S. Hrg. 114–193 

REVIEW OF THE AFFORDABLE CARE ACT HEALTH 

INSURANCE CO–OP PROGRAM 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

MARCH 10, 2016 

Available via the World Wide Web: http://www.fdsys.gov/ 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
REVIEW OF THE AFFORDABLE CARE ACT 

HEALTH INSURANCE CO–OP PROGRAM 
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WASHINGTON : 

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Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

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S. Hrg. 114–193 

REVIEW OF THE AFFORDABLE CARE ACT HEALTH 

INSURANCE CO–OP PROGRAM 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

MARCH 10, 2016 

Available via the World Wide Web: http://www.fdsys.gov 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

RON JOHNSON, Wisconsin, Chairman 

JOHN MCCAIN, Arizona 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

JAMES LANKFORD, Oklahoma 

MICHAEL B. ENZI, Wyoming 

KELLY AYOTTE, New Hampshire 

JONI ERNST, Iowa 

BEN SASSE, Nebraska 

THOMAS R. CARPER, Delaware 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

CORY A. BOOKER, New Jersey 

GARY C. PETERS, Michigan 

CHRISTOPHER R. HIXON, Staff Director 

GABRIELLE A. BATKIN, Minority Staff Director 

JOHN P. KILVINGTON, Minority Deputy Staff Director 

LAURA W. KILBRIDE, Chief Clerk 

BENJAMIN C. GRAZDA, Hearing Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

ROB PORTMAN, Ohio Chairman 

JOHN MCCAIN, Arizona 

RAND PAUL, Kentucky 

JAMES LANKFORD, Oklahoma 

KELLY AYOTTE, New Hampshire 

BEN SASSE, Nebraska 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

BRIAN CALLANAN, Staff Director 

MARGARET DAUM, Minority Staff Director and Chief Counsel 

KELSEY STROUD, Chief Clerk 
(III) 

C O N T E N T S 

Opening statements: Page 

Senator Portman .............................................................................................. 1 

Senator Sasse .................................................................................................... 5 

Prepared statements: 

Senator Portman .............................................................................................. 43 

Senator Sasse .................................................................................................... 48 

WITNESSES 

THURSDAY, MARCH 10, 2016 

Andy Slavitt, Acting Administrator, Centers for Medicare and Medicaid Services ......................................................................................................................... 7

Kevin Counihan, Marketplace Chief Executive Officer and Deputy Administrator, Centers for Medicare and Medicaid Services ......................................... 9 

Scott E. Harrington, Ph.D., Alan B. Miller Professor, and Chair, Health 

Care Management Department, The Wharton School, University of Pennsylvania ................................................................................................................. 31 

ALPHABETICAL LIST OF WITNESSES

Counihan, Kevin: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 50 

Harrington, Scott E., Ph.D.: 

Testimony .......................................................................................................... 31 

Prepared statement .......................................................................................... 60 

Slavitt, Andy: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 50 

APPENDIX 

Majority Staff Report ............................................................................................... 77 

Hearing Exhibits ...................................................................................................... 140 

Responses to post-hearing questions for the Record 

Mr. Slavitt and Mr. Counihan ......................................................................... 227 

Mr. Harrington ................................................................................................. 230 

(1) 

REVIEW OF THE AFFORDABLE CARE ACT 

HEALTH INSURANCE CO-OP PROGRAM 

THURSDAY, MARCH 10, 2016 

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:34 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Rob Portman, Chairman of the Subcommittee, presiding. 

Present: Senators Portman, Johnson, Lankford, Ayotte, and 

Sasse. 

Staff present: Mel Beras, Chris Barkley, Bryan Berky, Samantha 

Brennan, David Brewer, Kyle Brosnan, Brian Callanan, Will Council, Margaret Daum, John Kashuba, Andrew Polesovsky, Matt 

Owen, Aylene Senger, Kelsey Stroud, and Satya Thallam. 

OPENING STATEMENT OF SENATOR PORTMAN 

Senator PORTMAN. Let us go ahead and get started. There is a 

vote at 11:30, and this may make it difficult for us to get through 

all the questions unless we get started now. I want to thank Senator Sasse for being here. I think at least four of our colleagues 

have indicated they are going to join us today, so we will be seeing 

Senators coming in and out during a busy day. But let us bring the 

hearing to order. 

I want to begin by noting that Senator McCaskill will not be with 

us today. As some of you know, she is home in Missouri attending 

to some very important health issues. We wish her well. We know 

she will be back with us soon, I hope as soon as next week. And 

I will say I suggested to her that we postpone this hearing until 

she got back, and her answer was, no, that there is lots of work 

for our Subcommittee to do and we should allow the Senate’s business to go on, which is the way she is. I appreciate her attitude. 

She will be submitting questions for the record, and I want to on 

behalf of the Subcommittee thank Senator McCaskill’s staff for 

their hard work in preparing for this hearing. 

We are here today to discuss the Administration’s unfortunate 

adventure in the health care startup business. That is kind of how 

I look at this. The Affordable Care Act (ACA) created something 

called the Consumer Operated and Oriented Plan (CO–OP) Program. It was really a gesture to those who favored a public option 

and were not successful in advocating for that. Under the 

CO–OP Program, the Department of Health and Human Services 
2 

1The Majority Staff report appears in the Appendix on page 77. 

(HHS) awarded $2.4 billion of taxpayer money to 23 nonprofit 

health insurance CO–OPs. As of today, of those 23, 12 have failed. 

These 12 collectively received about $1.2 billion in taxpayer money 

that is almost certainly lost, and we can talk about that later in 

the Q&A. Their collapse, by the way, also caused 740,000 people 

in 14 States to lose their health insurance provider and have to 

scramble to find new coverage, most with little or no time. 

Over the last 9 months, our Subcommittee has carefully investigated these failures. We wanted to know whether HHS, when it 

played the role of investor, made good or bad decisions with taxpayer money. 

Unfortunately, what we found out is that a lot of bad decisions 

were made. In a Majority Staff Report released today1, we detail 

those findings. This report is here, and you all should have it. We 

detail findings that HHS was aware of serious problems concerning 

the failed CO–OPs’ enrollment strategies, pricing, financial forecasts, and management before the Department ever approved the 

initial loans. Once the CO–OPs got going in 2014, things went 

south in a hurry—both in terms of financial losses and enrollment 

figures that wildly deviated from the CO–OPs’ own projections. The 

failed CO–OPs ultimately racked up $376 million in losses in 2014 

and more than $1 billion in losses in 2015. But despite getting regular reports that the CO–OPs were hemorrhaging cash, HHS took 

essentially no corrective action for over a year. 

Worse, the Department approved additional loan awards to three 

of the now failed CO–OPs. This happened in 2014. This was despite clear warnings that these CO–OPs did not have reliable plans 

for turning things around. 

The Majority Staff Report explains these findings in great detail, 

and without objection, that report and its appendix are ordered to 

be made part of the record. 

Senator PORTMAN. Let me give you a few highlights. 

When HHS approved startup loans for the failed CO–OPs in 

2012, it asked a reputable firm, Deloitte Consulting, to evaluate 

the CO–OPs’ proposed loan applications and business plans. We 

have reviewed Deloitte’s analysis as part of our investigation. Here 

is what we found. 

You will probably hear from our witnesses that Deloitte gave the 

CO–OPs a ‘‘passing’’ score, but it was based on a grading scale set 

by HHS, and Deloitte warned HHS of very specific concerns with 

the failed CO–OPs that foreshadowed the problems we will talk 

about today, the problems that were to come. 

They said, among other things, many of the failed CO–OPs could 

not identify their senior leadership team. Seven of the 12 had serious deficiencies in their enrollment strategy—which later turned 

out to be a chief reason for CO–OP failure. Many of them submitted budgets that were incomplete, unreasonable, not cost-effective, or that did not align with the CO–OPs’ own financial projections. 

Those financial projections were not so hot either. Deloitte 

warned that several CO–OPs relied on unreasonable projections 

about their own growth. As just one example, Deloitte noted that 
3 

CoOportunity—the CO–OP for Iowa and Nebraska that I imagine 

Senator Sasse will be talking about a little later—had a target 

profit ‘‘much lower than the industry benchmark’’ of 4.8 percent. 

That was an understatement: CoOportunity’s stated target profit 

margin was 0 percent. 

Nevertheless, HHS approved all the loan applications to the failed CO–OPs, to the tune, again, of $1.2 billion. 

After they entered the marketplace in 2014, the CO–OPs’ financial health deteriorated rapidly. And HHS knew it. The Department regularly received key financial information from the 

CO–OPs, including monthly reports and audited quarterly financial 

statements. These reports showed that, starting almost immediately, the failed O–OPs experienced severe financial losses that 

exceeded even the worst-case scenarios outlined in their loan applications to HHS. Cumulatively, by the end of 2014, the failed 

CO–OPs exceeded their projected worst-case-scenario losses by at 

least $263.7 million—which is four times above the projection. 

The CO–OPs’ enrollment numbers were no less problematic. According to the 2014 monthly reports submitted to HHS, five of the 

failed CO–OPs dramatically underperformed enrollment projections, while five others overshot their projections by wide margins. 

Both errors can cause serious financial losses. And they did. Low 

enrollment means insufficient income to cover expenses, of course, 

but excessively high enrollment was an even greater threat to solvency because it multiplies losses rather than profits when those 

premiums are underpriced—as many of the CO–OPs’ premiums 

were. 

Despite having that information at its fingertips, HHS did not 

step in. The Department’s loan agreements with the CO–OPs entitled it to invoke a number of accountability tools for borrowers who 

were missing the mark, but here HHS chose to take a pass. 

Inexplicably, for over a year, the agency took no corrective action, 

nor did it put any CO–OP on enhanced oversight. Five of the 12 

failed CO–OPs were never subject to corrective oversight. Five of 

the 12 failed CO–OPs were never subject to corrective action by 

HHS, and HHS waited until September 2015 to put five others on 

corrective action or enhanced oversight. Two months later, all 12 

CO–OPs had failed. 

HHS also had the power to stop disbursing funds if a CO–OP’s 

financial viability was in doubt. It never did to the bitter end. Instead, over the course of 2014 and 2015, HHS disbursed $848 million in Federal loan dollars to the failed CO–OPs, even as those entities lost more than $1.4 billion. That is about $1.65 in losses for 

every $1 that HHS gave them. Think about that. 

More unbelievable, near the end of 2014, HHS approved additional solvency loans for three of the failed CO–OPs that were in 

danger of being shut down by State regulators for having insufficient capital—despite clear warning signs that those CO–OPs could 

not turn things around. Here again HHS asked Deloitte to complete an external review of the CO–OPs’ application for additional 

solvency loans and their plans to improve their finances going forward. But according to Deloitte, HHS truncated its review of these 

applications. Deloitte did not evaluate, for example, ‘‘the likelihood 

that each CO–OP would achieve sustainable operations based on 
4 

the revised business plan’’—which I would have thought was the 

whole point. But even the limited analysis that HHS allowed 

Deloitte to conduct pointed to clear warning signs that 

CoOportunity, the New York CO–OP, and the Kentucky CO–OP 

did not have a sound plan to regain their footing. 

Nevertheless, these three CO–OPs alone received $355 million in 

additional solvency loans from the taxpayers. All have failed, by 

the way. The Kentucky CO–OP collapsed after suffering losses of 

over $50 million in 2014 and another $115 million in 2015. At the 

time of CoOportunity’s closure, that company’s operating losses exceeded $163 million. And most staggering of all, after HHS gave 

the New York CO–OP $90 million to prolong its financial life rather than allow it to scale down, that CO–OP went on to lose another 

$544 million in 2015. 

The financial aftermath of all this is dire. The Subcommittee obtained the failed CO–OPs’ most recent financial statements, and 

those statements show that none of the failed CO–OPs have repaid 

a single dollar—not a single dollar—principal or interest, of the 

$1.2 billion in Federal loans they received. In my view, it is unlikely they will pay any significant fraction back. The latest statements show that the failed CO–OPs’ non-loan liabilities exceed 

$1.13 billion—which is 93 percent greater than their reported assets, including money they expect to receive. On top of that, they 

owe $1.2 billion to the Federal Government. As we said, we should 

not hold our breath on repayment. 

The American taxpayer is not the only creditor that stands to 

suffer large losses due to the failure of the CO–OP Program. The 

latest balance sheets we obtained show the failed CO–OPs have 

more than $700 million in unpaid medical claims to doctors and 

hospitals. Unpaid medical claims. In some States, these losses will 

be absorbed by other insurance companies—which means by the 

policyholders of other insurance companies who have to pay increased premiums. This is going to go back to our constituents, 

again, to the taxpayer. In other States, doctors, hospitals, and individual patients stand to suffer large out-of-pocket losses due to the 

CO–OP failures, as our report details. We will talk about this more 

in relationship to the New York CO–OP. 

These failed CO–OPs were a costly experiment gone wrong, and 

real people got hurt, including the more than 700,000 Americans 

who lost their health plans. Today I plan to ask HHS whether they 

accept any responsibility for the taxpayer waste, the disruption to 

consumers, and the losses to doctors and hospitals that the 

CO–OPs’ failures have wrought. 

At this point, I would like to ask my colleagues if they would like 

to make opening statements. All of you are welcome to do so. Senator Sasse arrived first, and, Senator Sasse, again, as I mentioned 

earlier, you have done a lot of work on the issue of CoOportunity 

and its effect on your constituents in Nebraska. And I appreciate 

your being involved in this issue, and I wonder if you have an 

opening statement. 
5 

OPENING STATEMENT OF SENATOR SASSE 

Senator SASSE. Yes, thank you, Chairman Portman, for your 

leadership and for holding this important hearing today. I would 

also first like to acknowledge our colleague and Ranking Member, 

Senator McCaskill. We all wish her well and a speedy return to the 

Senate. 

Today’s hearing is about the families who lost their health care 

plans. It is about the taxpayers who were swindled. It is about the 

bureaucrats who mismanaged this program. And it is about the 

local governments who had to cut budgets from firefighters and 

schools to make up for Washington’s failures. Everyone in this 

room—Republican and Democrat—has a duty to their constituents 

to get the whole story. 

