage on the marketplace right 

now. 

In 2016, nearly 8 in 10 returning marketplace consumers will be 

able to buy a plan with premiums less than $100 a month after tax 

credits. We continue to encourage those consumers already enrolled 

in the marketplace coverage to come back to the marketplace, update their information, compare their options, and make sure 

they’re enrolled in the plan that best meets their family’s needs. 

Since the enactment of the Affordable Care Act, CMS has worked 

to increase access to quality, affordable coverage through the marketplace while being responsible stewards of taxpayer dollars. The 

CO–OP program was designed to give consumers more choice, promote competition, and improve quality in the insurance market 

and has done so in a number of states. CMS will closely work with 

the CO–OPs and state departments of insurance to provide the 

best outcomes for consumers. We appreciate the subcommittee’s interest and be happy to answer more questions. 

[The prepared statement of Ms. Cohen follows:] 

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Mr. COLLINS. Thank you, Dr. Cohen. 

Now we’ll hear from Ms. Jarmon. 

STATEMENT OF GLORIA L. JARMON 

Ms. JARMON. Good afternoon, Mr. Collins, Ranking Member 

DeGette, and other distinguished members of the committee. I am 

Gloria Jarmon, Deputy Inspector General for Audit Services, Department of Health and Human Services, Office of Inspector General. Thank you for the opportunity to testify today about OIG’s 

work as it relates to CMS’ oversight of financial loans and the financial solvency of the Consumer Operatedand Oriented Plans. 

As part of our strategic plan to oversee implementation of ACA 

programs, OIG has performed three reviews related to CO–OPs. 

My testimony today focuses on OIG’s most recent report issued in 

July 2015 that reviewed whether enrollment and profitability met 

the CO–OPs projections on their initial loan applications. Understanding that CO–OPs face numerous challenges, we conducted 

this audit work to assess the financial and operational status of the 

CO–OPs once they had experience operating as a health insurer. 

We reviewed the status of the 23 CO–OPs as of December 31, 2014. 

We found that most CO–OPs had lower than expected enrollment 

numbers and significant net losses and that these financial concerns might limit some CO–OPs’ ability to repay loans. 

Based on these findings, OIG issued four recommendations to 

CMS to improve financial oversight and solvency of the CO–OPs. 

These recommendations include: One, continue to place underperforming CO–OPs on enhanced oversight or corrective action plans; 

two, providing guidance or establishing criteria to determine when 

a CO–OP is no longer viable or sustainable; three, working closely 

with state insurance regulators to identify and correct underperforming CO–OPs; and, four, pursuing available remedies for recovery of funds from terminated CO–OPs. I will briefly discuss each 

of these recommendations in more detail. 

With respect to enhanced oversight, with the 2011 funding opportunity announcement and loan agreements, CMS has the ability to 

place underperforming CO–OPs on enhanced oversight plans. This 

vehicle provides authority to CMS to conduct thorough reviews of 

the CO–OPs’ operations and financial status. 

With respect to guidance, to ensure that CMS can appropriately 

identify CO–OPs that pose a high risk of failure, CMS should establish criteria to assess whether a CO–OP is viable or sustainable. 

With respect to state insurance regulators, CMS should enhance its 

oversight by working closely with State insurance regulators who 

are the primary regulatory entities that oversee CO–OPs as health 

insurance issuers. By doing this, CMS can obtain timely insights 

as to the CO–OP’s performance and can work with CO–OPs to address and fix ongoing financial and operational problems earlier. 

Finally, if CMS no longer believes that a CO–OP is viable and 

sustainable, CMS should then pursue all available remedies for recovery of funds from CO–OPs. This would include the option to terminate loan agreements which would require the CO–OP to forfeit 

all unused loan funds. This may allow CMS to recover some portion 

of the loan with the recognition that a CO–OP must resolve any 

105 

outstanding debts or other claim obligations before paying the loan 

funds to CMS. 

In closing, we appreciate the subcommittee’s interest in this important issue and continue to urge CMS to fully address OIG’s recommendations related to improving oversight and financial solvency within the CO–OP program. OIG is committed to providing 

continued oversight of this program. Our ongoing work will assess 

whether CO–OPs were in compliance with Federal regulations and 

program requirements in managing Federal funds. In addition, 

OIG will reassess the CO–OPs 2015 financial status and identify 

CMS actions to oversee the loan program and monitoring underperforming CO–OPs. We anticipate issuing these reports in 2016, and 

we look forward to sharing those results with the committee at 

that time. 

This concludes my testimony. I will be happy to answer any 

questions. Thank you. 

[The prepared statement of Ms. Jarmon follows:] 

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Mr. COLLINS. Thank you. 

I’ll now recognize myself for 5 minutes, and I guess, Ms. Cohen, 

I’m just going to start and accept you at face value when you say 

CMS does consider themselves responsible stewards of taxpayer 

dollars. Today’s hearing kind of begs the question whether that’s 

totally accurate or not. Before I get into a couple of other questions, 

there have been comments made that would somehow try to correlate states that did not increase, expand Medicaid to some of 

these failures on CO–OPs, and I guess I would just point out for 

the record, New York State absolutely aggressively expanded Medicaid, actively promoted ObamaCare, probably more so than most 

any other state in the country, and the hearing today is recognizing 

the failure of a CO–OP that was oversubscribed—not undersubscribed—and cost the taxpayers over $250 million, which is almost 

25 percent. So I don’t know that some of these other comments 

would accurately portray the problem. I’ll just go back to the products were underpriced from day one, and if you underprice your 

product, there will be a price to pay. 

