[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
 HEALTH INSURANCE CO-OPS: EXAMINING OBAMACARE'S $2 BILLION LOAN GAMBLE

=======================================================================

                             JOINT HEARING

                               before the

                    SUBCOMMITTEE ON ECONOMIC GROWTH,
                  JOB CREATION AND REGULATORY AFFAIRS

                                and the

                 SUBCOMMITTEE ON ENERGY POLICY, HEALTH
                         CARE AND ENTITLEMENTS

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            FEBRUARY 5, 2014

                               __________

                           Serial No. 113-84

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida                ELIJAH E. CUMMINGS, Maryland, 
MICHAEL R. TURNER, Ohio                  Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee       CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona               GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania         JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee          MATTHEW A. CARTWRIGHT, 
TREY GOWDY, South Carolina               Pennsylvania
BLAKE FARENTHOLD, Texas              TAMMY DUCKWORTH, Illinois
DOC HASTINGS, Washington             ROBIN L. KELLY, Illinois
CYNTHIA M. LUMMIS, Wyoming           DANNY K. DAVIS, Illinois
ROB WOODALL, Georgia                 PETER WELCH, Vermont
THOMAS MASSIE, Kentucky              TONY CARDENAS, California
DOUG COLLINS, Georgia                STEVEN A. HORSFORD, Nevada
MARK MEADOWS, North Carolina         MICHELLE LUJAN GRISHAM, New Mexico
KERRY L. BENTIVOLIO, Michigan        Vacancy
RON DeSANTIS, Florida

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                    Stephen Castor, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

  Subcommittee on Economic Growth, Job Creation and Regulatory Affairs

                       JIM JORDAN, Ohio, Chairman
JOHN J. DUNCAN Jr., Tennessee        MATTHEW A. CARTWRIGHT, 
PATRICK T. McHENRY, North Carolina       Pennsylvania, Ranking Minority 
PAUL GOSAR, Arizona                      Member
PATRICK MEEHAN, Pennsylvania         TAMMY DUCKWORTH, Illinois
SCOTT DesJARLAIS, Tennessee          GERALD E. CONNOLLY, Virginia
DOC HASTINGS, Washington             MARK POCAN, Wisconsin
CYNTHIA LUMMIS, Wyoming              DANNY K. DAVIS, Illinois
DOUG COLLINS, Georgia                STEVEN A. HORSFORD, Nevada
MARK MEADOWS, North Carolina
KERRY BENTIVOLIO, Michigan
RON DeSANTIS Florida
      Subcommittee on Energy Policy, Health Care and Entitlements

                   JAMES LANKFORD, Oklahoma, Chairman
PATRICK T. McHENRY, North Carolina   JACKIE SPEIER, California, Ranking 
PAUL GOSAR, Arizona                      Minority Member
JIM JORDAN, Ohio                     ELEANOR HOLMES NORTON, District of 
JASON CHAFFETZ, Utah                     Columbia
TIM WALBERG, Michigan                JIM COOPER, Tennessee
PATRICK MEEHAN, Pennsylvania         MATTHEW CARTWRIGHT, Pennsylvania
SCOTT DesJARLAIS, Tennessee          TAMMY DUCKWORTH, Illinois
BLAKE FARENTHOLD, Texas              DANNY K. DAVIS, Illinois
DOC HASTINGS, Washington             TONY CARDENAS, California
ROB WOODALL, Georgia                 STEVEN A. HORSFORD, Nevada
THOMAS MASSIE, Kentucky              MICHELLE LUJAN GRISHAM, New Mexico


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 5, 2014.................................     1

                               WITNESSES

Mr. Devon Herrick, Ph.D., Senior Fellow, National Center for 
  Policy Analysis
    Oral Statement...............................................     8
    Written Statement............................................    11
Roger Stark, M.D., Health Care Policy Analyst, Washington Policy 
  Center
    Oral Statement...............................................    16
    Written Statement............................................    18
Ms. Sara Horowitz, Executive Director and CEO, Freelancers Union
    Oral Statement...............................................    22
    Written Statement............................................    24
Ms. Avik Roy, Senior Fellow, Manhattan Institute
    Oral Statement...............................................    28
    Written Statement............................................    30
Jan VanRiper, Ph.D., Executive Director, National Alliance of 
  State Health Co-ops
    Oral Statement...............................................    34
    Written Statement............................................    36

                                APPENDIX

Chairman Lankford submitted for the record a Majority Staff 
  Report, ``Examining the Administration's $2 billion ObamaCare 
  Loan Guarantee Gamble: Two Case Studies of Political Influence 
  Peddling and Millions of Taxpayer Dollars Wasted...............    66