The Affordable Care Act’s CO–OP Program created 23 not-for- profit health insurers using $2.4 billion in ‘‘loans’’ from the taxpayer. 

Less than a year into operation, the financial condition of many 

of these CO–OPs was unstable at best. As today’s report being released by the Committee shows, the Centers for Medicare and Medicaid Services (CMS’) own private consultant, Deloitte, warned that 

this was the case. Despite this, CMS continued to disburse loans 

and then began awarding additional loans to these troubled 

CO–OPs. Since then, 12 of the 23 have gone out of business, representing a CO–OP failure rate of more than 50 percent. 

Sadly, there were about 740,000 Americans covered by these 12 defunct insurance companies that were given $1.2 billion in socalled loans from the taxpayer. As we have suspected for some 

time, this Subcommittee’s report concludes that these loans will 

never be repaid. 

When these companies failed, they imposed varying degrees of 

disruption on their enrollees and the markets in which they operated. 

Unfortunately, the mess caused by this program began in my 

State with the abrupt failure of CoOportunity Health. 

CoOportunity was headquartered in Iowa, but it operated in both 

Nebraska and Iowa. And the newly created insurer was given a 

total of $145 million of taxpayer-funded loans. Things seemed to be 

going well at first when CoOportunity announced they had signed 

up far, far more enrollees than they had anticipated. 

However, despite ample funding and more than enough enrollees, 

on December 16, 2014, as people were signing up for their 2015 

coverage, the Iowa Insurance Commissioner placed CoOportunity 

under a supervision order. One month later, in January of last 

year, the Iowa Insurance Commissioner said rehabilitation of 

CoOportunity would be impossible, and he sought a court order for 

liquidation. After just one year of operation, the new not-for-profit 

health insurer would collapse completely. 

When CoOportunity failed, 120,000 enrollees, a majority of these 

being Nebraskans, had their coverage canceled and were forced to 

find new insurers. But the collateral damage from CoOportunity’s 

failure does not end there for Nebraskans. CoOportunity, of course, 

owed millions of dollars, as Chairman Portman has mentioned, to 

doctors and hospitals for claims by its enrollees that will not be repaid. 
6 

To address the insurer collapse, the State of Nebraska has a 

guaranty fund that pays claims in the event of insurer collapse, 

such as CoOportunity’s, and the guaranty fund is financed by assessments on other insurance companies selling similar plans in 

our State, prices that were at market rates, unlike what 

CoOportunity offered originally, and that is why they had far too 

many enrollees, because there was not competence to run this program. 

To help pay for CoOportunity’s unpaid claims, insurers in Nebraska were assessed fees totaling about $47 million last year 

alone. It should be noted that this sum was not even enough to 

cover CoOportunity’s losses and that the guaranty fund had to take 

out a loan. As CoOportunity has no remaining assets, it is improbable that the guaranty fund will ever be repaid this $47 million. 

In other words, it will be assessed onto other insurers in the market. 

These insurers had to pay CoOportunity’s outstanding bills, and 

there is no reason to believe that CoOportunity will ever pay any 

of this money back. As a result, Nebraska tax revenues will be decreased by $47 million because these insurers are subsequently 

able over a 5-year period to reduce their tax liability to the State 

in the amount of their contributions to bail out CoOportunity. 

This means that my State will have much less revenue to pay 

for priorities like education, roads, firefighters, and other local government issues. Thus, Nebraskans are going to have to pay for the 

CoOportunity failure again, first as individuals became uninsured 

and now as taxpayers have to bail out CoOportunity, on top of the 

$145 million that they as taxpayers made in Federal loans to 

CoOportunity. 

As previously mentioned, 11 other CO–OPs have now failed, likely initiating variations of this same story across 11 more States. 

Moreover, depending on the viability of the 11 remaining CO–OPs, 

it could happen in more States in the years to come. Indeed, of the 

11 CO–OPs that remain in operation, we know that as of February 

25th, CMS had placed 8 of the 11 under corrective action plans. In 

addition, updated financial reports show that conditions here have 

gravely worsened for the four CO–OPs with data available for the 

fourth quarter of 2015. 

Despite this mess, CMS has to date offered very little in terms 

of a substantive explanation for the problems. I have been questioning the Department since last May about all of this after only 

one failure. We now have 12 and potentially more on the horizon. 

I have sent four letters to your agency over the course of this period and have been working alongside Chairman Portman and the 

Ranking Member to request documents to unearth the cause of this 

debacle. 

HHS owes all CoOportunity enrollees and all Federal taxpayers, 

and particularly taxpayers in my State, an answer. I look forward 

to this hearing, and I hope for some new and actual substantive 

answers from the witness panel today. 

Thank you. 

Senator PORTMAN. Thank you, Senator Sasse. Senator Ayotte. 
7 

1The prepared joint statement of Mr. Slavitt and Mr. Counihan appear in the Appendix on 

page 50. 

Senator AYOTTE. I want to thank the Chairman for holding this 

important hearing. I do not have an opening Statement. Thank 

you. 

Senator PORTMAN. Thank you. Senator Lankford 

Senator LANKFORD. No opening Statement. 

Senator PORTMAN. Thank you. Excellent. We will now call our 

first panel of witnesses for this morning’s hearing. 

Andy Slavitt is the Acting Administrator for the Centers for 

Medicare & Medicaid Services. Before becoming Acting Administrator, he served as Principal Deputy Administrator beginning in 

July 2014. Before joining CMS, he was group executive vice president for Optum, where he oversaw the delivery of clinical, technical, and operational solutions to health care clients and consumers, including the Department of Health and Human Services. 

Kevin Counihan is the Marketplace Chief Executive Officer 

(CEO) and CMS Deputy Administrator. Before joining CMS, he 

served as CEO of Connecticut’s health insurance exchange, 

AccessCT. 

I appreciate both of you for being with us this morning, and we 

look forward to your testimony. It is the custom before this Subcommittee to swear in all witnesses, so at this time I would ask 

you to please stand and raise your right hand. Do you swear that 

the testimony you are about to give before this Subcommittee will 

be the truth, the whole truth, and nothing but the truth, so help 

you, God? 

Mr. SLAVITT. I do. 

Mr. COUNIHAN. I do. 

Senator PORTMAN. Thank you. Having heard in the affirmative, 

I appreciate your being here again, and your written testimony, 

you should know, will be printed in the record in its entirety, and 

we would ask you to try to limit your oral testimony to 5 minutes 

each. 

Mr. Slavitt, we will hear from you first. 

TESTIMONY OF ANDY SLAVITT,1 ACTING ADMINISTRATOR, 

CENTERS FOR MEDICARE & MEDICAID SERVICES 

Mr. SLAVITT. Thank you. Chairman Portman, thank you, and 

Members of the Subcommittee. And I also want to offer my best to 

Ranking Member McCaskill as well. And thank you for the invitation to participate in this hearing on the CO–OP health insurance 

companies. 

I know you are all aware of the challenges that the CO–OPs 

have faced, 12 having closed their doors prior to the end of 2015. 

And I understand the questions that you have about how CMS provides oversight to CO–OPs, how CMS makes awards decisions, and 

CMS’ level of accountability when a CO–OP closes. 

As you know, the Affordable Care Act allocated over $2 billion 

to start the CO–OP Program, the idea to stimulate new local competition in an industry that has a history of being very difficult for 

small companies to enter, with some entering markets that had not 

seen a new competitor in decades. 
8 

Let me first clarify our oversight purview. Under law, the Federal Government is not granted authority reserved for the States; 

analyzing and actuarially certifying rates and surplus levels, and 

determining who is qualified to offer insurance during open enrollment. CMS’ responsibility is to award and oversee funds and ultimately maximize the likelihood that taxpayer funds are returned. 

CO–OPs were selected and 85 percent of the loans were made 

prior to the start of the first open enrollment in 2015. The remaining 15 percent of funds were awarded during 2014. Loans were 

made through an evaluation process and review and scoring from 

a third party, which resulted in 16 percent of applications being 

granted loans. 

By the time I took this job in 2015, having come out of the private sector, all the loan funding had been obligated, and my principal focus was to ensure we had the best possible oversight practices. One of the first things I did was hire an independent actuarial consulting firm to do a risk assessment of all the companies 

afresh. 

Now, from that, our approach was driven by three unique challenges in overseeing CO–OP loan programs: 

First, the challenges CO–OPs have had should not be viewed as 

a CO–OP problem but as a small business startup problem in a 

very difficult industry. And I hazard to say that all of the small 

companies experienced similar challenges, CO–OP and 

non-CO–OP. 

While we were making loans to companies with 30 to 50 employees, they are typically competing with companies with multiple 

thousands of people and worth tens of billions of dollars in capital. 

Having run a startup in the past myself, trial and error is part of 

creating success, and in this situation, with the limited capital 

available and competing against giants, the CO–OPs had very little 

room for error. 

Second, as Mr. Counihan will elaborate on in a moment, across 

the marketplace, during 2014 there was actually very limited actual performance information available before plans filed rates for 

the 2015 year and for the CO–OP oversight team to evaluate the 

financial position of the CO–OPs. Unlike almost every other business, in insurance you get to make one pricing decision per year, 

and you live to see the outcome. This is why our decisions to shut 

down the CO–OPs were largely made prior to the third open enrollment period. 

Finally, all of the loan funding had been granted. Our strongest 

remaining tool from oversight is to call the loan, which I can tell 

you we did not take lightly, as it had ramifications for disrupting 

consumers, as you know, and would certainly not have increased 

the collectability of the CO–OP loans. 

In light of these three challenges, we set up an extremely active 

oversight process, which Mr. Counihan will cover in more detail. 

We created other oversight tools, new methods of gathering information, and focused decisions around key events like open enrollment. We were guided by the view, and are guided by the view, 

that the best way to maximize the opportunity for Federal loans to 

be repaid is if the CO–OP makes it through the startup stage when 

most failures occur and reaches a point of stability. Absent that, I 
9 

1The prepared joint statement of Mr. Counihan and Mr. Slavitt appear in the Appendix on 

page 50. 

have expected our team to be sober in their assessments and make 

difficult judgments. And they have, making recommendations to 

withhold funds, to place CO–OPs on corrective action plans, and to 

work with States to shut down operations when that is what the 

analysis suggested. 

Mr. Counihan represents by almost anyone’s description as 

knowledgeable and capable an executive as there is in these matters, and he and his team have not hesitated to make tough-minded calls. I recognize that when any program does not fully succeed, 

it raises important questions for you. We, too, go through after-action review to see what we would do differently and could improve. 

Ultimately, our goal at CMS is to make sure that the programs 

we are charged with are working as they should for American families. Today more than 90 percent of Americans have health coverage, and even in States where CO–OPs proved unsuccessful, in 

the first year the overall uninsured rate decreased by 20 percent 

and has continued to improve. 

Challenges like the ones we are discussing today are part of 

every program, and we must always be ready to work with them 

transparently, with urgency, with accountability, and in the best 

interests of taxpayers and consumers. 

So thank you, Mr. Chairman, for allowing me these few minutes, 

and, of course, we will be pleased to take your questions. 

Senator PORTMAN. Thank you Mr. Slavitt. Mr. Counihan. 

TESTIMONY OF KEVIN COUNIHAN,1 MARKETPLACE CHIEF EXECUTIVE OFFICER AND DEPUTY ADMINISTRATOR, CENTERS 

FOR MEDICARE & MEDICAID SERVICES 

Mr. COUNIHAN. Thank you. Chairman Portman and Members of 

the Subcommittee, thank you for the invitation to discuss the 

CO–OP Program with you. 

The team at CMS has the charge to specifically oversee the Federal loans made to these startups with the goal of maximizing the 

return taxpayer funds, supporting the CO–OPs so that consumers 

have access to uninterrupted competitive insurance coverage, and 

providing information to State Departments of Insurance (DOIs) so 

they can make the best possible decisions about the future of the 

CO–OPs in their State. 

Like Andy, I came to CMS from a long career in the private sector. I have had executive roles in insurance companies, and I have 

overseen four successful health insurance exchanges. 

Leveraging our experience, we worked with the teams to build 

and improve the oversight operation for the CO–OP loans that includes tailored oversight protocols, a formal risk committee, and an 

enhanced monitoring process. These processes are robust, have 

built-in controls, including reviews from independent firms, and 

utilized the knowledge of top financial professionals and actuaries. 

The lifeblood of any oversight process is, of course, data-driven 

decisionmaking. I will pick up on something Andy said. Our oversight team at CMS makes the best decisions they can based on the 

information available at the time. 
10 

I think it is important to explain more about the information 

available to the CO–OPs, the State Departments of Insurance and 

CMS. In insurance, you know your revenues relatively quickly. 

What you do not know for some time are your real claims costs because of the back-weighted nature of how care is consumed in the 

year and the lag time in how claims are submitted, processed, and 

paid. 

Due to the lag in claims data, as we neared the end of 2014, 

meaningful and complete data from the first and second quarters 

of the year was all that was available. The first reliable financial 

information on the CO–OPs’ 2014 performance from actual claims 

only became available in the middle of 2015. This was well after 

pricing decisions for plan year 2015 were made by the CO–OPs, 

well after funding decisions needed to be made by CMS, and well 

after certification and licensing decisions needed to be made by the 

State Departments of Insurance for 2015 open enrollment. 

Even when information is not readily available, we aggressively 

gather and analyze the best information we can on program performance and early warning signs. We used each of the oversight 

tools at our disposal to support and correct the CO–OPs on issues 

identified. In 2015, we conducted 27 financial and operational reviews, 16 in-person visits, and had 43 communications, not to mention hundreds of phone calls with the CO–OPs. This work is done 

in close collaboration with the State Departments of Insurance who 

have the full authority over all insurers in their State. 

As Andy said, we have several oversight tools short of calling a 

loan, including corrective action plans and using the leverage of 

cash disbursements when possible to push for performance improvement. Approximately one-third of the time, we have withheld 

some or all of a requested disbursement until the companies more 

clearly demonstrated the need or took some other action. 