So, Ms. Cohen, my worry now about New York and the loss of $250 million plus—Dr. Cohen, sorry—that it appeared that the 

New York CO–OP was in distress right from the beginning, lost 

over $35 million in the first year. I’m assuming you’re aware that 

there was an additional loan of $91 million after they lost $35 million, so could you speak to what that rationale was that the taxpayers now lost another $91 million? 

Dr. COHEN. Sure. As we looked at the CO–OP program over the 

first few years, I think you have heard a lot about the early years 

having uncertainty. We’re still in that. We’re only in the second 

year of the program in terms of folks facing a number of challenges. When any CO–OP approached us with any additional requests for funds, we evaluated that on an individual basis as we 

did even the startup of any one of these companies. We looked at 

their financial health at that time, their projection of where they 

were going to go, how they intended to get to a place of good standing, again, to say that we want to be good stewards of taxpayer dollars and want to be sure that if we are going to be further investing in a company, that we are going to be seeing those dollars. So 

we can only look at the information we have on hand at that time. 

At that time, our independent expert panel who reviews these felt 

that a further investment in New York, in the New York CO–OP, 

was the right decision. And we moved forward with that investment. We continue oversight and information, and facts on the 

ground change, and we make different decisions as we move forward. 

Mr. COLLINS. With that said, I would appreciate if you could provide the committee with the analysis that you indicate did occur 

that after losing $35 million in their first year, I have to presume 

that analysis would include such things as the difference in the, I 

would hope, much higher rates charged in 2015? Let me just start 

with that. They lost a lot of money in 2014, based on rates that 

weren’t adequate to cover losses. Were the rates substantially increased the next year, like 20 percent or more? 

Dr. COHEN. It’s important to remember that CMS shares in partnership the oversight responsibility here, but the responsibility for 

111 

rate setting is done at the State level in the New York Department 

of Insurance, or DFS, in New York is the one primarily responsible 

for saying, are these rates adequate to cover the expenses? 

Mr. COLLINS. And was that done? 

Dr. COHEN. So they do their own rate review in New York. As 

you know, New York also runs its own exchange. So from our perspective at CMS, we do do oversight in terms of the financial stability of the program, according actually with how OIG recommended our additional enhanced oversight. But the rates themselves are set by New York, by the company, and then approved 

by the State Department of Insurance. 

Mr. COLLINS. So do you know much the rates were increased for 

2015? 

Dr. COHEN. I don’t have off the top of my head, but I know that 

they did request and were granted a rate increase for 2015. 

Mr. COLLINS. I think it’s just important to note again that it’s a 

little concerning that CMS is making a $91 million loan based on 

what sounds like an analysis done by the New York State Department of Insurance, which ultimately was proven, by the fact that 

they’re now shutting down, to have been totally bogus. So if you 

could share that information back with the committee, I think we 

could learn something from that. 

Dr. COHEN. I would be happy to provide that. 

Mr. COLLINS. I certainly appreciate that. 

And Ms. Jarmon, my office will be sending you a letter to ask 

for even a more thorough investigation of what happened in New 

York State and what we may learn from the failures of the New 

York state CO–OP, and again thank you for that. 

And, with that, I would recognize Ranking Member DeGette for 

5 minutes. 

Mr. DEGETTE. Thank you so much, Mr. Chairman. 

I want to thank our witnesses for coming today, and I want to 

start with the risk-mitigation mechanisms in the law, which we 

commonly refer to as the three Rs, as I mentioned earlier. Those 

were designed to promote competition and ensure stability in the 

insurance marketplace. Is that correct, Dr. Cohen? 

Dr. COHEN. That’s right. 

Mr. DEGETTE. And yet some would argue that those programs 

are what have led to the insolvency of the CO–OPs. I don’t really 

understand how programs that were designed to help the CO–OPs 

could wind up hurting them. Let me go into that a little bit. The 

risk adjustment program is designed to transfer funds from lower 

risk programs to higher risk programs. Is that correct, Dr. Cohen? 

Dr. COHEN. The risk adjustment program is designed to again 

make sure that companies are taking care of the people who really 

need the care, those that are sick, and making sure they’re not just 

cherry picking the healthy folks but really offering coverage to anyone who walks through the door. 

Mr. DEGETTE. What that does then is it transfers money then 

from lower risk plans, where there aren’t so many severely sick 

people, to higher risk plans. Right? 

Dr. COHEN. That’s right. 

112 

Mr. DEGETTE. Given that, how is it that the CO–OPs wound up 

owing money to big insurance companies through the risk adjustment program? 

Dr. COHEN. Right. So the risk adjustment program is not based 

on size. It’s agnostic to size, but as you point out, what it’s really 

looking at the math formulas focused on the total risk and the 

health of the population. 

Mr. DEGETTE. So there was nothing in the statute to target not 

for profit or profit? 

Dr. COHEN. No. It’s agnostic as to—— 

Mr. DEGETTE. Was that the intention of the program. Do you 

know? 

Mr. DEGETTE. It was intended to be a risk program for all of the 

insurers that participated in the marketplace. 