 HEALTH INSURANCE CO-OPS: EXAMINING OBAMACARE'S $2 BILLION LOAN GAMBLE

                              ----------                              


                      Wednesday, February 5, 2014

                  House of Representatives,
 Subcommittee on Economic Growth, Job Creation and 
 Regulatory Affairs joint with the Subcommittee on 
       Energy Policy, Health Care and Entitlements,
              Committee on Oversight and Government Reform,
                                                   Washington, D.C.
    The subcommittees met, pursuant to call, at 3:07 p.m., in 
Room 2154, Rayburn House Office Building, Hon. James Lankford 
[chairman of the Subcommittee on Energy, Health Care and 
Entitlements] presiding.
    Present: Representatives Lankford, Jordan, Meadows, 
DeSantis, Speier and Cartwright.
    Staff Present: Brian Blase, Majority Professional Staff 
Member; Molly Boyl, Majority Deputy General Counsel and 
Parliamentarian; Lawrence J. Brady, Majority Staff Director; 
David Brewer, Majority Senior Counsel; Katelyn Christ, Majority 
Professional Staff Member; John Cuaderes, Majority Deputy Staff 
Director; Adam P. Fromm, Majority Director of Member Services 
and Committee Operations; Tyler Grimm, Majority Senior 
Professional Staff Member; Christopher Hixon, Majority Chief 
Counsel for Oversight; Michael R. Kiko, Majority Legislative 
Assistant; Jeffrey Post, Majority Professional Staff Member; 
Laura L. Rush, Majority Deputy Chief Clerk; Katy Summerlin, 
Majority Press Assistant; Sarah Vance, Majority Assistant 
Clerk; Rebecca Watkins, Majority Communications Director; Jaron 
Bourke, Minority Director of Administration; Devon Hill, 
Minority Research Assistant; Jennifer Hoffman, Minority 
Communications Director; Jennifer Kreiger, Minority New Media 
Press Secretary; Suzanne Owen, Minority Senior Policy Advisor; 
Jason Powell, Minority Senior Counsel.
    Mr. Lankford. The committee will come to order.
    This is an oversight subcommittee of the full Committee on 
Oversight and Government Reform. We exist to secure two 
fundamental principles: first, that Americans have a right to 
know that the money Washington takes from them is well spent; 
and second, Americans deserve an efficient, effective 
government that works for them. Our duty on the Oversight and 
Government Reform Committee is to protect these rights. Our 
solemn responsibility is to hold government accountable to 
taxpayers, because taxpayers have the right to know what they 
get from their government. We will work tirelessly in 
partnership with citizen watchdogs to deliver the facts to the 
American people and bring genuine reform to the Federal 
bureaucracy. This is the mission of the Oversight and 
Government Reform Committee.
    This hearing is a continuance of our oversight and the 
implementation of the Affordable Care Act. It is a multi-
billion dollar law that has been passed, so it is appropriate 
that we continue to have ongoing oversight as it advances. 
Today we will focus on the operation of Section 1322 of the 
law, which establishes the Consumer Operated and Oriented Plan, 
or CO-OP loan plan. The Department of Health and Human Services 
awarded a total of $2.1 billion to 23 CO-OPs throughout the 
Country. The CO-OPs receiving these loans have been awarded a 
portion and two portions of startup loans which are repayable 
in five years and a low-interest longer term solvency loans, 
which are repayable in 15 years.
    The committee's review of available information on the CO-
OP program to date suggests that the loan program is an 
investment disaster. There is a possibility that the American 
taxpayers will be left on the hook. That is what we are trying 
to follow up on today.
    Americans are well aware of other loan debacles and 
accusations of insider cronyism in the last few years. Today we 
are going to take a serious look at the multi-billion dollar 
loan program that is the CO-OPs.
    First, the HHS Inspector General reported last year that 
most CO-OPs have exhausted their startup funding and lack 
private support. Second, even the Obama Administration itself 
is not showing confidence about the viability of the CO-OP 
program. The Office of Management and Budget itself projected 
that the American taxpayers would lose over 40 percent of the 
funding through the CO-OP program. This means the 
Administration expects taxpayers to face an $860 million loss 
from the $2 billion allocated in the CO-OP loans.
    Due to these and other concerns, Congress ultimately cut 
the CO-OP funding to $3.8 billion in 2011. After awarding $2 
billion in loans, Congress rescinded the majority of the 
remaining unobligated funds in 2013.
    Third, the committee's investigation highlights serious 
concerns with the Obamacare CO-OP program. The committee is 
releasing a staff report today that summarizes preliminary 
findings from its investigation of this loan program based on 
this information. I would like to introduce the Majority staff 
report into the record at this time. Without objection.
    Mr. Lankford. This report represents two case studies: the 
Vermont Health CO-OP, which initially received $30 million but 
dissolved after failing to receive licensure from the State 
insurer last May; and three of the largest CO-OPs sponsored by 
Freelancers Union, which received a total of $340 million under 
the program.
    Today we are joined by Ms. Sara Horowitz, thank you for 
being here very much, the Executive Director and CEO of 
Freelancers Union. The committee also invited Mitchell 
Fleischer, the President of the Board of the Vermont Health CO-
OP. Mr. Fleischer notified the committee yesterday that he 
would not appear today and answer questions about the millions 
of dollars of lost taxpayer funds surrounding the failed 
company.
    We are also joined by three health care policy experts: Dr. 
Roger Stark of the Washington Policy Center; Mr. Avik Roy of 
the Manhattan Institute; and Dr. Devon Herrick of the National 
Center for Policy Analysis; as well as Ms. Jan VanRiper, 
Executive Director of the National Alliance of State Health CO-
OPs. Thank you all for being here. I look forward to hearing 
the testimony from today's witnesses on the operations of the 
loan program and how to best guard taxpayer dollars.
    With that, I recognize the ranking member of my 
subcommittee, Ms. Speier.
    Ms. Speier. Thank you, Mr. Chairman.
    Let me begin by saying that I have enjoyed a cordial and 
constructive working relationship with the Chairman. I believe, 
Mr. Chairman, that you are an honorable man. I choose to 
believe that this hearing has been orchestrated by a 
polarizing, destructive Majority staff that is more interested 
in scoring political points than in conducting meaningful 
oversight.
    The American people are sick of it, and I am sick of it. 
The Majority drops this biased, incomplete and unvetted 
document on my desk 45 minutes before this committee hearing 
was scheduled to begin, purporting to be the staff report of 
the committee. No one watching this hearing right now should in 
any way believe that this is a bipartisan product. I have had 
no time to fully review or study it, but what I have read is 
full of conjecture, ad homonym attacks and conspiracy theories.
    My cursory reading shows that the report exaggerates 
routine meetings, misrepresenting them as improper 
relationship, and accuses the CO-OPs of improper political 
activity when they only exercise their constitutional right to 
petition their government and comment lawfully on proposed 
regulations, just like the dairy farmers or the sugar beet 
growers did with all of us during the debate on the Farm Bill.
    I fear that this document will not stand up to the 
scrutiny. Otherwise, I would have received it weeks ago, and 
the full committee would have participated in its drafting. 
Instead, the majority chose to spend precious tax dollars and 
staff time focusing on one of 24 CO-OPs that failed to receive 
licensure and whose outstanding loan represents less than, less 
than one quarter, one quarter, of 1 percent. They did not 
receive $30 million, they received $4 million. They were slated 
to receive $30 million, that never came forward because they 
were never licensed.
    Their analysis of this single CO-OP is also transparently 
biased and I believe politically motivated. As much as the 
majority would like to manufacturer a scandal, there simply 
isn't one. There is no smoking gun. This is no Solyndra. The 
Majority is trying to use a single, unrepresentative example to 
sabotage the entire program.
    I stand ready and willing to conduct oversight with the 
Majority in a manner that allows for constructive and 
thoughtful study and debate. This hearing will do neither, and 
therefore I will not participate. I yield back.
    Mr. Lankford. I now recognize Mr. Jordan for an opening 
statement.
    Mr. Jordan. Mr. Chairman, I would just say, in light of the 
ranking member's statement, I was tempted to say, making a 
mountain out of a molehill, but I don't even see the molehill. 
Look, either side can release a report. They are not required 
to notify the other side. In fact, I have a report right here 
that our staff gave me that Ranking Member Cummings released, a 
new report on the Benghazi hearing. Today, Elijah Cummings, 
Ranking Member of the House Committee on Oversight and 
Government Reform released a new report prepared by Democratic 
staff. This goes on all the time.
    The fact remains, as you pointed out, Mr. Chairman, in your 
opening remarks, this program is slated to lose 40 percent of 
the money allocated by the taxpayers. Is that correct?
    Mr. Lankford. That is correct, and let me mention one thing 
as well. That is that all the findings from this report were 
all done in testimony where both the Majority and Minority 
staff were included, in all of the testimony behind the scenes, 
and were free to be able to ask questions and be engaged. So 
either side can create a written report from the findings they 
have from all the interviews and investigations. I yield back.
    Mr. Jordan. Thank you, Mr. Chairman. And I will dispense 
with most of my opening statement and just read from a couple 
of pages here. The Obama Administration projects that taxpayers 
could lose 40 percent of the loans given out through the CO-OP 
program, $860 million loss. In fact, one CO-OP has already 
failed. The Vermont Health Care CO-OP dissolved in May of last 
year, after the Vermont State insurance regulator denied the 
CO-OP a license to sell insurance due to serious concerns about 
their solvency and that cost the taxpayers $4.5 million.
    So the reference to Solyndra and the other programs in the 
loan guaranty program, or other entities in the loan guaranty 
program that went bankrupt, I think is very appropriate. The 
committee invited Mr. Fleischer, President of the Board of 
Vermont Health CO-OP to testify today. The committee sought to 
hold him accountable to the American taxpayers for the money 
that the taxpayers lost. But yesterday he said, you know what, 
I just can't make it. We took taxpayer money, but I just can't 
come answer to the taxpayers and answer to the United States 
Congress.
    Mr. Fleischer's refusal to testify is concerning the State 
of Vermont found that Mr. Fleischer's compensation as President 
of the Board of $126,000 was excessive. Just by way of 
comparison, the head of the BlueCross BlueShield Board of 
Vermont makes $29,000 a year. In addition, Mr. Fleischer's 
refusal to testify prevents the committee from questioning him 
on what the State of Vermont called a ``stark, ever-present 
conflict of interest.'' The State insurance regulator found 
that the company owned by Fleischer agreed to be the exclusive 
agent of the Vermont CO-OP. The CO-OP paid Mr. Fleischer's 
company at least $26,000 of taxpayer funds a month as part of 
his agreement. Between his compensation and his company's 
exclusive agreement with the Vermont CO-OP, Mitchell Fleischer 
received a substantial amount of taxpayer revenue. In return, 
the America taxpayers received nothing but a failed CO-OP.
    Mr. Fleischer's appearance today could have gone a long way 
in shedding light on why Vermont Health failed. It is 
incredibly disappointing that he chose not to be here and chose 
not to defend the misuse of taxpayer money.
    We are, however, joined by Ms. Sara Horowitz, the CEO and 
Executive Director of the Freelancers Union. The committee has 
had several longstanding questions about the process that 
informed the awarding of $340 million in loans to three 
companies sponsored by the Freelancers Union. The committee's 
investigation has shown that this union was not eligible under 
Obamacare to sponsor CO-OPs due to the Union's insurance 
company subsidiary. However, the Union successfully, in our 
judgment, manipulated the regulatory process to avoid the law's 
prohibition on giving taxpayer money to entities related to 
existing insurance companies.
    After receiving hundreds of millions of dollars in Federal 
loans, Freelancers Union then used its political connections to 
the White House to preserve its ability to benefit financially 
from the CO-OP program. This is what happens when the 
government picks winners and losers with taxpayer money. We 
look forward to learning more about all of these issues in 
today's hearing.
    Mr. Issa. Would the gentleman yield?
    Mr. Jordan. I would be happy to yield to the Chairman.
    Mr. Issa. I thank the Chairman. I will be brief.
    I share with both of the chairmen the importance of this 
hearing, the recognition that this happens in time of war, we 
rush to do something, we rush to spend money. This committee 
some years ago under Chairman Waxman recognized that the Bush 
Administration had flown cargo aircraft full of $20 bills to 
Iraq, had medium ranking and low ranking officers sign for them 
and the money had been disbursed, and we really didn't know 
where it went. So it is not unusual in times of emergency.
    But in this case, a bill that had multiple years to be 
prepared and thought out and then implemented appears to have 
some of the same loose money, money that cannot be justified or 
accounted for. I think the importance of this hearing today, 
notwithstanding the gentlelady from California, Ms. Speier's 
assertion, is about substantial amounts of taxpayer dollars 
that are either being used unwisely or in some cases used 
outside even the letter of the law that was passed.
    So I want to thank both chairmen for covering this 
important issue and believe I am looking forward to the 
hearing.
    In closing, Mr. Chairman, the witness that is not here 
today, I expect that witness to come before this committee. I 
would ask that at the conclusion of this hearing that you 
recess, and not adjourn, because we will reconvene when our 
witness is available. A witness says they are going to appear 
before this committee, where we could have and possibly would 
have issued a subpoena, when they change their mind at the last 
moment, that is not acceptable. So either through a 
continuation of this hearing or a deposition process, I expect 
full compliance with the invitation.
    I thank both chairmen and yield back.
    Mr. Lankford. I would like to recognize the ranking member 
of the Subcommittee on Economic Growth, Mr. Cartwright, for his 
opening statement.
    Mr. Cartwright. Thank you, Mr. Chairman.
    And I do thank the witnesses for taking time out to appear 
today.
    This hearing is going to examine the loan program 
established under the Affordable Care Act to create non-profit, 
member-focused health insurance CO-OPs, or Consumer Operated 
and Oriented Plans, in several States. The CO-OP program is an 
investment in health care innovation. It is an investment 
designed to increase market competition and consumer choice 
which drives down prices to consumers, something that we should 
all want more of.
    I had looked forward to the testimony of Sara Horowitz, the 
CEO of a sponsor of three CO-OPs, and a winner of the MacArthur 
genius award for social innovation. I thank you for coming 
today. I had also looked forward to the testimony of Dr. Jan 
VanRiper, the Executive Director of the National Alliance for 
State Health CO-OPs, to give us a big picture view of the 23 
successful CO-OPs operating today in both red and blue States.
    However, I regretfully inform you that I will not be 
hearing this testimony today. The Majority released this 28-
page report they have written on CO-OPs exactly one hour before 
the hearing was supposed to start. No Democrats had seen this 
report before its release. Look, the American public wants us 
to work together. They are hungry for Democrats and Republicans 
to work together. This is not working together. This is not a 
report that was generated just recently. It is perfect. It is 
28 pages that has 136 footnotes. There is not a typo to be seen 
in there. This is the type of report that took weeks to prepare 
and to dump it on us an hour before the hearing----
    Mr. Lankford. Would the gentleman yield?
    Mr. Cartwright. obviously a well thought-out attempt to 
just completely skew this process. We in America, we are used 
to something called due process. Due process means you have 
notice and an opportunity to be heard so that you don't just 
get one side of the story every time. That is what this is. 
This is the one side of the story. And to give the Democrats on 
this committee one hour to prepare for this hearing is 
ridiculous. Sadly, it is not the first time this has happened. 
It has become the standard operating procedure for the Majority 
on this committee. Republicans and Democrats alike are 
constantly talking about how they want to work with folks on 
the other side of the aisle. I would say to my colleagues, if 
you want to work with us, we are here. You have our emails, you 
have our phone numbers. We work just down the hall from each 
other in the same office building. Send us the report. We are 
happy to look at it. We don't care if it is not properly 
paginated or has typos in it, we want to get some notice of 
these things ahead of time so we can sit down and have a civil, 
informed and bipartisan discussion about these important 
matters.
    I can't sit through a hearing where we are going to talk 
about a report that none of the Democrats have had a chance to 
read and pretend that this is the way that we should be doing 
things here in Congress. The American people expect more than 
this of us and they deserve more than this of us. And I yield 
back.
    Mr. Lankford. Would the gentleman yield in conversation?
    Mr. Cartwright. I did.
    Mr. Lankford. The challenge that I have of this, do you 
know of any testimony that occurred or any interviews that 
occurred that both the Majority and the Minority staff were not 
involved with? Were you excluded from any of the interviews at 
all?
    Mr. Cartwright. We got this report one hour before the 
hearing. I would like to see which one of you who will stand up 
and say we could not have been given this with much more 
notice.
    Mr. Lankford. My challenge of this is for me personally, it 
has the feeling of, our staff worked hard on a hearing that had 
public notice, that obviously this hearing was coming, what the 
topic was about, there were interviews that had happened over 
the past year to all these individuals doing the background. It 
feels like there is a frustration that our staff prepared for 
it and our staff did not prepare for it. We did a repot and you 
all didn't. And you are walking into the hearing not ready. And 
that is what I am trying to figure out.
    I am glad for the conversation because the bulk of the 
conversation today, the testimony of these five folks, is not 
about our report. Now, we prepared a report to get ready for 
this hearing, but we came to this hearing not to talk about the 
report, but to receive witness testimony. We would be honored 
for you to be a part of the witness testimony.
    Mr. Cartwright. Will the Member yield?
    Mr. Lankford. Absolutely, sir.
    Mr. Cartwright. Mr. Chairman, I am not here to protest the 
facts and the opinions here to be given by these fine people. I 
am here protesting the one thing and the one thing alone, and 
that is this report that was dumped on us with--it is 
absolutely unfair. And I will not be a part of something that 
involves this level of unfairness. It just doesn't make sense 
and I feel that it is un-American.
    Mr. Lankford. I feel like you were involved in every single 
interview. We just wrote up a report of what we heard in those 
interviews and the facts that we had gathered. And I am sorry 
that your staff did not also pull together the facts that they 
had gathered and also release a report. Because that would be 
very appropriate, for our staff to work on it, for your staff 
to work on it and for us to come and hear the testimony of the 
people that are coming to bring testimony.
    Mr. Cartwright. Mr. Chairman, I protest conducting business 
in this fashion. I think I have expressed myself fully and I am 
going to excuse myself now.
    Mr. Jordan. Mr. Chairman?
    Mr. Lankford. Yes, sir.
    Mr. Jordan. I Ask unanimous consent to enter into the 
record a report the Minority released in September of last year 
regarding the Benghazi investigation.
    Mr. Lankford. Without objection.
    It is common practice for any Member to be able to come and 
bring a newspaper article, bring a report, bring whatever may 
be, and to introduce it into the record as a part of the 
hearing. That happens every single hearing I have been at, with 
very few exceptions, that a Member doesn't show up, hold up a 
newspaper article and say, I read this, this is about this 
hearing, I would like to submit it for the record and we don't 
have advance notice at all.
    So it seems a little unusual that we prepared for a hearing 
and the other side didn't prepare for the hearing and they are 
upset with that. So with that, I would like to be able to hear 
the testimony of our witnesses, and I do appreciate your coming 
here. I apologize for the theatrics that are going on. But we 
do want to get to your statements and the work that you have 
done. Because you have all brought also written testimony, and 
you are bringing oral testimony as well. For that, we 
appreciate you.
    Members will have seven days to submit opening statements, 
if any Member would like to submit an opening statement for the 
record.
    Mr. Devon Herrick, Senior Fellow at the National Center for 
Policy Analysis; Dr. Roger Stark, who is a retired physical and 
health care policy analyst at the Washington Policy Center; Ms. 
Sara Horowitz is the Executive Director and CEO of the 
Freelancers Union; Mr. Avik Roy is a Senior Fellow at the 
Manhattan Institute; Ms. Jan VanRiper is Executive Director and 
CEO for the National Alliance of State Health CO-OPs. We are 
glad that you are here.
    Pursuant to committee rules, all witnesses are sworn in 
before they testify. If you would please rise and raise your 
right hands.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth and nothing 
but the truth, so help you God?
    [Witnesses respond in the affirmative.]
    Mr. Lankford. Thank you. You may be seated. Let the record 
reflect that the witnesses have all answered in the 
affirmative.
    In order to allow time for discussion, I would ask you to 
limit your oral testimony to about five minutes. There is a 
clock in front of you on that, that you will be able to see as 
part of that. We are glad to be able to receive your testimony.
    Dr. Harrick?

                       WITNESS STATEMENTS

                   STATEMENT OF DEVON HERRICK

    Mr. Herrick. Chairman Lankford, Chairman Jordan and members 
of the committee, I am Devon Herrick, I am a health economist 
and senior fellow at the National Center for Policy Analysis. 
The NCPA is a public policy research institute.
    Thank you for allowing me to share my thoughts, and I look 
forward to your questions.
    Consumer Operated and Oriented Health Plans, otherwise 
known as CO-OPs, as they are commonly known, were a political 
compromise in 2009 during the health care debate. Congressional 
support for CO-OPs was primarily because they could serve a 
political purpose. Whether or not CO-OPs could serve an 
economic purpose or were economically viable received less 
scrutiny at the time.
    Proponents envisioned CO-OPs as an alternative to a public 
plan option that progressives hoped would boost competition 
with legacy health insurance companies. In a nutshell, the only 
real purpose for the CO-OPs was a political compromise that 
served its purpose in 2009 but was never really politically 
viable. This is a conclusion that is shared by both critics on 
the left and the right. For example, Nobel Laureate Paul 
Krugman called CO-OPs a sham. In interviews, Senator Jay 
Rockefeller referred to CO-OPs as a dying business model for 
insurance, arguing that we had tried this nearly a hundred 
years ago, and they largely failed.
    Yet proponents continue to view CO-OPs through rose-colored 
glasses, hoping that they would do what for-profit insurers 
supposedly fail to do: put patients ahead of profits. Indeed, 
the Office of Inspector General fears that the member-owned 
aspect of CO-OPs could undermine them, as members demand low 
premiums at the expense of financial viability.
    CO-OP proponents' political agenda further doomed their 
chances for survival. As we have all heard, advocates for 
public health coverage have long complained the profits and 
advertising just serve no other purpose than to push up the 
cost of premiums and that they are really unnecessary. So of 
course, CO-OPs were dreamed up as a non-profit entity that 
couldn't use any of their startup government funding to 
advertise to reach out to potential customers. With little 
access to the equity markets and without being able to use 
their startup funds to communicate they had little chance of 
success.
    Furthermore, CO-OPs are barred from competing in the large 
group lucrative employer markets. Instead, they have to compete 
for the individual market and the small group market. This is 
the most risky segment of the insurance market.
    Furthermore, CO-OPs are likely to suffer from adverse 
selection, which is attracting more sick people than healthy 
ones. This is especially true with the troubles we have seen 
with the rollout of the health insurance exchanges.
    According to the actuarial firm Milliman, starting a non-
profit health insurer is no easy task. And making that a non-
profit CO-OP adds additional complexity. Finally, with no 
claims data, no idea of who will enroll or how many will enroll 
or the age of the enrollees, it will be very difficult to 
accurately assess risk and price of premiums. Furthermore, CO-
OPs have a limited opportunity to gain market share needed to 
have financial viability. And without advertising dollars, they 
find it very difficult to reach out to their customers, and 
with the exchanges not working well, they have problems 
attracting anyone except those who seek them out, and of 
course, the people who tend to seek out insurance are those who 
have higher health costs.
    Moreover, the exchange problems and stop-gap fix, which is 
allowing insurers to sign up enrollees directly further 
disadvantages CO-OPs. Moreover, the selection process of 
awarding loans appears to contain an element of cronyism.
    Congress wisely decided to require loans with strict 
repayment schedules rather than making grants directly. But 
this may do little to ensure the safeguarding of taxpayer 
funds. The Administration has all but admitted that the CO-OPs 
are risky with more than one-third of the 15-year solvency 
loans expected to go into default, and 40 percent of the five-
year startup loans going into default. This estimate was made 
before the recent problems with the exchanges came to light.
    In conclusion, as with most ill-conceived, under-
capitalized ventures run by inexperienced management teams 
following an outdated business model, health insurance CO-OPs 
will most likely muddle along until they run out of taxpayer 
money, and I expect this will be how most of them will end. 
Thank you.
    [Prepared statement of Mr. Herrick follows:]

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    Mr. Lankford. Dr. Stark?