This tool had limitations as not funding a cash disbursement 

would cause a company to be out of State compliance, be unable 

to pay claims, and ultimately default on their loan. Even with the 

oversight and support provided by CMS and the Departments of 

Insurance, having operated insurance businesses, I can tell you 

that the outcomes of these companies are very much in their own 

hands, more so than either their regulators or lenders. For the existing CO–OPs, we are now reviewing their fourth quarter financials and the results of the most recent open enrollment period. 

Plan Year 2016 is a critical year for these CO–OPs. They must 

move from startup to stability and improve their financial capabilities, which are vital for their ability to predict, manage, and control 

costs. 

For the CO–OPs that are in the wind-down process, we are working with the Department of Justice (DOJ) to use every tool at our 

disposal to maximize recovery of Federal funds owed, including recently at the request of DOJ putting a hold on tens of millions of 

funds as the process plays out. 

CMS will continue to work closely with this Subcommittee, the 

CO–OPs, and the State Departments of Insurance to provide the 

best outcome for consumers and taxpayers. We appreciate the Subcommittee’s interest, and I am happy to answer any of your questions. 
11 

Senator PORTMAN. Thank you, Mr. Counihan. We will have a 

number of questions, and I appreciate you both being here and 

your testimony. 

I will say some of what you have just said confuses me, at least 

as to the period 2014 and 2015. You talk about not having adequate information, I think very limited information for HHS to review. You talk about a lag in data. HHS had monthly financial 

data to work with. You received the quarterly financial reports, Q1 

by mid-May, Q2 by mid-August, so there was plenty of time to put 

the failed CO–OPs on a corrective action plan or to cut your losses 

before sending them into open enrollment in 2015. So I just do not 

think that is accurate. 

It is interesting also when you say, Mr. Slavitt, our strongest tool 

is to call the loan. You have a lot of other tools, and Mr. Counihan 

actually has laid out some of those tools to deal with CO–OPs: corrective action plans, we talked about enhanced oversight plans, termination, of course. Ms. O’Brien, who is your CO–OP program director, told us these are all very valuable tools, and I know you are 

using them now more frequently, but our question is: How did this 

happen? 

Throughout 2014, HHS did not use the tools at all with respect 

to these failed CO–OPs. In fact, 5 of those 12 CO–OPs we have 

talked about were never put on a corrective action or enhanced 

oversight plan despite the fact, again, that you were receiving these 

regular monthly and quarterly financial reports showing massive 

losses. By the second quarter of 2014, 6 of the 12 failed CO–OPs 

reported net income losses that exceeded the worst-case scenario in 

their own business plans. By the end of the year, 10 of the 12 had 

exceeded their projected worst-case-scenario losses for 2014 by at 

least 300 percent—$263 million. 

So I just do not think it is accurate to say you did not have information and that there was a lag time that made it impossible to 

respond. It is just not accurate. The loan agreement says enhanced 

oversight plans should be used when a CO–OP ‘‘consistently underperforms relative to its business plan.’’ That is in the agreement. 

How could consistent monthly losses exceeding the worst-case scenario by 300 percent not be considered underperformance? I guess 

I would ask you that, Mr. Slavitt. 

Mr. SLAVITT. Sure. Thank you. And let me just start by saying 

these are very fair and appropriate questions, and they are questions that I have asked myself. To go back and look at 2014, obviously, a lot of this was before my time. 

You may remember that in 2014 the exchanges got off to what 

I might charitably call a ‘‘slow start.’’ Open enrollment had to be 

extended, and so membership did not start to come until late. And 

then, of course, the way health insurance works, people have 

deductibles, so claim filings do not start to happen for a while. And 

as Mr. Counihan described, you do not really get an accurate picture. And, look, I have been in this business a long time. You do 

not really get a good, accurate picture. Certainly in my view, the 

question I ask is: Did the people on the CO–OP team have enough 

information to effectively shut down a CO–OP or call a loan? Because if they did not continue to disburse a loan, they would, in effect, put the plan out of compliance, and then obviously the kind 
12 

of situation that we had in Nebraska and Iowa is not the kind of 

situation we wanted to be in. 

And I will say, to be fair, as I look back about things we would 

have done differently, I will say that CoOportunity should never 

have been allowed to go into the 2015 year, either by the CO–OP 

or by ourselves. And I think that is a very fair criticism in looking 

back, and I think that is something that we would all say. 

When I look at the other CO–OPs and I look at all the evaluations, notwithstanding that many of them were ahead of their business plan on membership, some were behind, I can tell you that 

the expression that once you have your first customer, your business plan goes out the window, it is very true. The team I think 

did the best job they could of evaluating the information they had. 

But 3 to 6 months into a CO–OP being off the ground as a startup, 

when I look at it—and, again, this is my opinion—and a reasonable 

person could reach a different judgment. But when I look at it, I 

look at the CO–OP team’s work, and I find it very difficult to criticize them, with the exception of CoOportunity, for letting those 

CO–OPs move forward into the 2015 open enrollment year, reset 

their pricing, which was allotted to them and approved by the Departments of Insurance, who also thought they should move in, and 

to move forward and see what happened in 2015. 

Obviously, looking back on judgments today, we have information we did not have then about how their claims developed, and 

I think that is why these are very fair questions. 

I do not know, Kevin, if you want to add anything. 

Mr. COUNIHAN. I guess what I would just add is, based on my 

experience, startup health insurance companies are very high risk. 

Over half of them fail. They take 3 to 5 years to stabilize and mature. It is seductive to look back and say look at what happened 

after a certain amount of period and say, you should have done 

something here and, if you look at open enrollment, for example, 

in that period and when it ended, it took us until October into November to actually have any credible experience, because in the 

first 3 months there is literally very modest utilization. And then 

it continues to get a little bit better in the fourth and fifth and 

sixth months, which is one of the reasons when issuers set their 

rates for 2015, they were setting their rates on manual rates, not 

based on experience. 2016 was the first year in which issuers actually had credible claims experience to set their rates from. 

So, again, a lot of different factors. It is dynamic, and it is complicated. 

Senator PORTMAN. Yes, look, I know you were not there, but I 

just think it is totally inappropriate for you all to say, as Mr. 

Slavitt just did, they did the best job they could with the information they had, and that somehow, this is just a problem with 

startups. 

First of all, we are talking about taxpayer money, $1.2 billion 

certainly lost, 700,00-plus people losing their health care, and 

somehow you guys seem to be saying that is just fine. 

In terms of startups, these CO–OPs failed at a much higher rate 

than the average startup. In fact, they did that despite the fact 

that they had something that no startup I have ever known has, 

which is millions of dollars in subsidized government loans. You 
13 

say you have been in business a while. Wouldn’t you have loved to 

have those millions of dollars in subsidized loans? You say that 

they did not have information. Let us talk about that. By March 

2014, two of the CO–OPs—this is 2014—CoOportunity and New 

York CO–OP, had already exceeded their high enrollment projections for the year. We talked about that as being one of the data 

points you are supposed to look at. They exceeded their scenario by 

more than 150 percent within the first month of enrollment. By the 

end of March 2014, New York CO–OP had more than doubled the 

high enrollment scenario in its feasibility study. There was plenty 

of information out there, and, again, you were not there. I am not 

blaming you personally, but for HHS not to take some responsibility or any accountability—were there any objective standards for 

deciding when underperformance would trigger an enhanced oversight plan? 

Mr. SLAVITT. Yes. 

Senator PORTMAN. And what were those? 

Mr. COUNIHAN. Well, it depended. There was a series, Mr. Chairman, of what those could be. But one thing I would just like to 

note—— 

Senator PORTMAN. But what were the objective—because let me 

just tell you something so I am not surprising you. And, again, we 

gave you guys this report to look at, OK? And we are trying to be 

fair here. It is a thorough report. You gave us some comments. We 

took your comments. But here is what we heard from the person 

who is in charge of the CO–OP Program, the CO–OP director. She 

told the Subcommittee there was no standard, no objective standard. She said there still is not a standard, by the way. It is done 

on an ad hoc basis. That is information that we have. So to say 

that there is and was assurance objective standard for deciding 

when underperformance should trigger an enhanced oversight plan, 

that is not what we learned. So, as manager of this $2.4 billion 

portfolio, do you not think it would have been good to have some 

kind of a metric to decide when enhanced oversight was appropriate? 

Mr. SLAVITT. So, thank you, and the thing that I would say is 

what I think the team does goes a level further than just having 

a standard rote plan. They really get into these businesses because 

they are at such an early and precarious stage. And as Kevin described, we sent our teams out into the field not just to evaluate 

but to provide technical assistance and the best advice that we can 

relative to how these CO–OPs perform. 

I will tell you that even when we put a CO–OP on an enhance 

oversight plan, it is not a silver bullet because the reality is that 

CO–OPs themselves have to perform. They have to price right, they 

have to have a good enrollment strategy, they have to sell, they 

have to service. And the Departments of Insurance are watching 

them every step of the way to make sure that they are doing it 

right, and I think everybody watches with a set of nervousness because these are such early and precarious operations. 

So it is absolutely at least—and I can speak more to the time 

since I have been here and since Kevin has been here, there has 

been very intense activity—— 
14 

Senator PORTMAN. Let me just—not to interrupt, we are talking 

about 2014 into 2015. 

Mr. SLAVITT. Yes. 

Senator PORTMAN. And, I do not know what the level of losses 

needed to be. Certainly 300 percent was not enough. But you did 

not have standards in place that enabled you to react quickly 

enough to be able to save this hemorrhaging of taxpayer dollars 

and the dislocation to all those patients who lost their health care. 

Senator Sasse, I will turn to you for questions. Sorry I am a little 

bit over my time. We will come back for another round, too. 

Senator SASSE. Thank you, Chairman. 

First of all, before I go to my questions, I just want to acknowledge something that Mr. Slavitt said a minute ago. I think you said 

that the CoOportunity failure should have been foreseen in 2014, 

should have never entered 2015. Is that correct? 

Mr. SLAVITT. I think that is correct. 

Senator SASSE. Well, thank you for that. That is a significant admission, so I appreciate your honesty on that. 

More broadly, as far as distinguishing between different regulatory responsibilities at HHS and in State Departments of Insurance, I understood in your opening statement that you said many 

of these issues are failures of State Departments of Insurance, and 

I think you said that the primary responsibility of HHS was to 

maximize potential repayment of loans to the taxpayer. Is that correct? 

Mr. SLAVITT. I would not use the word ‘‘failures,’’ but I think you 

have the sense right of the delineation of responsibilities. 

Senator SASSE. OK. So let us distinguish between CoOportunity, 

which you have acknowledged was a failure of oversight, should 

have never been able to go from 2014 to 2015, the next 11 that 

failed, and the 11 that remain. If one of your primary responsibilities is to maximize repayment to the fisc and to the American taxpayer, do you expect that there will be any repayment to taxpayers 

from CoOportunity? 

Mr. SLAVITT. So I think it is too early to say, but let me walk 

you through how we are approaching this. I think that is the fairest way to answer your question. 

Senator SASSE. The place is insolvent. They do not exist. You do 

not think they are actually going to pay any dollars back to the 

taxpayer, do you? 

Mr. SLAVITT. Well, so there are three sources of funds that we 

look to, and the Department of Justice is in the lead on this, and 

I think they would be happy to answer your questions on these 

more specifically. And because I do want to maximize these recoveries, I do not want to say anything in this hearing publicly that 

is going to hurt my negotiating position or the position of the Department of Justice. But, briefly, three things that we look at: 

First, after the CO–OP finishes paying claims, which for these 11 

additional CO–OPs they are going to do roughly through the first 

6 months of this year. Again, there is this lag effect. All the claims 

are still coming in. 

Second, there are a series of receivables that we, as Mr. 

Counihan said in his opening statement, if you caught it, that we 
15 

1The exhibit referenced appears in the Appendix on page 176. 

2 Additional excel exhibits are too large to be printed in the hearing record and are available 

on http://www.hsgac.senate.gov/subcommittees/investigations/hearings/review-of-the-affordablecare-act-health-insurance-co-op-program. 

have just put a hold on some funds that the CO–OPs have been 

expecting. That is a second source of funds. 

The third—— 

Senator SASSE. What are those? 

Mr. SLAVITT. They are receivables for things like the reinsurance 

payment, things like that. 

Mr. COUNIHAN. Risk adjustments. 

Mr. SLAVITT. And so that is the second source of funds. 

And then the third source of funds is there are lawsuits and 

judgments both with contractors and vendors, and in many of these 

situations—and, again, I do not want to venture into someone else’s 

fight. CO–OPs have felt poorly served by some of their vendors in 

terms of providing them enough financial information to see the 

full picture. That is also a potential source. So the DOJ, in looking 

at all three of those categories, is taking the lead and pursuing the 

Federal Government’s interests. I think it will take some time to 

play this out in the case of all of these situations. Obviously, we 

do not expect 100 percent recovery or anything close to that. But 

we are expecting between those sources and the strategy that they 

pursue that there will be funds recovered for the taxpayers. 

Senator SASSE. And if you had to guess, across the 12 failures, what percentage of their $1.2 billion do you think taxpayers will 

ultimately receive? 

Mr. SLAVITT. I cannot guess. It would be irresponsible for me to 

guess. I also do not want to bias our opportunities here. 

Senator SASSE. Would a fair bet on over-under between 100 

bucks? I mean, they are not going to repay any of these moneys. 

Mr. SLAVITT. I am not going to take that bait, because I want the 

Department of Justice, as they have asked me to do, to let them 

do their jobs. 

Senator SASSE. To this point about what State Departments of 

Insurance, particularly in Iowa and Nebraska, should have done, if 

we can look at the exhibit book, page 35,1 it reads that the cash 

on hand—or CoOportunity Health will ultimately be assumed to 

achieve a total enrollment of 66,101 by the end of year 2014, which 

is 55,000 more than original projections. That is pretty extraordinary.2

Mr. SLAVITT. I am sorry. Can you help me where—— 

Senator SASSE. On exhibit book, page 35—— 

Mr. SLAVITT. Am I looking at—— 

Senator SASSE [continuing]. The heading is—— 

Mr. SLAVITT. Is this what I am looking at? 

