[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]




                               BEFORE THE


                                 OF THE

                        HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                            NOVEMBER 5, 2015


                           Serial No. 114-99
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                          FRED UPTON, Michigan
JOE BARTON, Texas                    FRANK PALLONE, Jr., New Jersey
  Chairman Emeritus                    Ranking Member
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
JOSEPH R. PITTS, Pennsylvania        ELIOT L. ENGEL, New York
GREG WALDEN, Oregon                  GENE GREEN, Texas
TIM MURPHY, Pennsylvania             DIANA DeGETTE, Colorado
MICHAEL C. BURGESS, Texas            LOIS CAPPS, California
MARSHA BLACKBURN, Tennessee          MICHAEL F. DOYLE, Pennsylvania
  Vice Chairman                      JANICE D. SCHAKOWSKY, Illinois
STEVE SCALISE, Louisiana             G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio                DORIS O. MATSUI, California
GREGG HARPER, Mississippi            JOHN P. SARBANES, Maryland
LEONARD LANCE, New Jersey            JERRY McNERNEY, California
BRETT GUTHRIE, Kentucky              PETER WELCH, Vermont
PETE OLSON, Texas                    BEN RAY LUJAN, New Mexico
DAVID B. McKINLEY, West Virginia     PAUL TONKO, New York
MIKE POMPEO, Kansas                  JOHN A. YARMUTH, Kentucky
ADAM KINZINGER, Illinois             YVETTE D. CLARKE, New York
GUS M. BILIRAKIS, Florida            KURT SCHRADER, Oregon
BILL JOHNSON, Ohio                   JOSEPH P. KENNEDY, III, 
BILLY LONG, Missouri                     Massachusetts
RENEE L. ELLMERS, North Carolina     TONY CARDENAS, California
RICHARD HUDSON, North Carolina
KEVIN CRAMER, North Dakota

              Subcommittee on Oversight and Investigations

                        TIM MURPHY, Pennsylvania
DAVID B. McKINLEY, West Virginia     DIANA DeGETTE, Colorado
  Vice Chairman                        Ranking Member
MARSHA BLACKBURN, Tennessee          KATHY CASTOR, Florida
H. MORGAN GRIFFITH, Virginia         PAUL TONKO, New York
LARRY BUCSHON, Indiana               JOHN A. YARMUTH, Kentucky
BILL FLORES, Texas                   YVETTE D. CLARKE, New York
SUSAN W. BROOKS, Indiana             JOSEPH P. KENNEDY, III, 
MARKWAYNE MULLIN, Oklahoma               Massachusetts
RICHARD HUDSON, North Carolina       GENE GREEN, Texas
CHRIS COLLINS, New York              PETER WELCH, Vermont
KEVIN CRAMER, North Dakota           FRANK PALLONE, Jr., New Jersey (ex 
JOE BARTON, Texas                        officio)
FRED UPTON, Michigan (ex officio)
                             C O N T E N T S

Hon. Tim Murphy, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     1
    Prepared statement...........................................     3
Hon. Diana DeGette, a Representative in Congress from the state 
  of Colorado, opening statement.................................     4
Hon. David B. McKinley, a Representative in Congress from the 
  State of West Virginia, opening statement......................     5
Hon. Frank Pallone, Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................     7
Hon. Fred Upton, a Representative in Congress from the state of 
  Michigan, prepared statement...................................   123


Julie McPeak, Insurance Commissioner, Tennessee..................     9
    Prepared statement...........................................    11
    Answers to submitted questions...............................   135
James Donelon, Insurance Commissioner, Louisiana.................    28
    Prepared statement...........................................    30
    Answers to submitted questions...............................   139
Ben Sasse, a Senator from the State of Nebraska..................    45
    Prepared statement...........................................    48
Peter Beilenson, Board Of Directors, National Alliance of State 
  Health Co-Ops..................................................    53
    Prepared statement...........................................    55
John Morrison, Vice Chair, Montana Health Co-op..................    59
    Prepared statement...........................................    61
Mandy Cohen, Chief Of Staff, Centers for Medicare and Medicaid 
  Services.......................................................    92
    Prepared statement...........................................    95
    Answers to submitted questions...............................   146
Gloria L. Jarmon, Deputy Inspector General for Audit Services, 
  Office of Inspector General, U.S. Department of Health and 
  Human Services.................................................   104
    Prepared statement...........................................   106

                           Submitted Material

Subcommittee memorandum..........................................   124
Article entitled, ``Explaining `Risk Corridors,' the Next 
  Obamacare issue,'' Wall Street Journal, January 22, 2014.......   130



                       THURSDAY, NOVEMBER 5, 2015

                  House of Representatives,
      Subcommittee on Oversight and Investigations,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:00 a.m., in 
room 2322, Rayburn House Office Building, Hon. Tim Murphy 
(chairman of the subcommittee) presiding.
    Present: Representatives Murphy, McKinley, Burgess, 
Blackburn, Griffith, Bucshon, Brooks, Collins, DeGette, Castor, 
Tonko, Yarmuth, Clarke, Kennedy, Green, Welch, and Pallone (ex 
    Staff Present: Jessica Donlon, Counsel, O&I; Emily Felder, 
Counsel, O&I; Brittany Havens, Oversight Associate, O&I; 
Charles Ingebretson, Chief Counsel, O&I; Dylan Vorbach, 
Legislative Clerk, CMT; Christine Brennan, Minority Press 
Secretary; Ryan Gottschall, Minority GAO Detailee; Tiffany 
Guarascio, Minority Deputy Staff Director and Chief Health 
Advisor; Chris Knauer, Minority Oversight Staff Director; Una 
Lee, Minority Chief Oversight Counsel; Elizabeth Letter, 
Minority Professional Staff Member; and Arielle Woronoff, 
Minority Health Counsel.


    Mr. Murphy. Good morning. The subcommittee on Oversight and 
Investigation of the Committee on Energy and Commerce will come 
to order.
    The subcommittee convenes this hearing today to examine yet 
another ObamaCare failure, the CO-OP Insurance Loan Program, 
the Affordable Care Act established Consumer Oriented and 
Operated Plans or CO-OPs, an experimental program that awarded 
government-backed loans to nonprofit health insurance issuers. 
Of the 22 CO-OPs that sold health insurance plans, 
unfortunately, 12 have failed to date. These failed CO-OPs 
represent $1.23 billion in Federal taxpayer money. Since CO-OPs 
must pay any outstanding debts or obligations before repaying 
the loan funds to CMS, it is unlikely that the Federal 
Government will ever recover these funds.
    Originally intended to increase choice and create 
competition among insurers, these CO-OPs were structurally 
flawed and financially risky from the start. As early as 2011, 
HHS predicted that 36 percent of the loans would go unpaid. In 
2012, the Office of Management and Budget projected taxpayers 
would lose 43 percent of loans offered through the program. The 
following year, an HHS OIG report expressed concerns about CO-
OPs' financial stability and ability to repay loans. Even 
staunch supporters of the Affordable Care Act predicted the CO-
OP programs would fail. Back in 2009, Senator Rockefeller 
wrote, quote, ``There's been no significant research into 
consumer CO-OPs as a model for the broad expansion of health 
insurance.'' What we do know however is that this model was 
tried in the earliest part of the 20th century and largely 
failed. The Senator also called CO-OPs a, quote, ``dying 
business model for health insurance,'' unquote.
    Despite these widespread concerns CMS awarded $2.4 billion 
in Federal loans to 23 CO-OPs operating 23 States. This total 
does not include the CO-OP that failed before it enrolled a 
single person. CMS awarded a CO-OP in Vermont, over 30 million 
taxpayer dollars. However, in 2013, Vermont's State insurance 
commissioner denied the CO-OP a license, calling its 
application fatally flawed. The Federal funds that had already 
been spent to establish Vermont's CO-OPs, about $4.5 million 
taxpayer, were never recovered. The next CO-OP to fail was 
CoOpportunity, a CO-OP operating in Iowa and Nebraska. At 
first, CoOpportunity seemed to be a success. It enrolled over 
120,000 individuals, which amounted to one-fifth of CO-OP 
enrollees nationally. However, CoOpportunity premiums were too 
low, and it was concerned about its ability to pay claims to 
providers. CoOpportunity received $145 million in Federal 
loans, but upon liquidation, it had operating losses over $163 
    We are grateful today we will be joined later by Senator 
Ben Sasse, who had to run out to a vote on the Senate side. He 
will be here to talk about the CO-OP programs in Nebraska. Near 
the end of 2014, CMS awarded $315 million in last-minute loans 
to bolster six CO-OPs in dire financial situations, and of 
those six CO-OPs, three have since closed. It is doubtful that 
CMS will recover any of these additional funds.
    Several factors have caused the CO-OPs to fail. In some 
cases, low enrollment was to blame. In other cases, CO-OPs set 
premiums too low. A July 2015 HHS OIG audit issued before the 
rush of CO-OP closures found that 21 of 23 CO-OPs incurred net 
losses. In 2014, it anticipated that low enrollments and net 
losses might limit the ability of some CO-OPs to repay loans.
    Additionally, some CO-OPs have cited low-risk corridor 
payments from CMS as the reason for their demise because less 
money was paid into the risk corridor program than was 
expected. Insurers ended up with 12.6 percent of the payments 
they were anticipating. Given the CO-OPs' dismal financial 
situation, CO-OPs inappropriately hoped risk corridor payments 
would bail them out. However, the risk corridor program was 
always intended to be budget neutral. Only what was paid into 
the program would be paid out. In fact, in early 2014, a 
spokesman from CMS confirmed the risk corridor policy modelled 
on the risk corridor provision in Part D that was supported on 
a bipartisan basis was estimated to be budget neutral, and we 
intend to implement it as designed, unquote.
    We are here today to understand what went wrong. We will 
hear from individuals who were on the ground implementing and 
regulating CO-OPs from day one. We will hear from State 
regulators faced with difficult decisions about how to best 
protect consumers in their States. We will hear from 
individuals who have established CO-OPs and the challenges they 
faced to balance CMS requirements in keeping CO-OPs afloat. We 
will hear from the auditors of CO-OPs. We will speak to the 
financial challenges CO-OPs face to pay back their Federal 
loans. And, lastly, we will hear from CMS about not only what 
went wrong, but how we can fix it with the goal of recovering 
taxpayer dollars awarded to the CO-OPs.
    I thank all the witnesses for testifying today, and now 
magically appearing, the Ranking Member Diana DeGette.
    [The prepared statement of Mr. Murphy follows:]

                 Prepared statement of Hon. Tim Murphy

    The Subcommittee convenes this hearing today to examine yet 
another Obamacare failure: the CO-OP insurance loan program. 
The Affordable Care Act established ``Consumer-Oriented and 
Operated Plans'' or CO-OPs, an experimental program that 
awarded government-backed loans to non-profit health insurance 
    Of the 23 CO-OPs that sold health insurance plans, 12 have 
failed to date. These failed COOPs represent $1.23 billion in 
federal taxpayer dollars. Since CO-OPs must pay any outstanding 
debts or obligations before repaying the loan funds to CMS, it 
is unlikely that the federal government will recoup these 
    Originally intended to increase choice and create 
competition among insurers, these CO-OPs were structurally 
flawed and financially risky from the start.
    As early as 2011, HHS predicted that 36 percent of the 
loans would go unpaid. In 2012, the Office of Management and 
Budget projected taxpayers would lose 43 percent of loans 
offered through the program. The following year, a HHS OIG 
report expressed concern about CO-OPs' financial sustainability 
and ability to repay loans.
    Even staunch supporters of the Affordable Care Act 
predicted the CO-OP program would fail. Back in 2009, Senator 
Rockefeller wrote: ``There has been no significant research 
into consumer co-ops as a model for the broad expansion of 
health insurance. What we do know, however, is that this model 
was tried in the early part of the 20th century and largely 
failed.'' The Senator also called CO-OPs a ``dying business 
model for health insurance.''
    Despite these widespread concerns, CMS awarded $2.4 billion 
in federal loans to 23 CO-OPs operating in 23 states. This 
total does not include the CO-OP that failed before it enrolled 
a single person. CMS awarded a CO-OP in Vermont over $30 
million taxpayer dollars. However, in 2013, Vermont's state 
insurance commissioner denied the CO-OP a license to sell 
health insurance, calling its application ``fatally flawed.'' 
The federal funds that had already been spent to establish 
Vermont's CO-OP-about $4.5 million taxpayer dollars-were never 
    The next CO-OP to fail was CoOportunity, a CO-OP operating 
in Iowa and Nebraska. At first, CoOportunity seemed to be a 
success. It enrolled over 120,000 individuals, which amounted 
to one fifth of CO-OP enrollees nationally. However, 
CoOportunity's premiums were too low and it was concerned about 
its ability to pay claims to providers. CoOportunity received 
$145 million in federal loans, but upon liquidation, it had 
operating losses over $163 million. We are grateful that 
Senator Ben Sasse is here today to testify about the failure of 
the CO-OP program, and how it has negatively affected 
    Near the end of 2014, CMS awarded $350 million in last-
minute loans to bolster six CO-OPs in dire financial 
situations. Of those six CO-OPs, three have since closed. It is 
doubtful that CMS will recover any of these additional federal 
    Several factors have caused the CO-OPs to fail. In some 
cases, low enrollment was to blame. In other instances, CO-OPs 
set premiums too low. A July 2015 HHS OIG audit, issued before 
the rush of CO-OP closures, found that 21 of the 23 CO-OPs 
incurred net losses in 2014, and anticipated that ``low 
enrollments and net losses might limit the ability of some CO-
OPs to repay loans.'' Additionally, some CO-OPs have cited low 
risk corridor payments from CMS as the reason for their demise. 
Because less money was paid into the risk corridor program than 
was expected, insurers ended up with 12.6% of the payment they 
were anticipating. Given the CO-OPs' dismal financial 
situation, CO-OPs inappropriately hoped risk corridor payments 
would bail them out. However, the risk corridor program was 
always intended to be budget neutral-only what was paid into 
the program would be paid out.
    In fact, in early 2014, a spokesman from CMS confirmed, 
``The [risk corridor] policy, modeled on the risk corridor 
provision in Part D that was supported on a bipartisan basis, 
was estimated to be budget neutral, and we intend to implement 
it as designed.''
    We are here today to understand what went wrong. We will 
hear from individuals who were on the ground, implementing and 
regulating CO-OPs from day one. We will hear from state 
regulators faced with difficult decisions about how to best 
protect consumers in their states. We will hear from 
individuals who have established CO-OPs, and face challenges to 
balance CMS requirements and keep CO-OPs afloat. We will hear 
from the auditors of CO-OPs, who will speak to the financial 
challenges CO-OPs face to pay back their federal loans.
    And lastly, we will hear from CMS about not only what went 
wrong, but how we can fix it--with the goal of recovering 
taxpayer dollars awarded to the CO-OPs.
    I thank all the witnesses for testifying today.


    Mr. DeGette. Thank you, Mr. Chairman.
    I am sorry this important hearing has been impacted by the 
votes today because it is an important hearing. From day one I 
have worked with the State of Colorado and the administration 
to help our CO-OPs succeed. Across the country, the CO-OPs have 
provided consumer-focused coverage options and have injected 
competition into the health insurance market. Yet a number of 
CO-OPs are facing financial challenges and, unfortunately, will 
not be able to compete in the 2016 marketplace. We have all 
seen announcements in the last few weeks about CO-OPs closing 
their doors, including the CO-OP in my home State of Colorado.
    I am very disappointed that the Colorado Division of 
Insurance was compelled to shut down the CO-OP. Yes, it faced 
challenges. But it also served the critical needs of 83,000 
Coloradoans for 2 years, and the company was well on its way to 
fiscal sustainability in 2016. I am also disappointed at the 
way CMS has managed this problem, which I will get to later.
    But you know something, equally to blame is us, Congress. I 
believe Congress has not worked as a partner to support the 
emerging CO-OP market that is attempting to bring more 
competition and choice to a market frequently dominated by one 
or two insurers. Mr. Chairman, I do wish that we had saved the 
CO-OP in Colorado, but if we can't do that, I hope we will use 
our time productively today to make sure the remaining CO-OPs 
are successful. Unfortunately, I know better than that. I know 
that a hearing before this subcommittee with the title 
Affordable Care Act or ObamaCare in the title somehow won't be 
a productive endeavor. We won't spend the next several hours 
learning from the experts before us about the challenges faced 
by the CO-OPs and what we can do to improve them. We could be 
doing meaningful oversight instead of taking 61 votes to 
abolish the Affordable Care Act. And, instead, my colleagues on 
the other side of the aisle prefer to sit on the sidelines and 
root for the law to fail.
    Frankly, Congress has squandered the last 5 years by 
celebrating every bump in the road as we implemented the law, 
rather than focusing on how to make it better. Even worse, some 
of my colleagues have intentionally placed road blocks that 
have actually made it harder for their own constituents to 
access care.
    Now, look, I am not suggesting the Affordable Care Act has 
been perfect, far from it, but I think that the important thing 
from these bumps in the road is to recognize the problems and 
to try to move the ball forward. If we could do that, we could 
work together to improve health care coverage for millions of 
Americans. In his op-ed, the Senator--I guess he is not going 
to testify--he said in an op-ed last weekend, quote, this isn't 
about spreadsheets. It is about people. And, frankly, I 
couldn't agree more. It is about people who, before the 
Affordable Care Act, faced skyrocketing health care costs. It 
is about people who were at the mercy of health insurance 
companies that could raise rates or deny coverage for arbitrary 
reasons to protect their profits. It is about people who feared 
that an unexpected medical cost would bankrupt them. But thanks 
to the Affordable Care Act, they don't have to face these 
uncertainties anymore. Americans are no longer one accident or 
illness way from financial ruin.
    So, Chairman, our constituents should be able to depend on 
Congress to work productively in a bipartisan manner to improve 
the healthcare landscape in this country. That is what I hope 
to do today. I am going to use my time to hear from the experts 
before us about how we can make the remaining CO-OPs succeed. 
Frankly, as I said earlier, I have some hard questions for CMS. 
I want to know what went wrong with the risk mitigation 
mechanisms that were designed to promote competition and ensure 
stability in the insurance marketplace. I want answers about 
how the CO-OPs wound up owing money to the big insurance 
companies through risk-adjustment programs. I want to 
understand why CMS said over the summer that risk corridor 
collections would be sufficient to cover all risk corridor 
payments while less than 3 months later, they revealed they 
would only be able to pay 13 percent of the requested amounts 
to insurers. In short, I want to know whether CMS is thinking 
outside the box and coming up with a path forward to support 
this important competitive ingredient in today's health 
insurance market.
    Thanks again to all of our witnesses for coming today. 
Thanks for waiting while we went to vote. I think you are going 
to be waiting again in a minute while we go back to vote, but 
your expertise will improve the law and the lives of our 
constituents. And I hope that members on both sides of the 
aisle have come ready to hear your ideas so we can finally have 
a productive hearing on the Affordable Care Act. I yield back.
    Mr. Murphy. Thank you.
    Mr. McKinley is recognized for 5 minutes.