                    STATEMENT OF ROGER STARK

    Dr. Stark. Chairman Lankford, Chairman Jordan and members, 
thank you for this opportunity to testify this afternoon.
    As background, Consumer Operated and Oriented Plans, or CO-
OPs, have been part of the American health care delivery system 
since 1929. Although all the plans that existed during the 
Great Depression have closed, a few large CO-OPs formed during 
or shortly after World War II are still in existence. Thousands 
of non-health care CO-OPs serve American consumers every day in 
areas such as agriculture, utilities and credit unions. A CO-OP 
is designed to be self-owned and to be of benefit to its 
members. Governance is through a board member, and CO-OPs are 
not for profit.
    As mentioned, CO-OPs were authorized in Section 1322 of the 
Affordable Care Act and were placed in the ACA as a compromise 
to the public option health insurance plan. To date, Federal 
loans have been given to 24 new CO-OPs. One of these 24 is 
closed because it could not satisfy State insurance 
regulations. It is not clear how its original loans will be 
repaid. Ten other CO-OPs are projecting financial problems.
    The overriding concern with the CO-OPs allowed in the 
Affordable Care Act is financial solvency. The Federal loans 
cannot be used for marketing. These CO-OPs are essentially new 
insurance companies that are starting from scratch. They will 
need a very significant amount of private money or a very large 
enrollment premium base to guarantee solvency. Without the 
ability to formally advertise, many will need to rely on 
grassroots efforts to enroll a large number of people in a 
short time frame.
    The inefficient rollout of the health insurance exchanges 
has also been a disadvantage for the CO-OPs. Whether they are 
called accountable care organizations or medical homes, the 
integrated care models given priority in the new CO-OPs are 
essentially health maintenance organizations, or HMOs. From my 
personal experience and from broad experience with HMOs in the 
1980s and 1990s, using primary care doctors as gatekeepers can 
save money by rationing care. Obviously, this is not always in 
the patient's best interest.
    CO-OPs will need to establish provider networks. To have a 
hope of remaining financially competitive, they will in all 
likelihood be forced to offer providers lower payment rates 
than established insurance companies will offer. This will be a 
definite disadvantage in recruiting networks of doctors and 
hospitals.
    CO-OPs will have to deal with the insurance regulations in 
the Affordable Care Act. Legacy insurance companies are having 
a difficult time accurately pricing premiums with the mandates 
of community rating and guaranteed issue. Without historical 
actuarial data, new CO-OPs will have no idea where to set plan 
prices. Without substantial reserves, a few large claims will 
put them at an extremely high risk for financial failure. This 
may not reveal itself for a few years.
    As they do experience growing financial difficulty, the CO-
OPs will have two choices. The first would be to default on the 
$2 billion already loaned by the Federal Government. The 
mechanism for recapturing this money is unclear. The second 
choice would be to go back to the Federal Government and ask 
for more taxpayer dollars. If this choice was successful, and 
more taxpayer money was given out, CO-OPs would truly be a 
public option.
    Thank you very much. I look forward to your questions.
    [Prepared statement of Dr. Stark follows:]

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    Mr. Lankford. Thank you.
    Ms. Horowitz?

                   STATEMENT OF SARA HOROWITZ

    Ms. Horowitz. Chairman Jordan, Chairman Lankford, and 
members of the committee, thank you for the opportunity to 
appear before you today to discuss Freelancers Union 
sponsorship of three CO-OPs.
    I would like to begin by making three overarching points. 
First, we have strived to be open and transparent throughout 
the CO-OP application and launch process. This open book 
approach has carried over into our dealings with this committee 
over the last 16 months.
    Second, Freelancers Union was well qualified, perhaps the 
most qualified organization to serve as a sponsor of the CO-
OPs. We were chosen to be a sponsor on the merits. Prior to the 
enactment of the Affordable Care Act, Freelancers Union built, 
from the ground up, a successful, member-focused health 
insurance company. We leveraged that same experience and 
expertise in sponsoring the CO-OPs to put them in a position to 
deliver services on time and on budget.
    Third, despite the many challenges Freelancers Union faced 
in building three insurance entities from scratch, we did 
everything we said we would do to help those CO-OPs launch 
successfully and to move them quickly to self-sufficiency. And 
it worked. The CO-OPs we sponsored launched on time as 
independent entities. It is no accident that the Freelancers 
Union sponsored three CO-OPs. We believe that the goals of the 
CO-OP program were compatible with our own.
    By way of background, Freelancers Union is a non-profit, 
social purpose organization working to serve the nearly 42 
million independent workers that make up the new American 
workforce. To be clear, we are not a traditional labor union, 
as that term is generally understood. Rather, we are a trade 
association of sorts for independent workers. Since our 
inception, we have pioneered innovative ways to use market 
solutions to support independent workers who go from job to 
job, gig to gig and project to project. In essence, our motto 
is DIY, do it yourself.
    Developing sustainable programs to benefit independent 
workers is core to who we are and what we do. I am proud of our 
15-year history of providing services, including health 
insurance, to local communities, micro-entreprenurials and 
independent workers. This is also not the first time we have 
been called to service. We were the third largest grantee 
chosen to provide benefits for the 9/11 Fund, helping workers 
who lost their jobs as a result of the attacks.
    Because of the successful work we performed for the 9/11 
Fund, the American Red Cross called upon us to provide benefits 
to individuals who had either been in one of the towers or who 
had lost a loved one in the attack.
    Also in 2001, the Freelancers Union started a portable 
benefits network which eventually led to the creation of the 
Freelancers Insurance Company in 2009. To promote FIC's 
sustainability, Freelancers Union broke new ground in the 
health insurance marketplace, working with all interested 
constituencies to overcome a great number of market, practical 
and regulatory obstacles. The truth is, we could not have done 
it without the tireless advocates on both sides of the 
political aisle in New York. But that is how we operate. We 
work to achieve social goals, not to make political statements.
    FIC is now providing over 25,000 New Yorkers and their 
families with high quality, affordable health insurance 
tailored to meet their needs. As a result of the successful 
health care model that we established in New York, Freelancers 
Union was uniquely positioned to help launch three independent 
CO-OPs, each of which has, again, launched on time and on 
budget. Their successful launch was made possible in part by 
providing all three CO-OPs with common backend processes and 
infrastructure that would enable them to grow and be 
independent.
    However, it is important to understand that while 
Freelancers Union sponsored and fully supports the mission of 
the CO-OPs to provide affordable health coverage options, we do 
not own or operate them. The CO-OPs are independent entities 
with their own boards, leadership and management. As a sponsor, 
we helped establish the CO-OPs and get them up and running, 
applying the same innovation and creativity that defines 
Freelancers Union's CO-OP initiative. Our work was designed and 
did promote their independence.
    As we have made clear to the CO-OPs, our role as sponsor 
has ended.
    Thank you for the opportunity to testify. I appreciate the 
committee's interest and I welcome any questions you might 
have.
    [Prepared statement of Ms. Horowitz follows:]

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    Mr. Lankford. Thank you, Ms. Horowitz.
    Mr. Roy?

                     STATEMENT OF AVIK ROY

    Mr. Roy. Chairman Lankford, Chairman Jordan, members of the 
Oversight Committee, thanks for inviting me to speak with you 
today about the Affordable Care Act's CO-OP program. As others 
have described, CO-OPs were introduced as a substitute for the 
so-called public option by Senator Kent Conrad. The idea was 
that CO-OP plans, shorn of the profit motive, would offer lower 
premiums than traditional insurers.
    However, I regret to report that there are fundamental 
flaws in the way the CO-OP program was designed, making it 
unlikely that CO-OPs will ever achieve this goal. Failure of 
the CO-OP program could cost taxpayers as much as $2 billion. 
In addition, failure could expose hundreds of thousands of CO-
OP enrollees to unpaid medical bills.
    The argument that CO-OPs will succeed because they are non-
profit ignores the fact that non-profit insurers are already 
widespread in the United States. In Senator Conrad's home State 
of North Dakota, WellMark BlueCross and BlueShield, a non-
profit, controls 90 percent of the market. Massachusetts has 
the costliest health insurance market in the Country, despite 
the fact that the State's four largest health insurers are non-
profit.
    If the fact that CO-OPs are non-profit is not a genuine 
market advantage, what advantages do CO-OPs have? Under the 
ACA, CO-OPs cannot, at least in theory, be run by existing 
health insurance companies. As a result, CO-OPs will have to 
negotiate, from scratch, reimbursement contracts for every type 
of medical service with every hospital and doctor in their 
network. This is an extremely difficult and labor-intensive 
process. The likelihood that CO-OPs secure lower rates than 
established insurers is extremely low because as startups, CO-
OPs lack the patient volume necessary to establish bargaining 
power with providers.
    In addition, CO-OPs will lack the large data bases and 
management experience that established insurers use to identify 
opportunities for higher cost efficient utilization of medical 
services. Nonetheless, HHS claims that CO-OPs will be more 
efficient than existing insurers because ``new entities are not 
saddled with existing administrative and information systems 
which are often outdated and cumbersome to coordinate and 
upgrade.''
    A Silicon Valley venture firm would laugh this argument out 
of the room. Even large, well-capitalized insurance companies 
rarely stray outside their established markets, because 
entering new States and regions is extremely difficult. If all 
it took to succeed were new computers, they would have done it 
by now.
    Insurers are required to keep a certain amount of assets in 
reserve in case their spending on medical claims exceeds the 
amount they have received in premiums. However, Federal loans 
to CO-OPs are not assets, but liabilities, because they have to 
be repaid. As a result, HHS engaged in a kind of accounting 
legerdemain so that its CO-OP loans would count as assets. This 
means that HHS is helping CO-OPs overstate their true financial 
health. Even so, HHS estimated in 2011 that the CO-OP loan 
default rate would be 40 percent. The Office of Management and 
Budget predicted an even higher default rate of 43 percent. And 
the Government has no effective way to recover funds from CO-
OPs that default on their debt.
    According to one estimate, at least 11 of the CO-OPs were 
licensed in such a way that if they go bankrupt, they may not 
be able to pay outstanding medical claims before first 
relieving creditors. This means that Americans who enrolled in 
CO-OP based insurance in good faith and paid their premiums on 
time may not find that coverage is there for them when they 
actually need it. This problem could further damage consumer 
confidence in the broader exchange-based insurance marketplace.
    It should be noted that skepticism about the viability of 
CO-OPs is not limited to critics of the Affordable Care Act. 
Indeed, according to Jerry Markon of the Washington Post, 
``White House officials repeatedly suggested that funding for 
the CO-OPs be reduced. Some senior White House officials 
consider the CO-OPs risky, including for prospective policy 
holders, and question whether the loans would be repaid.''
    My recommendation to this committee would be to 
aggressively review the existing CO-OP loan recipients and at 
the very least, suspend the disbursement of loans to those CO-
OPs with a below-average likelihood of future solvency. 
Stewards of taxpayer dollars should not throw good money after 
bad and place vulnerable Americans at risk.
    The 2014 open enrollment period ends on March 31, giving 
CO-OP enrollees time to switch to a more financially stable 
insurer. With anything as complex as health reform, sweeping 
changes enacted by Congress are bound to have unanticipated 
consequences. In the case of CO-OPs, future insolvency is not 
unanticipated but assumed by experts in both parties. This 
should be an easy decision for both skeptics and supporters of 
the Affordable Care Act.
    I look forward to your questions and to being of further 
assistance to this committee. Thank you.
    [Prepared statement of Mr. Roy follows:]

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    Mr. Lankford. Thank you, Mr. Roy. Dr. VanRiper?