Senator SASSE. Yes. 

Mr. SLAVITT. OK. And where are the page—— 

Senator SASSE. Page 35 is essentially the CoOportunity additional solvency loan funding request report submitted to CMS in 

July 2014. The second page of that addendum, there is ‘‘Critical Assertions.’’ Point 1 is about enrollment. There is an enrollment table 

there, and it says that CoOportunity—you do not have it? 

Mr. SLAVITT. I am not seeing this. 
16 

[Pause.] 

Senator SASSE. So the overenrollment in CoOportunity is extraordinary, I mean, both of you having had private sector experience. I have not worked in the insurance space like you all have, 

but I have never heard of any startup business overperforming its 

projected volume of subscriber base by anything like this. 

Mr. SLAVITT. Right. 

Senator SASSE. I think you are going to say that this is primarily 

a Department of Insurance in Iowa and Nebraska problem, but I 

guess I have two lines of questioning there. One is: Were you talking to them? And if not, on what basis would you possibly 

have—your Department. I recognize that you were not there personally, but on what basis would your Department have possibly 

concluded that they were solvent and that their pricing was right? 

Because one more bit of context. Other insurers in the State and 

brokers in the State were talking widely across Nebraska that we 

have 93 counties, and we have two metropolitan regions, Omaha 

and Lincoln, and we have a whole bunch of cattle country. And 

pricing in rural places is complicated because you only have a couple of hospital systems. We have a Catholic health system, we have 

a University of Nebraska system, and you have a few small independent freestanding hospitals. And trying to project utilization 

and rates a year into the future is difficult, and so the insurers and 

the brokers in our State have a rough sense of how pricing should 

work, and everybody who knew anything knew that CoOportunity 

was pricing way too cheap. They did not know what they were 

doing. And yet you all gave them additional money. 

So either you should have known that they were incompetent, or 

you are going to assert that the Departments of Insurance in Iowa 

and Nebraska should have known. And then I wonder if you were 

talking with them. On what basis would you make the decision to 

give them additional loans. 

Mr. SLAVITT. I am not going to pass the buck. Looking at it, we 

both should have known, I think particularly relative to moving 

into 2015. 

A couple things. As we have done our autopsy on that situation, 

we do think that they underpriced perhaps, and also that their 

benefit designs attracted disproportionately sicker populations. And 

when things go bad, they go bad fast. 

So by no means do I want to point the finger at either Nebraska 

or Iowa State Department of Insurance. Kevin spent a ton of time 

talking to them, and so he can talk through a lot of—we were in 

constant contact, constant dialogue, because it is challenging. And 

when things start to go fast, they go fast in an awful hurry. So if 

someone beats their projections on revenue, some will look at that 

as a good thing. They will present that as, ‘‘Hey, look at how great 

I am doing. More people like our product.’’ Others will look at it 

and say, ‘‘Well, gee, the reason you beat your projections is you 

underpriced your product.’’ And because they do not have a chance 

to correct it until the next year, they have to live through the entire year with whatever price they set. 

So the real decision point should have been what do we do about 

entering the next year, because that is the point in time when they 

should have known. Obviously, as you have pointed out and you 
17 

well know, the situation deteriorated pretty rapidly, and I think it 

became apparent to everybody involved and everybody looking at 

the data, both the departments and ourselves, that we should have 

taken action. 

Senator SASSE. And, Mr. Counihan, I will go to you, and then I 

know that I have to yield back to the Chairman. But the 120,000 

people who became uninsured in Nebraska and Iowa became uninsured with plans that they re-enrolled in in December 2014 and 

had knowledge basically that they were going to be uninsured by 

the end of January 2015. So as far as going bad fast, I will acknowledge that. And yet people who were uninsured for the 11 

months of 2015, so obviously that is a complete regulatory travesty. 

But I think it begs questions not only about the decision to fund 

the additional loans, but what kinds of technical assistance was 

possibly—— 

Mr. SLAVITT. I think folks—— 

Senator SASSE [continuing]. Provided to these insurers. 

Mr. SLAVITT. I am sorry to interrupt. I think folks got covered. 

About 40 percent of people in Nebraska opted for another plan. The 

other 60 percent were covered by the guaranty fund, and we can 

certainly talk about guaranty fund—— 

Mr. COUNIHAN. I do not think anybody lost coverage, Senator. 

Mr. SLAVITT. There is a cost, certainly a cost to the State of the 

guaranty fund, typically borne by the insurers, and we can talk 

about the merits and the challenges of that. But our priority at the 

time was to set up a team to focus on each individual in Iowa and 

Nebraska and track their cases and make sure that people did get 

coverage. It was disruptive for them, so I am not going to excuse 

that. But we did track that. 

Mr. COUNIHAN. Yes. And, you made some good insights about the 

market in Nebraska. Frankly, we depend on the Departments of 

Insurance to really have that same kind of insight, much more 

than we are going to have. The rates that you talked about are actuarially developed. They have to be presented to the actuary in 

the actuarial departments of each State Department Insurance. 

They are walked through; the assumptions are kicked. Those DOIs 

do a pretty good job of trying to understand what the rates ought 

to be, and we trust them. And as Andy said, we got intimately involved in that transition. 

You look back and say, ‘‘Could we have done something differently?’’ In retrospect, you bet. But what we tried to do is acknowledge, move on, learn from it, and make sure that those patients in both States got coverage. 

Senator SASSE. Thank you. 

Senator PORTMAN. Thank you, Senator Sasse. 

Let me just follow up on one of the questions you had, which is, 

will these Federal loans ever be repaid? And the answer was we 

are not going to talk about it, that the Department of Justice is 

working on it. The real answer, of course, is no. Our investigation 

shows that in the aggregate, the failed CO–OPs’ non-loan—this is 

non-loan liabilities, that is, not even counting what they owe the 

Treasury, exceed $1.13 billion, which is 93 percent greater than the 

reported assets. So just in case you did not know that, if you get 

asked that question again, I think your answer is, ‘‘Where is it 
18 

going to come from?’’ I mean, we are talking about failed CO–OPs’ 

non-loan liabilities, forgetting the $1.2 billion we talked about, exceed $1.13 billion, which is 93 percent greater than the reported assets. So I think it is a near certainty that you are going to have 

a complete loss here in addition to the dislocation that we talked 

about. 

Let us talk for a second about another issue that was raised 

briefly but one that concerns me a lot, and I think continues to be 

a huge problem with the way in which this was handled back in 

2014 and 2015, and that is the issue of unpaid medical claims. In 

certain States, as you know, there is a substantial amount of unpaid claims, and one example would be New York. Health Republic 

of New York currently has $157 million in assets according to the 

latest balance sheet. It also has $379.5 million in unpaid medical 

claims. So their unpaid medical claims are well in excess of their 

assets, a shortfall of about $221 million, even if all those assets 

were devoted just to pay the doctors and the hospitals and the clinics and the patients that relied on it for their insurance payments. 

In other States, that shortfall might be covered your statewide 

guaranty funds, as was talked about today, including Nebraska, in 

which other insurance companies basically chip in to cover the 

losses, or sometimes it is an unfunded mandate on the States. But 

in New York, the CO–OPs’ unpaid medical claims are not covered 

by a guaranty fund. So I guess, Mr. Counihan, my question to you 

is: What is going to happen to these claims? Doctors, hospitals, patients are likely to go unpaid, right? 

Mr. COUNIHAN. I know the New York situation extremely well, 

Senator. 

Senator PORTMAN. What is going to happen? 

Mr. COUNIHAN. In all likelihood—I do not know the complete answer to that question yet. They are still going through a complicated wind-down process. So in all honesty, it is premature for 

me to say. But you are right in what you said, which is New York 

is a State that does not have a guaranty fund for health insurance. 

They have guaranty funds for many other insurance coverages. At 

present, they do not have one for health insurance. 

Senator PORTMAN. The experts tell us that, if anything, the yearend claims numbers are likely to turn out even worse than they are 

now, that it is not going down, it is going up. And I just do not 

know how you can imagine that these claims are going to be paid 

when, again, you have a balance sheet that shows $379.5 million 

in unpaid medical claims, a shortfall over its assets of $222 million, 

even, again, if all those assets were just devoted to these unpaid 

medical claims. 

Mr. SLAVITT. Yes, and I do not know that they are. I would like 

to—— 

Senator PORTMAN. You do not know that they are—— 

Mr. SLAVITT. I do not know that they are going to be paid. I 

would like, though, to talk a little bit about New York in this context. But I also have to say the numbers you quoted me about assets and liabilities, with due respect I need time to review this report. Some of our staff got to review it in camera yesterday, and 

I am not willing to accept that those are the accurate numbers 

until I have had a chance to review—— 
19 

Senator PORTMAN. Well, Mr. Slavitt, with all due respect, you are 

a smart guy, why should we be having to give you numbers that 

are publicly available? Get the numbers yourself. 

Mr. SLAVITT. I have—we have our numbers. 

Senator PORTMAN. You should have already had these numbers. 

You are saying that you do not trust our numbers. Again, we 

showed you this report. We gave you the chance to respond to it. 

That is unusual, as you know. We made all the changes that you 

suggested. But you are saying you cannot trust our numbers. You 

should know these numbers. This is your job. Not to know what the 

assets and liabilities are of these companies. Let me give you some 

more numbers because they are accurate. 

Our report points out that in three States with no guaranty fund 

coverage—in other words, no guaranty fund here—failed CO–OPs 

are reporting $500 million in unpaid claims and not nearly enough 

assets to cover them. And we are talking about New York, as I 

said, but also Kentucky, Louisiana. Imagine that. You sign up for 

health insurance in the Obamacare marketplace. You pay your premiums on time. You do everything right, and you play by the rules. 

And then your insurance company goes bust. And then what happens? The hospital can sue you for your unpaid bill, even though 

you have done everything right. 

I mean, I just think it is amazing that you guys are not more 

concerned about this. Can you give all those patients assurance 

that is not going to happen, they are not going to get a bill and 

have to pay twice? 

Mr. SLAVITT. We certainly are concerned about all these winddowns, and these wind-downs are complicated processes both from 

the standpoint of the patients, who I think are the first priority, 

the physicians and hospitals who you discuss in the context of New 

York, and also the Federal Government interests. So, there are 

precedents through the course of history of health insurance companies winding down. There are processes that States run. States 

have jurisdiction over that process. We try to represent our own interests in that process, the Federal Government. But I will say we 

have—and you may criticize us for this, but we have released 

funds—in fact, we have released $30 million of funds last year 

under my authority to CO–OPs that were closing down so that they 

could pay claims for consumers. And you could argue that that was 

$30 million that could have been in the Federal Treasury, but we 

believed it was an obligation that—— 

Senator PORTMAN. Well, $30 million of taxpayer money. It is the 

same people. These are taxpayers who have found themselves losing their health insurance and now potentially facing claims from 

providers because their health insurance company that was a federally established, federally subsidized health care company went 

bust. 

Mr. SLAVITT. Well, I can tell you—— 

Senator PORTMAN. There are some real human costs to this. Let 

me tell you what the New York CO–OP situation is, because you 

question our numbers or you have not looked at the numbers yourselves. This is how we got into that mess. It vastly overshot its enrollment targets while underpricing its premiums, leading to multi-
20 

plying financial losses. And all this information was available to 

you guys. 

In response, it considered scaling down its operations and reducing membership to a sustainable level, but HHS gave the CO–OP 

$90.7 million, so you are talking about giving them more money, 

which it used to scale up and add about 58,000 enrollees in 2015. 

OK? So you made it worse. The resulting losses led to a $544 million loss, sent those enrollees scrambling for new coverage, and, 

again, left doctors, hospitals, and patients with medical costs worth 

hundreds of millions of dollars. That is what happened. And so as 

you give out more taxpayer money, I hope you will look at that example of New York. And who did that help at the end of the day? 

It certainly did not help those individuals, those families who are 

now facing this prospect of having to pay twice and undergo the 

dislocation we talked about. 

Mr. SLAVITT. I would like to try to respond, and in doing so, I 

want to make sure that in the course of saying I want to review 

your numbers, the more important point is not lost that if there are 

individual cases where individuals are in difficult situations and 

are not getting covered, we have a unit that is set up that looks 

at all these kinds of cases, and I want to know of any of these specific cases, because that will be a very high priority for us. So 

whether or not your numbers and our numbers match, that is less 

material to me than making sure that I communicate that if there 

are situations that you hear of in any of those States. 

New York is an interesting situation, and Mr. Counihan will be 

able to talk about this because he spent days and days and days 

on end, did multiple trips to New York. We conducted separate special audits for New York. What is interesting about New York is 

when the original loan was made, as I look back on the Deloitte 

reports that were before my time, New York had scored over 90 

percent, I think the highest if not one of the highest scores, and 

even when I hired an independent auditing firm when I took the 

job in February, New York was not identified as high-risk. And so 

there was a narrative or a belief, again, based upon the fact that 

claims had not come in yet from many independent sources, that 

New York was doing really well. 

We saw some early warning signs, and Kevin and I ordered and 

independent audit and sent auditors up there in, I believe, the 

third quarter, and presented to the States and to the CO–OPs that 

they were going to see losses they had not yet expected. And I 

think what happened in New York, if I can get into the specific example, is their financial systems were not as accurate, and so the 

reports that they were sending us around the profitability of that 

large book of business was not accurate. And it was not until we 

did this independent audit—and you can correct me if I have gotten any of this in any way incorrect—that we realized that this was 

a situation that was going to come back and hurt them. And we 

spent a significant amount of time in the situation to try to prevent 

the damage that we are talking about right now. But, Kevin, you 

can add anything. 

Mr. COUNIHAN. No, Andy. I think you said it well. 

Senator PORTMAN. OK. Well, if there had been proper oversight 

back in 2014, we would have been able to address this issue, be-
21 

1The table referenced by Senator Sasse appears in the Appendix on page 136. 

cause they did overshoot substantially their enrollment targets. 

And, again, underpricing premiums, overshooting enrollment targets leads to this multiplying effect we talked about, and that is 

exactly what happened. And then we gave them more money, and 

it created even more problems. And that is the reality. 