    Mr. McKinley. Thank you, Mr. Chairman, and I agree with the 
lady from Colorado that this is about people. Failure of these 
CO-OPs have had real-life consequences. People are hurting. 
They are confused. The collapse of the West Virginia-Kentucky 
CO-OP leaves 56,000 policyholders frantically searching for new 
coverage before the close of the enrollment period. Seven years 
ago, the coal industry in West Virginia was booming, and we 
enjoyed the seventh best unemployment rate in the country. But 
now fast forward to 2015, the unemployment rate is the worst in 
the Nation: 45 percent of our coal miners have lost their jobs 
in the last 3 years, and thousands more affiliated with the 
coal industry have lost their paychecks. These individuals and 
their families, they are hurting.
    But they found a peace of mind in knowing that at least 
their family's health care was secure. Unfortunately, that 
comfort did not last long. Families enrolled in the West 
Virginia-Kentucky CO-OP have had that rug jerked right out from 
under them, all because CMS did not do its job and vet those 
CO-OPs properly or address the red flags that were raised after 
the Iowa-Nebraska CO-OP failed. Instead of hitting the pause 
button, the CMS continued to award $350 million in additional 
funding. Twelve of the 24 CO-OPs have already failed. At this 
hearing, I intend to ask now, who will be responsible for the 
medical bills that have been incurred by families all across? 
Who is going to pick up those costs when the CO-OPs are not 
there? Will CMS give flexibility to families confronting the 
crisis of their lost health care? What about with only one 
Statewide exchange available in West Virginia, one Statewide 
exchange? Failure of this CO-OP will now result in our families 
in West Virginia paying 120 percent higher premiums than they 
were last year. Is that fair?
    This issue is not just about another failed ObamaCare 
program costing taxpayers in excess of billions of dollars. It 
is an opportunity for us in this room and in Congress to 
express our compassion and empathy for the hardworking families 
that have lost their sense of security. I look forward to the 
presentations today, and I yield back the balance of my time.
    Mr. Murphy. Dr. Burgess will take the rest of that time.
    Mr. Burgess. Thank you, Mr. Chairman, and thanks for the 
recognition. I think it is important that we are having this 
hearing today. There is a lot of policy in the Affordable Care 
Act. A lot of it was bad policy, and the CO-OP program is no 
exception. It has wasted millions of taxpayer dollars. It has 
suffered from a lack of oversight, and it has created 
instability for millions of patients. The model was 
fundamentally unsound from the start and was another example of 
the administration's desire to conduct dangerous experiments 
with our Nation's health care. Let us not forget that the 
ultimate patient protection is the assurance that their 
insurance carrier will not simply evaporate in the night, 
leaving patients without the coverage on which they rely. At 
last count, 12 of the CO-OPs have shut down, accounting for 
over a billion dollars in taxpayer dollars lost. The rate of 
failure continues to accelerate. In fact, the subcommittee 
staff struggled to finalize materials for this hearing because 
CO-OPs were failing and announcing failures faster than they 
could finalize the memoranda.
    We will hear from witnesses today that the Center for 
Medicare and Medicaid Services continues to stand in the way of 
flexibility that the remaining CO-OPs need to become 
sustainable. We should not stand by as more and more taxpayer 
dollars are lost, more taxpayer dollars are invested in failed 
experiments, and millions remain at risk of losing their 
insurance as CO-OPs continue to close their doors.
    So thank you, Mr. Chairman, and I yield to Mrs. Blackburn.
    Mrs. Blackburn. Thank you, Mr. Chairman.
    I want to thank our witnesses. Especially I want to thank 
Commissioner McPeak from Tennessee for joining us. We are 
fortunate to have you in our state, and we are fortunate to 
have your guidance, and we look forward to what you will tell 
us about the failed CO-OP that we have had in our state. We 
also appreciate CMS taking the time to be here today. There are 
answers that we need as we conduct our oversight and due 
diligence on the system.
    And, Mr. Chairman, I yield the time back to you.
    Mr. Murphy. Thank you. I now recognize Mr. Pallone for 5 


    Mr. Pallone. Thank you, Mr. Chairman.
    When we passed the Affordable Care Act into law over 5 
years ago, we dramatically changed the healthcare landscape in 
this country. The law has been a historic success. It has made 
access to comprehensive health care a reality for the American 
people. Before the Affordable Care Act was passed, the 
insurance system in this country was broken. It was a system 
with rapidly rising costs, gross inefficiencies, and painful 
inequalities. A February 2010 headline just a month before the 
ACA was passed declared, and I quote, ``Soaring Premiums 
Reflect Unsustainable Health System.'' Up to 129 million 
Americans, nearly one in two people, could be discriminated 
against for a preexisting medical condition, ranging from 
diabetes to breast cancer to pregnancy. Many insurance plans 
lacked important benefits and limited coverage.
    These things are no longer true. Because of the Affordable 
Care Act, people who were previously deemed uninsurable because 
of a preexisting condition are finally getting coverage. Today, 
insurers cannot cancel a woman's policy just because she 
becomes ill. Women are no longer discriminated against, and 
people who could not afford insurance before are now able to do 
so. The CO-OPs fill a critical role in this new post-ACA world. 
They put healthcare choices in consumers' hands. They 
prioritize their customers instead of their company overhead. 
They foster competition in the marketplace by bringing down 
prices. They do exactly what we had in mind when we passed the 
Affordable Care Act into law. And today's hearing should be an 
opportunity to examine how we can ensure the remaining CO-OPs 
succeed. We should be talking about how to infuse competition 
into the marketplace to bring premiums down. We should be 
figuring out ways to help our constituents have access to high-
quality affordable health care.
    But I am worried that is not what today is going to be 
about here. This committee has had dozens of hearings on the 
Affordable Care Act since it was passed into law, and those 
hearings have had only one purpose, to undermine the Affordable 
Care Act, regardless of how many people it is actually helping. 
These hearings have more often served to highlight only the 
flaws in the program, and I look forward to you one day having 
a hearing, Mr. Chairman, where experts can talk about what is 
working, and there is much to applaud in that regard.
    Moreover, we should be taking this opportunity to do 
valuable oversight. The Affordable Care Act oversight of the 
last 5 years has neither served to enlighten the committee nor 
improve the law. It has done the opposite. In short it is 
incredibly frustrating to hear Republicans criticize the law 
time and time again without offering productive ways to improve 
it and get better health care to more Americans who need it. 
With over 60 votes to repeal or undermine the law, I think the 
record is clear that most of the majority would rather root for 
failure than help move the law forward.
    Finally, Mr. Chairman, I have suddenly heard many of my 
colleagues on the other side of the aisle lament that in the 
closing of the CO-OPs, many beneficiaries will now have to find 
new policies. Oh, my Republican colleagues are crying. Mr. 
Burgess in Texas, well, why don't you try to get the Governor 
and the State Legislature to expand Medicaid? That might help a 
lot of people. Or, Mrs. Blackburn, well, she didn't bring up 
TennCare today, but I usually hear about that. The fact of the 
matter is many of the people that signed up for the CO-OPs 
today had no insurance prior to their existence. Where were the 
voices of concern when people couldn't afford insurance or were 
uninsurable because their child had a preexisting condition? I 
think it is time to have a productive conversation about how we 
can improve the Affordable Care Act and the lives of all our 
constituents. Let this committee get to the place where it can 
work together to improve the law. I yield back.
    Mr. Murphy. The gentleman yields back. So they called 
votes. We are going to get through this as much as possible. We 
will swear you in, get your testimony. If you don't need the 
full 5 minutes, you don't have to give the full 5 minutes 
because we want to hear from you, and then we will come back 
and ask questions.
    You are aware the committee is holding an investigative 
hearing and when so doing has a practice of taking testimony 
under oath.
    Do any of you have any objections to taking testimony under 
    They have all answered no. The chair advises you that under 
the rules of the House and the rules of the committee, you are 
entitled to be advised by counsel. Do any of you desire to be 
advised by counsel today?
    Dr. Beilenson. [Nonverbal response.]
    Mr. Murphy. You desire to be advised by counsel. Could you 
identify your counsel, please?
    Dr. Beilenson. Steve Ross and Tom Moyer.
    Mr. Murphy. Will they be testifying?
    OK, thank you.
    Anyone else have counsel today? In that case, would you all 
please rise and raise your right hand. I will swear you in.
    [Witnesses sworn.]
    Mr. Murphy. Thank you. You are now under oath and subject 
to the penalties set forth in Title 18, section 1001, of the 
United States Code.
    We will start with Ms. McPeak, the insurance commissioner 
from Tennessee. You may give a 5-minute summary of your 


                   STATEMENT OF JULIE MCPEAK

    Ms. McPeak. Thank you. Good morning, Chairman Murphy, 
Ranking Member DeGette, Representative Blackburn, and members 
of the subcommittee. Thank you for inviting me to testify. I am 
Julie Mix McPeak, commissioner of the Tennessee Department of 
Commerce and Insurance. In addition to my responsibilities in 
Tennessee, I serve in committee leadership roles at the 
National Association of Insurance Commissioners, and as 
executive committee member of the International Association of 
Insurance Supervisors, and as a member of the Federal Advisory 
Committee on insurance. I've spent most of my career in 
insurance regulation, previously serving as the commissioner of 
the Kentucky Department of Insurance. And I have a strong 
affinity for the country's State-based system of insurance 
    My testimony today will highlight the history of 
Tennessee's CO-OP, Community Health Alliance Mutual Insurance 
Company or CHA. My comments will focus on events this year that 
ultimately led to CHA voluntarily entering runoff on October 
14. CHA was awarded $73.3 million in loans and advances from 
CMS to launch the company. CHA first offered plans on the 
federally facilitated marketplace in 2014, with plans in five 
of Tennessee's eight service areas. The company achieved 
minimal membership in 2014 due in large part to having plans 
priced significantly above the FFM leader and having limited 
network options. The company's membership and rate challenges 
were compounded by a population that was less healthy and 
sought more medical services than projected. CHA recorded a net 
loss of approximately $22 million at year end 2014.
    In 2015, CHA saw its enrollment grow exponentially during 
the open enrollment period. And during the same period of time, 
projected medical costs continued to significantly increase. 
The department and CHA quickly recognized that such growth was 
too much too fast. Our department wrote a letter, which you 
have as exhibit 1, to HHS Secretary Burwell on January 8 
requesting that HHS place an immediate enrollment freeze on CHA 
due to the company triggering the department's hazardous 
financial condition standard. The decision to freeze enrollment 
was and remains the right decision for the company and, most 
importantly, for Tennessee insurance consumers.
    In mid-2015, the department conducted a thorough actuarial 
review of the company's proposed 2016 rates. After conducting 
our review, the department approved a rate increase of almost 
45 percent for 2016. Throughout 2015, CHA peaked at more than 
40,000 covered lives, but reducing down to almost 25,000 lives 
on the FFM where they remain today. Though we approved the 
rates to meet the CMS deadlines, we were not going to formally 
unfreeze the company until we reviewed initial results from a 
targeted financial examination called to evaluate the company's 
expenses, projections, and financial viability, and until CMS 
released Federal final guidance on the risk corridor program.
    In late September, the department was notified by CMS, and 
I think you have that as exhibit 2 to my testimony, that CHA 
was being placed on an enhanced oversight plan. That 
announcement was followed by risk corridor guidance that 
provided for significantly reduced risk corridor payments. The 
announcement immediately created a net worth deficiency for 
CHA. CHA asked the department if the $18.5 million startup loan 
could be counted as surplus if the loan terms were changed to 
be identical to the terms of the CMS solvency contribution. The 
department did not think that option was appropriate but told 
CHA--and I think you have that as exhibit 3--that statutory 
accounting principles would require the loan money to be 
classified as surplus if CMS and CHA bilaterally agreed to the 
loan agreement terms. After review at the department, CMS 
ultimately concluded that the loan conversion was not prudent. 
CHA voluntarily entered runoff on October 14. The Tennessee 
Department of Commerce and Insurance, CMS and its contractors, 
and CHA are working in close cooperation to ensure successful 
runoff. Our focus is on Tennesseeans first and foremost. My 
staff will continue to monitor the situation closely.
    The runoff will continue well into 2016. And there may be 
additional surprises. But as of today, cooperation between the 
three entities has helped ensure a smooth transition.
    Thank you for the opportunity to discuss the Tennessee 
experience with the subcommittee. I look forward to your 
    [The prepared statement of Ms. McPeak follows:]
    Mr. Murphy. Thank you.
    I now recognize Mr. Donelon, the commissioner from the 
Louisiana Department of Insurance.


    Mr. Donelon. Thank you, Mr. Chairman and Ranking Member, 
for the invitation and the opportunity to be here today to 
speak briefly about our experience in Louisiana with the 
creation and now the demise of our CO-OP. Let me start at the 
outset by telling you a little bit about myself and emphasizing 
the point that I am here on behalf of my State of Louisiana and 
not as a representative of the National Association of 
Insurance Commissioners, though I am an active participant at 
that level as well, having served as its president during the 
year 2013. But I have been insurance commissioner in Louisiana 
since 2006 and was recently, last month, reelected for the 
third time, beginning my next 4-year term as we speak.
    The creation of the Louisiana Health Cooperative, along 
with cooperatives in 23 states around the U.S., was a welcome 
part, from my perspective, although I have said repeatedly 
throughout my time as commissioner that if I had been here, I 
would have voted ``no'' on final passage of the Affordable Care 
Act for other concerns, but not for the opposition to the 
creation of CO-OPs. I saw that as a mechanism to address 
competition, which I believe is the most important aspect of 
consumer protection in my State, where my top insurer, Blue 
Cross, has 70 percent of the individual, small group, and large 
group market. My friends next door in Mississippi have a more 
dominant Blue than that, and the one next to them in Alabama is 
even more dominant, so that the well-intentioned purpose of the 
creation of these CO-OPs, to put consumers in control of an 
insurer and also to create more competition in our states, I 
welcomed at the outset.
    Having said that, I now have described the effort to create 
insurers, health insurers, in the environment that existed as 
the rollout occurred of the Affordable Care Act, in hindsight, 
I have analogized it to being similar to learning how to sail 
in a hurricane. It truly was not possible, in my judgment, to 
succeed under those circumstances.
    Much happened in my state that affected that. We licensed 
our CO-OP in April of 2013. And they began signing up enrollees 
in accordance with their loan agreement with CMS in October of 
2013. That loan agreement called for them to sign up 28,000 
lives. They ended up with 9,000 lives instead. In the several 
months between their approval and the beginning of their doing 
business, they had the challenges of the issues presented by 
guaranty issue, no lifetime limits, age caps, et cetera, not to 
mention the need for them to go out and rent a network of 
providers in a not very friendly to a purchaser of such service 
environment. They had to hire a TPA to do claims, to do their 
premium collection and payments on. They had to build a 
marketing network of agents, all of that in a relatively short, 
5-month period of time that, frankly, in hindsight, was not 
    The next challenge came with the rollout on June 30 by CMS 
of the transitional reinsurance program numbers and the risk 
adjustment program numbers. And where the CO-OP would receive 
$10 million under the reinsurance payments, it would owe $7.5 
million under the risk adjustment program. That represented a 
$5 million hit to their bottom line and triggered our calling 
them in on July 1, the leadership of our CO-OP, to tell them 
they should actually make the decision to go into runoff before 
the enrollment period began this October 1.
    On July 7, their board voted to accommodate that request 
from our folks, and they began doing that. The Louisiana CO-
OP's financial situation is dire. And we are doing everything 
we can to preserve its network of providers and to make sure 
that their policy holders will continue to have coverage 
through the end of 2015.
    Now, us state regulators have the unenviable task, as I 
have, of trying to wind down a company while at the same time 
conserving it and doing so in my state, unlike Tennessee, 
without the protection of a guaranty fund to assure those 
healthcare providers that their bills would be paid. Let me 
talk for a few minutes about our relationship----
    Mr. Murphy. We don't have a few minutes. You're out of 
    Mr. Donelon. I'm out?
    Mr. Murphy. Yes.
    Mr. Donelon. I'm sorry.
    [The prepared statement of Mr. Donelon follows:]
    Mr. Murphy. That's OK. Here's the thing. We have one vote. 
We also have Senator Sasse who is here, so the question is, we 
have one vote on the floor.
    Ms. DeGette. Mr. Chairman, the problem is they are down to 
about 2 or 3 minutes left in the vote. And I don't think 
they're going to hold it open for us, unfortunately. So, with 
all due respect, I am going to ask my members to go down and 
    Mr. Murphy. So unless some person wants to remain, we are 
going to have to hold off. This will be very quick. So we'll 
run down, vote, and come back. So if members just do that, come 
back as quickly as possible, we should be able to reconvene in 
about 10 minutes. Thank you.
    Mr. Murphy. We are joined here and bringing back in the 
junior Senator from Nebraska Senator Ben Sasse, who we 
understand taught Jeff Fortenberry everything he knows in 
Congress, so we are thankful.
    Senator, you are recognized for 5 minutes.


