Minuteman Health, Inc.
Index to Appendices
Appendix
Title/Description
A
September 7, 2016 Letter from NAIC to HHS
B
Declaration of Thomas Policelli
C
House Energy and Commerce Committee Report: Implementing
Obamacare: A Review of CMS’ Management of the Failed CO-OP
Program
D
Minuteman Comments
E
White Papers
F
March 31, 2016 CMS Risk Adjustment Methodology Meeting Materials
G
States’ Commentary and Action
H
Complaint: Minuteman Health Inc. v. US Department of Health and
Human Services, et al.
I
September 20, 2016 Report of Axene Health Partners, LLC
Minuteman Appendix A – NAIC Letter to HHS
Date
September 7, 2016
Title / Description
Letter to The Honorable Sylvia Mathews
Burwell, Secretary, US Department of
Health and Human Services
Author
National
Association of
Insurance
Commissioners
No.
A-1
MINUTEMAN
APPENDIX A
DOCUMENT A-1
September 7, 2016
The Honorable Sylvia Matthews Burwell
Secretary
U.S. Department of Health and Human Services
200 Independence Avenue, S.W.
Washington, D.C. 20201
Dear Secretary Burwell:
On behalf of the membership of the National Association of Insurance Commissioners1, we write today to
express our concerns with the comment period provided for the proposed 2018 HHS Notice of Benefit and
Payment Parameters (CMS-9934-P). The breadth and complexity of this proposal merits a full comment
period time of not less than 60 days from the date published in the Federal Register.
Executive Order 12866, which was reiterated in President Obama’s Executive Order 13563, appears
applicable to this draft: “each agency should afford the public a meaningful opportunity to comment on any
proposed regulation, which in most cases should include a comment period of not less than 60 days.”
Instead, the U.S. Department of Health and Human Services has provided only 30 days from publication in
the Federal Register for public review and comment.
The proposed Notice includes hundreds of policy and process changes that must be carefully considered not
only for their own merits, but also for their impact on other regulations. In particular, the impact of proposals
dealing with rate setting, solvency, and risk sharing programs must be carefully considered.
We urge you to give the public additional time to fully review the proposed Notice and provide comments.
Sincerely,
John M. Huff
NAIC President
Director
Missouri Department of Insurance
1
Ted Nickel
NAIC President-Elect
Commissioner
Wisconsin Office of the
Insurance Commissioner
Founded in 1871, the NAIC is the U.S. standard-setting and regulatory support organization created and governed by the
chief insurance regulators from the 50 states, the District of Columbia and the five U.S. territories. Through the NAIC, state
insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight.
NAIC members, together with the central resources of the NAIC, form the national system of state-based insurance
regulation in the U.S.
September 7, 2016
Page 2
Julie Mix McPeak
NAIC Vice President
Commissioner
Tennessee Department of Commerce & Insurance
Eric A. Cioppa
NAIC Secretary-Treasurer
Superintendent
Maine Bureau of Insurance
Minuteman Appendix B - Declaration
Date
October 6, 2016
Title / Description
Declaration of Thomas Policelli
No.
B-1
MINUTEMAN
APPENDIX B
DOCUMENT B-1
DECLARATION OF THOMAS D. POLICELLI
I, Thomas D. Policelli, being over 18 years of age and of sound mind, hereby state
the following facts are true and correct to the best of my knowledge and belief:
1.
I am the Chief Executive Officer of Minuteman Health, Inc.
(“Minuteman”).
2.
I earned my BA in History from Wesleyan University and my MBA from
the Harvard Business School.
3.
I am a lifelong insurance and healthcare services executive.
4.
Prior to joining Minuteman, I worked with Cigna and United Health
Group, and I also co-founded the startup Averde Health.
5.
I became the CEO of Minuteman in December 2012 after serving in an
interim role. I have held the position of CEO at Minuteman continuously since December 2012.
6.
I submit this declaration in support of Minuteman’s comments to the
Proposed Rule published by HHS in the Federal Register on September 6, 2016 entitled Patient
Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2018
(“Proposed Rule”).
7.
The Proposed Rule proposes limited changes to the CMS’s previous Risk
Adjustment methodology, with most changes to go into effect in benefit year 2018.
8.
Because of my professional background and my current role as CEO of
Minuteman, I am familiar with the Affordable Care Act (“ACA”) and the Risk Adjustment
methodology and regulations that CMS and HHS have implemented (hereafter “Risk
Adjustment”). In my capacity as CEO of Minuteman, I have witnessed the devastating
consequences of Risk Adjustment – both for Minuteman and the industry more broadly.