Mr. DEGETTE. Now, the risk corridor program also ended up not 

coming through to the CO–OPs as we learned very painfully in Colorado in the last couple of weeks, and some State insurance commissioners, including mine, made management decisions based on 

the CO–OP’s inability to deal with losses, so I want to ask you 

some questions about that. The 2015 CR/Omnibus legislation made 

it so insurer payments into the risk corridor program are the only 

source of funding to reimburse claims, effectively making the program budget neutral. Is that correct, Dr. Cohen? 

Dr. COHEN. It is a mathematical formula that decides the proration rates or the ins and outs of that program, but yes, you’re correct. 

Mr. DEGETTE. I’m correct. Thank you. Now, in July of 2015, couple months ago, CMS reiterated to state insurance commissioners 

that they, ‘‘anticipate that risk corridor corrections will be sufficient to pay for all risk corridor payments.’’ Is that correct, Dr. 

Cohen? 

Dr. COHEN. That’s correct. 

Mr. DEGETTE. And yet just a few weeks ago, CMS revealed it 

would only be able to pay 13 percent of the reimbursements that 

the CO–OPs are owed. Is that correct? 

Dr. COHEN. That’s right. 

Mr. DEGETTE. So why is that? 

Dr. COHEN. As I mentioned, that formula is based on information 

that we got from the issuers themselves. That was not information 

that CMS had prior to the month of September. Originally, that 

data came in, as you may know, over the course of the month of 

July, and it was actually so messy we needed issuers to resubmit 

it. 

Mr. DEGETTE. But see, here’s the problem. In July, you’re saying 

it’s going to be sufficient to cover all risk corridor payments, and 

then, in October, you’re saying, oh, it’s only 13 percent. So irrespective of whether you had the data, you had CO–OPs like the one in 

my State with 83,000 people in it, who were relying on that. I 

guess it was bad information. 

Dr. COHEN. I think it’s important to remember that the risk corridor is one of three, ours as you mention, and in the reinsurance 

program, we actually paid 25 percent more than we thought we 

would be able to pay. Again—— 

113 

Mr. DEGETTE. But, again, if you have a CO–OP that’s on the 

edge, that didn’t solve that problem. I’m running out of time. I just 

want to ask you a couple of questions. Do you think that you can 

do anything to give more certainty to this program without statutory changes? Yes or no? 

Dr. COHEN. Could we give more certainty to the program? 

Mr. DEGETTE. Can you make changes that would give more certainty to these CO–OPs so they could stay in business without statutory changes? 

Dr. COHEN. I think we are always looking for opportunities. 

Mr. DEGETTE. If you can supplement your responses by giving us 

the ideas. Do you believe that there are statutory changes that 

Congress could pass to give more certainty? 

Dr. COHEN. I think that there are opportunities, yes, for—— 

Ms. DEGETTE. And that would be helpful if you would supplement that too. 

Thank you very much, Mr. Chairman. 

Mr. COLLINS. Yes. I thank the ranking member for her comments. 

We’ll now turn to Dr. Bucshon for 5 minutes. 

Mr. BUCSHON. Thank you, Mr. Chairman. 

And I thank the witnesses for being here. 

So, Dr. Cohen, who ultimately made the decision to give out $91 

million to New York, as was said; $66 million to Minutemen 

Health; $65 million to Kentucky Health CO–OP? I can go on, but 

three of—there’s a few more, but three of the six that I have listed 

here failed. So I want to know the person that made the decision 

to give them the money. 

Ms. COHEN. So we had a very rigorous process with an outside—— 

Mr. BUCSHON. Here’s the thing. I know you’ve already described 

your process. I understand you have outside people that look at all 

the data. But what I want to know is someone put their signature 

on the loan from CMS and said: We’re giving them this money. 

Who did that? 

Ms. COHEN. I don’t know who signed the loan agreements, but 

I can get back to you—— 

Mr. BUCSHON. Was it you? 

Ms. COHEN. It wasn’t me, sir. 

Mr. BUCSHON. I didn’t expect it would be. 

Ms. COHEN. I can let you know and—— 

Mr. BUCSHON. Yes, I’m sure you’ll have every intention of doing 

that, but I can tell you as a Member of Congress with experience 

asking these questions that I’ll never find the answer to that because no one’s going to take that responsibility, and I understand 

that. But do you know if it was a political appointee or a full-time 

CMS staff? 

Ms. COHEN. I don’t know who signed the loan agreements, but, 

again, I can talk more about the process that we went through in 

terms of evaluating the information that we had understanding 

the—— 

Mr. BUCSHON. Yes, I understand. 

Ms. COHEN. But we can get you that information. 

114 

Mr. BUCSHON. Dr. Cohen, you also testified before Ways and 

Means, and they asked when CMS knew the CO–OPs would fail. 

And it says you didn’t really give a clear answer. So I’m going to 

ask it. When did CMS know these CO–OPs would fail? 

Ms. COHEN. We have been doing oversight of the CO–OP program since its inception. And each circumstance is very unique. 

And there were different periods of time where we had information 

in front of us. When we knew folks were potentially going down the 

wrong path, we put folks in enhanced oversight, on corrective action plans, and as information presented itself, again, we took action. We really are still in the very early stages of this program. 