    Senator Sasse. Chairman Murphy, Ranking Member DeGette, and 
members of the subcommittee. Thank you for inviting me to 
testify today. I appreciate the opportunity to think along with 
you about how we should respond to the failure of the CO-OPs in 
now 13 states. I am tempted to joke after that voting moment 
that two more CO-OPs have failed while you were off voting. It 
is an urgent problem that has left hundreds of thousands of 
Americans scrambling to find new health plans this fall.
    Before we dive into the details on the CO-OPs, I would 
suggest that we should take our partisan hats off. I am a 
fierce opponent of the Affordable Care Act, and I know that 
many of you in this room night be strong supporters of the ACA, 
but I don't think that is what your hearing is about today. I 
think this is about getting to the bottom of what is actually 
going on and why so many of our neighbors are losing their 
healthcare coverage.
    The tumultuous failure ACA's CO-OPs began in my own 
backyard. It began with CoOpportunity, which is actually 
headquartered in Nebraska but had a majority of its subscribers 
in Nebraska. The goal of today's hearing is to get to the 
bottom of what is happening with the CO-OPs, and I want to 
speak to two issues. First, while there is much more that we 
need to understand, what we know so far would suggest a 
systematic failure of the CO-OP program and an even greater 
example of bureaucratic incompetence more generally. Secondly, 
the lack of transparency on this issue is harmful, and the 
Department of Health and Human Services owes the American 
public answers.
    Republican or Democrat our constituents deserve nothing 
less than a full accounting for what has happened with this 
program. The CO-OP program was included in the ACA to 
purportedly foster competition in the new exchanges by 
federally funding the start-up of 23 nonprofit health insurers. 
To get them off the ground, taxpayers loaned these insurers 
$2.4 billion. After less than 2 years of operation, 12 of the 
CO-OPs are down and the program has a failure rate over 50 
    The first failure, CoOpportunity Health, as I mentioned 
headquartered in Iowa but with a majority of its subscribers in 
Nebraska, was arguably the messiest, because the members of the 
coopportunity program lost their health plan in the middle of a 
plan year.
    CoOpportunity had been awarded it, $145 million of 
taxpayer-funded loans. The new insurer had garnered about 10 
times the numbers of enrollees that they had originally 
anticipated and was seemingly successful. However, despite 
ample funding and, obviously, far more enrollees than 
anticipated, on December 16th of last year, 2014, about a month 
into the new open enrollment season, the Iowa insurance 
commissioner placed CoOpportunity under a supervision order. By 
January 23rd of this year, 2015, the Iowa insurance 
commissioner deemed rehabilitation of CoOpportunity impossible 
and sought a court order for liquidation.
    After just one year of operation, the new not-for-profit 
health insurer abruptly collapsed. This was a terrible midyear 
shock to the 120,000 CoOpportunity enrollees, again, a majority 
of them in my State. These people were forced out of their 
insurance plans and had to go through the grueling process of 
signing up for coverage on healthcare.gov all over again with 
lots of uncertainty and fear about how their families might be 
covered or might not be covered during the transition.
    So why did could CoOpportunity fail? Curiously, 9 months 
later, we don't really have any answers. Sadly, CoOpportunity's 
messy demise was just the first of the CO-OP dominos to fall 
this fall. Now, a total of 12 CO-OPs and 13 States will be 
closed by the end of this year. These 12 CO-OPs were awarded 
more than $1.1 billion in taxpayer-funded loans and had more 
than half a million enrollees. Another noteworthy failure is 
Health Republic of New York, the largest CO-OP in the Nation. 
It received more in taxpayer loans than any other CO-OP, 
totaling about $265 million. In late September, they announced 
they would be ceasing operations at the end of this year, but 
just last Friday, the State's health insurance regulatory body 
revealed that the situation was actually much worse than it had 
even been understood 6 weeks ago. Apparently, a review 
conducted in conjunction with CMS now finds that the previously 
reported filings were not an accurate representation of Health 
Republic's financial condition. Now, that CO-OP is planning to 
close down as fast as possible instead of being in business 
until the end of the year.
    That means that more than 200,000 enrollees in Health 
Republic will have to pick a new insurer and plan in order to 
maintain health coverage for the month of December as well as 
planning for next year. Their new coverage, which they will now 
have to sign up for, will be expiring at the end of the next 
month, and then they will have to begin the process all over 
again of trying to find a health insurer.
    The sudden disruption and subsequent consumer confusion is 
eerily similar to what happened to Nebraskans and Iowans 
earlier this year with CoOpportunity's closure. This brings me 
to a second point. We still don't have any good answers. With 
12 out of 23 insurers rapidly going under, with inaccurate 
filings on the New York CO-OP, and with more than $1 billion in 
taxpayer loans out the door, there are more questions than 
ever, regarding the CO-OP program at large, and if they, those 
who are responsible for regulating it, knew what they were 
doing. I believe it is essential that HHS answer some basic 
questions, and all of us, Republican and Democrat, should be 
demanding that.
    For instance, CMS awarded additional solvency loans to 
CoOpportunity to Health Republic in New York and to the 
Kentucky Health Cooperative, all of which have since closed or 
are now closing, with CMS doubling down on their initial 
misjudgments by awarding additional loans. How did they decide 
to make these additional loans? Did they have any expectation 
that they were going to be paid back, or are they only going to 
be used to pay immediate claims?
    At the time of these awards, these three insurers were 
operating at substantial losses that seemingly stemmed from 
poorly pricing their products. One analysis measured the 
percentage difference between the CO-OPs' average silver plan 
premium for a 27-year-old single person in the State, to the 
corresponding overall insurance market for all other carriers. 
Here's what they found. CoOpportunity in Nebraska, Health 
Republic in New York, and the Health Cooperative of Kentucky 
were all pricing their products more than 20 percent below 
their competitors. How could this be possible?
    Should HHS have given these companies more taxpayer money, 
given the anomalies of their pricing models? Moreover, HHS has 
yet to address if and when taxpayers will be repaid for any of 
the more than $1 billion that have been loaned to these 12 CO-
OPs that have closed or are closing. These are the types of 
questions and the information that HHS should be providing to 
the American people through the Congress. Why are they not?
    The lack of transparency thus far has been terribly 
disappointing. I started asking questions right after 
CoOpportunity failed in my State in May. Without receiving a 
sufficient response to my questions, I asked more questions 
when a second CO-OP, Louisiana, failed. By the time eight more 
CO-OPs had gone under, I elevated my effort to try to get 
answers to these questions. These are good governance, not 
partisan questions. I elevated my question by pledging that we 
will oppose the fast-tracking of all HHS nominations before the 
U.S. Senate.
    Since that announcement less than 3 weeks ago, four more 
CO-OPs are closing, cementing further that this is a systematic 
problem, and still, we don't hear from HHS. Consumers who face 
this coverage disruption and the taxpayers who footed this bill 
deserve answers. CMS needs to provide a complete accounting of 
what has gone wrong within this program, and I hope that that 
starts today with your important hearing. Thank you for the 
invitation to testify.
    Mr. Murphy. I thank you so much, Senator.
    [The prepared statement of Senator Sasse follows:]
    Mr. Murphy. I think you are going to be leaving now and 
head back over to the Senate. We do appreciate your insights 
and your persistence on this, and we want to continue to work 
with you.
    Ms. DeGette. And let me just add, Senator. You didn't hear 
my opening statement, but I pretty much said the same thing as 
you did in terms of this should not be a partisan issue. We all 
need to figure out what's going on with these CO-OPs closing.
    Senator Sasse. Congress needs to do better in oversight, 
not just in health care but in life in general. But that is a 
conversation for another day.
    Mr. Murphy. Thank you. All the best.
    We'll now continue with our panel. Next up is Dr. Peter 
Beilenson. I got it right?
    Dr. Beilenson. Yes, sir.
    Mr. Murphy. The President, CEO, of Evergreen Health 
Cooperative. Doctor, you are recognized for 5 minutes.


    Dr. Beilenson. Thank you, sir.
    Chairman Murphy, Ranking Member DeGette, and members of the 
subcommittee, thank you for inviting me to testify before you 
today. As the Chairman said, my name is Peter Beilenson, and I 
am president and CEO of Evergreen Health CO-OP, the Maryland-
based CO-OP, founded in 2012. I also serve, as do all the CEOs 
of the CO-OPs, as a board member for the National Alliance of 
State Health Cooperatives, called NASHCO, and I appreciate the 
opportunity to appear before you today to discuss the issues 
affecting Evergreen and the other CO-OPs of NASHCO.
    As several of you have already said, while many elements of 
the ACA have engendered significant partisan disagreement, the 
notion of establishing local consumer-driven and innovative 
healthcare options while enhancing competition on the 
marketplace should be appealing across the ideological 
spectrum. The question now that we confront with the remaining 
11 CO-OPs is how can we succeed? How can they succeed? And how 
can taxpayer investment be preserved?
    Unlike the difficulties experienced by many other state 
cooperatives in their first 2 years, Evergreen Health 
Maryland's current fiscal condition is strong due to our quick 
and nimble response to unforeseen conditions in our first year 
of operations. Going into the current open enrollment, which 
just started a few days ago, we have a healthier than average 
enrolled population, due to a diversified book of business; we 
have greater than $35 million in assets; we have risk-based 
capital, a measure of solvency adequacy of almost 800 percent, 
and for the last 3 months, each month we have been turning a 
profit. So this can be a profitable mechanism.
    In addition, our strong relationship with Maryland Governor 
Larry Hogan's new insurance commissioner, Al Redmer, and his 
staff continues to provide us with significant support. 
Evergreen, like all other CO-OPs, take very seriously our 
obligation to pay back the loan funds granted to us by the 
Federal Government. However, several requirements in 
regulations developed by CMS and CCIIO at their discretion, not 
as required by provisions of the ACA, are significantly 
impeding the ability of the 11 remaining CO-OPs, including 
Evergreen, to successfully innovate and compete with the few 
carriers left on each state's respective insurance markets.
    In light of these concerns, I would like to highlight three 
solutions that could forge a successful path forward for the 
remaining CO-OPs. And let me be clear, these do not require an 
act of Congress; they do not require additional appropriations 
by the Congress.
    First, as the CO-OP successfully market themselves and 
capture larger enrollments, they will need additional solvency 
dollars to continue to meet state regulatory requirements, put 
aside CMS's requirements. However, as you know, CMS has no 
additional funds to assist with the solvency needs of the 
growing CO-OPs. The solution to this issue is to allow 
individual CO-OPs to raise capital to meet these solvency 
needs. In fact, as you may remember, the ability to obtain 
private capital in Section 1322, which established the CO-OPs, 
was one of the measures by which the original CO-OP 
applications were judged. CMS should amend the loan agreements 
to allow flexibility in raising capital, because the 
restrictions on obtaining additional capital, are not required 
under the ACA Section 1322.
    Second, risk adjustment under the ACA creates additional 
issues for the CO-OPs as formulas applied by CMS are skewed to 
the benefit of large preexisting insurers with enhanced 
administrative capabilities and years of claims experience with 
data for their members. The solution: CMS must revise the risk 
adjustment formula to create a level playing field for all 
    Third, and finally, the risk-corridor payments represent 
another issue for the CO-OPs. The solution: A swift resolution 
to the current funding deficit for this program will go a long 
way towards improving CO-OPs' balance sheets and long-term 
    Finally, we at Evergreen Health hope that both sides of the 
aisle and Congress will recognize that the nonprofit member-
governed CO-OPs are trying to forge a new and innovative path 
for health insurance and give consumers increased choices in 
their coverage. This competition in consumer choice has had 
demonstrable effects. CO-OPs have brought innovative approaches 
to the marketplace and, thus, additional choices to consumers. 
For example, Evergreen Health offers a value-base insurance 
design product for diabetics, unique in the State of Maryland, 
which push the marketplace considerably, which removes 
virtually all financial barriers, co-pays, co-insurance, and 
deductibles to services, medications, and care that is needed 
to keep a diabetic patient from developing a myriad of 
complications of the disease.
    In conclusion, I share the Congress' concern with 
protecting the Federal Government's initial investment in CO-
OPs. The solutions I have proposed today, again, do not entail 
an act of Congress or any additional congressional 
appropriations. They simply require CMS, the Congress, and the 
CO-OPs to work together to make sure that the remaining 11 CO-
OPs are preserved and that taxpayer dollars are preserved as 
well. Thank you very much.
    Mr. Murphy. Thank you very much, Doctor.
    [The prepared statement of Dr. Beilenson follows:]
    Mr. Murphy. And now finally we hear from Mr. John Morrison, 
the vice chairman of Montana Health Cooperative. You are 
recognized for 5 minutes.