I want to give Senator Sasse the opportunity to ask a question. 

I will come back for one more round. Senator Sasse. 

Senator SASSE. Thank you. 

I would like to look at the report. I know that you said you have 

not had a chance to read all of it in detail, but I want to point to 

two pages that I think are fairly self-explanatory. 

The main report that we are talking about today that was released, can we go to pages 56 and 57, ‘‘IV. Misconceptions Concerning the CO–OP Program.’’ When I asked a few minutes ago if 

you really thought that any of these 12 failed CO–OPs were conceivably going to ever repay the taxpayer, you said that potentially 

their accounts receivable would become a source of some of the 

funding that might come back to the taxpayer. And I asked what 

that meant, and you said that the reinsurance program might be 

yielding funds for some of these failed CO–OPs. 

If you would go with me to page 56 and 57, I would like—again, 

as the Chairman has said, these are publicly available numbers. I 

would like you to just walk me through what this table1 means. I 

think what it means is that the CO–OPs had much healthier populations than the overall Obamacare or Affordable Care Act marketplace. And if that is true, this means that, on net, our CO–OPs 

paid in $116 million to the reinsurance program. They are not getting any money back. I mean, here and there you may have one. 

The Arizona example, Meritus Health Partners, I am not familiar 

with them. It says that they are going to receive $2 million of reinsurance payments. But, on net, these insurers, including 

CoOportunity in my State, if you look at CoOportunity on page 56, 

they, on net, paid in $6.4 million because they had healthier populations than the insurance marketplace as a whole, which I think, 

humbly, contradicts the entire line of answers you gave in our last 

exchange. 

Mr. SLAVITT. Well, that would be bad if it did. I think the confusion—and these are complicated programs—is between risk adjustment, which you are referring to, and reinsurance. 

Senator SASSE. OK, you are right. I should have used the term 

‘‘risk adjustment.’’ Let us go forward with that. 

Mr. SLAVITT. So risk adjustment is one source, one potential 

source of receivable. So is reinsurance, and so is risk corridors, because no one really has a good feel for how much risk corridors are 

going to pay in the coming years, so those are reserved, separately. 

So all three of those are potential sources of funds, and as I mentioned, we have just put a hold on tens of millions of dollars of receivables to CO–OPs that they have been expecting from those 

sources. So those funds are available. 

Senator SASSE. OK, tens of millions. We are talking about $1.2 

billion, though, so let us have our numerator and denominator 

right. I mean, how much are we talking about, $30 million? 
22 

Mr. SLAVITT. Correct—I do not have the exact figure, but I can 

get that to you. 

Senator SASSE. What is that? That is 2 percent of the total we are talking about today. Let us say your tens of millions is $90 million. We are still at less than 5 percent of the real question here, 

right? 

Mr. SLAVITT. From that particular hold, correct. 

Senator SASSE. OK. Are there other sources? 

Mr. SLAVITT. That hold does not represent the entirety of what 

the receivables would be. And, look, I know it would be helpful if 

I could give you an estimate, and I understand why you would 

want me to—why it would be helpful to give you an estimate. And 

I hope you understand why I am reluctant to start negotiating publicly some figure. And I also think it is irresponsible because I will 

be wrong almost no matter what number I say. 

But to your general point, do I expect we are going to recover 95 

percent or 100 percent of these loans? No, I do not. 

Senator SASSE. But do you really expect we are going to recover 

10 percent of these loans? You do not—— 

Mr. SLAVITT. I do not know. I do not know. I really do not. 

Senator SASSE. What is the universe that could ever get us to 10 

percent? 

Mr. SLAVITT. I think I went through the categories. I do not 

know that I could be more specific. But I would be happy—— 

Senator SASSE. I know, but I do not want the categories. I want 

the taxpayers’ money. 

Mr. SLAVITT. I would be happy to followup, go through this report, which I have not had a chance to go through—I am sure there 

will be things in there that will be helpful to us; we do have our 

own sets of numbers—and sit down and try to see how much information we can provide you. 

Senator SASSE. OK. Your distinction between risk adjustment 

and reinsurance and the risk corridors is important. Technically, 

obviously, that is true. But it is still based on the underlying 

premise that maybe the CO–OPs failed because they had a much 

sicker population. And I think what the risk insurance numbers on 

page 56 and 57 show us is that the CO–OP enrollees were actually 

healthier than the average population. So the broad ideas that 

these CO–OPs failed because they sort of accidentally attracted a 

much sicker population, I do not think we have any evidence that 

shows that to be the case. 

Mr. SLAVITT. And I do not think I made that claim. If I did—certainly that would be a sweeping generalization that I would not 

make. And I also do not know that they had a healthier population 

because of the risk adjustment. I think the CO–OPs would tell you, 

many of the CO–OPs would tell you that they had a sicker population, but they were not able to get their numbers submitted for 

risk adjustment appropriately, and Kevin can walk through that, 

if you would like. 

Senator SASSE. Sure, I would love to hear that. 

Mr. COUNIHAN. OK. Well, essentially, Senator, the risk adjustment program is highly sensitive to claim coding and diagnostic 

codes. And if they are not done properly or thoroughly, that can 

have a real impact on the financials of that CO–OP and other risk 
23 

adjustment. And we clearly have a terrific example with one of 

those who has subsequently corrected that. Again, no heroes or villains. We are all learning, but that is very sensitive to that. 

Mr. SLAVITT. But in a nutshell, their financial systems were behind at the time they made—— 

Senator SASSE. Understood. But I am not looking for villains. I 

am thinking we need to acknowledge the just utter incompetence 

of trying to essentially plan a program like this. So I am not asserting that anyone here is evilly motivated. But whether or not anybody is competent to oversee this program, I have not seen any evidence of that yet. So, humbly, I am not asserting villain. I am just 

saying that, the more you look at these numbers, the less plausible 

it is that anybody knew what they were doing when they looked 

at these CO–OPs when one of the sort of core answers for why this 

sub-segment of the larger Affordable Care Act population marketplace could have failed would have been because the CO–OPs attracted an unusually sick population. It does not seem like we have 

any evidence that suggests that, and it would appear, again, just 

based on the snapshot we have from the risk adjustment market, 

that a net pay-in of $116 million is not a net zero and it is not a 

net pay-out. I think your evidence would suggest these are 

healthier than average, which makes it even harder to understand 

how we would not have recognized that we were going to have a 

failure rate of more than 50 percent among the CO–OPs. 

Thank you, Mr. Chairman. 

Senator PORTMAN. Thank you, Senator Sasse. 

We are in the third round here, Mr. Chairman, and I do not 

want to catch you unaware, but if you are interested in asking a 

question, I would like you to go before me since I know you have 

other hearings to attend. 

Chairman JOHNSON. Go ahead. 

Senator PORTMAN. All right. Well, let us followup on New York, 

because, Mr. Slavitt, you indicated that you all had spent a lot of 

time looking at that, and particularly you said that Mr. Counihan 

had spent time. You made a statement that said that you thought 

that your team, again, had done the best job they could with the 

information that they had. When HHS awarded additional solvency 

loans to these three failed CO–OPs we talked about—Kentucky, 

New York, and CoOportunity—when they were in danger of missing their capital requirements, you had to know they were in financial trouble and at risk of being shut down by State regulators. And 

yet you invested hundreds of millions of additional dollars in taxpayer dollars. 

In your written testimony, you confirm what you said today. You 

say that in evaluating additional solvency loan applications, ‘‘CMS 

undertook a rigorous review process substantially similar to what 

was conducted for the initial round of loans.’’ That is your testimony. Let us explore that for a minute. Let us take, again, New 

York as an example, because you both talked about that earlier, 

how you spent a lot of time on that. 

Like all CO–OPs, its initial loan application involved third-party 

review of its business plan by Deloitte. We talked about the 

Deloitte review earlier, which included extensive discussion of the 

reasonableness of proposed budgets, finances, and business plans. 
24 

1The page referenced by Senator Portman appears in the Appendix on page 142. 

Let us turn to the first page, page 1 of the hearing exhibit package.1 That is this package. On page 1, you see the analysis that 

Deloitte did of the New York CO–OP’s application for an additional 

solvency loan. Right at the top, the first sentence reads, and I 

quote, ‘‘Deloitte will not provide an opinion regarding the reasonableness of the proposed changes to each CO–OP’s business plan. 

Nor will Deloitte provide an opinion regarding the likelihood of 

each CO–OP achieving sustainable operations based upon the revised business plan.’’ 

So this notion that it was substantially similar to what was conducted in the initial round of loans is just not accurate. Deloitte did 

not provide the analysis. I am told, by the way, by some of your 

people that they said you guys did not give them enough time to 

do it because you wanted to get the money out the door. But 

Deloitte did not do that analysis. 

In light of that, do you stand by your testimony that this review 

was rigorous and substantially similar to the review provided to 

initial loan applications which did include, again, this third-party 

analysis of whether the CO–OP’S business plans were reasonable? 

Mr. SLAVITT. I do not, and I know I do not need to keep stipulating it was before my time, so—but I will say—— 

Senator PORTMAN. And I understand that, but in your testimony 

you are making the statements that are important for this hearing 

because we are talking about, again, this question of competence, 

as we said earlier, but also, accountability and what can we learn 

from this. 

Mr. SLAVITT. Sure. 

Senator PORTMAN. If you are saying everything was done right, 

we did the analysis just as we did with the initial loans, it is just 

not accurate. 

Mr. SLAVITT. It is a fair question, absolutely. And I think the 

way I interpret Deloitte’s statement here is that they are not ultimately accountable for these decisions. We are. And that is absolutely correct. The purpose behind hiring—— 

Senator PORTMAN. Well, wait. They are saying they did not provide an opinion. They are—period. Not that here is our opinion but 

you guys are ultimately accountable. They did provide opinions on 

the initial loans. We talked about that. We talked about it. You 

guys set up the standards. And I talked about the concerns that 

they raised in each of those where there should have been a red 

flag. But here they did not even do it. That is the point. 

Mr. SLAVITT. I think the team, what they were doing, the risk 

committee, was getting multiple sets of eyes, and I think what the 

Deloitte team is saying is, Hey, you cannot count on what you are 

seeing from us to be what they are warranting, at least the way 

I read this, they are warranting that we should not count on their 

analysis in making this judgment. And I think that is—— 

Senator PORTMAN. They did not do an analysis. That is the point. 

So here is my question to you: Who did do the analysis? Who did 

do the analysis when additional taxpayer dollars were given to 

New York? Who did the analysis? We have asked you all this, by 
25 

the way, for several months now, and we cannot get an answer. 

That is one reason I am asking you, because we do not know. 

Mr. SLAVITT. I believe they did do the analysis. I believe they did 

not render an opinion. 

Senator PORTMAN. Who is ‘‘they’’? 

Mr. SLAVITT. Deloitte. 

Senator PORTMAN. No. Let me look at the document. This is page 

1. Page 1 right here. This is from Deloitte: ‘‘. . . will not provide 

an opinion regarding the reasonableness of the proposed changes to 

each CO–OP’s business plan. Nor will Deloitte provide an opinion 

regarding the likelihood of . . . sustainable operations based upon 

the revised business plan.’’ 

Mr. SLAVITT. Are you saying because they did not render an 

opinion they did not do an analysis? 

Senator PORTMAN. Yes. Well, did they? 

Mr. SLAVITT. Yes. 

Senator PORTMAN. Why haven’t you provided us that analysis? 

Mr. SLAVITT. That is what it is. That is what this is. This is the 

analysis. They provided the analysis, and what they said is use this 

analysis, make your decision, but we are not providing an opinion. 

Senator PORTMAN. Yes, and you are saying they did not provide 

opinions for the initial loans? 

Mr. SLAVITT. No, I am not saying that. I am saying they—— 

Senator PORTMAN. Well, that is what your statement says. Your 

statement says you ‘‘undertook a rigorous review process substantially similar . . .’’ Do you think substantially similar means in one 

case there is an opinion, in another case there is not an opinion, 

and those are substantially similar? You did not give them enough 

time because you wanted to get the money out the door. That is 

what we are told. And so, I mean, look—— 

Mr. SLAVITT. I think I would find the work substantially similar 

enough that I would stand by that statement. Regardless of the 

fact that they said, hey, we are not willing to say that this is an 

opinion, I think the work is substantially similar. I understand you 

do not think that it is. 

Senator PORTMAN. Yes, well, look, you probably had some internal experts analyze the question and, therefore, you felt like you 

did not need Deloitte to do it, which is probably what your more 

accurate answer would be. My view is you needed the third-party 

analysis and the third-party opinion. 

Again, let us recap what happened in New York. Health Republic 

of New York applies for an additional solvency loan. It was projecting a loss of $62.8 million in 2014, $23 million in the next year, 

so we know the CO–OP’s original business plan was not working. 

The original projections were wildly off the mark, as we talked 

about earlier. Its losses were 14 times greater. And yet you awarded the CO–OP an additional $90.7 million without having any 

third-party opinion as to whether its new business plan was reasonable or likely to work. And the consequence was that the 

CO–OP lost $77.5 million in 2014, $544 million—more than half a 

billion dollars—in 2015. And, again, we talked about the consequences of this, the human toll, which is families, individuals not 

just having to be dislocated, but now facing the possibility that 

these claims that have not been paid—doctors, hospitals, 
26 

clinics—could come back on them. So they paid once; they paid 

their premiums. They did everything they were told to do. And now 

they have this risk. 

So I guess I would hope that you would say if you had to do it 

over again, you would actually ask for that third-party analysis 

that you—and opinion that you had in the initial loans that you 

say were substantially similar. 

With that, let me turn to the Chairman of the Committee who 

has joined us and thank him for his help with regard to PSI generally, but specifically on this investigation. Senator Johnson. 

Chairman JOHNSON. Thank you, Mr. Chairman, and I appreciate 

you calling this hearing. I apologize I could not be here earlier. I 

was at a Senate Foreign Relations business meeting, which had 

some important resolutions we had to be passing. So I missed a lot 

of the detailed testimony and questions and answers, and I really 

do not want to hop into where some other people have tread. 