And I think from the discussion today you could see that we have 

taken our oversight responsibilities very seriously. We do feel like 

we are trying to be the best stewards of taxpayer dollars as possible. 

Mr. BUCSHON. I am going to run out of time. Is there political 

pressure to keep these CO–OPs alive? 

Ms. COHEN. Sir, I would say we are trying to do our best job possible to make sure that consumers can know that if they go to the 

marketplace now and want to sign you for the CO–OP, that they 

are strong and stable. And that we have done a tough job here. I 

think if there was another way that we could have arrived here, 

we would have. But we’ve been doing some tough work. Again—— 

Mr. BUCSHON. OK. That doesn’t answer the question, but I understand that. 

Why do we need the three Rs? 

Ms. COHEN. So—— 

Mr. BUCSHON. Because, like I think Mr. Collins pointed out, if I 

was going to start a business out there somewhere, I wouldn’t rely 

on the three Rs to make sure that if something didn’t work out, I 

all of a sudden got a check from the Federal Government. So fundamentally I get it, but, first of all, answer this question real 

quickly: CMS has always said they intended the risk corridor Program to be budget neutral. Is that correct? 

Ms. COHEN. So all of the three R programs—— 

Mr. BUCSHON. No. That question specifically. Did CMS always 

intend for the risk corridor to be—— 

Ms. COHEN. I don’t know if always. I would have to get back to 

you on that. I don’t know if—— 

Mr. BUCSHON. OK. Because that’s what it says here on my paper. 

Ms. COHEN. I don’t know if that wasn’t something—— 

Mr. BUCSHON. So then you can go into why we need the three 

Rs in the first place. And I may know that may—I understand you 

didn’t make these decisions, but you’re here and so—— 

Ms. COHEN. Happy to answer. So the programs were based on 

our experience with the Medicare part D program, the drug program in Medicare that had those three similar programs. As you 

stand up any new market, there is uncertainty. We’ve been hearing 

about a lot of that uncertainty earlier today. And so, again, those 

programs, one, we wanted to make sure that sick people weren’t 

somehow not covered by the insurance. We want those folks to be 

covered. The reinsurance program specifically was to cover the cost 

of any high-cost enrollees in early years. We know there may have 

been pent-up demand as—— 

115 

Mr. BUCSHON. So it’s basically to capitalize the business. Right? 

So that they have the capital to get off the ground. 

Ms. COHEN. I think it’s to keep premiums stable for consumers—— 

Mr. BUCSHON. OK. And following up on what Ms. DeGette said, 

you thought earlier in the year that you were going to be able to 

make the payments, and then you found out in October that you 

couldn’t. And basically what’s the reason for that? 

Ms. COHEN. Honestly, it’s the math formula. It’s the way the 

data came in from the issuers. And that’s the way the math worked 

out. And so we were able to pay at 12 percent, which is the dollars 

coming in, dollars going out. And that’s the way we move forward 

for this program. We’ve always said that we will take from next 

year’s collections and pay back to this year. It is a 3-year temporary program. 

Mr. BUCSHON. OK. Thank you. 

And I yield back. 

Mr. COLLINS. Thank the gentleman for his questions. 

Now recognize Mr. Yarmuth for 5 minutes. 

Mr. YARMUTH. Thank you very much, Mr. Chairman. Welcome to 

the witnesses. 

I can help Dr. Bucshon out a little bit on the background of the 

CO–OPs. One of the problems, we faced when we were drafting legislation was that in certain states, the availability of private insurance was limited to one provider. Or I think, in Alabama, there 

was Blue Cross Blue Shield dominated over 90 percent of the market. And in many states, that was the situation—maybe not that 

high. But the idea was to create competition, and the only way you 

could do it was to create a new entity. We chose CO–OPs as a nonprofit. And the idea was that you could that way create the kind 

of price competition that was meaningful. 

But we knew, and we knew in Kentucky when the CO–OP was 

established—and I talked with them many times as they were getting started—that they had no idea what kind of an insured population they were going to have. They didn’t know what the age was 

going to be. They had no data to predict that. They didn’t know 

how many would enroll. They didn’t know how many would have 

never had any healthcare, so automatically once they became insured, they would have a rush of care. They would try to get tests 

and because they—or treat things that they had never been able 

to treat before or whether they were going to get people who had 

had medical care but just lost their insurance. So the unpredictability of it was certainly the rationale for that. And I’m really 

proud of the experience with ACA in Kentucky. We have led the 

country in the reduction and in the amount of uninsured. More 

than 50 percent of our previously uninsured are now covered, more 

than 520,000 people in a state of 4.4 million. And in my district 

alone, in Louisville, we’ve reduced the uninsured rate by 81 percent, an astounding accomplishment. And more importantly than 

that, I think, is that every day I’m hearing from people who now 

have insurance and had a family member or a neighbor or friend 

whose life has been saved because they had insurance that they 

otherwise wouldn’t have. And I could talk about that for a long 

time. 

116 

But the focus of this hearing is on the CO–OPs. And I want to 

try and set the record straight about what happened with Kentucky. 

Ms. Jarmon, unlike most of the CO–OPs reviewed by your office, 

is it your understanding that the Kentucky Health Cooperative had 

far higher enrollment than expected, nearly double their original 

projections? 