Although Risk Adjustment is supposed to stabilize the health insurance market, it does the exact
opposite. Risk Adjustment has generated wild volatility and outsized assessments that are
putting many issuers out of business and threatening the business models of others. Risk
Adjustment effectively penalizes lower-cost, efficient providers and the members who diligently
work with the providers to improve their health statuses.
9.
Minuteman has enjoyed great success in its first few years as an issuer on
the Massachusetts and New Hampshire insurance exchanges due to an innovative, narrownetwork model that keeps costs low and allows Minuteman to pass its savings on to its members.
However, Minuteman’s sound business model has been upended by Risk Adjustment. Risk
Adjustment assessments levied on Minuteman for benefit year 2015 total more than $16 million
– over $1200 per member. On June 30, 2016, CMS assessed Minuteman a 2015 Risk
Adjustment payment in New Hampshire of more than $10 million, amounting to a whopping
40% of its members’ premiums. Massachusetts, which operated a Risk Adjustment program that
mirrored the federal program and was certified by CMS, imposed a charge of $6,110,676, which
represents 39% of members’ premiums in that state. These numbers are all the more shocking in
light of Minuteman’s small market share. For example, in New Hampshire, despite having only
19% of the on-exchange market share for individual policies, Minuteman is responsible for
paying 90% of the Risk Adjustment charges in that state. This is not a function of adjusting for
actuarial risk. It is the result of a broken methodology that adjusts for factors other than actuarial
risk and that penalizes small, innovative, and growing issuers.
10.
Minuteman is not alone in being hit with such punitive assessments. The
result has been severely destabilizing across the United States. Many insurers have gone
insolvent, others have chosen to leave the ACA exchanges, and still more have been forced to
impose very large premium increases on their enrollees as this is the only way to mitigate the
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risk of Risk Adjustment. It is a sad irony that a program intended to stabilize the market is
instead wreaking havoc and undermining the progress of the ACA.
11.
As detailed more fully below, the current Risk Adjustment methodology is
fatally flawed and the Proposed Rule does not do enough to correct the problem, and what
minimal fixes are proposed are too delayed.
MINUTEMAN WAS CREATED TO OFFER A COMPETITIVE ALTERNATIVE
12.
Minuteman operates as an issuer in Massachusetts and New Hampshire,
primarily in the individual market on the ACA-created exchange marketplaces in each state.
13.
Consumers in both states have been plagued by exorbitant premiums for
years. In 2014, premiums in both New Hampshire and Massachusetts, in both the individual and
group markets, were more expensive than premiums in over 45 other states. See Henry J. Kaiser
Family Foundation, Average Single Premium per Enrolled Employee for Employer-Based Health
Insurance (2014), available at http://kff.org/other/state-indicator/single-coverage/.
-3-
1
14.
These skyrocketing costs and high premiums are largely due to dominant
insurance carriers and providers in both states who have used their market power to control the
health care market.
15.
Incumbent insurers have exploited their market power by creating a cycle
in which they pay a handful of brand name hospitals disproportionately high prices for their
services, while many other superb facilities receive artificially depressed rates.
16.
These provider price disparities cause significant harm in the
Massachusetts market. Providers who render care at equally good or better quality of care levels
than their higher-paid brand name competitors are deprived of the capital and resources to grow
and expand their services. This creates a gap between resource-rich favored providers and
resource-starved disfavored providers. Resource-strapped providers are unable to invest in
updating facilities, purchasing new equipment, and developing new programs that are essential to
1
Map Shows Average Single Premium per Enrolled Employee for Employer-Based Health Insurance
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maintaining and growing their service offerings even though their existing quality may be
excellent. As a result, volume shifts away from low price providers to higher priced providers,
increasing costs – and premiums – for all consumers. Finally, price sensitive consumers that
generally utilize lower-cost providers subsidize the premiums of less price-sensitive consumers
who purchase the most expensive services from the most expensive providers. See MA. Office
of Attorney General, Examination of Health Care Cost Trends and Cost Drivers (June 22, 2011),
at 27-31, available at http://www.mass.gov/ago/docs/healthcare/2011-hcctd.pdf.
17.