Let me kind of pull back and let us go to the obvious. Mr. Slavitt, 

your background is in the private sector, correct? 

Mr. SLAVITT. That is correct, Senator. 

Chairman JOHNSON. You came from Optima, which is a division 

of United Health? 

Mr. SLAVITT. Optum, yes. 

Chairman JOHNSON. What was the average profit margin of 

United Health after tax? 

Mr. SLAVITT. Four, 5, 6 percent perhaps. 

Chairman JOHNSON. Relatively low. I mean, on average, public 

corporations have pre-tax about 10 percent and after-tax about 5 

percent, correct? 

Mr. SLAVITT. Yes. 

Chairman JOHNSON. Not a wildly profitable or outrageously profitable type of industry, correct. 

Mr. SLAVITT. That is correct. 

Chairman JOHNSON. From your standpoint—again, I know you 

are new to the position—wouldn’t you have kind of real concerns 

as a private sector insurer under the old system that when the government set up a bunch of these CO–OPs, that they were going to 

subsidize them with these risk corridors and these reinsurance 

plans, weren’t you a little concerned that maybe these CO–OPs 

might tend to try and gain market share by underpricing their premiums? 

Mr. SLAVITT. So, you ask a really good, difficult question. 

Chairman JOHNSON. So I would like just a basic, obvious answer 

to it. From the private sector, isn’t that a real legitimate concern? 

And isn’t that exactly what happened? 

Mr. SLAVITT. Well, so these companies entered markets that had 

not had new competitors in many cases in decades. So, of course, 

I think you are correct, the companies would not like to see someone come in and offer more—— 

Chairman JOHNSON. It is not what the company—I am saying 

what was the natural result of what was going to happen with 

these government-run CO–OPs? Because they were going to come 

in, they were going to try and gain market share, they were going 

to underprice their product based on what their loss ratio would be, 

correct? 
27 

Mr. SLAVITT. Well—— 

Chairman JOHNSON. And isn’t that exactly what happened? Isn’t 

that exactly why the American taxpayers are on the hook for about 

$2.5 billion now in loans? 

Mr. SLAVITT. So these were loans to local nonprofit companies 

who I do not think had as a goal—I would not imagine they had 

as a goal to price themselves out of business. I think they clearly 

in many cases—— 

Chairman JOHNSON. That is exactly what happened, though, correct? 

Mr. SLAVITT. That is correct in many cases, yes. 

Chairman JOHNSON. In the private sector, did you ever believe 

for a moment President Obama’s insurance—that under 

Obamacare the cost of family health care would decline by $2,500 

per year? 

Did you ever think that was possible coming, again, from the insurance industry, where you know that the profit margin is about 

5 percent? There is about $1 trillion of the $2.8 trillion that we 

spent annually in 2012 runs through insurance companies. The average after-tax profits of the top seven is about 4.4 percent. So, 

again, that is about $45 to $50 billion of profit out of a $2,800 billion a year market. Did you ever think for a minute that this government-run health care system would actually deliver health care 

costs $2,500 less per year per family? 

Mr. SLAVITT. So the way I interpret that $2,500—and maybe I 

am not interpreting it correctly—is that that would be the reduction in health care cost trend under the Affordable Care Act, 

which—— 

Chairman JOHNSON. Do you think that is the way the American 

people heard that? 

Mr. SLAVITT. I think that is how some people heard it. 

Chairman JOHNSON. You think that is what the majority of 

Americans heard when they listened to President Obama and supporters of the bill promise that if you pass this wonderful bill, the 

average cost for insurance per family is going to decline by $2,500? 

Do you think people thought, well, that will just be—otherwise, it 

would go up higher by $2,500. 

Mr. SLAVITT. When I look at the text of that statement, yes, that 

is how I interpret it, and also that 20 million new people have 

health insurance and we have an uninsured rate below 10 percent. 

I think all of those things—I do not think anybody could have perfectly predicted the outcome of a new law of this size and complexity. And I think there are certainly some very good things and 

certainly some bad things and some challenges, and we are talking 

about one of the biggest challenges—— 

Chairman JOHNSON. In your private sector experience, did you 

ever participate in high-risk pools in different States? 

Mr. SLAVITT. I am aware of them, sure. 

Chairman JOHNSON. OK. Another problem Mr. Obama made and 

other supporters of the bill made is that if you like your health 

care plan, you can keep it, period. Again, coming from the private 

sector, understanding how those high-risk pools—by the way, we 

had one in Wisconsin. About 22,000 people were getting coverage 

that they liked, that they could afford. Coming from the private 
28 

sector looking at the Obamacare law, you knew in the private sector those high-risk pools would be gone, correct? That people that 

were being insured under the high-risk pools would not have access 

to those health care plans, correct? Did you have any doubt that 

those things would survive? In other words, did you believe President Obama’s repeated assurance and promise that if you like your 

health care plan, you can keep it, period? Did you ever for a minute 

believe that claim? 

Mr. SLAVITT. Well, what I believe was that there would be guaranteed coverage in the marketplace so that everybody could get 

coverage. Whether or not—— 

Chairman JOHNSON. So, in other words, you did not believe 

President Obama’s claim that if you like your health care plan you 

can keep it? 

Mr. SLAVITT. I think what happened was there were folks that 

had coverage that was below a standard that the Affordable Care 

Act set, and some of those people did, in fact, lose their coverage, 

as you well know. 

Chairman JOHNSON. You also understand that insurance products change as networks narrow. 

Mr. SLAVITT. Sure. 

Chairman JOHNSON. People might lose—if they lose a health care 

plan, let us face it, they lose a plan they could afford, that they 

liked in a high-risk pool that gave them access to a doctor. If they 

were forced onto a different plan, maybe a comparable plan, maybe 

one with better deductibles, although it has not happened, that 

being forced into another health care plan might cause them to lose 

access to a doctor they trusted, correct? 

Mr. SLAVITT. The Affordable Care Act created a higher standard—— 

Chairman JOHNSON. So President Obama’s repeated assurance 

that if you like your doctor, you can keep that doctor, period, was 

incorrect, wasn’t it? 

Mr. SLAVITT. Here is my perspective—— 

Chairman JOHNSON. No. I just really want an answer to the 

question. 

Mr. SLAVITT. I think hospitals and physicians have been moving 

in and out of health care networks for 20 or 30 years, and I do not 

think anything in the Affordable Care Act changed that fact. So, 

yes, I guess is the answer to that. 

Chairman JOHNSON. I mean, my point is that those promises by 

President Obama were ruled PolitiFact’s 2013 Lie of the Year. 

Coming from the private sector, had you made those kind of assurances to your policyholders, do you think your company would still 

be in business? Had your business, had you as the CEO or as a 

senior manager of one of those businesses conducted that level of 

massive consumer fraud, what would have happened to a private 

sector business? You would not be around, would you? You would 

be facing an enormous number of lawsuits. 

Mr. SLAVITT. I think our interpretations are a little bit different, 

but I understand your point. 

Chairman JOHNSON. So, again, getting back to the issue at hand, part of this hearing, is that CMS has loaned $2.4 or $2.5 billion 

to CO–OPs that obviously were not going to be able to survive. We 
29 

continued to pump money into these CO–OPs knowing they would 

never be able to repay them. You have not done the due diligence. 

The review of these things have not been rigorous. It was obvious 

they were never going to be able to pay them back. Now the American taxpayers are going to be on the hook for about $2.5 billion, 

and that is assuming you do not continue to pump money into 

these failing enterprises. Anybody want to refute that? 

Mr. SLAVITT. I guess what I would suggest—and I do not know 

that I will not repeat a lot of the things that we have said so far 

today, but, clearly, starting up a small insurance company is one 

of the biggest challenges imaginable, particularly because, as you 

said, they face significant entrenched competitors with years of history, thousands of people, and these are small enterprises. And I 

think it is very fair to say that the risk of failure of these CO–OPs 

is quite high. 

What we have tried to do to the best we can—and I think we will 

accept our share of responsibility and criticism certainly—is to 

oversee these programs, to maximize the opportunity, to get these 

CO–OPs through the early 3-to 4-year startup stage to a point 

where they can be stable, and the Federal taxpayer can get its 

money back. In some cases, we have not been able to do that, and 

in some cases, those companies have not put forward strategies 

which have succeeded in those markets. And I would certainly acknowledge that, Senator. 

Chairman JOHNSON. That is great you are accepting the respon- sibility, but the American taxpayer will be on the hook for the $2.4, 

$2.5 billion, and that is unfortunate. 

Thank you, Mr. Chairman. 

Senator PORTMAN. Thank you, and, again, gentlemen, thank you 

for coming today and giving us your perspective. I want to just end, 

if I could, on two points. 

One is there was a discussion earlier about the States’ role here, 

and I just wanted to be very clear about one thing, and I am happy 

to hear your response to this. But to shift the blame to the States 

I think is inappropriate. HHS had authority and sole authority to 

be able to stop these disbursements when it became clear that the 

CO–OPs were not likely to be financially viable and sustainable, 

and we have talked a lot about that today. It is not the States. The 

loan guarantee does not give that power to the States. It says HHS, 

and I quote, ‘‘has sole and absolute discretion’’ to terminate a loan 

agreement, and HHS had the power to withhold these disbursements when the CO–OPs did not perform under the corrective action plans we talked about, which were not put in place—for 5 of 

the 12 failed CO–OPs, they were never put in place. Never. For another five, you waited until September 2015. So I just want to be 

clear in the record here, and I would be happy to hear your comments on this, that shifting the blame to the States is not where 

the appropriate accountability ought to be here. It was HHS, despite plenty of warnings, that watched these CO–OPs lose, on net, 

about $1.4 billion, even as they failed to take corrective action for 

more than a year, and in some cases, again, not at all. 

Any comments? 

Mr. SLAVITT. Sure. You are correct, there is no question that we 

had the discretion to hold back cash to disburse from these CO– 
30 

OPs. And in about a third of the cases, when the team had a request for cash, the team did not make that disbursement. But I 

think the challenge—and I think it is the challenge that we have, 

and it is an important question—is ultimately if we do not disburse 

the cash at some point to a startup CO–OP, we are most assuredly 

putting that CO–OP out of business and most assuredly putting 

some of their consumers at risk. 

So the team has to make very tough choices. If they fund the 

CO–OP, there is certainly not going to be any guarantee that those 

CO–OPs are going to succeed if they fund the grant that has already been made. If they do not fund it, they are almost certainly 

putting them out of compliance and putting them out of business. 

So I do not suggest for a second that the team made every decision 

the right way. I would suggest that it is not as if the team was 

turning a blind eye and that there were lots of good choices in this 

oversight process. As you very well know, overseeing a small company in a complex environment is challenging, and I will say that 

in my defense of the team, it is not a defense of every decision they 

made. It is certainly not to point fingers at the States. It is to say 

as I have gone back and continually tried to ask the questions with 

the information that they made available, given the two choices 

they had, and I think notwithstanding the fact that we could put 

them on an oversight plan, at the end of the day if we do not withhold cash, you cannot force an action. And once we withhold cash, 

people do not get paid, claims do not get paid, and the loans never 

come back to us. And that is the difficult challenge that we faced, 

and recognizing that your report suggests that you think we could 

have done a better job. 

Senator PORTMAN. Well, again, there were plenty of tools, including the corrective action plans we have talked about and the enhanced oversight plans, short of even terminating. But the reality 

is there are 700,000 consumers who now find themselves not just, 

again, dislocated, but some of them actually facing the possibility 

of paying twice, once for their premium and now for claims that 

were never paid to health care providers. And that is a tragedy. 

We thank you for your testimony today and appreciate it. We 

will go on to the second panel. Thank you. 

[Pause.] 

Dr. Harrington, thank you for being here. We are going to move 

ahead quickly here because we have a vote coming up, and we have 

lots of questions for you, and I know you have a presentation for 

us. 

Dr. Scott Harrington is the Alan B. Miller Professor of Health 

Care Management, Insurance, and Risk Management, and Business Economics and Public Policy at the University of Pennsylvania 

Wharton School. He is also the Chair of the Health Care Management Department. He is a Senior Fellow with the Leonard Davis 

Institute for Health Economics and an adjunct scholar at the American Enterprise Institute and was president of the American Risk 

and Insurance Association and Risk Theory Society. His recent policy research focuses on the Affordable Care Act’s impact on insurance markets and insurance financial regulatory issues. He is a 

true expert, and we appreciate his input to our report and his 

being here today. 
31 

1The prepared statement of Mr. Harrington appears in the Appendix on page 60. 

We look forward to your testimony. It is the custom of the Subcommittee to swear in our witnesses, Dr. Harrington, so if you 

would not mind, please stand and raise your right hand. Do you 

swear the testimony you are about to give before this Committee 

will be the truth, the whole truth, and nothing but the truth, so 

help you, God? 

Mr. HARRINGTON. I do. 

Senator PORTMAN. Excellent. Let the record reflect the witness 

answered in the affirmative. Your written testimony will be printed 

entirely in the record, as we have talked about, and we would ask 

you to try to limit your oral testimony. I think we initially asked 

you to do it in 10 minutes. If you would do it even a little shorter, 

that would be great just because I know we are going to have some 

questions for you. But, again, thank you for your input today, and 

we look forward to your testimony. 

TESTIMONY OF SCOTT E. HARRINGTON, PH.D.,1 ALAN B. MILLER PROFESSOR, AND CHAIR, HEALTH CARE MANAGEMENT 

DEPARTMENT, THE WHARTON SCHOOL, UNIVERSITY OF 

PENNSYLVANIA 

Mr. HARRINGTON. Thank you, Chairman Portman and Chairman 

Johnson. I publish widely on insurance pricing and price regulation, capital and insolvency risk, the causes of insolvencies, solvency prediction and regulation, risk-based capital requirements, 

and State guaranty funds. I have done some prior work on 

CO–OPs’ financial conditions. I have not read the Majority Report. 

I have not seen anything about corrective action plans. I did review 

a lot of documents for preparing my testimony, especially for Iowa, 

Nebraska, New York, South Carolina, and Tennessee, including 

business plans, feasibility studies, pro forma financials, pricing 

analysis, additional funding requests, Deloitte reviews, and some 

financial information provided to the Subcommittee staff. 