Ms. JARMON. We actually have a chart in our report on the enrollment projections as of 2014, and for Kentucky, yes, it was like 

183 percent. So that was right. It was one of the few that was—— 

Mr. YARMUTH. And is it your understanding that a very high percentage of those enrollees were much sicker or utilized much more 

care than—and therefore were more expensive to ensure than the 

general population? 

Ms. JARMON. I don’t have that—— 

Mr. YARMUTH. You don’t have that information. 

Well, again, that’s why we established this risk corridor program 

and why it was so important. And that’s what happened to Kentucky’s CO–OP. They relied on this. Kentucky’s CO–OP, as I mentioned before the earlier panel, lost $50 million in its first year. In 

the second—first half of 2015 that loss had slowed down to a rate 

of 4 million. They were on track to make a profit in 2016, and unfortunately, when the risk corridor program was by that 87 percent, they were unable to continue. 

Dr. Cohen, is it your understanding that had Congress not 

capped the payments for the risk corridor program, that Kentucky 

Health Cooperative would still be open for business? 

Ms. COHEN. No. I think that there were a number of factors that 

contributed. Obviously, that was one of the last and certainly we 

have heard was an important factor for them. But you have to 

know that there were many factors, as we’ve been talking about all 

along in terms of the uncertainty and the challenges for the CO– 

OP program. 

Mr. YARMUTH. And as I mentioned before, that having been said, 

is it your understanding that even without the CO–OP, Kentucky 

residents will still have more health insurers to choose from in 

2016 than they had—— 

Ms. COHEN. Yes. 

Mr. YARMUTH [continuing]. In prior years? 

Ms. COHEN. Yes, very exciting. 

Mr. YARMUTH. Yes. So, again, I think I could talk for a long time 

about the success of the Affordable Care Act in Kentucky. We’re a 

much healthier state because of it. And I know somebody threw 

around a figure that maybe the approval rating of the Affordable 

Care Act is down near 20 percent. In Kentucky, it’s well over 50 

percent. 

Ms. COHEN. And I’ll give you a new number that the CDC just 

put out today for a new reduction in the uninsured rate to 9 percent historic. So I appreciate your leadership on that. 

Mr. YARMUTH. Thank you, Dr. Cohen. 

I yield back, Mr. Chairman. 

Ms. DEGETTE. Mr. Chairman, can I take a moment of personal 

privilege? 

Mr. COLLINS. Yes. Absolutely. 

117 

Ms. DEGETTE. You might have noticed this is not one of the new 

Members of Congress here. This is a dear, dear friend of mine and 

Chairman Upton’s, Max. And Max has been helping us with our 

21st Century Cures bill. Most of the staff and members have met 

him. Last night, Max was very honored to receive an award at the 

Every Life Foundation for Rare Diseases, Rare Voice Awards gala 

reception. And also Chairman Upton and I received awards, but 

Max is the one. He’s why we’re doing this. So thanks for letting 

me—— 

Mr. COLLINS. Oh, no. Thank you. And we all welcome Max. When 

I look back to the unanimous vote out of our committee on 21st 

Century Cures, I can tell you Max whipped more than one vote. 

Ms. DEGETTE. Max is our secret weapon. 

Mr. COLLINS. We may be looking at a future majority whip here 

sitting next to us. 

With that, I’d like to recognize Mrs. Blackburn for 5 minutes. 

Mrs. BLACKBURN. Thank you so much. 

And thank you for our witnesses and for your patience today. We 

appreciate it. 

I’m sorry that Mr. Yarmuth left. I think it’s important to note in 

Kentucky, when Tennessee had TennCare, a lot of Kentucky residents were coming into the state to try to get healthcare. And the 

Kentucky CO–OP did close. And the Kentucky approval rating of 

the ObamaCare products that are in the marketplace is really quite 

low, as was evidenced in that state this week. 

Ms. Cohen, I want to come to you. I had Commissioner McPeak 

here. I don’t know, were you in the room for the first panel? 

Ms. COHEN. I was. 

Mrs. BLACKBURN. OK. I’m really concerned about what has happened with taxpayers and the liability there with what took place 

with the loans and then the solvency grants. And we all should be 

concerned with that. That is not your money to give away. It is taxpayer money. And this is just money down the hole it appears because this didn’t work. And to go in here and hear from the CO– 

OPs that they now have these loan conversion options and that 

these startup loans classified as assets rather than debt, and I 

don’t see how you get there. Doesn’t that type loan conversion really give a false picture of what is going on in that CO–OP? Is that 

not a falsehood? 

Ms. COHEN. So, when talking about those conversions, which is 

what some of the CO–OPs have approached CMS with, we evaluated each of those on an individual basis. And I think you heard 

Ms. McPeak mention that in that case that was not the right step 

forward. And we did not go—— 

Mrs. BLACKBURN. To have suggested that, is that not giving an 

inappropriate picture of the financial stability of that CO–OP? 

Ms. COHEN. So that was a request by the CO–OP to CMS. We 

did evaluate whether or not that was the right—— 

Mrs. BLACKBURN. So you looked at whether they could call debt 

an asset. 

Ms. Jarmon, let me ask you. In the business world, the private 

business world, I think if you did that, you’d be accused of fraud, 

if you started re-characterizing your debts as assets and putting 

them on your balance sheet as an asset. I have just never even 

118 

heard of somebody saying that the Federal Government would approve such a process. How do you all view that? 