    Mr. Morrison. Thank you, Chairman Murphy, Ranking Member 
DeGette, members of the subcommittee. Thank you for inviting me 
to testify. My name is John Morrison. I was Montana's insurance 
commissioner, in 2001 to 2008, and I chaired NEIC's health 
insurance committee. I am the founder and past president of the 
National Alliance of State Health CO-OPs and vice-chair of the 
Montana Health CO-OP.
    CO-OPs entered the marketplace in 22 States in 2014 and are 
now providing coverage to a million Americans. CO-OPs have 
brought much needed competition to the marketplaces, giving 
consumers more choice, introducing innovations and saving 
consumers and taxpayers money.
    Montana, where I live, has a CO-OP. Wyoming does not. Both 
States are on the FFM. In 2013, Montana's average monthly 
premium was 18 percent lower than Wyoming. In 2015, with the 
Montana Health CO-OP in the picture, based on the second lowest 
silver plan, Montana is now 40 percent lower.
    In 2014, states with CO-OPs had average silver plan rates 8 
percent lower than states without CO-OPs. In 2015, among FFM 
states, the Delta was about 13 percent and over $500 per person 
for the year. Based on the roughly 3.7 million Americans 
enrolled in CO-OP states in 2015, consumers in those states 
have already saved more than the total cost of the CO-OP 
    Moreover, when rates are lower, subsidy costs to the 
Federal Government are lower. Taxpayers have already saved at 
least hundreds of millions in subsidies and would have saved 
billions over the decade ahead. One study published in Health 
Affairs, projected that if CO-OPs held rates down by just 2 to 
5 percent, the savings to taxpayers over the next 10 years 
would be $7 billion to $17 billion. So the question is not how 
much CO-OP loans have cost the taxpayer. Rather, the better 
question is this, how much has the closing of CO-OPs and their 
removal from the marketplaces cost the consumer and the 
taxpayer for years to come? This question should be studied 
    So I thank you for holding this hearing today. Senator Kent 
Conrad recently said, the long knives came out to kill the CO-
OPs in their cribs. We need to get to the bottom of this, as 
Senator Sasse said, and find out who killed these CO-OPs and 
how much Americans will pay for that mistake.
    I got involved in the CO-OP project at the request of 
others, because I believe CO-OPs can break the endless 
inflationary spiral in our health insurance system. In my 
opinion, the following conduct of Congress and the 
administration has contributed significantly to the recent CO-
OP closures.
    One, the $6 billion in capitalization grants were changed 
to loans. Two, the CO-OPs were prohibited from using loan funds 
from marketing. Three, in 2011 when dozens of groups began 
meeting to turn the CO-OP concept into a nationwide reality, 
Congress slashed CO-OP loan funding from $6 billion to $3.4 
billion. Four, OMB directed CMS to cap CO-OP loans to prevent 
CO-OPs from achieving more than 5 percent market share. Five, 
in late 2012, 24 CO-OPs had signed loan agreements, and more 
than 40 additional groups were awaiting review.
    Congress responded in the year-end fiscal cliff deal by 
rescinding the remaining lending authority and prohibiting CMS 
from authorizing additional CO-OPs.
    Six, although CO-OPs had not yet opened their doors, 
congressional committees attacked them in hearings and press 
releases and tied the CO-OPs up with burdensome and expensive 
document demands.
    Seven, CO-OPs reserve requirements were more than twice as 
high as other insures. Eight, existing insures were allowed to 
early renew their ACA noncompliant policies and preselected 
good risk, degrading the marketplace pool. Nine, CO-OPs were 
prohibited from offering necessary terms to outside investors 
to access private capital. Ten, in year one, CO-OPs were 
prohibited from limiting their enrollment on State exchanges 
and the FFM despite, limited capital.
    Eleven, many CO-OPs were forced to pay risk adjustment to 
large existing carriers without consideration of the effect of 
early renewals or the CO-OP solvency requirements.
    Twelve, most recently, Congress and the administration 
reneged on risk-corridor commitment, paying less than 13 cents 
on the dollar for 2014. For some CO-OPs, this was the fatal 
    Americans will pay billions of dollars more in the years 
ahead, because these CO-OPs are closing. There are eleven CO-
OPs remaining in 13 States. In my written statement, I make 
recommendations for measures that should be taken to maximize 
these CO-OPs' chance of long-term survival. I hope we can 
discuss some of these options today.
    Thank you, and I look forward to your questions.
    Mr. Murphy. Thank you, Mr. Morrison.
    [The prepared statement of Mr. Morrison follows:]
    Mr. Murphy. Let me start off with some questions here and I 
recognize myself for 5 minutes.
    The CO-OPs and state regulators have cited many factors 
that contributed to the failure of the CO-OPs. Lower and hire 
expected enrollments, restrictions on investors, CMS blames 
risk adjustment formula, low risk corridor payments, lots of 
those. Let me start off, and Ms. McPeak, what are the top 
reasons that the CO-OP failed in your state?
    Ms. McPeak. Thank you for your question, Mr. Chairman.
    Our CO-OP had challenges from inception in that, as 
Commissioner Donelon mentioned, going into a state without 
provider networks caused the company to have to lease those. 
There were administrative costs that were due to the startup 
that any startup company would have. But then in 2014, we had 
disastrously low enrollment. Truly, at most, maybe 1,000 people 
signed up for the CO-OP plan. Mostly because the rates were 
somewhat higher than the FFM leader, a well establish a company 
in the State of Tennessee.
    So overcoming those challenges became extremely difficult, 
and that's why we saw significant rate increases for 2015 and 
beyond because of the enrollees across the market and 
Tennessee. We had higher than expected utilization, high claims 
costs, and insufficient premiums.
    Mr. Murphy. Did the other plan also lose money, then, too 
when they had lower costs for the premiums?
    Ms. McPeak. Yes. Actually, every plan on our federally 
facilitated marketplace on the exchange lost----
    Mr. Murphy. That's what I understand. Kind of nationwide, 
whether they would cost others in the bid to get enrollees, 
they had to underbid, and then we find out many of them 
realized the next year, they had to make up for the losses by 
charging more. And some survived and some didn't.
    Ms. McPeak. That's our experience in Tennessee. We didn't 
have any company accurately project the claims costs that were 
going to be coming from these enhanced benefit plans that were 
sold in the state and mandated under the Affordable Care Act. 
And so some of our larger established companies could withstand 
those companies and offer plans, but the CO-OPs just didn't 
have those resources available.
    Mr. Murphy. Dr. Beilenson and Mr. Morrison, what would you 
say are the top reasons that 12 out of the 23 CO-OPs failed? I 
think, Mr. Morrison just read off a list, but internal problems 
too, so not just external. But, Dr. Beilenson, do you have some 
insight into what are the top reasons why they failed?
    Dr. Beilenson. I don't really know specially what happened 
with the other groups, although the risk corridor was clearly 
an issue and as John said, the risk adjustment was a big issue 
as well, because they were surprising payments instead of 
receivables on risk adjustment and vice versa on risk corridor.
    Mr. Murphy. Mr. Morrison?
    Mr. Morrison. I don't mean to suggest that there were no 
mistakes made by management in CO-OPs, but if you look across 
the marketplace, what you see is that this was a very 
competitive marketplace, and insurance companies all priced 
aggressively. Everybody lost money. The difference was that CO-
OPs were new entrants. They did not have other business and 
surplus to be able to offset the losses, and their capital was 
continuously reduced and capped.
    So when Commissioner Donelon talks about learning to sail 
in a hurricane, that's especially apt in a situation where we 
were prohibited from building a big boat, and we were not only 
put into a hurricane, but in some cases given money to build a 
boat for 50 people----
    Mr. Murphy. As the rollout occurred, we heard this, whether 
it was the Web site or other aspects, too, there was just not a 
lot that was clearly thought out. It was rolled out, pushed out 
and maybe is more like it. I know with the Web enrollment and 
other things, which we found out wasn't ready, they knew wasn't 
ready. Would you say it wasn't ready when this started up? 
Should more foresight have gone into setting this up before the 
CO-OPs were thrown into the hurricane?
    Mr. Morrison. To my knowledge, there has never been the 
situation where 22 new health insurance companies entered the 
health insurance market across the country in the same year, 2 
years after they chartered their business. And so that was 
certainly a challenging situation. But it was much more 
challenging, and indeed, fatal for some, because they did not 
have adequate capital to deal with the risks that they were put 
    Mr. Murphy. Mr. Donelon, can you comment on that, too, how 
in your state that happened?
    Mr. Donelon. Absolutely. Thank you.
    Mr. Murphy. Microphone.
    Mr. Donelon. I'm sorry. Thank you, Mr. Chairman. And again, 
thank you for the invitation to be here today. My situation was 
even worse. We were one of the last CO-OPs to be approved 
before the termination of the program.
    And so the timeframe from licensing in May to selling in 
October was so constrained that building our company was quite 
a challenge. I was initially very encouraged, because the group 
that got approval from CMS for CO-OP loans and from us for 
licensing, was closely associated with our optional health plan 
back in New Orleans. A maybe 100-year-old hospital and clinic 
operation, internationally respected and had been in the health 
insurance business until the 1990s when they sold off their 
health plan to Humana. So with their credibility and their 
experience and expertise, I was hopeful and optimistic that 
we'd be successful. In hindsight, it was too much in too short 
a period of time, plus all the other problems that have been 
described here in testimony today.
    Mr. Murphy. Thank you.
    Ms. DeGette is recognized for 5 minutes.
    Ms. DeGette. Well, this is what I was talking about in my 
opening statement, because the ACA started in 2010, then these 
CO-OPs started a couple of years later, and then they had a 
couple of years to get going. So it wasn't like we were trying 
to stand up 22 companies all at the same time we were doing the 
enrollment on the Web site and all that. This was staggered. Is 
that right, Mr. Morrison? Yes or no will work. It wasn't all at 
the same time?
    Mr. Morrison. The awarding of the loans was staggered.
    Ms. DeGette. Right.
    Mr. Morrison. That's true.
    Ms. DeGette. So really, part of the problem we have--yes, 
there were problems with the capitalization from the beginning, 
but part of the big problem is that there was no support as it 
went along. Wouldn't that be a fair assessment?
    Mr. Morrison. Inadequate capital was the problem.
    Ms. DeGette. Right. That's what I want to talk about. The 
CO-OP program was initially conceived as a grant program, but 
then the startup funding ultimately ended up being in the form 
of loans; is that right?
    Mr. Morrison. Yes.
    Ms. DeGette. And then Congress cut the CO-OP loan funding 
program from $6 billion to $3.4 billion; is that right?
    Mr. Morrison. And then to $2.4.
    Ms. DeGette. Right. And then in the 2012 fiscal cliff deal, 
Congress--which by the way I voted against, Congress rescinded 
the remaining lending authority for CO-OPs, which essentially 
blocked the establishment of further CO-OPs even though 40 
additional groups had submitted applications; is that correct?
    Mr. Morrison. Very correct.
    Ms. DeGette. Now, irrespective of that, 23 CO-OPs got 
established. And the CO-OPs, like all the other insurers in the 
health marketplaces, took into account the Affordable Care Act 
risk stabilization programs, to help insurers mitigate the risk 
of insuring new populations who had potential losses, the law 
offered the 3Rs; the reinsurance, risk adjustment, and risk 
quarter programs, but those don't seem to have worked.
    So I wanted to ask you, Dr. Beilenson, the risk adjustment 
formula has been problematic, as we've been discussing. In 
fact, a lot of the small CO-OPs are writing checks to large 
insurance companies under the risk adjustment formula. Does 
that seem fair to you?
    Dr. Beilenson. It does not. And it was actually 21 of the 
23 that were writing checks.
    Ms. DeGette. Twenty-one of the 23 writing checks to big 
insurance companies.
    I also understand because of Congress' rule of budget 
neutrality, the risk-corridor program has failed to help the 
CO-OPs. This was the problem with the Colorado CO-OP failure, 
and we recently learned that the program lacked sufficient 
funds to reimburse for 2014 claims.
    Now, Mr. Morrison, the risk-corridor program is only 
reimbursing the CO-OP claims at 12.6 percent of what they're 
owed; is that correct?
    Mr. Morrison. That's correct.
    Ms. DeGette. And if Congress had not made this program 
budget neutral, would it be fair to say that the payments from 
the risk-corridor program would have likely made a difference 
in keeping a lot of these CO-OPs solvent?
    Mr. Morrison. I have read news accounts from a half a dozen 
or so CO-OPs before the most recent closures, that specifically 
attributed their closures to the government reneging on the 
risk-corridor payments.
    Ms. DeGette. Now, Dr. Beilenson and Mr. Morrison, what 
additional--let's start with you, Dr. Beilenson. What 
additional steps do you think that we can take to ensure the 
continued viability of the CO-OP?
    Dr. Beilenson. Well, I think as I was talking about before, 
revising the risk adjustment formula. And by the way, Medicare 
advantage's risk-adjustment formula was tweaked several times 
over a 10-year period.
    Ms. DeGette. Right.
    Dr. Beilenson. Secondly, pay the risk corridor that was 
required. And third and probably as important, is allow us to 
have the flexibility to go after private capital as any truly 
free market allows you to do.
    Ms. DeGette. Mr. Morrison?
    Mr. Morrison. I made recommendations in my written 
statement, but the ones that Peter has suggested are important. 
I just want to say about the risk corridor, that when you send 
these little boats into a hurricane to learn how to sail, it's 
critically important that there be a Federal backstop, because 
they don't have any other business to balance things against. 
And that's why the risk-corridor payments are very important.
    The other thing I want to say is that the risk-corridor 
payments and full payment of it was promised repeatedly to the 
CO-OPs. And so the CO-OPs and their actuaries took that into 
account from the very beginning with rating.
    Ms. DeGette. Now, you said we needed a Federal backstop for 
these. What's the public interest in having that Federal 
backstop for these small boats?
    Mr. Morrison. Because it takes a few years. We didn't know 
until 2016 what this risk pool looked like. That's why you had 
big rate increases this year. And so the Federal backstop 
allows room for aggressive competition. The CO-OPs come in and 
add to that competition. Now everybody lost money. $2.5 
billion, Wall Street Journal said 2 days ago from the McKinsey 
report on how much all the insurers had lost in those----
    Ms. DeGette. But the CO-OPs didn't have any way to recoup 
that. I'm out of time.
    Mr. Morrison. The CO-OPs were not outliers in pricing. The 
CO-OPs were pricing competitively. Everybody lost money, but 
the CO-OP needed the Federal back stop, because they did not 
have the corporate depth to do it.
    Ms. DeGette. Right. To do it. Thank you very much.
    Mr. Murphy. Thank you.
    Mrs. Blackburn is recognized for 5 minutes.
    Mrs. Blackburn. Thank you, Mr. Chairman.
    Thank you, all, for being here.
    Mr. Morrison, I think it's important to note that any 
business in the country can be you can successful if it had a 
Federal backstop and somebody that was going to be there, and 
people have grown quite weary of bailouts.
    Ms. McPeak, I want to come to you and talk about the CMS 
enhanced oversight plans. Was the Tennessee CO-OP under an 
enhanced oversight plan?
    Ms. McPeak. The first notification we had about the 
enhanced oversight plan for the Tennessee CO-OP was on 
September 29 when we received a letter that I think I've 
attached to my testimony. What's problematic about that day is 
that we were also in discussions with CMS to lift the 
enrollment freeze for 2016 without any knowledge that the 
enhanced oversight plan was going to be coming our way.
    Mrs. Blackburn. So you were getting conflicting information 
from CMS. The enhanced oversight plan for the Tennessee CO-OP 
included what?
    Ms. McPeak. There were five pages of issues in the letter 
that were identified that were areas that the CO-OP needed to 
focus on to create greater financial stability and create 
better viability for the plan going forward.
    Mrs. Blackburn. So they were giving you conflicting 
information; on one hand you had this, and on one hand the 
    Ms. McPeak. We were under the impression that CMS felt much 
more comfortable with the financial stability of the CO-OP, and 
that's why we were requested to lift the enrollment freeze by 
October 1, so that the programming could be effectuated to be 
available for open enrollment starting November 1. So we were 
surprised by the notification of the enhanced oversight plan.
    Mrs. Blackburn. OK. Now, let's talk about the solvency, 
because they converted the solvency loans, the startup loans 
and seven CO-OPs, so that the loans would artificially appear 
more financially secure. So did CMS approach you about 
converting those loans so that the CO-OP would appear to have 
more capital on its books?
    Ms. McPeak. CMS had indicated that they were in agreement 
with that approach, and so the actual request came from our CO-
OP itself, CHA----
    Mrs. Blackburn. To recharacterize----
    Ms. McPeak. Yes, ma'am.
    Mrs. Blackburn [continuing]. To recharacterize those loans.
    Did you think it made sense to convert those loans?
    Ms. McPeak. In my analysis, we decided that was not a 
prudent course of action, because, in fact, you are not adding 
any capital or revenue to the benefit of the company. You're 
creating the impression on the balance sheet that the debt 
could be subordinated and the company would appear more 
financially healthy than we felt that it was.
    Mrs. Blackburn. So it's kind of a smoke screen type 
    Ms. McPeak. Well, it certainly doesn't add any additional 
dollars to pay claims for the company.
    Mrs. Blackburn. Right. Let's see, is it true that you were 
instrumental in relegating the Tennessee CO-OP so that the 
premium prices were appropriate and that consumers were 
    Ms. McPeak. Yes. It's difficult to look at premium 
increases that have been approved in Tennessee. We took that 
very, very seriously. But as has been mentioned here today, we 
need companies to be able to make good on the claims, and the 
losses were more problematic for all companies. And so, yes, we 
definitely took an interest in making sure that our premiums 
were appropriate for the CHA in 2016.
    Mrs. Blackburn. Let me ask you this: Does the CO-OP have 
enough money to support consumers and pay its claims through 
the end of the year?
    Ms. McPeak. Because we took the decisive action of going 
into runoff, we do believe that the claims will be paid for all 
services rendered through the end of the year.
    Mrs. Blackburn. Through the end of the year.
    OK. And let me go back to Dr. Murphy's questions. You were 
talking about the enrollment and it didn't hit a thousand. What 
was the projected enrollment from the CO-OP, and what did CMS 
project that enrollment to be for 2016?
    Ms. McPeak. I would have to research the number, but I do 
believe that it was probably close to the 12- to 15,000 
enrollee range for the first year growing to something more 
along the 20,000 enrollee range for 2015.
    Mrs. Blackburn. So their projection was 12- to 15,000 
people, and what they actually got was about a thousand?
    Ms. McPeak. At its highest point.
    Mrs. Blackburn. So they were that far off their mark?
    Ms. McPeak. Yes, that's correct.
    Mrs. Blackburn. OK. Thank you very much for that.
    Mr. Chairman, I will yield back 30 seconds of my time.
    Mr. Murphy. There you go. Thank you.
    I now recognize Mr. Pallone, if he's ready it, for 5 
    Mr. Pallone. Let me get my questions out here, Mr. 
Chairman, if I can find them.
    Congress established CO-OPs to do a number of things that 
the private market had not done, and specifically, CO-OPs were 
created to compete with large for-profit insurance companies 
and hopefully, put downward pressure on premium prices and 
serve parts of the country that had fewer, no-good insurance 
    So I wanted to ask Mr. Morrison, remind us of what the 
landscaped looked like for the consumer prior to the arrival of 
CO-OPs, particularly in rural regions. Is it accurate to say 
that there was minimal competition and the policies were often 
prohibitively expensive?
    Mr. Morrison. All of those things are true, Ranking Member 
Pallone. In Montana the uninsured rate was about 20 percent. As 
I said, with the introduction of the CO-OP, the difference in 
average premiums between Montana and Wyoming went from Montana 
being 13 percent lower to being 40 percent lower. We now have 
an uninsured rate that's, I think, closer to 11 or 12 percent 
in our state. Many, many thousands of people are now covered, 
who didn't use to have insurance. Many, many thousands of 
people are now able to afford insurance, who were not able to 
afford insurance before. And with the CO-OP, consumers now have 
more choices.
    Mr. Pallone. All right. Let me read a passage from a 
January 2015 study by the Commonwealth Fund, regarding what the 
landscape looked like prior to the passage of the Affordable 
Care Act. And it says, and I quote, ``Most States' markets for 
individual health insurance were dominated by one or two 
carriers that competed primarily on how well they will they 
were table to screen and select people based on the risk of 
incurring medical claims. They had little incentive to compete 
by providing efficient services. Instead, their focus was on 
reducing their risk of covering people who might have a very 
high medical cost.''
    So, Mr. Morrison, that sounds look a rather bleak insurance 
landscape. Did insurance companies compete largely by denying 
    Mr. Morrison. There's no question that segmenting the 
market and cherry picking to provide health insurance to the 
healthy people and exclude or price up the people with health 
issues was what was going on before the ACA, and that was 
certainly happening in Montana. In my experience, as the chair 
of the health insurance committee of NAIC, I saw it across 
rural America.
    Mr. Pallone. And, Mr. Beilenson, would you agree with that, 
what he just said?
    Dr. Beilenson. I believe so, but it's not my area of 
    Mr. Pallone. OK. Let me go back to Mr. Morrison. Is it also 
accurate to say that prior to the passage of the ACA and the 
establishment of CO-OPs, many rural areas were underserved? And 
what did that mean for Montana residents?
    Mr. Morrison. What it meant for Montana residents was that 
if they were unable to get health insurance, in many cases, 
they were unable to get the health care that they needed. And 
access to health care has improved because access to health 
insurance has improved.
    The other thing that's happened is although BlueCross 
BlueShield, which is now owned by Health Care Service 
Corporation, one of the BlueCross corporate groups, still is 
the dominant carrier in the State of Montana. Their market 
share is somewhat smaller now, and consumers have the choice of 
the CO-OP, and so there's more competition.
    Mr. Pallone. Well, before the ACA, were there many rural 
residents being rejected for insurance or only being offered 
excessively costly policies?
    Mr. Morrison. We found, when I was insurance commissioner, 
that most of the uninsured were people who worked full time for 
a small business. And the greatest area of difficulty in 
delivering health coverage to people was through small 