                   STATEMENT OF JAN VanRIPER

    Ms. VanRiper. Thank you, Chairman Lankford and Chairman 
Jordan, members of the committee. Thank you for this 
opportunity to be here. Again, my name is Jan VanRiper, I am 
with the CO-OP trade association to which all 23 CO-OPs belong.
    I am going to focus my remarks today on CO-OP viability, as 
I was asked to do. First, I think it is really critical to 
mention the importance of CO-OP financial viability and other 
types of viability to insurance costs for both consumers and 
for governments. As you know, a major reason CO-OPs were 
provided for was to inject some much-needed competition into 
markets that had been very stagnant for a very long period of 
time. The expectation, of course, was that with more 
competition in those markets, prices would be driven down, 
hence benefiting not only private payers but governments that 
subsidized some premiums for private payers.
    In both cases, CO-OPs have already delivered on that 
expectation. A study conducted some months ago shows that in 
States where CO-OPs exist, overall premium prices are 
approximately 8 to 9 percent lower than in States without them. 
In a July health affairs blog, health policy experts 
extrapolated from pricing information provided by the CBO and 
the Urban Institute, concluding that if markets with CO-OPs 
have prices ranging from just 2 to 5 percent lower than 
otherwise, savings to taxpayers in lower Federal premium tax 
credits alone over the next 10 years would arrange from $6.9 
billion to $17.4 billion. So it is maybe not an investment 
disaster.
    Finally I would say to that, the financial viability of 
these CO-OPs is really in everyone's best interest. The CO-OPs 
take seriously their responsibility to make these CO-OPs 
viable.
    As with any new business, it is important to look not only 
at immediate financial conditions, but most importantly to 
projections, realistic projections and expectations for long-
term financial viability. As expected, and it is expected, that 
it would take some time for CO-OPs, as startup companies, like 
any startup company, to become totally self-sustaining. As an 
aside, I want to mention that in spite of this expectation, it 
turns out that a number of the CO-OPs are already doing very, 
very well on enrollment and garnering significant market share 
in their markets and in their States.
    Going back to looking to the long-term projections for 
long-term CO-OP viability. The outlook really is excellent, and 
it is because of the tremendous and dedicated expertise in CO-
OP management, demonstrated support from communities in the 
States where CO-OPs operate, early enrollment successes that 
point to this, and the facts that the CO-OP boards will soon be 
populated by consumers for whom they provide coverage, all 
pointing to long-term financial success and commitment on the 
part of the CO-OPs.
    As with any business, however, it will take some time to 
reach the maximum positive capacity. In the meantime, the 
numbers show that CO-OPs have already gone a long way toward 
paying for loan costs by driving down prices in markets where 
they operate.
    Having said that, I do want to mention some of the specific 
factors impacting current CO-OP enrollment numbers, because of 
course, enrollment numbers, along with and other things, are 
something that very much drive financial success. At this early 
stage, as I said earlier, some of the CO-OPs are doing very, 
very well with enrollments. And I will tell you honestly that 
other CO-OPs are struggling out of the chute with enrollments. 
There are a number of reasons for it. One is pricing, another 
one is unanticipated market changes, and the third, at least 
the third is the number of competitive carriers in any given 
State in which there is a CO-OP.
    I will just very, very quickly highlight those. With 
pricing, for new entrants, as was mentioned before, new 
entrants have to operate somewhat blindly, as did all the 
traditional carriers who operated on the exchange, somewhat 
blindly with respect to pricing. So it will take, since some 
CO-OPs came in maybe a little bit more, some cane in a little 
bit low, we have a good cross-section of CO-OPs that came in 
with excellent lower prices. But it will take a period of time, 
maybe a year, maybe two, for the pricing to get just right. 
That is probably true for all insurance carriers.
    The unanticipated market changes that CO-OPs have been 
challenged with are again some of those faced by other 
carriers, but some are unique to the CO-OPs. I see that I am 
out of time.
    Mr. Lankford. You can go ahead and finish. You have just 
two points.
    Ms. VanRiper. Thank you. Well, the first one obviously are 
the problems with the exchanges, both the Federal and State 
exchanges. They got off to a slow start, the Federal exchanges 
are working better now. There are still a couple of States who 
have non-functional exchanges. So that of course makes it 
difficult.
    Another couple, and then I will finish, another couple 
unexpected changes was both the allowance for traditional 
carriers to do early enrollment and then the Administration's 
allowance for carriers to offer non-compliant plans, effective 
January 1st, because of the cancellation issue. Both of those 
things operate to reduce the number of potential enrollees in 
the exchange pools. So that obviously operates to a 
disadvantage of any new entrants versus those in the 
traditional carriers. I am saying this not with respect to 
whining about it on behalf of CO-OPs, it is just something that 
was unanticipated and it will take some time for them to react 
to that and regroup.
    Thank you.
    [Prepared statement of Ms. VanRiper follows:]