Ms. JARMON. I believe that came out in guidance in July of this 

year. So it was after we had done our work. We will be looking at 

it, but—— 

Mrs. BLACKBURN. You’re going to go back in and review that? 

Ms. JARMON. Yes, we will look at it as part of our follow-up. It 

was part—— 

Mrs. BLACKBURN. Well, we will appreciate getting that. Is that 

not an odd business practice? I’ve never seen this type characterization viewed as being a standard operating procedure. 

Ms. JARMON. It appears unusual. Right. 

Mrs. BLACKBURN. It does appear unusual. And I think that it 

leads us, Ms. Cohen, to wonder if there are other unusual business 

practices that are surrounding the stability of the CO–OPs or the 

lack of stability of the CO–OPs and the entire lack of stability of 

the Affordable Care Act programs. This is highly unusual. 

Vermont Health CO–OP, $33 million in Federal loans had been 

awarded to the Vermont Health CO–OP. How much, if any, of the 

money for the Vermont Health CO–OP has been or will be returned 

to the Federal Treasury? 

Ms. COHEN. We work aggressively, if we are winding down any 

CO–OP, to return funds back to the taxpayer. 

Mrs. BLACKBURN. How much has been returned? 

Ms. COHEN. I don’t have the number—— 

Mrs. BLACKBURN. Would you get that number for us? 

Ms. COHEN. I will do what I can. 

Mrs. BLACKBURN. When money is awarded and then they don’t 

get the license to stand up the CO–OP, every penny of that ought 

to be coming back to the Federal Treasury. And I think you know 

that. 

Ms. COHEN. We work aggressively to recover the loan funds 

in—— 

Mrs. BLACKBURN. I can imagine what the IRS would say if people would: Well, we’re going to work to get that money back to you, 

IRS. We’re really working on it. 

So we want to see that that comes back. Because I think it is 

inconceivable that the taxpayers are going to be held responsible 

for this. 

And when should we expect that money? What’s your timeline 

for getting that money back in? 

Ms. COHEN. So we’re working through that process right now. I 

don’t have—— 

Mrs. BLACKBURN. So you’ve got all this money out here. Ms. 

Cohen, listen to yourself. You got all this money out here. It is 

being wasted. Half of your CO–OPs are insolvent, and you’ve got 

this re-characterization process going to take your debts and make 

them appear to be assets. That is highly unusual. And you want 

to sit here and say: Well, we’re looking at it? 

When are you doing it? Are you continuing to meet on it every 

week? Do you have a timeline for coming up with getting this 

money back? Is it a top priority? 

Ms. COHEN. So my team—— 

119 

Mrs. BLACKBURN. Yes. Please read the note that’s been passed to 

you. 

Ms. COHEN. So we got all of the money back from Vermont, 

which—I would say the rest of the CO–OPs that we’ve been working with over the last several months, obviously, are still in business. They continue to provide coverage for consumers until the 

end of the year. And then we’ll work through the process at that 

point in accordance with the loan agreement to recover funds for 

the taxpayer. 

Mrs. BLACKBURN. OK. So there is something in process. Thank 

you. 

Ms. COHEN. Thank you. 

Mrs. BLACKBURN. And if you will continue to provide that type 

of information for us, that is what we need to know, the specifics. 

It does not help us in doing our due diligence and being certain 

that people have coverage, it does not help us if you come into a 

hearing and you cannot say: This is where we are, exactly where 

we are, and what we’re going to do. It is helpful when Ms. Jarmon 

says: This happened after our July review, and then we’re going to 

come back in and we’re going to look at this very unusual business 

practice and have a recommendation for you. That’s the kind of 

thing that is helpful. 

I am way over my time. I yield back. 

Mr. COLLINS. That’s OK. We are missing a lot of our members. 

So we’ll actually maybe ask a few more questions, to dig down a 

little bit deeper. 

And, again, I’d like to kind of just set the stage. All of us up here 

agree we need to be good stewards of taxpayer money. And that’s 

the purpose of this hearing. Learning from what’s happened the 

last 2 years, and losses have occurred, it sounds like a few CO–OPs 

are doing OK. Half of them failed. There’s lessons to be learned 

here. And I think the purpose of this hearing and our requests for 

more information will be: How can we take all of that and hopefully not continue to lose taxpayer money? 

But, Ms. Jarmon, there is a question for OIG that the loan agreements, as I understand it, between CMS and the CO–OPs do have 

provisions in them, enforcement provisions, and I just wondered, 

could you explain what some of those provisions might be. And 

then a very direct question would be, to the best of your knowledge, 

and then I’ll go to Dr. Cohen, have we taken any of these enforcement measures against any CO–OPs? 

Ms. JARMON. Right. The loan agreements do allow—there’s an 

option to terminate the loan agreements which would require the 

CO–OP to forfeit all unused loan funds. And there’s also within the 

loan agreement and the funding opportunity, there’s the issue of 

the enhanced oversight plans and corrective action plans, which 

CMS has actually put several of the CO–OPs under enhanced plans 

and corrective action plans. So those are all part of the loan agreement. 

Mr. COLLINS. Has CMS terminated any loan agreements? 

Ms. JARMON. I am not aware. 

Dr. COHEN. So we have terminated the loan agreements for those 

12 CO–OPs that you have heard that are shutting down. So we 

have terminated all of those, and we will—— 

120 

Mr. COLLINS. Did we get any money back? 