businesses that wanted very much to provide health coverage to 
their employees, but they couldn't afford what the coverage 
cost in the market. That's why we undertook a program called 
Insure Montana, before the ACA, before the Massachusetts plan, 
that provided refundable tax credits to help those small 
businesses afford health insurance.
    Mr. Pallone. All right. Just one more question. Based on 
your experience, how have CO-OPs served the rural West and 
States such as Montana? Has it provided important competition 
and access to health care that previously didn't exist?
    Mr. Morrison. Well, CO-OPs have a great tradition in rural 
America. I think Senator Conrad, when he introduced the idea of 
a CO-OP at the time of the ACA's enactment, talked about those. 
But people in our part of the country and across the great 
expanse between the coasts in the United States have long used 
the CO-OP model for credit, for electricity, for agriculture, 
and for other kinds of needs where they want to spread risk and 
spread expense to be able to deliver the goods and services 
that they need.
    Mr. Pallone. All right. Well, I'm obviously concerned that 
if we don't shore up the remaining CO-OPs, we may again find 
ourselves lacking adequate competition and choices in rural 
areas. But thank you.
    And thank you, Mr. Chairman.
    Mr. Murphy. Thank you.
    Dr. Bucshon, you are recognized for 5 minutes.
    Mr. Bucshon. Thank you, Mr. Chairman.
    I just would like to say at the outset, I'm a strong 
believer in competition is the way to drive down healthcare 
costs. And I was a provider before I was a heart surgeon, so 
I'm also a believer in provider competition, including price 
transparency, quality transparency, and other measures that 
help consumers know what product they are getting and help to 
drive down healthcare costs, and I'm working towards those 
    And I think it's unfortunate that we are in the situation 
we are now with the CO-OPs and we need to figure out why and 
what we can do to prevent the others from going under.
    Mr. Morrison, CMS is--well let me see--yes. I'll say this. 
CMS has cited enhanced oversight plans is a measure to evaluate 
troubled CO-OPs. These plans are being critiqued as ineffective 
and burdensome to CO-OPs. This would be for Mr. Beilenson 
first. Has your CO-OP been placed under an enhanced oversight 
plan from CMS?
    Dr. Beilenson. Yes, as far as we know, most of the CO-OPs 
have been put----
    Mr. Bucshon. Most of them have.
    And what kind of requirements have they put upon you based 
on that?
    Dr. Beilenson. There are only two. One is enrollment 
getting to 30,000. We are at 26,500 today. Clearly, we'll hit 
that by the end of December. December is a big month. And, 
second, there's a resolve transition of our TPA, which we've 
already done. So we expect to come off of the corrective action 
    Mr. Bucshon. Great. And do you believe that these oversight 
plans can be effective?
    Dr. Beilenson. I think the oversight plans can be 
effective, yes.
    Mr. Bucshon. Mr. Morrison, you have some comments on any of 
    Mr. Morrison. I would just say that it has certainly been a 
challenge for CO-OPs to face, not only state regulation, but 
several levels of CMS regulation and congressional oversight 
investigation, which began before the CO-OPs ever opened their 
doors. And so there's no question that administrative resources 
in these CO-OPs have been distracted and diverted to comply 
with multiple levels of regulation that far exceed the 
regulation of other carriers.
    And at the same time, I understand that the Federal 
Government needs to look after its money.
    Mr. Bucshon. Understood.
    And just a personal kind of question, unrelated, really, to 
CO-OPs. I mean, creating more competition, and anyone can 
answer this. Is expanding the traditional healthcare private 
insurance market across the country rather than having, 
essentially, state-based or regionally based, is that a concept 
that would work to create more competition? I think the state 
regulators would probably want to commend on that. Mr. Donelon?
    Mr. Donelon. May I? Thank you very much, Congressman. And 
great question, doctor.
    And I would caution my Republican colleagues, who have made 
a strong push toward authorizing companies to sell health 
insurance on a national basis, which they can do already, but 
subject to the individual State's regulation.
    I would be concerned about a race to the bottom and the 
least regulation, similar to what happened with the AIG 
failure. And that concern is truly--I had a meeting with one of 
my delegation members before coming here this morning and 
passed on that advice and caution to him.
    I do want to point out one other thing when Congresswoman 
Blackburn and Commissioner McPeak were discussing, Tennessee is 
better served than Louisiana at this point. Their HMOs are 
protected by a guarantee fund safety net, unlike Louisiana, 
where we have tried that in the past but unsuccessfully.
    The Ranking Member DeGette, was talking about a Federal 
backstop. That has traditionally been done at the state level 
and should be done at the state level.
    Mr. Bucshon. OK.
    Mr. Donelon. In closing I would say, please, support state-
based regulation. It has served all forms of insurance 
extremely well for over 100 years. When I was NAIC president 3 
years ago and was asked to come the Oval Office and meet with 
the President, he strongly expressed his continued support for 
regulation of insurance at the state level.
    Mr. Bucshon. OK. Fair enough. I expected that you and Ms. 
McPeak would probably have a similar comment. So I would go to 
the others.
    Any other conceptual thoughts on that? Because the whole 
idea is to create competition for consumers to have more 
choice, to know what the product they're getting, and to help 
the consumers drive down the costs of health care.
    Mr. Morrison, then we'll----
    Mr. Morrison. I'm a former commissioner, too, and I 
testified in 2005 in the Senate Small Business Committee about 
the AHP bill, and I opposed it for the same reasons that 
Commissioner Donelon articulated.
    Mr. Bucshon. Ms. McPeak.
    Ms. McPeak. The only point that I would want to add to your 
question, that I think we would have more interest in companies 
selling across state lines if we had uniform essential health 
benefit plan designs. Because each state has their own 
essential health benefits, it's very difficult for a company to 
sell across state lines and program their systems to pay for 
different benefits and different benefit levels in Kentucky as 
opposed to Tennessee as opposed to Mississippi or Georgia.
    Mr. Bucshon. Yes, and whose state laws apply, right? If you 
live in California and have a plan from a company owned in New 
York, which state's laws would apply? I know there's some 
challenges. And my time is up.
    Ms. McPeak. OK.
    Mr. Bucshon. So, I appreciate all your comments.
    I yield back.
    Mr. Murphy. Thank you.
    Ms. Castor, you are recognized for 5 minutes.
    Ms. Castor. Thank you, all, very much for being here today.
    Under the Affordable Care Act, Congress wanted to foster 
more competition among insurance providers to benefit 
consumers. This was one of the primary reasons behind the 
formation of the CO-OPs. And to some extent, as we've heard 
here this morning, they have achieved their goal, somewhat.
    However, the CO-OPs have faced headwinds. And I would like 
to understand from our witnesses how CO-OPs can continue to 
meet the original goals of providing the public with more 
insurance choices and benefits achieved through greater 
    Mr. Morrison, for those who may not closely follow 
healthcare economics, why are CO-OPs an important ingredient in 
today's insurance market?
    Mr. Morrison. The insurance markets were lacking 
competition to begin with, and now we see in the news that 
there is increasing mergers of the largest health insurance 
companies in the country. There's mergers of the largest 
hospitals in the country. What's happening is consolidation, 
and the need for competition has never been more greater than 
it is today.
    CO-OPs can come into the marketplace and have a 
fundamentally different kind of motive. Their motive is not to 
make as much money as they can. Their motive is to deliver 
quality health care at an affordable price, and that guides 
corporate decisions in a different kind of way. And that kind 
of competitive influence can be very positive in the 
    And in short, to answer your question, what they need in 
order to succeed in the future, eventually, they will stand on 
their own, but they need adequate capital until they can get 
their sea legs in this new marketplace.
    Ms. Castor. OK. Mr. Beilenson, similar question for the lay 
person, how do CO-OPs foster competition? How can they keep 
premium prices in check?
    Dr. Beilenson. Well, I think as a new competitor on the 
market and additional competitor, we as, Mr. Donelon, state, 
have a big insurance company that's 75 percent of the 
marketplace, and so adding a new competitor is very important.
    And I want to point out a couple of things about a CO-OP. 
First of all, we are member governed. I actually sort of pooh-
poohed that when we started the company, but it really makes a 
difference having members enrolled in your insurance company as 
the board of directors. We've gotten all sorts of great ideas, 
and it's very consumer-driven, consumer friendly, as the CO-OP 
program was meant to be.
    Secondly, it allows for innovation. We're nimble; we're 
quick. We're like a, sort of like--a Titanic I shouldn't use. 
Sort of like the giganto ship, Lake Erie or whatever. Instead, 
we're sort of a nimble PT boat, if you will, for Mr. Kennedy 
over there. And we can do innovative things like our diabetic 
program, where we get rid of all co-pays, co-insurance, 
deductibles for proven practices to keep diabetics under 
control so we get rid of financial barriers to have them 
staying healthy. That's sort of the sweet spot of healthcare 
    Ms. Castor. How many Americans are enrolled in CO-OPs 
today? Do you know?
    Dr. Beilenson. Depends on how many are left. I'm not sure, 
    Ms. Castor. Does anyone know?
    Dr. Beilenson. 400,000 something in the remaining 11.
    Ms. Castor. In March 25th, 2015, press release from the 
National Alliance of State Health CO-OPs, said for the second 
year in a row, average premium rates in the states with CO-OPs 
are lower than those without.
    Mr. Beilenson, can you explain how, in reality, what has 
actually happened? How have the CO-OPs affected the premium 
prices and plan choices in those states where they are still 
    Dr. Beilenson. Well, predominantly, it was actually being a 
new competitor in a generally staunchly over the market--for 
example, in Maryland, we were the first new commercial insurer 
in 25 years, and that was the case in many different states.
    Ms. Castor. And that same release cites another analysis 
from 2014 that showed that CO-OP states have premiums that are 
8 to 9 percent lower than in non CO-OP states. Is that 
accurate? Were CO-OPs able to drive down the premium rates in 
    Mr. Morrison. The delta between the CO-OP states and the 
non CO-OP states in 2014 was, as you said, about 8 percent, a 
little more than that. And apparently, in 2015, it was more 
like 13 percent. We believe that CO-OPs played a significant 
role in that, and, frankly, there have been other insurance 
executives who have commented in the media that they thought 
that the CO-OPs were responsible for the rates being lower in 
those states. But as the question requires further study 
because, obviously, there are other factors at work.
    Ms. Castor. And there are other trends right now, as Mr. 
Beilenson mentioned. The health insurance industry is facing a 
wave of consolidation such as Aetna and Anthem are considering 
merger and purchasing their smaller rivals.
    Mr. Morrison, if additional consolidation between large 
insurance companies occurs, what will this do to prices? Will 
we expect higher premiums as a result?
    Mr. Morrison. Generally, competition drives lower prices. 
And so if there's less competition, there's higher prices. And 
so we think that's one of the reasons that the CO-OPs were 
created, and we take that mission pretty seriously--the CO-OPs 
I should say do.
    Ms. Castor. Thank you. We have work to do on this for 
consumers in the country. Thank you very much.
    Mr. Morrison. Thank you.
    Mr. Donelon. Mr. Chairman, may I be excused? I have a 
flight that leaves in 38 minutes.
    Mr. Murphy. Good luck getting to the airport. You are 
    Mr. Collins is recognized for 5 minutes.
    Mr. Collins. Thank you, Mr. Chairman. And thank the 
witnesses for coming in today. I'm a private-sector guy that 
understands how you're supposed to make money in business, how 
you capitalize companies, and how you either fail or succeed 
based on your pricing and your product, and what you've 
delivered to your customers. And basically, if you make money, 
you succeed; and if you lose money, you don't.
    So, we're here today talking about CO-OPs in particular. 
And I'm from New York, where the New York CO-OP and its failure 
cost the American taxpayers over $250 million. Well, somebody 
asked me if I'd be surprised we're here today. Well, no, I 
predicted this over 2 years ago. I remember sitting down with 
some insurance executives, health insurance people, in early 
2013 and asked them how they were going to be pricing their 
products for ObamaCare and for the enhanced benefits. And what 
basically came out of those meetings is they were going to 
underprice their products because of the risk corridors, and 
they were confident they would get the money back.
    Because I said, well, what are you presuming for the number 
of healthy subscribers under age 30? Well, a third of our 
subscribers will be young and healthy. And I said, what are you 
guys smoking? That's not gonna happen. And what's going to 
happen when it doesn't? Well, we are going to lose money, then 
the government is going to make it up to us. This was set up 
for failure from day one. The insurance companies knew it was 
going to fail. They released a product that was underpriced. 
They could not make money.
    So, Mr. Morrison, when you talk about it being not 
capitalized properly, would you agree with me if the CO-OPs 
made money, we wouldn't be having this discussion? You don't 
need more capital if you start with X and you make money. Isn't 
that just fundamental common sense?
    Mr. Morrison. I would agree with that.
    Mr. Collins. So----
    Mr. Morrison. All the companies lost money.
    Mr. Collins. So we are here because ObamaCare was set up 
for failure. It was set up to encourage low premiums, to 
deceive the American public.
    You know the saying, you can put lipstick on a pig, but 
it's still a pig. That's what we've got here. Everyone knew 
these products were underpriced and they were going to make it 
up on the backs of the taxpayers, and that's why we're here 
today. This problem here is a product that was underpriced, 
knowingly underpriced, meant you lost money, and now the 
complaint is we cut the money from $2.4--from $6 to $2.4 
billion, but the $6 billion was based on 50 CO-OPs. The 23 got 
$2.4 billion. They got every dollar they were supposed to get. 
Had we not cut from $6 to $2.4, there would be 50 CO-OPs.
    So I kind of have to just categorically disregard your 
comment that had we thrown $6 billion, but I think you're 
suggesting throwing $6 billion at 23 CO-OPs would have shored 
them up. But that was never the intention. The $6 billion was 
for 50 CO-OPs. The 23 were not harmed in any way. They failed 
because the product was underpriced. It was knowingly 
    ObamaCare was meant to deceive the public, and all I can 
say is, as now we're a couple of years in, the deception is 
obvious. And I don't know what the polls would say, and I'm not 
a guy to poll, but I think ObamaCare now would be probably in 
the 20 percent range.
    And now we've got these problems. New York, 150,000 members 
on the New York plan lose their insurance in 2 weeks. And you 
know what we're doing, we're forcing the private companies to 
take those policyholders for 30 days who have all hit their 
deductibles. So the BlueCross BlueShield, Independent Health, 
they are going to have to take these 150,000 people for 30 
days, eat those losses, and then have those folks set up a new 
plan. This is ObamaCare at its worst. It's not surprising to 
me. I saw this coming 3 years ago, only because I have a 
certain level of common sense and know in the private sector, 
if you underprice your product, there will be a price to pay.
    And this product was deliberately underpriced from day one. 
And then when people say, woe is me, the risk corridor didn't 
give me as much money as I expected, that's because you 
expected to lose a lot of money and thought the taxpayers 
should shore that up, and it didn't happen. So I can't say I 
feel sorry for the American taxpayers who are bearing this 
financial burden who were deceived from day one, and it's all 
coming home to roost. And we see it every day with the price 
increases and policies, the turmoil within the American public 
trying to find doctors day in and day out.
    So, again, private sector, you make money, you do fine. You 
lose money, you don't do fine. Not a surprise we're not doing 
fine here. The product was never priced correctly.
    Mr. Murphy. Mr. Collins----
    Mr. Collins. And with that, I yield back.
    Mr. Murphy. I was asking, can you give an answer with 
regard to would you have priced it differently if there were 
not risk corridors from the onset? Would you price it a higher? 
Yes or no? Just in response to what he said.
    Dr. Beilenson. No, we actually priced conservatively, and 
we were actually making a profit the last 3 months.
    Mr. Murphy. Ms. McPeak, was that a backstop that you saw 
that would cover those losses and it didn't work?
    Ms. McPeak. I don't know that I would characterize as a 
backstop. But certainly, the incentive to appropriately price 
was eliminated when any excess profit of needed to be paid back 
to the other insurers. So unless the entire market priced 
appropriately, you were going to be pricing yourself out of the 
market not having the enrollment.
    Mr. Murphy. And that's what you're saying. Got it. Thank 
    OK. Mr. Yarmuth, 5 minutes.
    Mr. Yarmuth. Thank you, very much, Mr. Chairman.
    I thank the witnesses. I actually think this has been a 
very constructive hearing, and the dialogue has been good. It 
seems to me that what we've heard today is that there are a lot 
of different experiences with CO-OPs and a lot of different 
reasons some have had problems.
    My CO-OP in Kentucky did not have an enrollment problem. As 
a matter of fact, the initial projection was about 30,000 
enrollees. It peaked at 57,000 and was insuring 51,000 when it 
announced that because of the risk-corridor deductions it 
cannot sustain itself. But, in fact, it had gone from losing 
$50 million in its first year to losing $4 million in 2015 and 
was on track to make a profit in 2016. So not every experience 
has been right.
    And I think looking at the various factors that could 
affect this, Commissioner McPeak, Tennessee didn't expand 
    Ms. McPeak. That's right.
    Mr. Yarmuth. And this is not a partisan statement, but 
Tennessee did not have an administration that supported, 
necessarily, the Affordable Care Act. So as opposed to 
Kentucky's experience, where you had an administration that was 
very much supportive in marketing it and running a PR campaign 
and alerting the population to the options that were available 
to them, that experience was going to be different than 
Tennessee's or Louisiana's, where, it seems to me, you had an 
enrollment problem first and foremost.
    Would that be a fair statement that all of these factors 
would affect how the CO-OPs operated and whether they had a 
better or worse chance of succeeding?
    Ms. McPeak. Certainly. And I will say statewide, we had a 
very positive enrollment through the federally facilitated 
marketplace. So we did not expand Medicaid. But the skewed 
enrollment of less than 1,000 people for the CO-OP made it 
extremely difficult to survive.
    Mr. Yarmuth. Exactly. And, obviously, we have different 
health conditions as well. Montana probably has a lot healthier 
population than Kentucky and Tennessee. I know Kentucky, we 
have serious challenges in that regard.
    But one of the things that impresses me, and this relates 
to just Mr. Collins' statements, is that while our CO-OP is 
going out of business, we have three new private insurers who 
have joined our exchange. We now have seven insurers who are 
offering insurance and not relying on risk corridors. So they 
have seen opportunity in Kentucky and not a disastrous 
    And so our consumers are going to, as a result partially of 
the CO-OPs competition and their activities, we're going to see 
enhanced competition in the private market through our 
exchange. So it could have an ancillary benefit as well. Would 
that not be true, Mr. Morrison?
    Mr. Morrison. That's very encouraging, and I think that the 
benefits of introducing a CO-OP into the dynamics of the 
marketplace has lots of ripple effects, and that was one that I 
wasn't even aware of. So glad to know about that.
    Mr. Yarmuth. And one other thing. Senator just asked, we 
talked about the question of how can you offer insurance 
policies of 20 percent less than commercial insurance company 
can? Well, if there's no profit margin involved, so you can. I 
don't know whether it would be a 20 percent different as to the 
profit versus a nonprofit CO-OP, but there's some factor there 
that would allow a CO-OP to offer pricing that even apples to 
apples would be below what a commercial for-profit insurance 
company could offer. Would that be correct?
    Mr. Morrison. Yes, that's true. But I want to make the 
point that the CO-OPs generally were not outliers on the low 
end in price. And McKinsey did a report in late 2013 about 
those initial prices, and CO-OPs were toward the bottom. They 
were within 10 percent of the lowest 42 percent of the time. 
But the point is, when these companies set their prices and 
file them with the commissioner, they don't know what the other 
companies are doing. And so the mere fact that the CO-OPs were 
there caused the other companies to price more aggressively.
    Mr. Yarmuth. So what I'm taking away from this is that 
there are lot of different reasons the CO-OPs have either 
succeeded or not succeeded, and I think this is a very useful 
hearing to analyze that, not necessarily to ascribe blame, but 
to take about the factors that are involved. I think what I 
would conclude is there was not a fundamental flaw in the 
Affordable Care Act that caused any of those CO-OPs to fail. 
They were different factors, just as there is in any business 
    With that, Mr. Chairman, I yield back.
    And thanks again to the witnesses.
    Mr. Collins [presiding]. I thank the gentleman for 
questions and certainly thank all the witnesses. This will 
conclude our second panel, and you can rush to the airport if 
you've got any tight flights. I want to thank the members that 
did stay. It is a flyout day. We had so many members that had 
flights to connect. We had two vote series, so to some extent, 
I apologize for the attendance.
    Thank the members that did stay, and your testimony, which 
is on the record, is very helpful. Thank you very much
    So we are now going to bring on our third panel, which is 
our representative from CMS and our representative from OIG.
    We will begin our third panel here. I want to thank the 
witnesses, Dr. Cohen and Ms. Jarmon, for joining us today. 
Before we get going on this committee, we want to make sure the 
witnesses are aware that we are holding an investigating 
hearing, and when doing so, we have the practice of taking 
testimony under oath. Do you have any objection to testifying 
under oath?
    The chair then advises you that under the rules of the 
House and the rules of the committee, you are entitled to be 
advised by counsel. Do you desire to be advised by counsel 
during your testimony today?
    No. In that case, if you would, please rise, raise your 
right hand. I will swear you in.
    [Witnesses sworn.]
    Mr. Collins. Thank you very much. Be seated. You are now 
under oath and subject to the penalties set forth in title 18, 
section 1001, of the United States Code.
    We now recognize you to give a 5-minute summary of your 
written testimony beginning with Dr. Cohen, chief of staff for 
    Dr. Cohen?