This market dysfunction and the resulting increase in health care costs has
not gone unnoticed by Massachusetts officials, who have worked for over a decade to institute
government reform to try to curb health care spending. Noting that a “wide variation in the
prices health insurance companies pay providers for similar services, unexplained by differences
in quality” are a “major reason for escalating health care premiums,” the Commonwealth of
Massachusetts advanced a range of initiatives to lower health care costs and address market
dysfunction. MA. Office of Attorney General, Examination of Health Care Cost Trends and
Cost Drivers (Sept. 18, 2015), at 1, available at
http://www.mass.gov/ago/docs/healthcare/cctcd5.pdf. Many of these efforts seek to strengthen
effective market operation by improving the information and incentives available to consumers
to choose insurance plans and health care providers based on cost and quality. Id.
18.
Massachusetts has also enacted reforms to mandate that carriers in the
state offer narrow network or tiered network insurance plans at discounted prices to try
producing innovation that will result in lower premiums for consumers. MASS. GEN. LAWS ANN.
ch. 176J §11 (2016).
-5-
19.
New Hampshire’s consumers have similarly suffered at the hands of
market dominant insurance companies. Until 2015, New Hampshire’s dominant insurance
company faced virtually no competition in New Hampshire’s commercial insurance market.
20.
Consumers in New Hampshire in the individual market face another
hurdle. Prior to Minuteman’s market entrance, only one insurance company offered insurance
products on the New Hampshire health care marketplace. While there were other national
companies offering individual coverage, those companies refused to offer plans on the New
Hampshire exchange in 2014.
21.
A group of high-quality, low-cost Massachusetts providers, including
Tufts Medical Center (“Tufts MC”), New England Quality Care Alliance (“NEQCA”) and
Vanguard Health Systems, came together to find a way to break the market impasse in
Massachusetts that has continually harmed consumers by sponsoring the creation of a new
insurance carrier that would focus on driving down costs and steering patients to providers
committed to bending the health care cost curve.
22.
These providers sponsored the formation of Minuteman, a non-profit
health plan, to drive down costs by building a select network of highly qualified, yet traditionally
underfunded providers, and excluding overpriced name brand hospitals.
23.
While their focus was initially on Massachusetts, it soon expanded to
include New Hampshire.
24.
Minuteman sought to offer a new and innovative alternative – a model
designed to invigorate competition, drive costs down, and increase the quality of health care
delivered to consumers in the individual and small group markets.
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25.
Minuteman set out to offer affordable health care coverage by securing
low reimbursement rates (prices for services) from a select network of health care providers.
Minuteman excludes high-priced and inefficient hospital systems from its network and instead
directs its members’ care to lower-cost, high-quality health care providers.
26.
Minuteman drives down the cost of healthcare services by partnering with
providers willing to offer low rates without sacrificing quality, and then passes those price
savings on to its members through lower insurance premiums.
27.
Minuteman’s actuaries’ early estimates found that Minuteman’s approach
would yield members up to 25% in premium savings. Even using more conservative figures, the
plans would yield a minimum of 16% premium savings for members. These savings projections
were based entirely on Minuteman’s select network approach and were not based on any
assumptions that Minuteman would have healthier than average members.
28.
HHS approved Minuteman’s select-network business plan and awarded it
funding through the CO-OP program to enter the Massachusetts market. On August 13, 2012,
Minuteman signed a loan agreement (“Loan Agreement”) with HHS to fund its initial formation
and operation in Massachusetts. It signed an amendment to the Loan Agreement in November
2013 for additional funding to enter the New Hampshire market.
29.
The Loan Agreement required Minuteman to comply with all standards set
forth in Section 1311(c) of the ACA, all state specific standards, and any CO-OP regulatory
standards. Minuteman was also required to offer at least two-thirds of its plans as QHPs in these
markets.
30.
In other words, unlike its larger, entrenched competitors, Minuteman is
required to offer products on the individual insurance exchanges established by the ACA, and is
-7-
required to do substantially all of its business in the individual and small group markets – the
very markets impacted by the Risk Adjustment program. Minuteman cannot simply flee the
market or turn to other business lines to avoid the volatile Risk Adjustment program, as its
competitors have.
31.
Minuteman delivered on its plans. It entered the Massachusetts market in
2014 and the New Hampshire market in 2015 with lower cost products.
32.
In 2015, in the individual market for the “Bronze” tier plans often
preferred by cost-conscious consumers, Minuteman’s lowest monthly premiums ranged from
$196-$232 while BCBS’s monthly premiums for its Bronze product ranged from $348-$392.