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    Mr. Lankford. Thank you.
    I now recognize myself for the first round of questioning. 
Thanks for being here.
    In some ways, this is a very difficult thing, because we 
have tried to ask a lot of questions. Ms. Horowitz, you 
mentioned you have been very transparent, and you have. Your 
group has been very transparent, you have come to interviews 
and we thank you for that.
    But when we go to CMS and HHS and ask questions on 
enrollment numbers and all those things, it seems to be 
somewhat of a black box for us. So part of our conversation 
today is to be able to determine how is this going, where are 
we, and what is the expectation.
    Dr. VanRiper, tell us about enrollment numbers. You 
mentioned some are doing well, some are not doing well. Let's 
talk about just targets. Each of them set a target amount. How 
are they doing reaching their targets?
    Ms. VanRiper. I would love to tell you what every CO-OP is 
doing. Unfortunately, I don' have all the information.
    Mr. Lankford. For those that you have.
    Ms. VanRiper. What I have, and I put some of what I have in 
the written testimony. For example, in Maine, we have, as of 
yesterday I believe, they had 18,374 enrollees.
    Mr. Lankford. What was their target?
    Ms. VanRiper. At percentage of target market, it is 80 
percent. Projected forecast of original enrolment goals for 
2014 at 119 percent.
    Mr. Lankford. Okay.
    Ms. VanRiper. Wisconsin, they are at 11,500, they are at 
110 percent of their goal for year one. They have approximately 
25 percent of the total enrollment in the QHPs in Wisconsin. 
Iowa and Nebraska, 43,465 enrollees, exceeding their original 
enrollment projections by a factor of four. Montana has 7,029 
total enrollees, on enrollment target with 38 percent of market 
share. Those are the only numbers I have. I wish I had more.
    But I do know, just because I want to be totally honest 
here, I do know that there are other CO-OPs who are struggling 
with their enrollments for a variety of factors.
    Mr. Lankford. But you don't know of any right now that are 
not meeting target goals? All those that you are listing are 
meeting or exceeding their target goals. You don't have any of 
them at this point that are not? You just know there are some?
    Ms. VanRiper. Yes, I can't name any. I know that there are 
some who are having to revise their business plans in light of 
some of the market conditions and other things. For example, 
Oregon and Maryland don't have functioning exchanges, so that 
is a bit of a difficulty.
    Mr. Lankford. Dr. Stark, you mentioned there are 10 that 
you have already seen based on your own research, that are 
having significant problems. Is that correct?
    Dr. Stark. Yes, that is the number that is in the 
literature right now. That includes the one that lost their 
credentials.
    Mr. Lankford. Obviously the one from Vermont that was not 
able to get State licensure.
    I do have a question. Ms. Horowitz, in context, and then we 
will have some other conversations, why choose CO-OPs? 
Freelancers Union has a for-profit insurance company that you 
are obviously connected to in a subsidiary of the company, and 
you have this interoperability and relationship there. Why also 
start the three CO-OPs? What was the benefit that you said, we 
have this but this won't work for these three different areas, 
we think a CO-OP would work? Why?
    Ms. Horowitz. If I could just start by saying that 
Freelancers Union is not a CO-OP. We are a sponsor. And it was 
because the first part wasn't because there was any failure in 
terms of FIC, but actually, as I said in my opening statement, 
really the need for service and seeing that 42 million 
Americans don't have health care.
    Mr. Lankford. The FIC model would not work in those three 
areas that you are extending into? My question is, you already 
have the Freelancers Insurance Company, which is a for-profit 
entity. Why would that not work? And you said to meet the needs 
of these individuals, we need to start these three CO-OPs, or 
sponsor them?
    Ms. Horowitz. I wouldn't say that it is because we had a 
perception that something wouldn't work. Actually it was the 
opposite. We are social entrepreneurs. Social entrepreneurship 
is about figuring out market models and something that can go 
to scale or can be applied. So in each case what we saw was 
that FIC was a non-profit insurance company that was doing very 
well in terms of meeting its mission. And when the ACA came 
forward, it was clear that there was going to be a lot of 
change in the health insurance world. We wanted to see if there 
was a role that we could play, specifically because we 
understood, in the CO-OP legislation, that they were starting 
non-profit CO-OPs, and we had started one.
    And as we have heard today, the issue is starting from the 
ground up. Having been a CEO doing insurance for 15 years, I 
can tell you, starting an insurance company from the ground up 
is hard. What we have been able to do is to really take the 
learnings and the experts and other things so that we could 
sponsor three CO-OPs, get them to be independent entities, and 
that is what we have done.
    Mr. Lankford. I am still a little confused, though, on just 
why FIC couldn't have worked to be able to meet that same need, 
other than just you saw this possibility in the ACA and said, 
let's try it. That is a lot of work to get something started 
rather than expand what is existing. Why not take what was 
already existing and expand into new areas, rather than try and 
create something new, all the work?
    Ms. Horowitz. Okay, well, FIC is licensed in New York. It 
is a New York insurance
    Mr. Lankford. One of your CO-OPs is in New York as well, 
isn't it? Or is it?
    Ms. Horowitz. Yes, and it is not our CO-OP. They are 
independent, that we have sponsored, is in New York, yes. So 
what we were looking for was to have a broad range of options. 
Because independent workers weren't able to get large employer 
coverage. So typically, they were the ones who were having the 
hardest time buying health insurance. So here, the CO-OPs were 
coming out with an ability to have a potential national reach. 
We saw that we had this model, and we wanted to make sure that 
we could show how you could do it. That is because that is part 
of our mission, it is core to our mission, and we saw there was 
a big problem. We thought this was an effective way, and we 
still do.
    Mr. Lankford. Okay, thank you. I recognize Mr. DeSantis for 
a line of questioning.
    Mr. DeSantis. Thank you, Mr. Chairman. And to both the 
chairmen, thank you for having this hearing. I think it is very 
important. It is such a huge law, there is so much money thrown 
around. We are the only line of defense for the American 
taxpayer to keep track of this.
    It is interesting, there was this report by the 
Congressional Budget Office, and people in Washington get 
excited about a lot of this stuff sometimes. And it was very 
negative about this law generally. And people say it is in an 
indictment of the law, and I think it is. But it is also an 
indictment of what CBO has previously done, because if you look 
at when this law was being debated, we were told that it would 
cost $850 billion over 10 years, most of the Democrats said it 
would cover everybody, it would reduce the deficit.
    Now we know, and I know that there was some fraud in that 
because they jiggered the spending versus the taxes to make it 
appear like it would reduce the deficit, but now the 10-year 
forecast, not $848 billion but $2.004 trillion dollars over 10 
years. And the kicker for me is, 10 years from now, their 
estimate, and I think this is probably a floor, not a ceiling, 
31 million people, no health insurance at all. And so sometimes 
it is viewed as an article of faith, even by journalists here, 
oh, well, at least Obamacare is covering everyone. It is just 
factually false.
    So we are spending trillions of dollars to really make only 
a minor dent in the number of people who run insurance. In that 
sense, I think comparing those 2009 and 2010 reports to now, 
now you can't just put garbage in and get the result you want, 
because there are actually facts. So I think the CBO is forced 
to acknowledge some of that.
    But I just wanted to point out, Mr. Roy, maybe you can 
speak to this. I know you have written about the report. But 
this notion of essentially creating a disincentive to work and 
that it is going to create less full-time employment, 2 million 
people by 2017, do you believe that Obamacare does create that 
disincentive? And what are your thoughts on what the CBO said 
in that respect?
    Mr. Roy. The CBO was really reflecting a lot of the recent 
academic research in the field of how means-tested welfare 
programs affect incentives for people to remain in the 
workforce. But there are three major considerations as to why 
the ACA disincentivizes or reduces the size of the labor force. 
The first is the employer mandate. So by requiring a business 
of more than 50 workers to offer health coverage, it increases 
the cost of hiring a new worker. Because it increases the cost 
of hiring a new worker, a lot of employers will hire less 
people. So that is factor number one.
    Factor number two is the $1 trillion in tax increases over 
the next 10 years the ACA imposes on the economy. And for a lot 
of different reasons, just general economic growth, 
disincentive for people to work harder, et cetera, those tax 
hikes will reduce economic growth and therefore contract the 
labor market.
    The third issue, which is the one that is getting the most 
attention, is the means-tested subsidies, the Medicaid 
expansion and the exchange subsidies that, because they can 
substitute for earned income through wages, will give some 
people the incentive to either withdraw from the workforce 
entirely or reduce the amount of hours they work, because they 
will be getting equivalent benefits.
    Mr. DeSantis. So that 2 million figure that CBO put out, 
that is really only dealing with number three, which you 
listed. They are not saying that because of the employer 
mandate it is going to cause that. So in other words, if I 
agree with you, and I do, that that employer mandate creates a 
disincentive for businesses that are small to expand, it 
creates an incentive to move people to part-time, 29 hours or 
less, to relieve themselves of the burdens of Obamacare. If 
that is the case, then 2 million is already in the bank because 
of the general incentives in terms of means-tested welfare. 
Then you have to add on top of that, correct, for the employer 
mandate, the first two points that you made would be in 
addition to that 2 million, correct?
    Mr. Roy. I believe the number for, I think it was year 
2023, was 2.5 million people less in the labor force. And that 
encompassed all three factors. And they didn't break out how 
much was each. But I believe the third factor was the largest 
component.
    Mr. DeSantis. Which I think will be interesting, because I 
think the CBO has traditionally underestimated the impact of 
this employer mandate. And we may very well see soon the 
incentives that creates. I have businesses in my district that 
say, look, it is cheaper for me to pay the penalty. Now, they 
can't always do that, because they do have some employees who 
would have other options who may be able to leave. But for a 
lot of the low skilled, the blue collar folks, they are going 
to be in a position where they are going to lose hours, they 
are going to be moved to potentially the Obamacare exchanges. I 
think that is going to create a huge upheaval.
    So in terms of this deficit reduction, you had mentioned 
there is a trillion dollars in tax increases. I think the way 
they did it was, there was a trillion dollar in tax increases, 
$700 billion in Medicare cuts, therefore compared to $850 
billion, that reduces the deficit. But now that it is $2 
trillion in outlays, even though significant tax increases and 
Medicare cuts, that still doesn't get you to $2 trillion, does 
it?
    Mr. Roy. This is a long subject we could spend all of your 
time discussing. But the CBO projections have a fair amount of 
uncertainty, and we can say that for sure. I think one thing 
that is important about this report that came out yesterday, 
the Budget and Economic Outlook Report, is that the CBO 
estimated, compared to its previous year estimates, that the 
deficit would be $1 trillion larger, due to $1.4 trillion less 
in tax revenue and $400 billion less in spending.
    So the deficit outlook is worse than it was before, and 
that is largely due to lower economic growth, lower GDP growth 
which potentially is in part a result of the ACA and its tax 
increases.
    Mr. DeSantis. Absolutely. And I thank the chairmen. I would 
just note on top of that, it is my understanding that the CBO 
director today, when he was in front of the Budget Committee, 
said that they are forecasting less economic growth in large 
part because of these incentives. So this is not a law that is 
causing the economy to grow or put people back to work. It is 
actually hindering our recovery which has real effects for 
people in their individual lives trying to find work, but also 
in terms of our long-term fiscal outlook. If we are growing 
less, we are going to be taking in less revenue and all our 
problems become even more severe.
    So I thank both of the chairmen for holding this hearing.
    Mr. Lankford. Thank you.
    Mr. Jordan?
    Mr. Jordan. Thank you, Mr. Chairman.
    Ms. Horowitz, the chairman asked you a question about why 
you didn't just use the existing insurance company. You said to 
meet needs and do things, you set up the CO-OPs.
    But when you set up the CO-OPs, you were able to access 
$240 million of taxpayer money in the form of a loan, isn't 
that true?
    Ms. Horowitz. The $340 million did not go to the 
Freelancers Union.
    Mr. Jordan. I am not saying that. The question was, why 
didn't you just, to meet all the things you talked about in 
your opening statement, the chairman asked you why didn't you 
use the existing structure. And you said you set up the CO-OPs 
to deal with the concerns that you had to meet some need. But 
isn't it true when the CO-OPs were set up you were able to 
access taxpayer money?
    Ms. Horowitz. So perhaps I am not understanding.
    Mr. Jordan. Let me just ask the question straightforward 
then. Did the Freelancers-sponsored CO-OPs receive Federal 
taxpayer funds?
    Ms. Horowitz. The funds went to start the three CO-OPs.
    Mr. Jordan. Okay. So I will leave out the sponsored part. 
The CO-OPs got funds, right?
    Ms. Horowitz. Yes.
    Mr. Jordan. And how much money did they get?
    Ms. Horowitz. Three hundred and forty million.
    Mr. Jordan. Okay. And let's put up slide number one.
    [Slide shown.]
    Mr. Jordan. I just want to be clear on what the law says. 
Any organization shall not be treated as a qualified non-profit 
health insurance issuer if the organization or related entity 
was a health insurance issuer on that date.
    Was Freelancers Insurance Company a health insurer on July 
16th, 2009?
    Ms. Horowitz. Freelancers Insurance Company was. But
    Mr. Jordan. Okay, that is fine. So let's go to chart number 
two.
    [Slide shown.]
    Mr. Jordan. This is information that you provided the 
committee staff that shows the structure of several 
organizations that you are part of. And IWS is the one in the 
middle, and IWS stands for what, Ms. Horowitz?
    Ms. Horowitz. I am sorry?
    Mr. Jordan. You tell me. This is your chart.
    Ms. Horowitz. I am sorry, are you asking me what does IWS 
stand for?
    Mr. Jordan. Yes.
    Ms. Horowitz. Independent Worker Services.
    Mr. Jordan. Okay. And there we have Freelancers, the Union, 
and then we have the Freelancers Insurance Company as well. And 
then of course we have the CO-OPs over there, the New York, New 
Jersey and Oregon CO-OPs, is that correct?
    Ms. Horowitz. If I may, sir, Congressman, the structure 
that I think is a little bit easier to understand is really 
that it is Freelancers Union which just says Freelancers. I 
don't know where this slide came from, because it might be kind 
of an older one.
    Mr. Jordan. It is your slide.
    Ms. Horowitz. Yes, for sure. My fault, happy to say that 
here. Freelancers Union is the (c)(4) non-profit. IWS and FIC 
are kind of under that as the two for-profits. Some of these I 
don't really know where they come from, the self-organized work 
groups or the cooperative businesses.
    Mr. Jordan. Well, I don't either, because I didn't put the 
chart together, you did.
    Ms. Horowitz. What I am saying is----
    Mr. Jordan. I am just pointing out the chart here.
    So let me ask you this. Those CO-OPs which have a line 
connected to IWS, and then there is a line to Freelancers and a 
line to FIC, I just want to know, which of these organizations 
are you involved with? Are you the CEO of any of these 
organizations?
    Ms. Horowitz. Yes.
    Mr. Jordan. Let's start with the circles. Are you the CEO 
of Freelancers?
    Ms. Horowitz. The CEO of Freelancers Union, yes.
    Mr. Jordan. And are you the CEO of the circle marked FIC?
    Ms. Horowitz. Yes, I am.
    Mr. Jordan. And are you the CEO of the organization in the 
middle?
    Ms. Horowitz. Yes, I am.
    Mr. Jordan. So three of those six circles, you run the 
show?
    Ms. Horowitz. Yes, I am the CEO.
    Mr. Jordan. Okay. So it seems to me the answer to Mr. 
Lankford's question was, the CO-OPs had to be formed so that 
you could send money to IWS to get money to the other two 
entities that you are the CEO of, isn't that correct?
    Ms. Horowitz. No, it isn't correct.
    Mr. Jordan.  Well, let me ask you this, then. You said the 
CO-OPs got taxpayer loan dollars, correct? The CO-OPs, they 
received money from the taxpayers, the $340 million.
    Ms. Horowitz. The three were the recipient of the $340 
million, yes.
    Mr. Jordan. How much of that $340 million went to the line 
that goes, see that line that you drew between the CO-OPs, that 
circle, lower right corner, and IWS, see that line? How much of 
that $340 million traveled across that line to that circle in 
the middle? Or I guess that is not a circle there, IWS in the 
middle.
    Ms. Horowitz. I would love to be able to explain this. As 
Mr. Roy----
    Mr. Jordan. I didn't ask you to explain it. I asked you how 
much money went from that circle over on the right to that big 
bold IWS in the middle, which you are the CEO of?
    Ms. Horowitz. So if I could try to, because I know that----
    Mr. Jordan. It is a simple question, Ms. Horowitz. I want 
to know how much money traveled from the CO-OPs to IWS.
    Ms. Horowitz. And I really want to be able to explain it to 
you, but it is complicated, because there are a number of 
structures----
