Senate report: HHS kept shoveling money into ObamaCare co-ops it knew were failing

posted at 2:41 pm on March 10, 2016 by Ed Morrissey

Consider this in light of the de rigueur Watergate question: When did HHS know about the failing ObamaCare co-ops, and when — if ever — did they do something about it? A damning report from the Senate oversight panel’s subcommittee on investigations shows that HHS had evidence from the very beginning that the co-op business model contained a high amount of risk, and that the data following their launches showed that failure accelerating faster than even their worst-case scenarios predicted. Despite all of this, the panel’s majority staff reports, HHS continued to pour cash into the co-ops — up to $2.4 billion, even as half of them folded.

“HHS approved the failed CO-OPs despite receiving specific warnings from a third-party analyst about weaknesses in their business plans,” the report states. Deloitte Consulting warned HHS of “several significant weaknesses” in the co-op proposals. In seven of the twelve failed co-ops, Deloitte noted enrollment strategies with defects including “inadequate actuarial analysis, to unsupported assumptions about sustainable premiums, [and] a lack of demonstrated understanding of the health demographics of the COOP’s target population.” Ten of the twelve failed co-ops had incomplete budget proposals flagged by Deloitte, and one even noted that their plan had a “stated target profit margin [of] zero.” Deloitte also raised concerns about leadership in all twelve failed co-ops.

Still, HHS provided a grading scale that allowed Deloitte to give passing marks to all twelve business proposals, which then allowed HHS to provide taxpayer-subsidized loans for the 2013 launches. By 2014, HHS had plenty of evidence that the co-ops were in serious trouble, the Senate panel reports, but more than a year passed before HHS took any corrective action. Even though the agency had included “significant accountability tools” in the loan agreements, “HHS took a pass. … 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,” the report notes. “Two months later, all twelve CO-OPs had failed.”

It’s not as if HHS wasn’t aware of the problems that arose. By the beginning of 2015, the financial reports from the co-ops showed “severe financial losses that quickly exceeded even the worst-case loss projections they had provided to HHS as part of the business plans in their loan applications.” Even so, HHS continued its planned loan disbursements to the co-ops, and in some cases accelerated payments, amounting to $848 million — while the co-ops lost $1.4 billion.

If that weren’t bad enough, HHS then “approved additional solvency loans for three of the failed CO-OPs in danger of being shut down by state regulators, despite obvious warning signs that those CO-OPs would not be able to repay the taxpayer.” Three more co-ops also received solvency loans, with total additional disbursements amounting to $352 million.

In order to continue a pretense of solvency, the co-ops listed predicted risk-corridor payments as assets while HHS tacitly allowed it. Deloitte warned HHS that these projections were highly unlikely to pan out and that the co-ops were likely to fail. Sure enough, HHS only paid 12.6% of the projected risk-corridor payments — thanks to much lower profits at larger insurers, and the choke on risk-corridor funding from Congress. As Deloitte predicted, the co-ops went under, taking all of the taxpayer-subsidized loans with them — and leaving 740,000 consumers without insurance.

Why did HHS ignore the warning and throw good money after bad for so long? As I wrote four months ago at The Fiscal Times, Democrats needed the co-ops to succeed in order to prove that the private sector was to blame for escalating health-care costs. They became too politically beneficial to fail:

A government-funded plan could run deficits with no consequences, forcing health insurers to either match the price and go out of business or leave the markets altogether. Republicans accused Democrats of plotting to drive private insurers out of business, while supporters of the public option accused Republicans of leaving consumers at the mercy of for-profit corporations in accessing health care.

When it became clear that the public option would be a non-starter, Barack Obama and Democrats in Congress settled on a compromise: health insurance co-ops. These non-profit entities would operate under consumer control, providing an option outside of for-profit insurer plans that would focus entirely on patient care. The ACA provided for a significant amount of backing from the federal government, both in loans and in the so-called “risk corridor” funding that gave the Obama administration the option of covering losses for insurers in the first few years of Obamacare.

That backstop was necessary, advocates insisted, as insurers and especially the co-ops needed time to adjust for unknown utilization patterns, premium pricing, and the proper level of deductibles. The co-ops remained an important component for advocates of the government-controlled system, both as a check on for-profit insurers and as a proof of concept for excluding profit-based coverage entirely at some point.

Instead, they have proven that government-run health-insurance markets are even more dysfunctional and unaccountable than private-sector markets. Don’t expect HHS to broadcast that obvious conclusion.

Senate PSI Majority Staff Report on ACA Co-Ops

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