Ms. COHEN. So let me clarify, and I want to make sure for the 

record I have it right. So, in Vermont, we did get the vast majority 

of the money. There was some funding that was used in their startup funds that was not recovered. On a go-forward basis, we are 

making sure that consumers have coverage through the end of the 

year. These entities will be operating through the end of the year. 

And at that time, we will do a run-out of claims and understand 

the financial health of the organization and then use all of our ability with the terms of the loan agreement to recover—— 

Mr. COLLINS. Now, but that’s not the case in New York. They’re 

not running—it’s my understanding—the CO–OP in New York, 

which lost $250 million in fact is shutting down in 2 weeks’ time. 

So that doesn’t—— 

Ms. COHEN. That’s right. 

Mr. COLLINS [continuing]. Line up with what your testimony just 

was. 

Ms. COHEN. That is right. So that is why we are doing so much 

of the hard work right now before this open enrollment period 

started on November 1 to make sure we understood the financial 

health of any one of these CO–OPs, is because we want consumers 

to be confident that there wouldn’t be a midyear closure of any one 

of these CO–OPs. 

In the case of New York, we went to wind them down and terminate their loan agreement back in the September timeframe when 

we sent in our audit team after we even decided to wind them 

down. We went and found out that their financial situation was 

even more dire than we understood it to be when we made the decision to wind them down, and that is why we are in this unfortunate situation. I will say that the folks in New York, the Governor’s 

Office, the Department of Insurance, has jumped on this problem 

and is working it very aggressively to make sure consumers have 

a smooth transition. And this is exactly why we’re doing all of this 

tough work right now so this doesn’t happen in other places. 

Mr. COLLINS. I purchased a lot of distressed companies in my private sector career. And let me tell you, a bank who then loans 

money in many cases in what you might call workout or assetbased lending agreements, there’s literally daily and weekly reports. And you are under a magnifying glass until that bank who 

has money at risk is confident that they’re going to be able to be 

paid back. And it, quite frankly, sounds as though CMS has accepted a lot of information at face value, and not dug very deeply into 

those details to say: OK, 2 months later, we’re totally shocked the 

finances are much worse. If somebody was really watching a $250 

million loan, day by day and week by week, I don’t think you would 

wake up 2 months later you would have found out 2 months earlier, and maybe we would have lost $200 million instead of $250 

million. I think there’s lessons learned in that, when you’re good 

stewards of taxpayer money, the taxpayers expect a level of scrutiny at least consistent with what big banks do when they make 

loans. And, in fact, you could argue maybe it should even be more 

than that. 

So my last few seconds here, another question, I know that 

there’s going to be outstanding claims, as these CO–OPs are shutVerDate Nov 24 2008 12:28 Jun 14, 2016 Jkt 037690 PO 00000 Frm 00124 Fmt 6633 Sfmt 6633 F:\MY DOCS\HEARINGS 114\114-99 CHRIS
121 

ting down, including New York. I’m assuming there’s no money. 

Who’s going to pay those claims? 

Ms. COHEN. So, as I said, the CO–OPs continue to wind down 

over the course of this year, and they do have funding that—— 

Mr. COLLINS. So like take New York. Is there enough money 

in—— 

Ms. COHEN. So New York is a different circumstance where they 

need to wind down by November 30 and then run out those claims 

after—— 

Mr. COLLINS. And they’ll have enough money to pay all those? 

Ms. COHEN. So one of the big things that we did in partnership 

with the State Department of Insurance is make sure that they go 

into receivership. And by doing that, we are able to have better 

control over their finances and the claims payout as well as—— 

Mr. COLLINS. Do you feel as though there will be enough money 

to pay out? If there’s not, is the government going to make the provider, that—now there’s no money. How do they get paid? 

Ms. COHEN. So we’re working—and as you said, it’s a day-by-day 

type of situation. We’re watching very closely to make sure we 

can—— 

Mr. COLLINS. Could there be more taxpayer moneys having to go 

in as this is wound down? 

Ms. COHEN. Our primary goal is to protect the consumer and 

the—— 

Mr. COLLINS. It should be. Right. 

Ms. COHEN [continuing]. And the taxpayer. So we’re going to do 

everything possible to make sure that we can have a smooth transition. That’s a partnership between ourselves and the New York 

State Department of Insurance. We’re working collaboratively in 

that process to make sure that that—— 

Mr. COLLINS. Well, and we would encourage you to continue to 

do that. And thank you for your testimony. 

I’d like to see if Ranking Member DeGette has a few follow-on 

questions. 

Ms. DEGETTE. Thank you, Mr. Chairman. I want to go back to 

something that Mr. Morrison said in the previous panel. When we 

set up the insurance CO–OPs under the ACA, we set them up to 

help give people who were sicker, who were poorer, who had less 

of a choice, a choice of an insurance plan. And as we all know quite 

clearly, the CO–OPs don’t have a lot of the same benefits as private 

insurance companies. They don’t have the kind of capitalization 

from other products and so on. Wouldn’t that be a fair statement, 

Dr. Cohen? 

Ms. COHEN. Yes. They face a number of those challenges. 