    Mr. Jordan. I will let you explain it once you give me a 
number.
    Ms. Horowitz. I know that I can do it pretty easily.
    Mr. Jordan. You can?
    Ms. Horowitz. Yes. May I?
    Mr. Jordan. The number is easy to get if you know the 
number. Do you know the number?
    Ms. Horowitz. So the three CO-OPs----
    Mr. Jordan. Do you know the number? You don't have to give 
me the number. Do you know the number?
    Ms. Horowitz. I do and I want to explain it. May I have a 
moment to explain it?
    Mr. Jordan. Explain it and then give me the number. Go 
ahead.
    Ms. Horowitz. Okay, thank you very much. So Freelancers 
Union sponsored three CO-OPs, Oregon, New York and New Jersey, 
those got $340 million. IWS' job, as was put in our application 
to begin with, was to be able to help to launch them, setting 
up their IT systems, their backend operations, helping them 
select their vendors and for that, IWS was paid $25 million in 
the last two years to provide those. And that is how the three 
CO-OPs were able to launch on time and on budget. This is 
something that is done in the agricultural CO-OPs, they are 
called secondary CO-OPs, and that was the model that we used
    Mr. Jordan. You still didn't answer my question. How much 
money traveled from the circle on the right to the one in the 
middle? Did you say that?
    Ms. Horowitz. I believe I did, sir.
    Mr. Jordan. And how much was that again, just for the 
record?
    Ms. Horowitz. Twenty-five million.
    Mr. Jordan. Twenty-five million, of the $340 million?
    Ms. Horowitz. Yes, and that was the work through 
sponsorship, which ended December of last year.
    Mr. Jordan. And was there ever any question raised about 
this arrangement, it is all new, did CMS ever say, hey, wait a 
minute, we are not sure this is kosher, we are not sure this is 
appropriate? Was that ever brought up?
    Ms. Horowitz. Well, as Chairman Lankford thanked us for our 
transparency, you will see that throughout the process, that 
was indeed in our application, the first application for the 
CO-OP program that was discussed with Deloitte.
    Mr. Jordan. If the Chairman would indulge me here. Could we 
put up the next slide?
    [Slide shown.]
    Mr. Jordan.  So this is an email we got. Seems to me CMS 
had real concerns. We must insist that the CO-OP in Oregon 
provide the following assurances, bullet point number one, the 
Freelancers CO-OP in Oregon will make no more disbursements to 
IWS. So at some point they said, hey, we have to stop this 
little game you have set up here. Is that correct? That is what 
it says.
    Ms. Horowitz. I don't believe--so Congressman, when we were 
launching these three CO-OPs, we, our staff had regular 
meetings and eventually, very quickly after the awards, the 
CEOs, interim CEOs and management team of each of the CO-OPs 
met regularly with CMS, where contracts were reviewed. If there 
was something of concern that was raised at those meetings, 
this has all been a transparent process and this is a big 
project and there were questions that went back and forth.
    Mr. Jordan. All right. Let me put up slide number four.
    [Slide shown.]
    Mr. Jordan. This is again from the same presentation that 
you all provided to someone and gave us, we got the copies from 
you. I want to look at the first bullet point. Support 
Freelancers goal--this is the vision and mission of this packet 
of information you put, when you were talking about this 
structure to access taxpayer dollars and set up these CO-OPs. 
Bullet point one says, support Freelancers Union's goals of 
power and markets and power in politics. Tell me about the 
power in politics, what that means.
    Ms. Horowitz. It really derives from the power in markets, 
just to give you an example, I am pleased to say that we were 
the recipient of the Manhattan Institute award for social 
entrepreneurship in 2003 for our work on insurance using market 
practices.
    Mr. Jordan. That is fine in 2003. I am talking about now 
relative to the CO-OPs and this term power in politics. What 
does that mean?
    Ms. Horowitz. So if I can give you an example. So for 
instance, in New York, we had a market insurance company so 
that we could demonstrate how you could bring people together 
in a new kind of insurance company. Because as others on the 
panel have mentioned, they were geared toward large employer, 
small employer. So we had a market kind of innovation that we 
said is going to be really important for the next workforce. We 
could show that in a market, and then we could go and say to 
our regulators or our elected officials, we need to evolve our 
policies so that we start meeting the needs of the next 
workforce.
    That is what we always do. It is always in tandem, but we 
start with market strategies, because we are DIY.
    Mr. Jordan. You talked all about markets. I was asking 
about the power in politics. What does that term when you are 
talking about the IWS business development plan, which is what 
this all is? What does that mean, power in politics? I have my 
idea, because I am going to show the next email.
    Ms. Horowitz. Okay, well, it is about evolving through 
demonstrations how we need to change our policies, our 
regulations, our laws, so that we evolve.
    Mr. Jordan. Okay, let me go to the next email, because this 
to me seems like what power in politics is. This is an email 
from you where you contact Liz Fowler. Now, Ms. Horowitz, who 
is Liz Fowler?
    Ms. Horowitz. Liz Fowler worked in the Administration.
    Mr. Jordan. Do you know her title?
    Ms. Horowitz. I do not.
    Mr. Jordan. Special Assistant to the President. Yes. Power 
in politics is when you can reference and talk to the Special 
Assistant to the President. And this email is to your 
government relations person, or who is this email to?
    Ms. Horowitz. I believe--I am sorry, I can't see it from 
here.
    Mr. Jordan. Melanie Nathanson, does that name ring a bell?
    Ms. Horowitz. Yes.
    Mr. Jordan. And who is that?
    Ms. Horowitz. Melanie Nathanson is our lobbyist.
    Mr. Jordan. She is your lobbyist? And you think calls for 
an SOS to Liz Fowler and high level friends, that sounds like 
power in politics. You are telling your lobbyist, call the 
White House, CMS is saying this cozy arrangement we have where 
the CO-OPs get $340 million of taxpayer's money, send a bunch 
of it to IWS, which I am the CEO of, and then we can use that, 
because money is fungible, we can use that at Freelancers 
Union, which I am also the CEO of, and we can potentially use 
it at Freelancers Insurance Corporation, which I am also the 
CEO of, and we need to send an SOS to Liz Fowler, the White 
House Special Assistant to the President, and other high level 
friends. This is like sending up the flare, shooting up the 
fireworks, jumping up and down on the table. We got to make 
sure our little cozy arrangement here continues to stay in 
existence. That is what this is, particularly after CMS said, 
hey, wait a minute, stop the payments. Stop the payments. Tell 
me where I am wrong, Ms. Horowitz.
    Ms. Horowitz. If I might have the opportunity, Congressman, 
Chairman, sorry. When we were awarded the $340 million----
    Mr. Jordan. You said earlier you weren't awarded the $340 
million. You said the CO-OPs were.
    Ms. Horowitz. As a sponsor.
    Mr. Jordan.  But you just said ``we.'' You just made my 
point, Ms. Horowitz. All along you said the CO-OPs got the 
money and then IWS got a little bit. Now you just said ``we'' 
got $340 million.
    Ms. Horowitz. Chairman, Freelancers Union has a track 
record of being very careful stewards of money. When we 
launched and were awarded, we had a track record of starting an 
insurance company from the ground up. Soon after that, there 
were issues with HHS that we found where HHS had their ideas 
about how to successfully launch, because we were dogged about 
spending taxpayer money, investor money, philanthropic money 
very carefully. We were able to do that. So if I can respond, 
because you have asked me a question.
    Mr. Jordan. I am way over time and the chairman has been 
very indulgent. We may have a second round.
    Mr. Lankford. I would be glad for you to be able to respond 
as well.
    Mr. Jordan. I am going to say one last thing, Mr. Chairman, 
then I will yield back and if she wants to respond.
    Mr. Lankford. She will have time to respond.
    Mr. Jordan. I will look forward to hearing it.
    In your opening statement, you said our model is DIY. You 
said that in your opening statement?
    Ms. Horowitz. Yes, I did.
    Mr. Jordan. Our model is DIY, do it yourself.
    Ms. Horowitz. Yes.
    Mr. Jordan. And yet, you didn't do it yourself, you got 
$340 million of taxpayer money, you set up this cozy structure 
where IWS is in the middle of it all and you are the CEO of 
three of the organizations leveraging that $340 million and 
getting a bunch of that money. So I don't know, our model is 
DIY? Since when does DIY mean I need $340 million of taxpayer 
money? That is our big concern here, Ms. Horowitz. And it 
wasn't just our concern. It was the concern of the people at 
CMS. And you used the political, what was it called now, you 
called it the power in politics, to make sure it got to 
continue. And that is the concern with this entire arrangement. 
I yield back.
    Mr. Lankford. You do have time to respond to that, Ms. 
Horowitz.
    Ms. Horowitz. Thank you very much.
    So I was very concerned that these CO-OPs would launch on 
time and on budget. That was what I was thinking about. That is 
my job, to use taxpayer money, any money, financial money, 
investor's money, members' money. And so when they were issues, 
I was not going to let that get derailed. And when I was having 
a difficult time, when our staff was meeting with CMS 
regularly, we were regularly having difficulty with some of the 
decisions, we said, we need to do whatever it takes.
    So we then went to the Administration to say, we need you 
to help iron this out. There is a reason that we launched on 
time and on budget. When we see the other problems with 
exchanges, those were problems. We launched on time and on 
budget.
    Mr. Lankford. Mr. Meadows.
    Mr. Meadows. Thank you, Mr. Chairman.
    Dr. Stark, I want to come back to your testimony. I think 
you said that there's potentially 10 other CO-OPs that are 
financially in difficult situations, is that correct?
    Dr. Stark. Yes, that is correct.
    Mr. Meadows. So by being in financially difficult 
situations, what are we looking at in terms of trying to make 
them potentially solvent? What is the exposure to the American 
taxpayer, if we chose to bail them out?
    Dr. Stark. I don't know specifically the 10 CO-OPs. As I 
say, those are the numbers that are in the literature right 
now. My big concern is that 10 out of the 23 and then 
potentially all 23 will go into financial failure, or financial 
problems. And that entire $2 billion will be at risk. Either 
that, or as I testified before, either the $2 billion is at 
risk or the CO-OPs will come back to the American taxpayers, 
back to Congress and say, we need more money to stay viable.
    Mr. Meadows. So let's say they were to come back to us for 
additional money. That is not typically the model of a CO-OP. 
You were very kind in giving us the history of CO-OPs in a 
number of other areas, and I am very familiar, I am probably 
the only Member here who has actually been involved in a health 
care CO-OP. So as we look at this, if we look at the history of 
CO-OPs, it is member-driven, it is member-owned, and it is not 
government owned. Although there have been components, I was in 
the electric utility business, there have been components of 
financial interest with a Federal role.
    However, what I am hearing today is that we are taking a 
model that is directly competing with the insurance model and 
we are saying, what we are going to do is create a kinder, 
gentler and member-owned health care insurance provider, but we 
really want the Federal Government to play the backbone role of 
that. Is that correct?
    Mr. Stark. Yes, they are the backstop, that is correct.
    Mr. Meadows. So if we are doing that, so let me go over to 
you, Dr. VanRiper, because you talked about competition. 
Indeed, what we have done is we have created a Federal loan to 
a CO-OP to compete with private businesses. Is that correct?
    Ms. VanRiper. Yes.
    Mr. Meadows. All right. So why would the Federal 
Government, now that we have the Affordable Care Act and it is 
the law of the land, where access to health care is guaranteed, 
my Democrat colleagues would say that it is guaranteed, why 
would we need the private, Federal Government to come in and 
create new insurance companies for greater competition? Because 
I know in your testimony you said it drove prices down.
    But I would go back to Dr. Stark, if we have a company that 
is not financially viable, driving the cost down, we are 
creating a false market anyway, because it is, we can't make up 
this in volume. So what is the rationale behind it?
    Ms. VanRiper. Two points, I think, if I may. Thank you for 
the question. First of all, with respect to the Government-
backed loans provided to carriers who are competing with the 
already-existing private carriers, as I mentioned before, the 
market has been very stagnant. We have several States where 
there is one dominant carrier; some States the dominant carrier 
has 90 percent of the market.
    Mr. Meadows. But that is how most of these CO-OPs are, I 
mean, you are looking at New York, so you are saying you have 
one health care provider.
    Ms. VanRiper. I am sorry, I didn't mean to say health care 
provider. I meant other insurance companies.
    Mr. Meadows. So you have one insurance company in New York?
    Ms. VanRiper. No, I did not say New York. I said in many 
States one dominant carrier.
    Mr. Meadows. Well, that is where this CO-OP was, I think 
New Jersey, Oregon and New York.
    Ms. VanRiper. Okay, then I don't understand the question.
    Mr. Meadows. I guess my question is, so you are saying that 
the only time that a CO-OP is really viable is if you only have 
one insurance company in a State?
    Ms. VanRiper. No, I did not say that, and I took the 
question initially to be, what is the point of having 
Government-backed loans to compete with a private carrier.
    Mr. Meadows. Well, the question was, why should the Federal 
Government be backing competition when there already is 
competition?
    Ms. VanRiper. Because again, in some States there is really 
no competition. Throughout the Country, the insurance markets 
have been completely stagnant for about 30 years. I put in a 
call not too long ago to NAIC to try to find out what kind of 
new entrants there have been in the insurance industry over the 
last several years. Basically I was told they couldn't find any 
record but for maybe six in the last several years. So again, I 
think the thought was, and it may have proved to be a good 
idea, that if you loaned money to some startup companies, 
because it is difficult to start an insurance company, 
obviously, that it would inject that competition in the markets 
and lower the price. And indeed, if the figures we are looking 
at, if they are appropriate, it seems to have been working.
    Mr. Meadows. Well, it is lowering costs, but according to 
Dr. Stark, if they are not financially viable, I can sell 
watermelons for a dollar every day and buy them at $1.10. I 
can't make it up in volume and make a profit. And so if indeed 
it is driving down the cost and it is not a financially viable 
market, how does that help us in the end?
    Ms. VanRiper. Totally a very good point, and if I may, that 
is right, if you have insurance companies coming in and doing 
predatory pricing or for whatever reason, and the pricing is 
not helping anybody. Certainly if carriers do that, it is not 
good for anybody. But what I would really like to talk about 
here real quickly is the kind of risk that the government faces 
with these CO-OP loans. Just from a logical perspective, it 
isn't nearly as much as has been described, which is a 
different issue than pricing too low.
    But I think it went to your additional question, and that 
is this. These loans are, in most cases, the ratio of the 
startup loans to the solvency loans is very low. So you might 
have a 10 percent startup loan to 90 percent solvency loan. The 
startup loans are largely expended by the CO-OPs. There are 
some that haven't spent all those monies yet. But those will 
have been spent.
    And then the solvency loans are there for the, they are 
never intended to ever be spent.
    Mr. Meadows. Well, then let's don't give them. Why do you 
have them? I mean, because what I have found in a very short 
period of time is that what we intend not to happen always 
happens. If there are monies that are there, they always get 
tapped. And what I can tell you, I was a small business guy. So 
when I look at making things work, going to the federal 
Government to make sure that I am solvent was never an option. 
It was not an option. I had to make it on my own.
    And what I am concerned about is, I hear today, in in very 
mature insurance markets we are now looking at a CO-OP model to 
compete directly with other insurance companies. It is one 
thing if they only have one carrier. So maybe there is a model, 
as there was in the electric utility business in very rural 
areas. But even now, that particular model has outlived its 
usefulness, just because so much of that is member-driven, and 
they do a fine job, and they compete with investor-owned 
utilities.
    So it sounds like in a very mature insurance market, we are 
allowing the Federal Government to get in there at the risk of 
insolvency. You would not agree with that?
    Ms. VanRiper. I would not agree at the risk of insolvency 
to anywhere near the level that has been discussed today. I 
mean, certainly there is a chance, and we have already seen it 
in one CO-OP for particular reasons. There is a chance that 
some of these CO-OPs won't make it, obviously. They are 
startups, they won't necessarily all make it.
    But let's just say a couple of them go down. As I was 
trying to explain before, if they do, if they do, what the 
government will be out, they will be out the startup loans and 
whatever possibly none of the solvency loans. And why, if they 
are not going to draw down those solvency loans, why are they 
necessary? It is because of State insurance regulation 
requirements. You can't come in and be an insurance company 
without some pretty massive reserves or funding available to 
cover losses in the event you can't pay your claims.
    In CO-OPs' case, they are required to do what is called 500 
percent of RBC, so because they are new entrants, they are 
required by all of these States to keep reserves, even in 
excess of what the carriers are. So there is a lot of 
protection there for consumers, and again----