                    STATEMENT OF MANDY COHEN

    Dr. Cohen. Thank you. Good afternoon, and thank you for 
inviting me here. Chairman Murphy, who I know has gone, but Mr. 
Collins, Ranking Member DeGette, and other members of the 
subcommittee. We appreciate the opportunity to talk about the 
CO-OP program. CMS takes its commitment to both the CO-OP 
consumers and taxpayers very seriously. Our priority is to make 
sure that consumers have access to quality affordable coverage.
    In the years since the passage of the Affordable Care Act, 
we have seen an increase in competition and more choices for 
consumers. In today's dynamic market, consumers can choose from 
on average 50 plans and five issuers for 2016 coverage. Nearly 
9 out of 10 returning consumers will have three or more issuers 
to choose from, which research shows has typically intensified 
price competition in the market. New entrance to any market, 
especially the insurance market, can face pressures 
particularly in early stages.
    CO-OPs entered the insurance market with a number of 
challenges including building a prior network; no previous 
claims experience on which to base pricing; and competition 
from larger, more experienced issuers; as well as the 
uncertainty that a company is in the early years of a new 
market. As with any new business venture, some CO-OPs have 
succeeded while others have encountered more challenges. There 
have been successful CO-OPs which have provided consumers in 
their states an additional choice of health insurance and have 
improved competition. There have also been CO-OPs that for a 
number of reasons have faced technical, operational, or 
financial difficulties. In addition, Congress has made a 
substantial rescission to the initial $6 billion for funding 
for CO-OPs, impacting program operations and available funding. 
In the face of multiple pressures, it is not surprising that 
some new entrants have struggled to succeed.
    CMS plays a dual role with the CO-OP program, providing 
both oversight and support. CMS works to give CO-OPs tools to 
succeed, including sharing best practices amongst CO-OPs, and 
looking for additional regulatory flexibilities. At the request 
of CO-OPs, CMS has approved conversion of surplus notes, and we 
have approved the infusion of outside capital consistent with 
legal and regulatory framework of the CO-OP program. CMS also 
plays an oversight role. CMS, along with state departments of 
insurance, which serve as the primary regulator of insurance in 
a state, work to ensure that the CO-OPs are well run and 
financially sound. CMS has implemented the CO-OP program as 
required by statute and with the funds available, evaluating 
applications, monitoring financial performance, and conducting 
oversight. All CO-OPs are subject to standardized, ongoing 
oversight activities, including calls to monitor goals and 
challenges, periodic onsite visits, performance and financial 
auditing, reporting obligations, and a host of additional 
measures employed as needed on a case-specific basis, such as 
the evaluation of CO-OP sustainability. CMS increased the data 
and financial reporting requirements for CO-OPs required for 
them to provide quarterly statements saying that they are in 
compliance with state licensure requirements. If a CO-OP has 
experienced compliance issues with state regulators, the CO-OP 
was required to describe the steps being taken to resolve 
    Financial data collection has helped CMS to identify CO-OPs 
with financial issues and give CMS the opportunity to work with 
state insurance regulators to help correct issues that are 
identified. As part of our oversight efforts, CMS has put some 
CO-OPs on enhanced oversight schedules or corrective action 
plans. Despite this support and oversight, some new entrants to 
the insurance market have struggled to succeed.
    When states and CMS determine that a CO-OP should wind 
down, our first responsibility is to make sure current 
policyholders are able to retain coverage to the end of the 
year. CMS' priority is to make sure that customers have access 
to quality, affordable coverage. We're working with local 
officials to do everything possible to make sure consumers stay 
covered and retain access to high quality choices of issuers. 
Like other consumers, CO-OP enrollees are able to shop for 2016 
coverage on the marketplace right now.
    In 2016, nearly 8 in 10 returning marketplace consumers 
will be able to buy a plan with premiums less than $100 a month 
after tax credits. We continue to encourage those consumers 
already enrolled in the marketplace coverage to come back to 
the marketplace, update their information, compare their 
options, and make sure they're enrolled in the plan that best 
meets their family's needs. Since the enactment of the 
Affordable Care Act, CMS has worked to increase access to 
quality, affordable coverage through the marketplace while 
being responsible stewards of taxpayer dollars. The CO-OP 
program was designed to give consumers more choice, promote 
competition, and improve quality in the insurance market and 
has done so in a number of states. CMS will closely work with 
the CO-OPs and state departments of insurance to provide the 
best outcomes for consumers. We appreciate the subcommittee's 
interest and be happy to answer more questions.
    [The prepared statement of Ms. Cohen follows:]
    Mr. Collins. Thank you, Dr. Cohen.
    Now we'll hear from Ms. Jarmon.