As we know, the CO–OP Program ultimately awarded $2.44 billion of low-or zero-interest Federal loans to 23 CO–OPs; $358 million was for startup loans, $2.09 billion was for solvency loans to 

meet State regulatory capital requirements. 

Twelve of the CO–OPs have closed. The longevity of the 11 

CO–OPs still providing coverage in 2016 is uncertain. Future closures seem likely. Eight of the 11 are reported to be subject to 

some CMS corrective action plan. 

The closed CO–OPs’ ultimate deficits are going to depend on the 

resolution of a lot of claims, and the final tally of what their claim 

costs are, as I will elaborate a little bit, very little, if any, of the 

$1.24 billion in Federal loans will be repaid from those closed 

CO–OPs. At least several will be unable to meet their obligations 

to enrollees and health care providers, and some will require significant State guaranty fund assessments. 

The CO–OPs did face significant operational challenges, and the 

ACA 2014 reforms posed major challenges and risks associated 

with pricing and utilization of the previously uninsured and transition of previously insured people to ACA-compliant plans. The 

CO–OPs were inherently vulnerable to unpredictably high claim 
32 

costs, including from any adverse selection from established carriers renewing their pre-2014 plans, especially if enrollee growth 

outpaced projections. They had little ability to diversify pricing and 

claims risks across geographies and products. CO–OPs had none of 

their own experience and data to consider in pricing. They were 

plausibly prone to a winner’s curse, pricing too low, generating 

large enrollment and losing lots of money. Pricing uncertainty remained high for 2015 premium rates, which had to be filed in the 

summer of 2014 when the CO–OPs still had relatively little data 

to assess claim experience in the adequacy of premiums. 

Insurers must hold substantial capital to achieve a high solvency 

probability. Academic literature stresses that insurers and other financial firms’ solvency incentives depend on the amount of owner’s 

capital at risk, on the firm’s value as a going concern, which could 

be lost in financial distress, on the sensitivity of customers’ demand 

to insolvency risk, and on external monitoring by lenders and other 

counterparties. 

CO–OPs’ financial strength, growth, and potential for underpricing should have been a central focus from the program’s inception. CO–OPs faced considerable pressure to capture market share. 

They had almost no private capital, no going-concern value, no financial ratings, and it was likely that many potential customers 

would be insensitive to insolvency risk. 

Very importantly, history indicates that insolvent insurers often 

have charged low prices and grown rapidly with inadequate reported claim liabilities, ultimately producing claim costs much larger than reported. There is also risk that insurers will try to grow 

their way out of financial trouble, hoping, or gambling, for survival. 

This history and context also suggest that CO–OPs’ financial 

strength and potential adverse consequences of rapid growth 

should have been paramount, especially given slow development of 

information on claims. 

The approved CO–OPs’ award applications included detailed 

business plans, feasibility studies, including actuarial projections of 

growth, profitability, and ability to repay government loans. Originally, their startup loans were recorded as debt on their financial 

statements. But to meet State regulatory requirements, all solvency loans were treated as ‘‘surplus notes,’’ subordinate to all 

claims and counted as capital for the purpose of meeting regulatory 

requirements. 

Actuarial analyses supporting solvency loan awards and disbursements relied on pricing, claim cost, and enrollment assumptions over a long horizon. The analyses I reviewed contained what 

I would consider modest stress tests. They did not combine or consider much higher than projected enrollment, combined with worse 

than expected claim costs. The baseline pricing assumptions, however, did build in something for a potentially sicker population. 

Now, as we have heard this morning, some CO–OPs experienced 

vastly larger enrollment than projected, greatly increasing their 

need for capital. This should have been a cause for alarm. Those 

CO–OPs generally had low premium rates compared with competitors. Other CO–OPs generally with relatively high premiums had 

very low enrollment in 2014. Some CO–OPs continued rapid 

growth in 2015, further increasing their need for capital. Some 
33 

with low enrollment reduced premium rates and grew rapidly in 

2015. 

Six CO–OPs were approved for $355.5 million in additional solvency loans in the last 4 months of 2014. Three later closed. The 

regulatory takeover of CoOportunity Health in late December occurred just 6 weeks after disbursement of its additional $32.7 million solvency loan award approved in September, and following the 

denial of a late October request for another $55 million. 

Health Republic of New York sought an additional $70.5 million 

in late October 2014, which was denied following CMS approval of 

an additional $90.7 million in September. 

The additional solvency loans exhausted the CO–OP Program’s 

$2.44 billion in funding. CMS did not have the funds to approve additional requests from CoOportunity Health, Health Republic, or 

any other CO–OPs. With State regulators’ approval, however, CMS 

permitted seven CO–OPs to convert startup loans to surplus notes 

so that they could be counted as capital for meeting target capital 

requirements. Five CO–OPs converted a total of $82.1 million in 

startup loans to surplus notes before their closure. CMS also accelerated disbursements of solvency loan funding to many CO–OPs 

during 2014 and 2015. 

A couple quick comments on growth, and we have heard this this 

morning. By September 2014, CoOportunity Health had over eight 

times the originally projected number of enrollees for 2014 and 

14,000 more enrollees than projected for 2020. It generally had the 

lowest rates in Nebraska and the lowest rates in the Iowa small 

group market and the lowest rates in at least one rating region in 

the Iowa individual market. 

Regarding New York, Health Republic of New York, its June 

2015 enrollment was over four times the baseline 2015 projection, 

over three times the projected high enrollment scenario for 2015, 

and more than double the baseline projection for 2020. Health Republic generally had the lowest premiums in the regions it operated. It received rate increases for 2015, but its rates still generally 

remained low compared with competitors. 

I have done some analysis to back out the ACA risk stabilization 

programs just on Health Republic of New York’s June 2015 financials. If they had received their entire risk corridor requested at 

that time, they still would have lost $50 a month for their entire 

18 months of operation on a per member basis. Without risk corridor receivables, they were losing about $150 per month. 

Updated financials provided to the Subcommittee for 10 other 

closed CO–OPs suggest little, if any, of their Federal loans will be 

repaid. Assets were less than claim and other obligations for 7 of 

the 10 and only marginally greater than those obligations in the 

other three States. Colorado and South Carolina project substantial 

guaranty fund assessments. 

The CO–OP Program’s experience raises a number of key questions—beyond the fundamental issue of whether the program made 

economic sense when enacted, which, while difficult to do, should 

be evaluated without the benefit of 20/20 hindsight. I will quickly 

conclude with these. 
34 

First, was it appropriate and prudent to push for the CO–OPs to 

begin operations in 2014 as opposed to wait a year or two before 

selling tens of thousands of policies in an uncertain environment? 

Second, why were the low premium rates charged by some 

CO–OPs not viewed as a signal of potential trouble from the getgo, especially when their plans and rate filings anticipated relatively high provider reimbursement and administrative expenses? 

Third, why were some CO–OPs permitted to enroll far more customers than their projections as opposed to having some formal or 

informal speed limits imposed by CMS and/or State regulators? 

And, fourth, why didn’t CMS delay solvency loan disbursements 

or possibly terminate loan agreements when confronted with enrollments far greater than projected and early evidence of operating 

losses? 

My time is up, so I am happy to take questions. 

Senator PORTMAN. Thank you, Dr. Harrington. You were right on 

time for what we asked you to do, and you have asked key questions, many of which, as you know, have been discussed today with 

HHS. 

I would like to go to my colleagues first for their questions in 

that they have come back to the hearing. I know they are busy. We 

have a vote at 11:30, so we will try to keep the questions and answers as short as possible. Senator Johnson. 

Chairman JOHNSON. Thank you, Mr. Chairman. 

Dr. Harrington, I want to kind of just go to basic economics on 

this. Let us talk about premiums that real people would be paying. 

We have Janice Fenniman in Spooner, Wisconsin, who, before the 

health care law was implemented, was paying about $276 per 

month. This year she is paying $787 per month. I held a telephone 

town hall yesterday, and I do not have permission to use the gentleman’s name, but he was claiming that, prior to Obamacare, he 

was pay $400 a month; now he is paying $1,000 per month. And, 

by the way, these are for lesser policies. Their deductibles are higher. Their premiums are higher. 

Because of the CO–OPs—and, again, as I said in my earlier 

questioning, to me, a private sector guy, it was obvious what was 

going to happen here. I mean, you used the words ‘‘inherently vulnerable.’’ It was obvious what was going to happen. 

The experience people have already had of skyrocketing premiums, these have been actually constrained because of these 

CO–OPs, correct, in the marketplace? They are underpricing their 

premiums, which puts pressure on the other health insurers. So, if 

anything, premiums have not skyrocketed to the point they are 

going to. Would you agree with that? 

Mr. HARRINGTON. I would agree that at least in 2014 and 2015, 

the CO–OPs had a restraining influence on premiums. I am not as 

sure about 2016 because I have not reviewed the filings. 

Chairman JOHNSON. Well, kind of the game is up right now, but 

going forward, we know how these losses are going to be recovered. 

Certainly, the American taxpayer lose the loans, but also the payments to providers, these losses are going to be spread over other 

insurers in States, and then their reaction is going to be what? 

Mr. HARRINGTON. Well, I think the big issue is that it is becoming more apparent that the cost of the new risk pools under the Af-
35 

fordable Care Act is higher than anticipated, and that that will 

produce higher premiums, and that the rating restrictions in the 

Affordable Care Act are going to lead to especially high premiums 

for certain cohorts. 

Chairman JOHNSON. Describe that in greater detail. What do you 

mean certain cohorts? 

Mr. HARRINGTON. I think one thing that has happened is that 

prior to the Affordable Care Act rating restrictions, people in, say, 

their 50s and 60s that were in relatively good health were able to 

get premiums on a risk-rated basis, guaranteed renewable coverage 

so that their rates would not go up with deterioration in their 

health status. Under the new regime, if you are not eligible for any 

kind of subsidy, you now have to buy insurance in a risk pool that 

limits the amount that can be paid based on your age, but, nonetheless, is based on a risk pool that includes lots of unhealthy people. 

So I think more and more evidence will show that healthy people 

that try to buy coverage outside of an employment-based market 

going forward, if they are in their 50s and early 60s, probably are 

going to face quite a bit higher premiums than what they would 

have prior to the Affordable Care Act. So that is one of the cohorts. 

The other cohort would be very young people that are facing 

higher premiums because of the rating restrictions. 

Chairman JOHNSON. We have already seen that the first year in 

Wisconsin. A 27-year-old male I think on average experienced like 

a 127-percent rate increase; a 27-year-old female, a little under 100 

percent, still, dramatic increases. 

Let us talk a little bit about adverse selection and the gaming 

of the system. We have heard anecdotal reports of this, of people— 

one of the reasons you need a high level of participation in dental 

insurance, for example, is otherwise people will just delay getting 

dental care until they have one month’s worth of premiums and go 

in there and get all their care and then they stop coverage. Isn’t 

that also what is going to happen with Obamacare? To a certain 

extent. I mean, you cannot totally predict, but you can certainly 

time certain medical procedures and people will game the system, 

correct? 

Mr. HARRINGTON. Yes, to a certain extent, and the evidence is 

that it is occurring not only in open enrollment but in special enrollment periods. 

Chairman JOHNSON. Our Committee staff did a pretty good job 

looking at the fact—President Obama said, Trust me, no illegal immigrants are going to be qualifying for Obamacare. But the way 

they set up the system is CMS is forced to enroll individuals without documentation of eligibility. And so what has been happening 

is people sign up, they get the subsidies, they get the prepaid premium tax credits. They also get some tax credits or subsidized 

deductibles and that type of thing as well. Our Committee report 

showed that about $750 million of prepaid premium tax credits 

were paid on behalf of individuals who in the end were unable to 

prove their eligibility. Just speak a little bit to that in terms of, 

again, that was just totally predictable, correct? 

Mr. HARRINGTON. I have not studied the particular issue. I am 

familiar with the reports. I think anytime you impose a gigantic 
36 

program with mind-numbing complexity, there are going to be 

many slippages and unintended consequences. 

Chairman JOHNSON. Let me finish up, because I know one of the 

big reasons people passed Obamacare is they just hated the idea 

of anybody making a profit off of health care. So I just kind of want 

to go through the actual figures. This was in 2012. America in total 

spent about $2,800 billion, about $2.8 trillion worth, $2,800 billion. 

I have just taken a look at the profitability of the top seven companies in health care for 2012, and the after-tax profits are about 4.4 

percent. Of the $2.8 trillion, about $1 trillion of that is paid 

through third-party payers, basically insurance companies. So if 

you take 4.4 percent of $1 trillion, that is about $45 billion of profit 

out of an industry, a sector of the economy that is $2,800 billion 

large. Does that seem like a grotesque level of profit to allocate 

pricing efficiently and do all the things that a free market system 

actually does? Is that out of whack? 

Mr. HARRINGTON. No. 

Chairman JOHNSON. And what is the result of having government come in there and try and stamp out literally 1.6 percent— 

that is what that profit represents, 1.6 percent of total health care 

spending was profit of insurance companies. And in order to wipe 

that out, which is really the goal of Obamacare, take a look at the 

dislocations. We have again, Janice Fenniman paying $276 before 

Obamacare, now paying $787 for a lesser policy. In the end, do you 

think this is a pretty foolish law, a pretty damaging law to real 

people? 

Mr. HARRINGTON. I opposed the law when it was enacted. I think 

there were better ways of promoting the growth of insured people 

in the United States than passing this particular law. 

Chairman JOHNSON. I would agree with that assessment. 

Thank you, Mr. Chairman. 

Senator PORTMAN. Thank you, Chairman Johnson. Senator 

Lankford. 

Senator LANKFORD. Thank you, Mr. Chairman. 

I appreciate you being here and bringing some other facts to bear 

in this. Like others on this panel, I would tell you that person after 

person that I talk to in my State, in Oklahoma, talk to me about 

the same issue. They are spending more on health care than they 

ever have. Their deductibles are high. All their premiums are going 

higher. They have fewer options than they had before. The hospitals that I talk to now have more benevolent care than they have 

had in the past because though they have ‘‘insurance’’ when they 

walk through the door, they cannot afford to use it. We have failed 

State exchanges around the country from States that tried to start 

their own exchange that have gone through the process, and that 

is millions of dollars that has been lost in that process. 