    Mr. Meadows. I am out of time. The Chairman has been very 
gracious in allowing me to go over. I know Mr. Roy wants to 
comment, but I will yield back. Thank you, Mr. Chairman, for 
your graciousness.
    Mr. Lankford. Thank you. Mr. Roy, if you had a comment, you 
can certainly give that.
    Mr. Roy. Yes. I think that Mr. Meadows has raised an 
important question, which is why is it that many of the CO-OPs 
are located in States that already have relatively competitive 
individual and small business insurance markets. The States 
that have less competitive insurance markets, where the CO-OPs 
are most needed, are not the States, generally speaking, where 
the CO-OPs are participating. Therefore, in that central way, 
they are not achieving their goal.
    This gets to the point that Dr. VanRiper mentioned in her 
opening statement, which is she said that there was a study 
that showed, in States where CO-OPs are participating, average 
premiums were lower than in States where CO-OPs weren't 
participating. Well, that is not because of CO-OPs. That is 
because those markets were already competitive, and because 
they were already competitive, average premiums were lower. CO-
OPs have no causality relationship with those results.
    Mr. Lankford. Right, it is too early on that. Dr. VanRiper, 
it looks like you want to respond to that, then I have several 
questions with that as well.
    Ms. VanRiper. Thank you. I mean, that is simply at odds 
with what the evidence shows. It shows that in States where 
there are CO-OPs, this isn't operating on the exchanges, it is 
8 to 9 percent lower premiums across the board.
    Mr. Lankford. But you are saying it is cheaper last year, 
when the CO-OPs were new, or cheaper this year? Because you 
were saying several months ago when it came out. When you 
quoted that earlier, I thought, how did the CO-OPs reduce 
prices last year or for this year when they are just trying to 
get online right now.
    Ms. VanRiper. Right, and isn't that a good question. I 
think it is based on historical data, yes.
    Mr. Lankford. But we don't have any current data on it? It 
is just an assumption that CO-OPs are in these States, prices 
are going down. But trying to develop the causality, we don't 
know yet?
    Ms. VanRiper. We don't know, but I mean, just like with all 
kinds of other projections, it is based on historical 
information and projections by experts.
    Mr. Lankford. Mr. Roy?
    Mr. Roy. I just want to add one thing, which is, actually, 
it is not true that premiums are going down in the States with 
CO-OPs. Average premiums on the individual non-group market are 
going up by an average of 41 percent, according to a Manhattan 
Institute study, across the Country. Only a small handful of 
States are seeing decrease, and that has to do with prior 
regulatory schemes. Generally speaking, premium rates are not 
going down. Relatively speaking, on the exchanges, some States 
have higher premiums, some States have lower premiums. That is 
what this study is addressing. It is not addressing rates in 
the 2014 market relative to the 2013 market. In the vast 
majority of States, I believe 42 or 43, premiums are going up, 
in many cases dramatically.
    Mr. Lankford. Right. Dr. VanRiper, you made a statement, 
you listed off three things that were basically problems for 
some of these CO-OPs getting off the ground. Pricing, 
obviously, market changes, which is basically regulatory 
changes on the whole at CMS and HHS, changing the rules at 
whim, and the CO-OPs trying to catch up to that often. And the 
third thing was competitive carriers. I found that very 
interesting, because obviously this was designed in the law to 
be able to create an entity. But you are saying one of the 
problems is, they are trying to start up in places where there 
is a lot of competition already and that makes it very 
difficult.
    Ms. VanRiper. I think that is right.
    Mr. Lankford. How many States are they starting up where 
there is low competition? You are saying that is a problem for 
the 23 that exist, that a lot of them are trying to start in 
places where there is already high competition. How many of 
them are starting in low competition areas?
    Ms. VanRiper. I am sorry, I can't give you that off the top 
of my head. I can find out.
    Mr. Lankford. That is what we would like to find out, 
because obviously that was the original purpose. And I want to 
be able to express this to everyone in this, a lot of what you 
are going to hear from this panel and our conversation is not 
anything personal with your entities and organizations. It is 
with the law that was written that people are trying to figure 
out, and the rules are changing on consistently. Ms. Horowitz, 
for instance, the statute is pretty clear when it says entities 
may not receive direct loans through the CO-OP program if the 
organization or related entity was a health insurance issuer 
prior to July 16th, 2009.
    So our concern is, you are right, you are very well suited 
to start up CO-OPs because you have had these related entities, 
you are a CEO of one of those groups, you are helping start CO-
OPs. There is no question in the plain reading of the law that 
your organization should not have these funds. But you are 
actually better qualified to do it because you have done it in 
the past.
    So the issue is not necessarily with you personally 
starting this up, the issue is, it is not the plain reading of 
the law. So all these gymnastics with CMS to try to work 
through, to try to create this new term sponsorship, is to 
allow a group that is probably qualified to do it to actually 
do it when the law says, no, you really can't do that. This is 
the nature of this law that they seem to shift and change at 
whim and this Administration seems to have problems with the 
way the law is written. So they will just, by regulation, 
change it. And then everybody is trying to figure out how to be 
able to process through it.
    Do you want to comment on that?
    Ms. Horowitz. If I may. Yes, perhaps I can help clarify a 
bit. Because really, the law itself did not mention 
sponsorship. That really was left to, it is the overarching 
framework, obviously.
    Mr. Lankford. Where did that term sponsorship come from, 
and how long did it take to be able to create that term? 
Because that wasn't the original term that was affiliated.
    Ms. Horowitz. Right. And I am not sure I know, actually. 
But I know that when the law, the overarching framework went to 
HHS so that we could granularly understand what would that be, 
that is when there was the opportunity to talk about what would 
be the roles, what would be the role of a sponsor. Perhaps 
because we could see what we were able to do with FIC, we were 
able to talk about, at that phase, how we thought that we could 
play a role. I do not know the intricacies of what happened 
with HHS, and I am sorry that I can't shed light on it.
    Mr. Lankford. It just begs the question, when you are 
getting off the ground, you are getting everything organized, 
it is obvious you had some pushback from CMS, as Mr. Jordan 
actually put up the information, CMS started asking questions, 
saying, hey, this seems very connected as far as an 
organization, with the startup funds. It seems to all run 
through one for-profit organization. So there was some pushback 
on that. Obviously there was some pushback for you related to 
this as well, to say hey, I am not sure you qualify for this 
because of this. You had conversations and your people had 
conversations to try to provide some clarity, is that correct?
    Ms. Horowitz. I would say that is a complex bunch of 
activities, if I can just parse this out a little bit. One was 
the issue initially which was, what kind of role can 
Freelancers Union play, how can it be a sponsor. And HHS made 
it crystal clear that we could. That was one set.
    Mr. Lankford. When was that determined?
    Ms. Horowitz. It would be during the rulemaking. I am not a 
Washington, D.C. person, so I never really know, like this is 
rulemaking, this is this, this is the White House.
    Mr. Lankford. Give me a time period. That was 2012, 2011, 
2010?
    Ms. Horowitz. The applications were due, I believe, in the 
end of 2011. And so in the beginning of 2012 we were awarded, I 
believe it was February of 2012.
    Mr. Lankford. Was there at any point a conversation to say, 
I am not sure you meet the criteria because you have a related 
insurance company? Did that ever come back to you at all?
    Ms. Horowitz. When we looked at the law itself that had 
just been passed, it was clear to us that we could not be, 
Freelancers Union could not be a CO-OP. So then we were saying, 
okay, if we can't be a CO-OP, then are there any other ways 
that we can participate. So again, I don't know where the idea 
of sponsorship came, but that is the role that we could play.
    Mr. Lankford. Did you have ongoing conversations with 
anyone in the White House or HHS or CMS about, how could we 
participate, can we work out some way to be able to have this 
relationship?
    Ms. Horowitz. I would say the early conversations were more 
about what kind of role could we play, because of the things we 
knew, but also given a lot of the conversation on this panel, 
how do you start up a non-profit health insurance company, 
given our expertise. That is one batch of conversations. The 
conversations that were later on were much more after the award 
in terms of the starting implementation. So in our application, 
we had really envisioned a very wide role in terms of IWS 
providing the backend services and HHS really had a different 
role of how you would launch and what you would do. That is 
when we started running into difficulties, because, forgive me 
for being a dogged person, either a charm or a fault, but I 
really know what you need to do to get something off the 
ground. And as we have seen, perhaps the Federal Government 
hasn't had that same level of expertise in some areas.
    Mr. Lankford. Listen, I would say the Federal Government 
doesn't have expertise in a lot of areas. I understand that. 
That is what is interesting to me in this, for you 
particularly. You are right, you bring expertise to this and 
experience to this. But the law specifically forbids it. And 
that is what makes it so difficult. A CO-OP is being set up 
that you can't advertise, can't have any experience in doing it 
or related activities in a related organization, trying to 
start an insurance CO-OP, and I can't imagine a worse time to 
start anything healthcare related dealing with insurance than 
right now when the rules are changing all the time. The deck 
could not be more stacked against the CO-OPs based on how the 
law is written.
    So CMS and HHS, they are figuring this out and saying, 
okay, we will just shift the law then. We will just change it 
and try to shift it around. One of the emails, and again, you 
were incredibly transparent with us during the walkthrough, one 
of the emails we had, apparently you had suggested at some 
point that HHS could exclude organizations that are exempt from 
Federal taxation to try to find some way to be able to connect 
and say, how can we help provide some determination on this, so 
entities that have experience can actually engage in it. Again, 
that is not the plain reading of the law. I don't know how that 
actually went through. Do you know how that finished out?
    Ms. Horowitz. Well, first, would it be okay if I saw those 
emails? I would just prefer to.
    Mr. Lankford. Sure it would. Absolutely. We can get a 
chance to bring those to you. But the way this particular piece 
that we had, just from the emails that you had provided to us, 
and thank you for that, HHS could exclude organizations that 
are exempt from Federal taxation from the definition of a 
related entity. This solution would allow organizations like 
Freelancers Union to participate in the program.
    By the way, an entirely reasonable request. It is a 
workthrough, that is not the plain reading of the law. That is 
your responsibility, to try to find a way to work through it, 
it is their responsibility to actually enforce the law they 
chose not to do.
    Ms. Horowitz. If it is possible, if I could just take a 
look at that email that you are referring to.
    Mr. Lankford. I will. I have just a part of this report 
that apparently is so devious. I will bring this to you in a 
moment. But you don't have to comment on it, because you don't 
have it right in front of you.
    Ms. Horowitz. If it is okay, one thing that you had said 
about the it, and that Freelancers couldn't do it, the law, the 
law made clear Freelancers Union could not be a CO-OP. But 
clearly, as there was rulemaking, as you do every day and know 
far better than I, it really is to clarify and make granular. 
And in this particular law, as we all know, having read it, it 
was a very short document. It was six pages. It really did not 
define what this was to be. And so that is the role that we 
played.
    And I know that this isn't in any way how you are saying 
this, so please, hear this with respect, it was our job as 
citizens, when you feel that you have something to offer, to 
come forward. It is about service. And that is our orientation. 
Whatever happens in D.C. is a world unto itself. But when 
citizens come from the other parts of the Country to do the 
right thing, that is what we do. And that was the spirit that 
we did that in here.
    Mr. Lankford. And that is why I prefaced all this statement 
with this. This is an issue of how the Administration is 
applying the law. The law is clear in some of these areas. But 
it is changing all the time. It is affecting the CO-OPs. The 
CO-OPs were intended to be in areas where there wasn't high 
competition, but they ended up in areas where there is very 
high competition. Those that were involved in related 
activities couldn't be involved in it, they were trying to 
figure out a workaround on that. This is an issue where the 
Administration, both the startup funding and the solvency 
funding. And by the way, can I ask the $25 million that went to 
IWS, what percentage of that is the startup funding? Do you 
remember the startup loan? Because you got $340 million, the 
largest portion of that is actually the solvency loan. What 
percentage of that is the startup loan?
    Ms. Horowitz. You know, I don't.
    Mr. Lankford. Do you remember the size of the startup loan 
at all?
    Ms. Horowitz. About $46 million, I believe.
    Mr. Lankford. So $46 million of the startup loan total, 
around there, plus or minus, we won't hold you to that exactly, 
$25 million of that actually comes through IWS in the operation 
of it.
    Ms. Horowitz. If I could just explain, I don't know if this 
is helpful, but really, if you look at it for the first, the 
first parts are really where it starts to grow, then it builds. 
Because remember, we are building three websites, connecting 
three billing and enrollment vendors, claim vendors, so they 
only have to do it once, rather than having, in other words, 
they have the economies of scale.
    After December 31st, the sponsorship ends, and the amount 
is just much smaller and will eventually probably stop.
    Mr. Lankford. One quick question, then I want to pass this 
off to Chairman Jordan and see if he has additional questions 
as well. By the way, you should have, instead of building your 
website, you should have just partnered with healthcare.gov. 
That would have saved you all a lot of money. That would have 
been so much easier.
    Ms. Horowitz. It is funny, but actually we really build 
them all in the cloud using state of the art technology. When 
we look at the insurance companies that are on the market, both 
non-profit and for-profit, ours is actually state of the art 
using cloud technology and using a system that is unbelievably 
efficient, because it doesn't require these in-house clunky old 
legacy systems.
    Mr. Lankford. It is quite remarkable to me how often the 
private sector can get a job done, and to be able to accomplish 
that, without the government saying, we can do this better. 
Very often, when the government steps in to do it, it ends up 
being much more complicated and very, very expensive.
    I have one quick question, and I am going to pass it off to 
Chairman Jordan as well. Ms. VanRiper, the numbers. We talked 
several times about the numbers. When do you think we will have 
good enrollment numbers, good viability pictures of how this is 
coming together? You have all the good examples. When will we 
have the other 23. There is a tremendous amount of money and 
taxpayer risk here.
    Ms. VanRiper. Yes, thank you. Understood. It is my 
understanding that HHS is going to release enrollment numbers.
    Mr. Lankford. We have petitioned that multiple times, 
actually. We started making the requests of them to try to get 
those numbers. And it has been an interesting, slow walk to be 
able to get those numbers. So do you know when the CO-OPs are 
going to release those, or should we reach out to the CO-OPs 
directly?
    Ms. VanRiper. I think you perhaps, at least the larger 
committee has already done that. There are inquiries out to 
every CO-OP.
    Mr. Lankford. We have, and it is my understanding that HHS 
was not very happy that we were reaching out to the CO-OPs 
directly on that. But that is one that we are trying to reach 
out and be able to gather those numbers directly.
    Ms. VanRiper. I would love to be able to just produce the 
numbers right now, but we just don't have them from all the CO-
OPs.
    Mr. Lankford. Thank you.
    Chairman Jordan?
    Ms. VanRiper. If I may?
    Mr. Lankford. Yes, ma'am.
    Ms. VanRiper. I just wanted to clarify something, a 
question you asked me earlier. I got a little confused there. 
It was on the 8 to 9 percent lower rates for States with CO-
OPs. That is really just, I was looking at historical 
information. That is comparing States, the prices for premiums 
for States that have CO-OPs versus States that don't have CO-
OPs. That is the difference there.
    Mr. Lankford. Well, we won't know the actual economic 
effect of that for a while, of what it means for a CO-OP to be 
in the State to get to the premium, that will be several years 
before we actually know if it is driving costs down.
    Ms. VanRiper. Well, hopefully not too many years, but yes.
    Mr. Lankford. It will take a couple just to be able to work 
out the costs. I will be very interested to see what happens to 
premiums in this October, November, December for January of 
next year. Because once we have a full year of the Affordable 
Care Act under our belt, we will know a lot more.
    Ms. VanRiper. Absolutely.
    Mr. Lankford. Chairman?
    Mr. Jordan. Thank you, Mr. Chairman.
    Ms. Horowitz, you said you weren't a Washington insider, 
you are not exactly in tune with how D.C. operates. And yet I 