    Ms. Jarmon. Good afternoon, Mr. Collins, Ranking Member 
DeGette, and other distinguished members of the committee. I am 
Gloria Jarmon, Deputy Inspector General for Audit Services, 
Department of Health and Human Services, Office of Inspector 
General. Thank you for the opportunity to testify today about 
OIG's work as it relates to CMS' oversight of financial loans 
and the financial solvency of the Consumer Operatedand Oriented 
    As part of our strategic plan to oversee implementation of 
ACA programs, OIG has performed three reviews related to CO-
OPs. My testimony today focuses on OIG's most recent report 
issued in July 2015 that reviewed whether enrollment and 
profitability met the CO-OPs projections on their initial loan 
applications. Understanding that CO-OPs face numerous 
challenges, we conducted this audit work to assess the 
financial and operational status of the CO-OPs once they had 
experience operating as a health insurer. We reviewed the 
status of the 23 CO-OPs as of December 31, 2014. We found that 
most CO-OPs had lower than expected enrollment numbers and 
significant net losses and that these financial concerns might 
limit some CO-OPs' ability to repay loans.
    Based on these findings, OIG issued four recommendations to 
CMS to improve financial oversight and solvency of the CO-OPs. 
These recommendations include: One, continue to place 
underperforming CO-OPs on enhanced oversight or corrective 
action plans; two, providing guidance or establishing criteria 
to determine when a CO-OP is no longer viable or sustainable; 
three, working closely with state insurance regulators to 
identify and correct underperforming CO-OPs; and, four, 
pursuing available remedies for recovery of funds from 
terminated CO-OPs. I will briefly discuss each of these 
recommendations in more detail.
    With respect to enhanced oversight, with the 2011 funding 
opportunity announcement and loan agreements, CMS has the 
ability to place underperforming CO-OPs on enhanced oversight 
plans. This vehicle provides authority to CMS to conduct 
thorough reviews of the CO-OPs' operations and financial 
    With respect to guidance, to ensure that CMS can 
appropriately identify CO-OPs that pose a high risk of failure, 
CMS should establish criteria to assess whether a CO-OP is 
viable or sustainable. With respect to state insurance 
regulators, CMS should enhance its oversight by working closely 
with State insurance regulators who are the primary regulatory 
entities that oversee CO-OPs as health insurance issuers. By 
doing this, CMS can obtain timely insights as to the CO-OP's 
performance and can work with CO-OPs to address and fix ongoing 
financial and operational problems earlier.
    Finally, if CMS no longer believes that a CO-OP is viable 
and sustainable, CMS should then pursue all available remedies 
for recovery of funds from CO-OPs. This would include the 
option to terminate loan agreements which would require the CO-
OP to forfeit all unused loan funds. This may allow CMS to 
recover some portion of the loan with the recognition that a 
CO-OP must resolve any outstanding debts or other claim 
obligations before paying the loan funds to CMS.
    In closing, we appreciate the subcommittee's interest in 
this important issue and continue to urge CMS to fully address 
OIG's recommendations related to improving oversight and 
financial solvency within the CO-OP program. OIG is committed 
to providing continued oversight of this program. Our ongoing 
work will assess whether CO-OPs were in compliance with Federal 
regulations and program requirements in managing Federal funds. 
In addition, OIG will reassess the CO-OPs 2015 financial status 
and identify CMS actions to oversee the loan program and 
monitoring underperforming CO-OPs. We anticipate issuing these 
reports in 2016, and we look forward to sharing those results 
with the committee at that time.
    This concludes my testimony. I will be happy to answer any 
questions. Thank you.
    [The prepared statement of Ms. Jarmon follows:]
    Mr. Collins. Thank you.
    I'll now recognize myself for 5 minutes, and I guess, Ms. 
Cohen, I'm just going to start and accept you at face value 
when you say CMS does consider themselves responsible stewards 
of taxpayer dollars. Today's hearing kind of begs the question 
whether that's totally accurate or not. Before I get into a 
couple of other questions, there have been comments made that 
would somehow try to correlate states that did not increase, 
expand Medicaid to some of these failures on CO-OPs, and I 
guess I would just point out for the record, New York State 
absolutely aggressively expanded Medicaid, actively promoted 
ObamaCare, probably more so than most any other state in the 
country, and the hearing today is recognizing the failure of a 
CO-OP that was oversubscribed--not undersubscribed--and cost 
the taxpayers over $250 million, which is almost 25 percent. So 
I don't know that some of these other comments would accurately 
portray the problem. I'll just go back to the products were 
underpriced from day one, and if you underprice your product, 
there will be a price to pay.
    So, Ms. Cohen, my worry now about New York and the loss of 
$250 million plus--Dr. Cohen, sorry--that it appeared that the 
New York CO-OP was in distress right from the beginning, lost 
over $35 million in the first year. I'm assuming you're aware 
that there was an additional loan of $91 million after they 
lost $35 million, so could you speak to what that rationale was 
that the taxpayers now lost another $91 million?
    Dr. Cohen. Sure. As we looked at the CO-OP program over the 
first few years, I think you have heard a lot about the early 
years having uncertainty. We're still in that. We're only in 
the second year of the program in terms of folks facing a 
number of challenges. When any CO-OP approached us with any 
additional requests for funds, we evaluated that on an 
individual basis as we did even the startup of any one of these 
companies. We looked at their financial health at that time, 
their projection of where they were going to go, how they 
intended to get to a place of good standing, again, to say that 
we want to be good stewards of taxpayer dollars and want to be 
sure that if we are going to be further investing in a company, 
that we are going to be seeing those dollars. So we can only 
look at the information we have on hand at that time. At that 
time, our independent expert panel who reviews these felt that 
a further investment in New York, in the New York CO-OP, was 
the right decision. And we moved forward with that investment. 
We continue oversight and information, and facts on the ground 
change, and we make different decisions as we move forward.
    Mr. Collins. With that said, I would appreciate if you 
could provide the committee with the analysis that you indicate 
did occur that after losing $35 million in their first year, I 
have to presume that analysis would include such things as the 
difference in the, I would hope, much higher rates charged in 
2015? Let me just start with that. They lost a lot of money in 
2014, based on rates that weren't adequate to cover losses. 
Were the rates substantially increased the next year, like 20 
percent or more?
    Dr. Cohen. It's important to remember that CMS shares in 
partnership the oversight responsibility here, but the 
responsibility for rate setting is done at the State level in 
the New York Department of Insurance, or DFS, in New York is 
the one primarily responsible for saying, are these rates 
adequate to cover the expenses?
    Mr. Collins. And was that done?
    Dr. Cohen. So they do their own rate review in New York. As 
you know, New York also runs its own exchange. So from our 
perspective at CMS, we do do oversight in terms of the 
financial stability of the program, according actually with how 
OIG recommended our additional enhanced oversight. But the 
rates themselves are set by New York, by the company, and then 
approved by the State Department of Insurance.
    Mr. Collins. So do you know much the rates were increased 
for 2015?
    Dr. Cohen. I don't have off the top of my head, but I know 
that they did request and were granted a rate increase for 
    Mr. Collins. I think it's just important to note again that 
it's a little concerning that CMS is making a $91 million loan 
based on what sounds like an analysis done by the New York 
State Department of Insurance, which ultimately was proven, by 
the fact that they're now shutting down, to have been totally 
bogus. So if you could share that information back with the 
committee, I think we could learn something from that.
    Dr. Cohen. I would be happy to provide that.
    Mr. Collins. I certainly appreciate that.
    And Ms. Jarmon, my office will be sending you a letter to 
ask for even a more thorough investigation of what happened in 
New York State and what we may learn from the failures of the 
New York state CO-OP, and again thank you for that.
    And, with that, I would recognize Ranking Member DeGette 
for 5 minutes.
    Mr. DeGette. Thank you so much, Mr. Chairman.
    I want to thank our witnesses for coming today, and I want 
to start with the risk-mitigation mechanisms in the law, which 
we commonly refer to as the three Rs, as I mentioned earlier. 
Those were designed to promote competition and ensure stability 
in the insurance marketplace. Is that correct, Dr. Cohen?
    Dr. Cohen. That's right.
    Mr. DeGette. And yet some would argue that those programs 
are what have led to the insolvency of the CO-OPs. I don't 
really understand how programs that were designed to help the 
CO-OPs could wind up hurting them. Let me go into that a little 
bit. The risk adjustment program is designed to transfer funds 
from lower risk programs to higher risk programs. Is that 
correct, Dr. Cohen?
    Dr. Cohen. The risk adjustment program is designed to again 
make sure that companies are taking care of the people who 
really need the care, those that are sick, and making sure 
they're not just cherry picking the healthy folks but really 
offering coverage to anyone who walks through the door.
    Mr. DeGette. What that does then is it transfers money then 
from lower risk plans, where there aren't so many severely sick 
people, to higher risk plans. Right?
    Dr. Cohen. That's right.
    Mr. DeGette. Given that, how is it that the CO-OPs wound up 
owing money to big insurance companies through the risk 
adjustment program?
    Dr. Cohen. Right. So the risk adjustment program is not 
based on size. It's agnostic to size, but as you point out, 
what it's really looking at the math formulas focused on the 
total risk and the health of the population.
    Mr. DeGette. So there was nothing in the statute to target 
not for profit or profit?
    Dr. Cohen. No. It's agnostic as to----
    Mr. DeGette. Was that the intention of the program. Do you 
    Mr. DeGette. It was intended to be a risk program for all 
of the insurers that participated in the marketplace.
    Mr. DeGette. Now, the risk corridor program also ended up 
not coming through to the CO-OPs as we learned very painfully 
in Colorado in the last couple of weeks, and some State 
insurance commissioners, including mine, made management 
decisions based on the CO-OP's inability to deal with losses, 
so I want to ask you some questions about that. The 2015 CR/
Omnibus legislation made it so insurer payments into the risk 
corridor program are the only source of funding to reimburse 
claims, effectively making the program budget neutral. Is that 
correct, Dr. Cohen?
    Dr. Cohen. It is a mathematical formula that decides the 
proration rates or the ins and outs of that program, but yes, 
you're correct.
    Mr. DeGette. I'm correct. Thank you. Now, in July of 2015, 
couple months ago, CMS reiterated to state insurance 
commissioners that they, ``anticipate that risk corridor 
corrections will be sufficient to pay for all risk corridor 
payments.'' Is that correct, Dr. Cohen?
    Dr. Cohen. That's correct.
    Mr. DeGette. And yet just a few weeks ago, CMS revealed it 
would only be able to pay 13 percent of the reimbursements that 
the CO-OPs are owed. Is that correct?
    Dr. Cohen. That's right.
    Mr. DeGette. So why is that?
    Dr. Cohen. As I mentioned, that formula is based on 
information that we got from the issuers themselves. That was 
not information that CMS had prior to the month of September. 
Originally, that data came in, as you may know, over the course 
of the month of July, and it was actually so messy we needed 
issuers to resubmit it.
    Mr. DeGette. But see, here's the problem. In July, you're 
saying it's going to be sufficient to cover all risk corridor 
payments, and then, in October, you're saying, oh, it's only 13 
percent. So irrespective of whether you had the data, you had 
CO-OPs like the one in my State with 83,000 people in it, who 
were relying on that. I guess it was bad information.
    Dr. Cohen. I think it's important to remember that the risk 
corridor is one of three, ours as you mention, and in the 
reinsurance program, we actually paid 25 percent more than we 
thought we would be able to pay. Again----
    Mr. DeGette. But, again, if you have a CO-OP that's on the 
edge, that didn't solve that problem. I'm running out of time. 
I just want to ask you a couple of questions. Do you think that 
you can do anything to give more certainty to this program 
without statutory changes? Yes or no?
    Dr. Cohen. Could we give more certainty to the program?
    Mr. DeGette. Can you make changes that would give more 
certainty to these CO-OPs so they could stay in business 
without statutory changes?
    Dr. Cohen. I think we are always looking for opportunities.
    Mr. DeGette. If you can supplement your responses by giving 
us the ideas. Do you believe that there are statutory changes 
that Congress could pass to give more certainty?
    Dr. Cohen. I think that there are opportunities, yes, for--
    Ms. DeGette. And that would be helpful if you would 
supplement that too.
    Thank you very much, Mr. Chairman.
    Mr. Collins. Yes. I thank the ranking member for her 
    We'll now turn to Dr. Bucshon for 5 minutes.
    Mr. Bucshon. Thank you, Mr. Chairman.
    And I thank the witnesses for being here.
    So, Dr. Cohen, who ultimately made the decision to give out 
$91 million to New York, as was said; $66 million to Minutemen 
Health; $65 million to Kentucky Health CO-OP? I can go on, but 
three of--there's a few more, but three of the six that I have 
listed here failed. So I want to know the person that made the 
decision to give them the money.
    Ms. Cohen. So we had a very rigorous process with an 
    Mr. Bucshon. Here's the thing. I know you've already 
described your process. I understand you have outside people 
that look at all the data. But what I want to know is someone 
put their signature on the loan from CMS and said: We're giving 
them this money. Who did that?
    Ms. Cohen. I don't know who signed the loan agreements, but 
I can get back to you----
    Mr. Bucshon. Was it you?
    Ms. Cohen. It wasn't me, sir.
    Mr. Bucshon. I didn't expect it would be.
    Ms. Cohen. I can let you know and----
    Mr. Bucshon. Yes, I'm sure you'll have every intention of 
doing that, but I can tell you as a Member of Congress with 
experience asking these questions that I'll never find the 
answer to that because no one's going to take that 
responsibility, and I understand that. But do you know if it 
was a political appointee or a full-time CMS staff?
    Ms. Cohen. I don't know who signed the loan agreements, 
but, again, I can talk more about the process that we went 
through in terms of evaluating the information that we had 
understanding the----
    Mr. Bucshon. Yes, I understand.
    Ms. Cohen. But we can get you that information.
    Mr. Bucshon. Dr. Cohen, you also testified before Ways and 
Means, and they asked when CMS knew the CO-OPs would fail. And 
it says you didn't really give a clear answer. So I'm going to 
ask it. When did CMS know these CO-OPs would fail?
    Ms. Cohen. We have been doing oversight of the CO-OP 
program since its inception. And each circumstance is very 
unique. And there were different periods of time where we had 
information in front of us. When we knew folks were potentially 
going down the wrong path, we put folks in enhanced oversight, 
on corrective action plans, and as information presented 
itself, again, we took action. We really are still in the very 
early stages of this program. And I think from the discussion 
today you could see that we have taken our oversight 
responsibilities very seriously. We do feel like we are trying 
to be the best stewards of taxpayer dollars as possible.
    Mr. Bucshon. I am going to run out of time. Is there 
political pressure to keep these CO-OPs alive?
    Ms. Cohen. Sir, I would say we are trying to do our best 
job possible to make sure that consumers can know that if they 
go to the marketplace now and want to sign you for the CO-OP, 
that they are strong and stable. And that we have done a tough 
job here. I think if there was another way that we could have 
arrived here, we would have. But we've been doing some tough 
work. Again----
    Mr. Bucshon. OK. That doesn't answer the question, but I 
understand that.
    Why do we need the three Rs?
    Ms. Cohen. So----
    Mr. Bucshon. Because, like I think Mr. Collins pointed out, 
if I was going to start a business out there somewhere, I 
wouldn't rely on the three Rs to make sure that if something 
didn't work out, I all of a sudden got a check from the Federal 
Government. So fundamentally I get it, but, first of all, 
answer this question real quickly: CMS has always said they 
intended the risk corridor Program to be budget neutral. Is 
that correct?
    Ms. Cohen. So all of the three R programs----
    Mr. Bucshon. No. That question specifically. Did CMS always 
intend for the risk corridor to be----
    Ms. Cohen. I don't know if always. I would have to get back 
to you on that. I don't know if----
    Mr. Bucshon. OK. Because that's what it says here on my 
    Ms. Cohen. I don't know if that wasn't something----
    Mr. Bucshon. So then you can go into why we need the three 
Rs in the first place. And I may know that may--I understand 
you didn't make these decisions, but you're here and so----
    Ms. Cohen. Happy to answer. So the programs were based on 
our experience with the Medicare part D program, the drug 
program in Medicare that had those three similar programs. As 
you stand up any new market, there is uncertainty. We've been 
hearing about a lot of that uncertainty earlier today. And so, 
again, those programs, one, we wanted to make sure that sick 
people weren't somehow not covered by the insurance. We want 
those folks to be covered. The reinsurance program specifically 
was to cover the cost of any high-cost enrollees in early 
years. We know there may have been pent-up demand as----
    Mr. Bucshon. So it's basically to capitalize the business. 
Right? So that they have the capital to get off the ground.
    Ms. Cohen. I think it's to keep premiums stable for 
    Mr. Bucshon. OK. And following up on what Ms. DeGette said, 
you thought earlier in the year that you were going to be able 
to make the payments, and then you found out in October that 
you couldn't. And basically what's the reason for that?
    Ms. Cohen. Honestly, it's the math formula. It's the way 
the data came in from the issuers. And that's the way the math 
worked out. And so we were able to pay at 12 percent, which is 
the dollars coming in, dollars going out. And that's the way we 
move forward for this program. We've always said that we will 
take from next year's collections and pay back to this year. It 
is a 3-year temporary program.
    Mr. Bucshon. OK. Thank you.
    And I yield back.
    Mr. Collins. Thank the gentleman for his questions.
    Now recognize Mr. Yarmuth for 5 minutes.
    Mr. Yarmuth. Thank you very much, Mr. Chairman. Welcome to 
the witnesses.
    I can help Dr. Bucshon out a little bit on the background 
of the CO-OPs. One of the problems, we faced when we were 
drafting legislation was that in certain states, the 
availability of private insurance was limited to one provider. 
Or I think, in Alabama, there was Blue Cross Blue Shield 
dominated over 90 percent of the market. And in many states, 
that was the situation--maybe not that high. But the idea was 
to create competition, and the only way you could do it was to 
create a new entity. We chose CO-OPs as a nonprofit. And the 
idea was that you could that way create the kind of price 
competition that was meaningful.
    But we knew, and we knew in Kentucky when the CO-OP was 
established--and I talked with them many times as they were 
getting started--that they had no idea what kind of an insured 
population they were going to have. They didn't know what the 
age was going to be. They had no data to predict that. They 
didn't know how many would enroll. They didn't know how many 
would have never had any healthcare, so automatically once they 
became insured, they would have a rush of care. They would try 
to get tests and because they--or treat things that they had 
never been able to treat before or whether they were going to 
get people who had had medical care but just lost their 
insurance. So the unpredictability of it was certainly the 
rationale for that. And I'm really proud of the experience with 
ACA in Kentucky. We have led the country in the reduction and 
in the amount of uninsured. More than 50 percent of our 
previously uninsured are now covered, more than 520,000 people 
in a state of 4.4 million. And in my district alone, in 
Louisville, we've reduced the uninsured rate by 81 percent, an 
astounding accomplishment. And more importantly than that, I 
think, is that every day I'm hearing from people who now have 
insurance and had a family member or a neighbor or friend whose 
life has been saved because they had insurance that they 
otherwise wouldn't have. And I could talk about that for a long 
    But the focus of this hearing is on the CO-OPs. And I want 
to try and set the record straight about what happened with 
    Ms. Jarmon, unlike most of the CO-OPs reviewed by your 
office, is it your understanding that the Kentucky Health 
Cooperative had far higher enrollment than expected, nearly 
double their original projections?
    Ms. Jarmon. We actually have a chart in our report on the 
enrollment projections as of 2014, and for Kentucky, yes, it 
was like 183 percent. So that was right. It was one of the few 
that was----
    Mr. Yarmuth. And is it your understanding that a very high 
percentage of those enrollees were much sicker or utilized much 
more care than--and therefore were more expensive to ensure 
than the general population?
    Ms. Jarmon. I don't have that----
    Mr. Yarmuth. You don't have that information.
    Well, again, that's why we established this risk corridor 
program and why it was so important. And that's what happened 
to Kentucky's CO-OP. They relied on this. Kentucky's CO-OP, as 
I mentioned before the earlier panel, lost $50 million in its 
first year. In the second--first half of 2015 that loss had 
slowed down to a rate of 4 million. They were on track to make 
a profit in 2016, and unfortunately, when the risk corridor 
program was by that 87 percent, they were unable to continue.
    Dr. Cohen, is it your understanding that had Congress not 
capped the payments for the risk corridor program, that 
Kentucky Health Cooperative would still be open for business?
    Ms. Cohen. No. I think that there were a number of factors 
that contributed. Obviously, that was one of the last and 
certainly we have heard was an important factor for them. But 
you have to know that there were many factors, as we've been 
talking about all along in terms of the uncertainty and the 
challenges for the CO-OP program.
    Mr. Yarmuth. And as I mentioned before, that having been 
said, is it your understanding that even without the CO-OP, 
Kentucky residents will still have more health insurers to 
choose from in 2016 than they had----
    Ms. Cohen. Yes.
    Mr. Yarmuth [continuing]. In prior years?
    Ms. Cohen. Yes, very exciting.
    Mr. Yarmuth. Yes. So, again, I think I could talk for a 
long time about the success of the Affordable Care Act in 
Kentucky. We're a much healthier state because of it. And I 
know somebody threw around a figure that maybe the approval 
rating of the Affordable Care Act is down near 20 percent. In 
Kentucky, it's well over 50 percent.
    Ms. Cohen. And I'll give you a new number that the CDC just 
put out today for a new reduction in the uninsured rate to 9 
percent historic. So I appreciate your leadership on that.
    Mr. Yarmuth. Thank you, Dr. Cohen.
    I yield back, Mr. Chairman.
    Ms. DeGette. Mr. Chairman, can I take a moment of personal 
    Mr. Collins. Yes. Absolutely.
    Ms. DeGette. You might have noticed this is not one of the 
new Members of Congress here. This is a dear, dear friend of 
mine and Chairman Upton's, Max. And Max has been helping us 
with our 21st Century Cures bill. Most of the staff and members 
have met him. Last night, Max was very honored to receive an 
award at the Every Life Foundation for Rare Diseases, Rare 
Voice Awards gala reception. And also Chairman Upton and I 
received awards, but Max is the one. He's why we're doing this. 
So thanks for letting me----
    Mr. Collins. Oh, no. Thank you. And we all welcome Max. 
When I look back to the unanimous vote out of our committee on 
21st Century Cures, I can tell you Max whipped more than one 
    Ms. DeGette. Max is our secret weapon.
    Mr. Collins. We may be looking at a future majority whip 
here sitting next to us.
    With that, I'd like to recognize Mrs. Blackburn for 5 
    Mrs. Blackburn. Thank you so much.
    And thank you for our witnesses and for your patience 
today. We appreciate it.
    I'm sorry that Mr. Yarmuth left. I think it's important to 
note in Kentucky, when Tennessee had TennCare, a lot of 
Kentucky residents were coming into the state to try to get 
healthcare. And the Kentucky CO-OP did close. And the Kentucky 
approval rating of the ObamaCare products that are in the 
marketplace is really quite low, as was evidenced in that state 
this week.
    Ms. Cohen, I want to come to you. I had Commissioner McPeak 
here. I don't know, were you in the room for the first panel?
    Ms. Cohen. I was.
    Mrs. Blackburn. OK. I'm really concerned about what has 
happened with taxpayers and the liability there with what took 
place with the loans and then the solvency grants. And we all 
should be concerned with that. That is not your money to give 
away. It is taxpayer money. And this is just money down the 
hole it appears because this didn't work. And to go in here and 
hear from the CO-OPs that they now have these loan conversion 
options and that these startup loans classified as assets 
rather than debt, and I don't see how you get there. Doesn't 
that type loan conversion really give a false picture of what 
is going on in that CO-OP? Is that not a falsehood?
    Ms. Cohen. So, when talking about those conversions, which 
is what some of the CO-OPs have approached CMS with, we 
evaluated each of those on an individual basis. And I think you 
heard Ms. McPeak mention that in that case that was not the 
right step forward. And we did not go----
    Mrs. Blackburn. To have suggested that, is that not giving 
an inappropriate picture of the financial stability of that CO-
    Ms. Cohen. So that was a request by the CO-OP to CMS. We 
did evaluate whether or not that was the right----
    Mrs. Blackburn. So you looked at whether they could call 
debt an asset.
    Ms. Jarmon, let me ask you. In the business world, the 
private business world, I think if you did that, you'd be 
accused of fraud, if you started re-characterizing your debts 
as assets and putting them on your balance sheet as an asset. I 
have just never even heard of somebody saying that the Federal 
Government would approve such a process. How do you all view 
    Ms. Jarmon. I believe that came out in guidance in July of 
this year. So it was after we had done our work. We will be 
looking at it, but----
    Mrs. Blackburn. You're going to go back in and review that?
    Ms. Jarmon. Yes, we will look at it as part of our follow-
up. It was part----
    Mrs. Blackburn. Well, we will appreciate getting that. Is 
that not an odd business practice? I've never seen this type 
characterization viewed as being a standard operating 
    Ms. Jarmon. It appears unusual. Right.
    Mrs. Blackburn. It does appear unusual. And I think that it 
leads us, Ms. Cohen, to wonder if there are other unusual 
business practices that are surrounding the stability of the 
CO-OPs or the lack of stability of the CO-OPs and the entire 
lack of stability of the Affordable Care Act programs. This is 
highly unusual.
    Vermont Health CO-OP, $33 million in Federal loans had been 
awarded to the Vermont Health CO-OP. How much, if any, of the 
money for the Vermont Health CO-OP has been or will be returned 
to the Federal Treasury?
    Ms. Cohen. We work aggressively, if we are winding down any 
CO-OP, to return funds back to the taxpayer.
    Mrs. Blackburn. How much has been returned?
    Ms. Cohen. I don't have the number----
    Mrs. Blackburn. Would you get that number for us?
    Ms. Cohen. I will do what I can.
    Mrs. Blackburn. When money is awarded and then they don't 
get the license to stand up the CO-OP, every penny of that 
ought to be coming back to the Federal Treasury. And I think 
you know that.
    Ms. Cohen. We work aggressively to recover the loan funds 
    Mrs. Blackburn. I can imagine what the IRS would say if 
people would: Well, we're going to work to get that money back 
to you, IRS. We're really working on it.
    So we want to see that that comes back. Because I think it 
is inconceivable that the taxpayers are going to be held 
responsible for this.
    And when should we expect that money? What's your timeline 
for getting that money back in?
    Ms. Cohen. So we're working through that process right now. 
I don't have----
    Mrs. Blackburn. So you've got all this money out here. Ms. 
Cohen, listen to yourself. You got all this money out here. It 
is being wasted. Half of your CO-OPs are insolvent, and you've 
got this re-characterization process going to take your debts 
and make them appear to be assets. That is highly unusual. And 
you want to sit here and say: Well, we're looking at it?
    When are you doing it? Are you continuing to meet on it 
every week? Do you have a timeline for coming up with getting 
this money back? Is it a top priority?
    Ms. Cohen. So my team----
    Mrs. Blackburn. Yes. Please read the note that's been 
passed to you.
    Ms. Cohen. So we got all of the money back from Vermont, 
which--I would say the rest of the CO-OPs that we've been 
working with over the last several months, obviously, are still 
in business. They continue to provide coverage for consumers 
until the end of the year. And then we'll work through the 
process at that point in accordance with the loan agreement to 
recover funds for the taxpayer.
    Mrs. Blackburn. OK. So there is something in process. Thank 
    Ms. Cohen. Thank you.
    Mrs. Blackburn. And if you will continue to provide that 
type of information for us, that is what we need to know, the 
specifics. It does not help us in doing our due diligence and 
being certain that people have coverage, it does not help us if 
you come into a hearing and you cannot say: This is where we 
are, exactly where we are, and what we're going to do. It is 
helpful when Ms. Jarmon says: This happened after our July 
review, and then we're going to come back in and we're going to 
look at this very unusual business practice and have a 
recommendation for you. That's the kind of thing that is 
    I am way over my time. I yield back.
    Mr. Collins. That's OK. We are missing a lot of our 
members. So we'll actually maybe ask a few more questions, to 
dig down a little bit deeper.
    And, again, I'd like to kind of just set the stage. All of 
us up here agree we need to be good stewards of taxpayer money. 
And that's the purpose of this hearing. Learning from what's 
happened the last 2 years, and losses have occurred, it sounds 
like a few CO-OPs are doing OK. Half of them failed. There's 
lessons to be learned here. And I think the purpose of this 
hearing and our requests for more information will be: How can 
we take all of that and hopefully not continue to lose taxpayer 
    But, Ms. Jarmon, there is a question for OIG that the loan 
agreements, as I understand it, between CMS and the CO-OPs do 
have provisions in them, enforcement provisions, and I just 
wondered, could you explain what some of those provisions might 
be. And then a very direct question would be, to the best of 
your knowledge, and then I'll go to Dr. Cohen, have we taken 
any of these enforcement measures against any CO-OPs?
    Ms. Jarmon. Right. The loan agreements do allow--there's an 
option to terminate the loan agreements which would require the 
CO-OP to forfeit all unused loan funds. And there's also within 
the loan agreement and the funding opportunity, there's the 
issue of the enhanced oversight plans and corrective action 
plans, which CMS has actually put several of the CO-OPs under 
enhanced plans and corrective action plans. So those are all 
part of the loan agreement.
    Mr. Collins. Has CMS terminated any loan agreements?
    Ms. Jarmon. I am not aware.
    Dr. Cohen. So we have terminated the loan agreements for 
those 12 CO-OPs that you have heard that are shutting down. So 
we have terminated all of those, and we will----
    Mr. Collins. Did we get any money back?
    Ms. Cohen. So let me clarify, and I want to make sure for 
the record I have it right. So, in Vermont, we did get the vast 
majority of the money. There was some funding that was used in 
their startup funds that was not recovered. On a go-forward 
basis, we are making sure that consumers have coverage through 
the end of the year. These entities will be operating through 
the end of the year. And at that time, we will do a run-out of 
claims and understand the financial health of the organization 
and then use all of our ability with the terms of the loan 
agreement to recover----
    Mr. Collins. Now, but that's not the case in New York. 
They're not running--it's my understanding--the CO-OP in New 
York, which lost $250 million in fact is shutting down in 2 
weeks' time. So that doesn't----
    Ms. Cohen. That's right.
    Mr. Collins [continuing]. Line up with what your testimony 
just was.
    Ms. Cohen. That is right. So that is why we are doing so 
much of the hard work right now before this open enrollment 
period started on November 1 to make sure we understood the 
financial health of any one of these CO-OPs, is because we want 
consumers to be confident that there wouldn't be a midyear 
closure of any one of these CO-OPs.
    In the case of New York, we went to wind them down and 
terminate their loan agreement back in the September timeframe 
when we sent in our audit team after we even decided to wind 
them down. We went and found out that their financial situation 
was even more dire than we understood it to be when we made the 
decision to wind them down, and that is why we are in this 
unfortunate situation. I will say that the folks in New York, 
the Governor's Office, the Department of Insurance, has jumped 
on this problem and is working it very aggressively to make 
sure consumers have a smooth transition. And this is exactly 
why we're doing all of this tough work right now so this 
doesn't happen in other places.
    Mr. Collins. I purchased a lot of distressed companies in 
my private sector career. And let me tell you, a bank who then 
loans money in many cases in what you might call workout or 
asset-based lending agreements, there's literally daily and 
weekly reports. And you are under a magnifying glass until that 
bank who has money at risk is confident that they're going to 
be able to be paid back. And it, quite frankly, sounds as 
though CMS has accepted a lot of information at face value, and 
not dug very deeply into those details to say: OK, 2 months 
later, we're totally shocked the finances are much worse. If 
somebody was really watching a $250 million loan, day by day 
and week by week, I don't think you would wake up 2 months 
later you would have found out 2 months earlier, and maybe we 
would have lost $200 million instead of $250 million. I think 
there's lessons learned in that, when you're good stewards of 
taxpayer money, the taxpayers expect a level of scrutiny at 
least consistent with what big banks do when they make loans. 
And, in fact, you could argue maybe it should even be more than 
    So my last few seconds here, another question, I know that 
there's going to be outstanding claims, as these CO-OPs are 
shutting down, including New York. I'm assuming there's no 
money. Who's going to pay those claims?
    Ms. Cohen. So, as I said, the CO-OPs continue to wind down 
over the course of this year, and they do have funding that----
    Mr. Collins. So like take New York. Is there enough money 
    Ms. Cohen. So New York is a different circumstance where 
they need to wind down by November 30 and then run out those 
claims after----
    Mr. Collins. And they'll have enough money to pay all 
    Ms. Cohen. So one of the big things that we did in 
partnership with the State Department of Insurance is make sure 
that they go into receivership. And by doing that, we are able 
to have better control over their finances and the claims 
payout as well as----
    Mr. Collins. Do you feel as though there will be enough 
money to pay out? If there's not, is the government going to 
make the provider, that--now there's no money. How do they get 
    Ms. Cohen. So we're working--and as you said, it's a day-
by-day type of situation. We're watching very closely to make 
sure we can----
    Mr. Collins. Could there be more taxpayer moneys having to 
go in as this is wound down?
    Ms. Cohen. Our primary goal is to protect the consumer and 
    Mr. Collins. It should be. Right.
    Ms. Cohen [continuing]. And the taxpayer. So we're going to 
do everything possible to make sure that we can have a smooth 
transition. That's a partnership between ourselves and the New 
York State Department of Insurance. We're working 
collaboratively in that process to make sure that that----
    Mr. Collins. Well, and we would encourage you to continue 
to do that. And thank you for your testimony.
    I'd like to see if Ranking Member DeGette has a few follow-
on questions.
    Ms. DeGette. Thank you, Mr. Chairman. I want to go back to 
something that Mr. Morrison said in the previous panel. When we 
set up the insurance CO-OPs under the ACA, we set them up to 
help give people who were sicker, who were poorer, who had less 
of a choice, a choice of an insurance plan. And as we all know 
quite clearly, the CO-OPs don't have a lot of the same benefits 
as private insurance companies. They don't have the kind of 
capitalization from other products and so on. Wouldn't that be 
a fair statement, Dr. Cohen?
    Ms. Cohen. Yes. They face a number of those challenges.
    Ms. DeGette. Right. And so when you're just starting up 
some CO-OPs, it's not like you're a private company saying: OK, 
let's offer this new product and if it takes us a few years, we 
can do that. So I really think that the comparison of the CO-
OPs to a private business is a little unfair. And that's why I 
think we set up these three Rs, to try to help the CO-OPs get 
established and then the concept, Dr. Cohen, was that they 
would become self-sufficient and they would be able to sustain 
their business model. Is that right?
    Dr. Cohen. I think that those programs were set up to help 
the entire market transition, CO-OPs among them.
    Ms. DeGette. OK. And so I guess I was a little concerned 
when I heard you say earlier that you were reviewing all of the 
states' situations on an individual basis. And here's why. And 
I saw this from my end being in Congress where my state thinks 
in July that the money's going to be sufficient for risk 
corridor payments. Then they hear in October that, no, that's 
not going to happen. And they have a real degree of uncertainty 
with how CMS is viewing that state CO-OP, whether it's--how 
they're viewing their capitalization, how they're viewing their 
viability. And they don't know day to day whether they're going 
to be able to offer a product in open enrollment period that 
starts on November 1. So the concern that a lot of us have is 
where you don't have some kind of a bright line rule, the 
uncertainty in those states is really contributing to 
instability in the whole insurance market in those states. I 
assume you understand those points I'm making.
    Ms. Cohen. Absolutely.
    Ms. DeGette. And so I'm hoping that you and your staff 
would be willing to continue to meet with our committee staff 
on both sides of the aisle to help us figure out how we can 
help you get some certainty so that we don't have situations 
where states like New York and Colorado are suddenly going out 
of business just a few weeks before the open enrollment period, 
the other providers, including private insurance companies, are 
scrambling to try to figure out how to absorb this, and the 
83,000 people in Colorado, I'm sure it was--I don't know how 
many it was in New York, but, you know, this is affecting real 
lives. And I know you realize that, but I think it would be 
really helpful if we could get much more clear standards going 
    Ms. Cohen. Understand.
    Ms. DeGette. Thank you, Mr. Chairman.
    I yield back.
    Mr. Collins. Thank you. And it was 155,000 in New York.
    As we conclude this hearing. I would ask Dr. Cohen if we 
could get a commitment out of CMS to provide that analysis that 
resulted in the CMS awarding additional funds to New York's CO-
OP and some others the end of 2014.
    Ms. Cohen. I will work with the staff to get it confirmed.
    Mr. Collins. Thank you. And also if you could commit that 
CMS will provide us any CO-OP corrective action plans that may 
exist. I mean, as you've done this analysis, could you forward 
those to the committee?
    Ms. Cohen. I'll have to look and see. Some of those are 
market-sensitive. But we will do our best to get what we can to 
the committee.
    Mr. Collins. I thank you for that. And then also I'd like 
to enter into the record a Wall Street Journal article that 
does have a quote from CMS that risk corridors were intended to 
be budget neutral. And I'd ask unanimous consent to enter this 
into the record.
    So moved.
    [The information appears at the conclusion of the hearing.]
    Mr. Collins. As we conclude our hearing, again, I want to, 
first of all, also say that we would ask unanimous consent that 
members' written opening statements be introduced into the 
    And, without objection, those documents will be entered 
into the record.
    And I'd like to thank our two witnesses for your comments, 
as we all want to work together to, again, be good stewards of 
taxpayer money.
    And I would like to remind members they have 10 business 
days to submit questions for the record. And I ask that the 
witnesses all agree to respond promptly to those questions.
    And, with that, this meeting is adjourned.
    [Whereupon, at 2:03 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