And then when we walk into the CO–OP issue, and it is one 

more piece of this process where in the original design there would 

be these nonprofit institutions that would stand up to go compete. 

In theory, they would be nonprofit insurance institutions that were 

created to compete in areas where there was not good insurance 

available or was not enough available. 
37 

So my initial question to you is: Did you find the CO–OPs and 

their distribution around the country to be in places where insurance was not available? 

Mr. HARRINGTON. That is an excellent question, and I have not 

studied that. 

Senator LANKFORD. What I have seen is that they were not competing in areas where they were not available. They were trying to 

startup in places where there was a good market already. And if 

there is a good market already, there were other companies that 

are already available in that area. 

We put out loans that they expected to have a 40-percent loss 

rate, which, by the way, the Consumer Financial Protection Board 

(CFPB) is aggressively going after payday lenders who have a 40- 

percent loss rate on it, a 40-percent interest rate that they are putting down, and for whatever reason, they thought that was a good 

idea at the beginning to do this with the CO–OPs, which is baffling 

to me. But then they seemed to also have this unique challenge in 

places that they were in that I am trying to determine what happened here. When the CO–OPs came in and gave arbitrarily low 

amounts that were not business possible—and that has been proven now by more than half of them already failing and the rest of 

them struggling. They put out a pricing strategy. Other companies 

in the area, other insurance companies in the area, had to try to 

compete with those CO–OPs that had these arbitrarily low costs on 

it that were clearly not sustainable, which forced them down, 

which I believe some of those insurance companies have now left 

those markets. We have many States that have fewer insurance options now, not only the CO–OP leaving but other companies leaving 

as well. 

Do we know a connection here, or is it too early to know whether 

the CO–OPs in those markets were driving prices low, forcing other 

companies to have to try to compete with them, and then now they 

have since left the market as well, giving even fewer options to the 

consumer? 

Mr. HARRINGTON. That is an issue that really needs to be subject 

to high-quality investigation and research. Clearly, in principle, low 

prices can have a negative effect on the market overall when they 

are written really well below what the consensus estimate of costs 

is. And I think we will find out more over time as people start to 

dig into this. 

I would add that, of course, there was a lot of variation in 2014 

among the 23 CO–OPs. Some had relatively high prices. They sold 

very little business. So in those cases, any negative spillovers from 

pricing were not there. But in a few cases where we had this enormous explosive growth during 2014, I think it is at least plausible 

that there were adverse effects in terms of pricing in the overall 

market that could have contributed to poor results in the overall 

market. But one thing we know for sure is that when you have a 

new entrant with no experience that comes in with a very low 

price, someone should be paying very close attention to their early 

enrollment and getting whatever data they can about early claims 

and really asking the hard question of: When is enough enough? 

Should we not be putting some sort of speed limit or brake on this 
38 

enrollment so that they cannot run up an enormous tab that they 

will not be able to pay? 

Senator LANKFORD. So if the CO–OPs were competing on the 

open market and they were trying to get private lending, private 

capital either from a bank or outside equity groups, would they 

have been able to get these loans in your suspicion based on their 

model? CMS has testified that only 16 percent of the applicants actually got the loan, which gives the impression, we were very limiting, 84 percent we returned away, so we really were getting the 

cream of the crop. Obviously, the cream of the crop, more than half 

of them are now out of business. 

So my question is: Of the business models that were presented, 

could they have gotten private funding? Or are these individuals 

presenting a business model that only government would have actually provided a loan for them? 

Mr. HARRINGTON. That is an important question. The business 

models that I reviewed, I think it would have been really difficult 

to make a sell to any private investors with those models. What 

private investors would be looking for is: Do you have something 

here that we really think is disruptive and beneficial that will 

allow you to have a better model going forward? And I think it is 

highly unlikely they would have seen that. 

Now, I hasten to add that some significant private money has 

gone into health insurance startups, and some of them have reported pretty large losses for 2014 and 2015. So private investment 

does not have a monopoly here on any kind of wisdom. 

Senator LANKFORD. Right, but private investment is also tracking the day-to-day operations, trying to figure out are you going to 

make it, are you not going to make it. Are we going to keep dumping money into this? Or are we going to force you to make some 

changes internally to actually be successful? 

Mr. HARRINGTON. Yes, and private investment in these sort of 

situations, the money will be paid out over time based on clear evidence that the performance is being met, and if there are warning 

signs that things are problematic, the spigot gets shut off. 

Senator LANKFORD. Rather than changing the rules and saying, 

OK, you can now use this money and count it as capital and count 

it as assets, and the rules change through the middle of it, they 

are not going to do that in a private setting. 

Mr. HARRINGTON. No. 

Senator LANKFORD. Let me ask another question that is a quick 

one as well. The CLASS Act was a long-term-care insurance program that was created by Obamacare. At the very beginning it was 

studied to be implemented, it was in the law, do it. Secretary 

Sebelius came out and said this is totally unsustainable at the very 

beginning and said if we try to implement this, it cannot be done 

under this current model. Congress agreed, in 2013 to pull out the 

funding for that program—that program went away. 

They saw immediately that the long-term-care insurance that 

was put into place is not sustainable, studied it, and pulled it. The 

CO–OPs, they aggressively went after, started it, and put $2 billion 

into something that we are now discovering is just as totally 

unsustainable. What is different about the CLASS Act and their research behind the scenes or the CO–OPs? 
39 

Mr. HARRINGTON. That is a very difficult question. I think one 

thing that is different, as I recall with the CLASS Act, you had various independent government agencies doing the actuarial projections and forecasts with an eye toward budget implications from 

the beginning, and recognizing that the program had to be financially sustainable in order to go forward. 

In the CO–OPs’ case, there may have been much more uncertainty in the short run about what was likely to happen, and the 

CO–OP business plans were accompanied by actuarial feasibility 

studies by major actuarial firms and advisers that were putting out 

scenarios that suggested that they might be viable. 

Senator LANKFORD. Thank you. I yield back. 

Senator PORTMAN. Thank you, Senator Lankford. And, again, Dr. 

Harrington, thanks for your help on this, and your expertise has 

been helpful to us as we have gone through this report and tried 

to figure out how this could have happened. I think you have 

raised a lot of great questions about whether this should have happened or not. 

One question you asked in your testimony that I would like you 

to answer is: Should they have launched these at a time when 

there was so much regulatory uncertainty? Or should they have 

waited for a year or two? 

Mr. HARRINGTON. There was this real concern that if you missed 

2014, you were going to miss the boat, and I am very reluctant to 

be influenced by hindsight here, but my opinion is that it would 

have made more sense to wait at least a year, if not longer. 

Senator PORTMAN. Yes. I mean, look, it was a lousy time to start 

a health startup in any category, and certainly in the insurance 

sector. You talked about enrollment being a key determinant of a 

health insurer’s financial performance, and if you would not mind 

just talking about that for a second, you said there should have 

been, I think you said in your testimony, some speed limits at least 

in place, incredibly sharp deviation from what they projected, both 

under and over. We talked earlier about this with regard to the 

overenrollment. The overenrollment multiplied the problem, where 

you already had a problem, then to have this massive overenrollment compared to projections. And yet there were no red flags apparently, or at least there was no reaction by the Federal Government in pulling back the taxpayer support. Can you talk about why 

that is so important? 

Mr. HARRINGTON. Well, it is very important given the history of 

insurance insolvencies and the pricing problem. You can sell a lot 

of insurance at low prices because the claims do not come home 

until a bit later. So you always really have to be on your toes in 

order to guard against this sort of underpricing and rapid growth. 

Given that context, it made sense to really be on top of enrollment. 

I was puzzled, as things rolled out, I was very puzzled by the 

lack of public discussion, the lack of commentary about insolvency 

risk whatsoever in this market. It is as if no one understood that 

insurance companies do fail, and those that fail often have been 

underpriced and grown rapidly. That background, that context, as 

well as the lack of incentives for safety and soundness given this 

type of government funding, should have overall made the environ-
40 

ment be one of much greater caution about how these things would 

be permitted to grow. 

Senator PORTMAN. And, again, just to be clear, as compared to 

some of the testimony we heard earlier, there was information. We 

had monthly and quarterly reports, including on enrollment, an 

issue that you talked about. 

Let me just ask you this, and it is kind of, speculation in your 

part, but why did this happen? I mean, it was so obvious that the 

underpricing and the overenrollment and the other business factors 

were problematic and there were reports, and there was plenty of 

data. Why did they keep putting money out the door and not take 

the obvious step, which is to cut the losses to the taxpayer and cut 

the losses to all these families who ended up losing health care insurance, some of whom now are facing the risk of actually having 

providers have claims against them? Even though they paid their 

premiums, did everything right, the providers were not paid because these companies went insolvent. And now these consumers 

are told they might have to pay for what the companies did not pay 

when they were required to do so. How did this happen? 

Mr. HARRINGTON. I think in part what happens is even though 

you are getting information, the accuracy of the information about 

claim costs was not there, so there could be a much bigger bill than 

what had been anticipated. 

I have to speculate, but it seems there was a very strong commitment to the CO–OP Program, a very strong belief that this new 

model would work in an environment where insurance companies 

were viewed as making excessive profits with excessive administrative costs in markets that were regarded as not being sufficiently 

competitive. It seems to me there was an ideological commitment 

to the program and to the success of the program. 

Having said that, I will also point out that once you get information that a company might be in trouble, there always has been a 

fine line that regulators have to draw about doing something that 

definitely will put the company over the edge or giving it a little 

more runway to try to work things out. But in those scenarios, 

when you give a little more runway to let companies try to work 

things out, you want to make sure that they grow, if at all, at a 

very orderly pace. You want to make sure that you have the speed 

limits. The last thing you want to do is to provide more funding 

to enable greater growth, especially when you have maybe soft information about claims experience at that point in time. 

Senator PORTMAN. Well, look, given your academic background 

here and lots of experience, I respect what you are saying, and I 

think you are right, there was an ideological commitment, your 

quote, and I think it blinded some of these folks who otherwise 

would have seen these warning signs. And as you say, it was a 

commitment maybe to CO–OPs or maybe against the insurance 

companies that, as you said, were making excessive profits. I think 

it also was to get enrollment numbers up under Obamacare, which 

was part of the desire by the White House at the time, and continues to be. 

So I do believe that we have to learn from this. We have to come 

up with ways to ensure that we are not going to lose even more, 

hemorrhage even more taxpayer dollars. At a minimum $1.2 billion 
41 

now appears to be lost. We talked earlier about that, and we could 

not get HHS to acknowledge that. But when you look at it, the 

companies who would have to repay that actually have assets that 

are far lower than their liabilities, even taking out the loans, forgetting the money that they owe the Federal taxpayer. And not a 

single one has paid a penny in principal or interest. 

So I appreciate your focus on this. I hope you will continue to 

work with us on trying to figure out moving forward how we avoid 

this problem even growing further and how we deal with this very 

real problem we have now in some States where you have consumers who actually might get tagged with additional costs so they 

lose their health care, they have this dislocation, hopefully they 

have now found health care, but they are now looking at the possibility that these claims might come back on them. 

Do you have any final comments before we go to our vote, on that 

or other topics? And, again, I want to thank you very much for 

your willingness to come before us, Dr. Harrington. Any final 

thoughts? 

Mr. HARRINGTON. No. Thank you for allowing me to testify. 

Senator PORTMAN. Thank you. Thanks for your good work in this 

area. It has been very helpful to have you. 

Do you have any additional questions? 

Chairman JOHNSON. Just to thank you for holding this hearing. 

What this underscores is literally what a spectacular failure this 

ideological effort was. You had States that know how to do these 

things, know how to regulate, know how to prevent insurers getting into too much trouble. If they start getting in trouble, they 

know how to resolve those things. And you have the arrogance of 

a Federal Government walking in here spending at least $1.5, 

probably $2.5 billion in support of these things. 

So this is an incredibly important hearing. We are just not getting the press attention to what a spectacular failure Obamacare 

is, how couples lost health care plans and high-risk pools that they 

could afford. The premiums have skyrocketed. Out-of-pocket maximums have skyrocketed. 

So I hope this hearing gets a lot of attention, and I hope your 

testimony gets a lot of attention. I hope we actually learn lessons. 

I am not convinced we will. But thank you, Mr. Chairman. Excellent hearing. 

Senator PORTMAN. Thank you for your attendance today. And, 

again, to all our witnesses, thanks, particularly here at the end. 

Dr. Harrington, thanks for your expertise. 

I want to thank also my colleague Senator McCaskill for her 

hard work on this Subcommittee, her support of the Subcommittee. 

We missed having her here today and look forward to her return 

soon and her good health. 

I will say that, we have talked a lot today about how this money 

was lent to these dozen CO–OPs that failed. Others, as you have 

said, Dr. Harrington, are in big trouble. And at a minimum, we are 

talking about $1.2 billion of taxpayer money that is going to be 

lost. It will be more than that at the end. We all know that. While 

this happened, there was not corrective action taken—in some 

cases not all, in other cases it took more than a year. And what 

we are looking for today is someone to take accountability for it. 
42 

We heard a little of that, and I appreciate that. But this was not 

the fault of these consumers. This was not the fault of the States. 

This was the fault of HHS, the way the program was structured, 

and then even once it was structured, the lack of adherence to the 

basic requirements in these loan agreements. 

So I would hope that we will learn from this and that we can 

avoid further disruption in this case to over 700,000 consumers, in 

addition, again, to them having the possibility of actually having 

to pay out-of-pocket more than their premiums because there are 

claims that, from our analysis, could be brought against the consumers, which would be adding an additional insult to the taxpayers who have already been out so much money. 

So this hearing record will remain open for 15 days for additional 

comments or questions by any of the Subcommittee Members, and 

with that, we are adjourned. 

[Whereupon, at 11:36 a.m., the Subcommittee was adjourned.] 
(43) 

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Æ