will go back to the presentation you gave at the IWS business 
development plan power point, where you said Freelancers Union 
supports the goals of power in markets and power in politics. I 
will go back to the email sent to your lobbyist, I think this 
calls for an SOS to Liz Fowler and high level friends. If that 
is not functioning in the Washington world, I don't know what 
is.
    And now we learn, I guess I didn't quite put it together, 
now we learn through the Chairman's questioning that of the $46 
million startup loan given to the CO-OPs, you got 54 percent of 
the money. You got $25 million.
    Ms. Horowitz. That was to start the three CO-OPs. That was 
not profit on the part of IWS.
    Mr. Jordan. It came to IWS, though, right?
    Ms. Horowitz. The CO-OPs, as----
    Mr. Jordan. Of the $46 million the CO-OPs got, $25 million 
came to IWS.
    Ms. Horowitz. Can I explain?
    Mr. Jordan. Sure.
    Ms. Horowitz. So the CO-OPs received the startup and the 
$340 million together. And as we made clear and as we said, we 
have been transparent, it was in our application, we said we 
are going to provide these services. And we explained each one 
of those.
    Mr. Jordan. I am going to do the numbers. Of the $340 
million that the three CO-OPs got, $46 million was startup. 
That was your answer to the Chairman's question, correct?
    Ms. Horowitz. I am sorry, what?
    Mr. Jordan. The Chairman asked the question, what was the 
startup loan. You said $46 million, $25 million of that came to 
IWS. So you have also said $340 million went to the CO-OPs. So 
that leaves approximately $300 million more dollars. Are you 
getting some of that money as well? Is IWS, I should say, 
getting some of that money as well?
    Ms. Horowitz. May I answer?
    Mr. Jordan. Sure.
    Ms. Horowitz. Okay. So as I believe Dr. VanRiper has 
explained, the total money doesn't just go to the CO-OPs. They 
have to pass different milestones.
    Mr. Jordan. I understand that.
    Ms. Horowitz. So over the course of starting and launching, 
which are obviously the most expensive times, because you are 
building all your infrastructure.
    Mr. Jordan. Got it.
    Ms. Horowitz. So what we did was, taking three of the CO-
OPs' systems and integrating them, building up their website, 
their backend processes, integrating everything, setting up 
their staffing, that is what it cost to start them on time and 
on budget. As Congressman Meadows said, I too am a small 
business person. And when you are looking at project like that 
that has not been done before, I think everybody in this room 
would agree, there are risks. And so we managed to our budget 
and had a 12 percent profit, which again, we would have been 
happy with an 8 percent profit, but we could have lost 
everything.
    And so what we did is, we delivered these and they are all 
functioning, while some of the exchanges are not, ours are on 
time and on budget.
    Mr. Jordan. I appreciate the fact that you did work. I 
would expect you to do work if you got a contract and you are 
sponsoring these entities. What I am asking is the numbers. 
Forty-six million in the startup loan, your response to the 
Chairman was, $25 million of that came to IWS. Is that correct?
    Ms. Horowitz. Yes.
    Mr. Jordan. Okay. Now, there is an additional approximately 
$300 million going to these CO-OPs over a course of time, 
solvency loans, et cetera. I get that. I am asking, are you 
getting some of that money as well?
    Ms. Horowitz. So the only thing that we----
    Mr. Jordan. That is a simple yes or no. Are you getting 
more money? Is $25 million the limit? Or is IWS getting more 
than that?
    Ms. Horowitz. I take seriously what Chairman Lankford said 
that this is a conversation and that you would want to actually 
hear my answer. And so if I may, I would really like to give 
you an answer.
    Mr. Jordan. Okay.
    Ms. Horowitz. So the sponsors, our job as sponsor ended 
December of 2013. The only thing left that we are doing with 
the three CO-OPs, as I believe I told your staff, was IT, 
managing the website for both New York and New Jersey. And 
Oregon will be building their own and we will be supporting 
that. So likely it will end in 2014 for sure with Oregon. But 
they may decide to build their own. Whatever they want to do is 
whatever they want to do. The amount will be significantly 
less, which is why I can't say a simple yes or no. It is a very 
small amount comparatively.
    Mr. Jordan. But so you are receiving some, on an ongoing 
basis, some of it ended, from two States it ended in December, 
but in Oregon it could continue?
    Ms. Horowitz. The contract is a one-year contract.
    Mr. Jordan. Okay. Did any, when the startup of these CO-
OPs, I am just curious, was there any private capital put up as 
well, or was it all done with the $46 million of taxpayer 
money?
    Ms. Horowitz. For the three CO-OPs? It was a--I don't want 
to speculate, but I believe it was all the CO-OP money.
    Mr. Jordan. No private investment? Okay. If I could, Mr. 
Chairman, I want to get others who have been patiently 
listening and waiting. I want to get your comments if I could, 
Dr. Herrick, Dr. Stark and Mr. Roy, just on the Vermont 
disaster. What happened there? Just your thoughts. I don't know 
if you have analyzed that particular case, but here is one that 
failed, lost taxpayer money, gone, Mr. Fleischer wouldn't even 
come answer our questions, even though he got paid a pretty 
large amount of money for sitting on the board. So if we could, 
Mr. Chairman, go through it and I will be done for the day.
    Dr. Herrick?
    Mr. Herrick. As I stated before, the CO-OPs were 
essentially a political compromise. The progressives, the left 
of center progressives in Congress wanted to have a public plan 
option. Supposedly without marketing, without advertising, 
without profit, this would force the legacy insurers to keep 
their costs down. It is very naive. And of course, you asked 
specifically about Vermont. I think probably the bright side 
with Vermont is that in fact, the plug was pulled, because it 
obviously could not succeed.
    And that is true of many of the other States. The CO-OPs in 
all the other States, there really is no competitive advantage. 
There is nothing that the CO-OPs can do that the legacy 
insurers cannot do. And I think it has been demonstrated in 
this committee here.
    Mr. Jordan. Do you think the three CO-OPs sponsored by 
Freelancers, do you think they are going to succeed? Have you 
had a chance to look at what is happening there?
    Mr. Herrick. I haven't really had a chance to analyze it. I 
think, as Chairman Lankford mentioned, they probably have more 
experience than all the others. So from that standpoint, they 
will probably fare better than the other 23.
    Mr. Jordan. Well, to fare better than Vermont is not saying 
a whole lot.
    Mr. Herrick. Well, that is true. I think what will happen 
is the weaker ones will probably just fall apart very quickly. 
The stronger ones will muddle along, having no real impact on 
their markets and just barely stay alive, doing nothing to 
lower premiums or really providing services that weren't 
already being provided. I find it very interesting that, all 
the cooperative are in States that had a lot of competition. 
The idea was these should be in the rural areas, these should 
be where the risk pools are too small for the legacy insurers 
to really want to bother with. That is not what we have seen. 
We have seen that they seem to be going into the same areas 
with large populations and established networks, for reasons 
that I guess it is easier to do business there.
    Mr. Jordan. But also, access to, if you can provide, if you 
have taxpayers subsidizing your model, you can offer it at a 
lower cost and you can grab market share, right? That is why 
they are going to these areas, because that is where the people 
are. And they say, wait a minute, we can provide a product 
cheaper because we have $340 million from the taxpayer.
    Mr. Herrick. I think having taxpayer subsidies is something 
that a lot of businesses would love to have. Luckily, that is 
not the case in most businesses. But yes, I agree that it seems 
to be, there is really a lot of naive thinking that CO-OPs have 
come in and somehow they are something different. It is not 
clear to me that they have the advantages that the other 
insurers already had.
    Mr. Jordan. Thanks, Mr. Chairman. Obviously Mr. Meadows is 
waiting, but if Dr. Stark and Mr. Roy want to say something, 
whatever you choose.
    Dr. Stark. Let me just comment, one thing, I think it is 
much too early to know whether these solvency loans are going 
to be called in or not. Especially with, as I mentioned, 
guaranteed issue and community rating. Our existing insurance 
companies, really they are very, very concerned about those two 
insurance mandates. And several large claims could wipe out 
those solvency loans very, very quickly. And that is my 
concern. Even if you are viable today, what is your viability 
in 12 months, 24 months, 36 months and so forth.
    Mr. Roy. A couple of points, three points quickly I will 
try to make. The first is that Vermont famously is attempting 
to install a single payer system in their State. So in a sense, 
they have as much incentive as anyone to try to get government-
sponsored plans in there. So it is particularly notable that 
the CO-OP was not licensed in Vermont. The Manhattan Institute 
study I cited earlier, which I know I have discussed with this 
committee previously, the average 40 year old in Vermont will 
face individual market premium increases of 125 percent under 
the ACA, compared to 2013 rates. So Vermont is one of the 
States seeing the highest premium increases in the Country.
    One of the points I want to make, the final point I want to 
make is on this issue of how the CO-OPs are pricing their 
plans. There has been a lot of discussion in the House of 
Representatives about the risk corridors in the ACA and how 
those are a form of potentially taxpayer bailouts. I think this 
is a good example of where that is most likely to be true, 
which is that CO-OPs, first of all, having no experience in 
pricing these products, two, having no negotiating leverage 
with providers and therefore having higher reimbursement rates 
with the hospitals and doctors, are likely to underprice their 
products to be competitive and gain market share, even though 
their costs are likely to exceed the premiums that they are 
charging, and therefore they are going to be loss-making 
entities. But they are going to benefit from these risk 
corridors and other adjusting features in the law. They are the 
most likely to be reckless in the way they price their premiums 
and require further taxpayer support to compensate for that 
fact. I think that is something this committee can be useful in 
looking into.
    Mr. Lankford. Dr. VanRiper, Ms. Horowitz asked about the 
private funding versus the startup funding on it. How common is 
it among the 23 CO-OPs that are out there that the majority of 
the funding for startup was all Federal? Do you know how much 
private money was put in at the start?
    Ms. VanRiper. Thank you. I think it's fair to say that with 
all the CO-OPs, the majority of the money came from the Federal 
Government. Some of them have had more luck than others in 
attracting private funds, and many of them have.
    Mr. Lankford. When you say majority, you mean just, as a 
ballpark, obviously I am asking you to pull a figure just out 
of your head on this. Eight percent? Fifty percent? Ninety 
percent? What do you think is a ballpark figure of the Federal 
dollars versus private dollars?
    Ms. VanRiper. I couldn't venture a guess on the percentage. 
I would say a substantial majority.
    Mr. Lankford. Do you think it is higher than 80 percent?
    Ms. VanRiper. In some cases it might be, in other cases 
not.
    Mr. Lankford. A majority higher than 80 percent Federal 
dollars?
    Ms. VanRiper. I don't know.
    Mr. Lankford. Is there a way we can get that figure, do you 
think?
    Ms. VanRiper. One thing to understand is that as a trade 
association, we can't make them give us information.
    Mr. Lankford. I know. You are helping integrate, helping 
them answer questions and navigate this stuff.
    Ms. VanRiper. Sure.
    Mr. Lankford. I get that. But there is also a common 
conversation that is there, to be able to determine as they are 
starting up.
    Ms. Horowitz, just a quick question on that. Do you have 
any idea from the other CO-OPs? Is your percentage pretty close 
to what theirs is?
    Ms. Horowitz. Because our sponsorship has ended, and they 
were independent, we literally haven't been at any meetings for 
probably a year and a half to two. I am not even talking to the 
other CO-OPs.
    Mr. Lankford. Thank you. Mr. Meadows?
    Mr. Meadows. I thank each one of you for your testimony 
today and for your patience. Dr. VanRiper, I want to come back 
to you on a couple of issues. Out of your member CO-OPs, you 
are a trade association, out of those member CO-OPs, how many 
of those members are in rural States?
    Ms. VanRiper. Again, I wish I had those exact numbers for 
you. But I can tell you, for example, CO-OPs in Maine, 
Kentucky, South Carolina that have rural populations, Iowa, 
Montana, Louisiana.
    Mr. Meadows. So you have some in rural States. So the 
average premium in those States where there is insurance 
providers, the average premium the CO-OP would charge versus 
the private sector, BlueCross BlueShield, say, what is the 
difference in your premiums? How much are they saving by going 
with the CO-OP versus going with BlueCross BlueShield?
    Ms. VanRiper. I can give you an example of, say, a Montana 
price compared to a Wyoming price where there is no CO-OP.
    Mr. Meadows. That is not what I am asking. I am asking, 
when you are competing head to head, your analysis early on was 
that this was driving costs down. The only way to drive costs 
down is to drive premium costs down. And so I would assume that 
based on your testimony, you would have documentation on how 
much cheaper your premiums are for CO-OPs versus a private 
carrier.
    Ms. VanRiper. Well, sure. I mean, we definitely, it is 
public information what all the prices are on the exchanges 
through the qualified health plans, what those prices are and 
how they compare.
    Mr. Meadows. So they are not cheaper. Is the CO-OP cheaper 
than the private insurance? I guess what I am saying is, why 
would I go to a CO-OP? Why would I do that? Is it going to be 
cheaper? Or should I go to all the people that I represent in 
North Carolina and say, this CO-OP is the best thing coming, 
because you know what, our premiums, your premiums just jumped 
by $180 a month. If you had a CO-OP here, it would only go up 
by $80. But that is not happening.
    Ms. VanRiper. Well, that is because you don't have a CO-OP 
in North Carolina.
    Mr. Meadows. But that gets to the specific question that I 
just asked. Give me real numbers from New Jersey. Is it cheaper 
to go with a CO-OP than it is with a private sector provider? 
The answer is no.
    Ms. VanRiper. I can provide you, after this hearing, the 
numbers in all the States for all the plans selling through the 
exchanges. What our figures tell us is, as an average, if there 
is a CO-OP in your State, you are going to have 9 percent lower 
premiums on those market----
    Mr. Meadows. We have already gone there. That is a red 
herring.
    Ms. VanRiper. Is it cheaper, okay. Well, let me answer 
that. In some cases it is, and in some cases it isn't. A report 
by the McKenzie Consulting Group recently found that 37 percent 
of the lowest prices in the health exchanges were CO-OP prices.
    Mr. Meadows. All right, so let me ask you this. How, with, 
you can't seem to answer my question directly, how in the world 
do you market that to a consumer? If I am going to get health 
care coverage, and I am going to go to a CO-OP, and let's say I 
am going to go to BlueCross BlueShield, what is the difference 
in premiums in New Jersey? Do you know that figure?
    Ms. VanRiper. I do not know that figure off the top of my 
head.
    Mr. Meadows. So how do you market it to the consumer if you 
don't know? How do you know----
    Ms. VanRiper. I am not marketing a CO-OP plan to the 
consumer.
    Mr. Meadows. Well, that may be the problem why we are 
having a problem with CO-OPs, is because we are not marketing.
    Ms. VanRiper. Let me explain something. All CO-OPs do 
marketing. They cannot use Federal dollars, but they have 
scraped up money from some other place to do marketing. In 
spite of the prohibition on using Federal loan money for 
marketing, I just gave you some statistics. Some of them are 
doing pretty darned good, even at this early stage. And that 
would be the selling point.
    Mr. Meadows. So what would be your testimony today, if I 
were to go to a CO-OP, it is consistently how much cheaper than 
the private sector to buy insurance?
    Ms. VanRiper. I--all I can tell you is what I said before, 
because I cannot tell you State by State what the price is.
    Mr. Meadows. New Jersey?
    Ms. VanRiper. I don't know. I told you that. I don't know 
exactly what the pricing is there versus other places.
    Mr. Meadows. All right. Mr. Chairman, I yield back.
    Mr. Lankford. Long afternoon, we started an hour late 
because of votes, then we had a two-hour conversation on this. 
I really appreciate your coming. This is the first hearing on 
this topic. This is a $2 billion piece of the Federal budget. 
It is important that we get a chance to have this conversation. 
This conversation will advance with members of the 
Administration as they are trying to work through the process 
of how they are handling the regulations on this. The 
information that you all brought today, both in your written 
testimony and in your oral testimony was incredibly beneficial 
to us, to get some perspective of what is happening and how you 
are trying to manage it. Obviously there are lots of numbers 
and facts and figures still to come as this rolls out in the 
next couple of months. And time will most certainly tell where 
this comes out.
    Proverbs says, wisdom is proved right by her children. This 
will be one of those moments to be able to look at and say, 
what are the children that are born from this process and where 
does this go. I would like to thank all the witnesses for 
coming and taking so much time from your busy schedules. The 
committee will stand in recess until we get a chance to finish 
testimony of a witness that did not arrive today.
    Thank you.
    [Whereupon, at 5:05 p.m., the subcommittee was recessed, to 
reconvene at a later date.]


                                APPENDIX

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               Material Submitted for the Hearing Record

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