                 Prepared statement of Hon. Fred Upton

    Hardworking taxpayers loaned $2.4 billion to Obamacare's 
CO-OP program, which was intended to create new non-profit 
health insurance insurers to increase choice and competition. 
Unfortunately for both taxpayers and consumers, it has been a 
mess with 12 out of the 23 COOPs having failed. That's a 
success rate of 48 percent. Sadly, taxpayers are once again on 
the losing end as the 12 failed CO-OPs cost $1.23 billion.
    The CO-OP program faced an uphill battle from the outset. 
In fact, as early as 2011, HHS predicted that only 65 percent 
of the solvency loans and 60 percent of the start-up loans 
would be repaid. And those predictions might be considered rosy 
since they have done far worse. The statute and CMS regulations 
and policies have seemed to hamper the CO-OPs ability to 
succeed. For example, CMS has prohibited CO-OPs from raising 
capital from outside investors and capping enrollment numbers.
    We have witnesses today who will offer valuable testimony, 
sharing unique perspectives and experiences with the CO-OP 
program, including state insurance regulators, CMS, OIG, and of 
course, the CO-OPs. We have many questions, and the American 
public deserves answers. The committee wants to understand why 
do these CO-OPs continue to shut their doors? What can CMS do 
to help COOPs succeed? What can the administration do to recoup 
these vital taxpayer dollars from the failed CO-OPs? And what 
plans did the administration have in place to protect taxpayer 
dollars in light of HHS' initial pessimistic predictions for 
the program?
    Regardless of one's view of the president's health law, the 
law itself and its implementation demand oversight. It seems 
that the news gets worse by the day, with more and more 
taxpayer dollars squandered. The CO-OP program has sadly 
followed the same script. With 12 out of 23 having failed at a 
loss of over $1.23 billion, who is taking responsibility and 
being held accountable?