Ms. DEGETTE. Right. And so when you’re just starting up some 

CO–OPs, it’s not like you’re a private company saying: OK, let’s 

offer this new product and if it takes us a few years, we can do 

that. So I really think that the comparison of the CO–OPs to a private business is a little unfair. And that’s why I think we set up 

these three Rs, to try to help the CO–OPs get established and then 

the concept, Dr. Cohen, was that they would become self-sufficient 

and they would be able to sustain their business model. Is that 

right? 

122 

Dr. COHEN. I think that those programs were set up to help the 

entire market transition, CO–OPs among them. 

Ms. DEGETTE. OK. And so I guess I was a little concerned when 

I heard you say earlier that you were reviewing all of the states’ 

situations on an individual basis. And here’s why. And I saw this 

from my end being in Congress where my state thinks in July that 

the money’s going to be sufficient for risk corridor payments. Then 

they hear in October that, no, that’s not going to happen. And they 

have a real degree of uncertainty with how CMS is viewing that 

state CO–OP, whether it’s—how they’re viewing their capitalization, how they’re viewing their viability. And they don’t know day 

to day whether they’re going to be able to offer a product in open 

enrollment period that starts on November 1. So the concern that 

a lot of us have is where you don’t have some kind of a bright line 

rule, the uncertainty in those states is really contributing to instability in the whole insurance market in those states. I assume you 

understand those points I’m making. 

Ms. COHEN. Absolutely. 

Ms. DEGETTE. And so I’m hoping that you and your staff would 

be willing to continue to meet with our committee staff on both 

sides of the aisle to help us figure out how we can help you get 

some certainty so that we don’t have situations where states like 

New York and Colorado are suddenly going out of business just a 

few weeks before the open enrollment period, the other providers, 

including private insurance companies, are scrambling to try to figure out how to absorb this, and the 83,000 people in Colorado, I’m 

sure it was—I don’t know how many it was in New York, but, you 

know, this is affecting real lives. And I know you realize that, but 

I think it would be really helpful if we could get much more clear 

standards going forward. 

Ms. COHEN. Understand. 

Ms. DEGETTE. Thank you, Mr. Chairman. 

I yield back. 

Mr. COLLINS. Thank you. And it was 155,000 in New York. 

As we conclude this hearing. I would ask Dr. Cohen if we could 

get a commitment out of CMS to provide that analysis that resulted in the CMS awarding additional funds to New York’s CO– 

OP and some others the end of 2014. 

Ms. COHEN. I will work with the staff to get it confirmed. 

Mr. COLLINS. Thank you. And also if you could commit that CMS 

will provide us any CO–OP corrective action plans that may exist. 

I mean, as you’ve done this analysis, could you forward those to the 

committee? 

Ms. COHEN. I’ll have to look and see. Some of those are marketsensitive. But we will do our best to get what we can to the committee. 

Mr. COLLINS. I thank you for that. And then also I’d like to enter 

into the record a Wall Street Journal article that does have a quote 

from CMS that risk corridors were intended to be budget neutral. 

And I’d ask unanimous consent to enter this into the record. 

So moved. 

[The information appears at the conclusion of the hearing.] 

123 

Mr. COLLINS. As we conclude our hearing, again, I want to, first 

of all, also say that we would ask unanimous consent that members’ written opening statements be introduced into the record. 

And, without objection, those documents will be entered into the 

record. 

And I’d like to thank our two witnesses for your comments, as 

we all want to work together to, again, be good stewards of taxpayer money. 

And I would like to remind members they have 10 business days 

to submit questions for the record. And I ask that the witnesses all 

agree to respond promptly to those questions. 

And, with that, this meeting is adjourned. 

[Whereupon, at 2:03 p.m., the subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

PREPARED STATEMENT OF HON. FRED UPTON

Hardworking taxpayers loaned $2.4 billion to Obamacare’s CO–OP program, 

which was intended to create new non-profit health insurance insurers to increase 

choice and competition. Unfortunately for both taxpayers and consumers, it has 

been a mess with 12 out of the 23 COOPs having failed. That’s a success rate of 

48 percent. Sadly, taxpayers are once again on the losing end as the 12 failed CO– 

OPs cost $1.23 billion. 

The CO–OP program faced an uphill battle from the outset. In fact, as early as 

2011, HHS predicted that only 65 percent of the solvency loans and 60 percent of 

the start-up loans would be repaid. And those predictions might be considered rosy 

since they have done far worse. The statute and CMS regulations and policies have 

seemed to hamper the CO–OPs ability to succeed. For example, CMS has prohibited 

CO–OPs from raising capital from outside investors and capping enrollment numbers. 

We have witnesses today who will offer valuable testimony, sharing unique perspectives and experiences with the CO–OP program, including state insurance regulators, CMS, OIG, and of course, the CO–OPs. We have many questions, and the 

American public deserves answers. The committee wants to understand why do 

these CO–OPs continue to shut their doors? What can CMS do to help COOPs succeed? What can the administration do to recoup these vital taxpayer dollars from 

the failed CO–OPs? And what plans did the administration have in place to protect 

taxpayer dollars in light of HHS’ initial pessimistic predictions for the program? 

Regardless of one’s view of the president’s health law, the law itself and its implementation demand oversight. It seems that the news gets worse by the day, with 

more and more taxpayer dollars squandered. The CO–OP program has sadly followed the same script. With 12 out of 23 having failed at a loss of over $1.23 billion, 

who is taking responsibility and being held accountable? 

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