Similarly, in “Silver” products, Minuteman’s monthly premiums ranged from $241-$285 while
BCBS charged monthly premiums from $384 to $433.
33.
Minuteman achieved similarly impressive cost savings for New
Hampshire. In 2015, Minuteman’s Bronze premium for a non-smoker in New Hampshire was
only $188 per month, compared to $224 per month for Anthem, $238 per month for Harvard
Pilgrim, $260 per month for Maine Community Health Options, and nearly $400 per month for
Assurant.
34.
Likewise for Silver plans for non-smokers in New Hampshire in 2015,
Minuteman set a monthly premium of only $238, compared to $283 for Anthem, $295 for
Harvard Pilgrim, $304 for Maine Community Health Options, and $474 for Assurant.
35.
Minuteman’s business model is sound and successful. Since it entered the
market in 2014, Minuteman has expanded coverage to 25,000 members, many of whom are cost
conscious and had been frustrated for years with the overpriced health insurance plans being
offered in two of the most expensive insurance markets in the country. Minuteman’s innovative
-8-
approach to driving down hospital and physician prices led to its success, while at the same time
achieving the goals of the ACA and its CO-OP program to expand access to affordable health
insurance products.
36.
However, Minuteman’s success has been threatened by the Risk
Adjustment program developed and implemented by HHS and CMS.
RISK ADJUSTMENT
37.
With the influx of new insureds and the ACA’s prohibition against
rejecting enrollees or setting premiums based on individual health history, Congress recognized
that there was likely to be some uncertainty in the market after the ACA went into effect. To
address this uncertainty, Congress enacted a trio of risk stabilizing measures often referred to as
the “3 Rs”: the Reinsurance, Risk Corridor, and Risk Adjustment programs.
38.
The Risk Adjustment program is the only permanent “R” program; the
other two are temporary programs that will sunset after 2016.
39.
Risk Adjustment is supposed to mitigate bias in the distribution of
insureds by compensating insurers in the individual and small group markets whose enrollees are
considered to be sicker and, therefore, costlier. The theory of Risk Adjustment is that plans
should not fail or succeed only because they attract sicker or healthier enrollees, but rather
should compete based on price, efficiency, and service quality.
40.
States may offer their own Risk Adjustment program or allow the federal
government to administer their program for them. Massachusetts was the only state that chose to
operate its own Risk Adjustment program. All other states, including New Hampshire, have
programs administered by CMS.
41.
While CMS theoretically permitted Massachusetts to develop and operate
its own Risk Adjustment program, Massachusetts did not have any real autonomy. Instead, CMS
-9-
and HHS required Massachusetts to adhere to CMS’s own fatally flawed directives. When
Minuteman challenged its 2014 Risk Adjustment assessment through Massachusetts
administrative procedures, the state agency replied that it had no authority to vary its formulas
because CMS would not provide any regulatory flexibility. See Commonwealth Health Ins.
Connector Auth., Decision on Minuteman Health’s Request for Reconsideration First Round
Review (Oct. 7, 2015), at 5.
42.
Because CMS has prevented Massachusetts from genuinely running its
own program, the flaws described in this Declaration and in other critiques of the Risk
Adjustment program apply with equal force to both the federal formula applied in New
Hampshire and the purportedly separate Massachusetts state program.
43.
Beginning in 2017, Massachusetts will transition to a CMS-run Risk
Adjustment program.
44.
Under the ACA, insurers are prohibited from setting discriminatory
insurance premiums based on an individual’s health status and corresponding risk profile. ACA,
Pub. L. No. 111-148, § 2701 (codified at 42 U.S.C. § 300gg). In addition, insurers lack control
over who they enroll in their plans. With that lack of control comes risk that a disproportionate
number of sicker individuals (i.e. individuals with higher actuarial risk) will enroll in certain
plans while healthier individuals who require less care will enroll in other plans. This is the
singular issue that CMS is permitted to address through the Risk Adjustment formula.
45.
Specifically, the text of the ACA statute provides that:
each State shall assess a charge on health plans and health
insurance issuers [in the individual or small group market within
the state] . . . if the actuarial risk of the enrollees of such plans or
coverage for a year is less than the average actuarial risk of all
enrollees in all plans or coverage in such State for such year that
are not self-insured group health plans (which are subject to the
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provisions of the Employee Retirement Income Security Act of
1974). . . .
each State shall provide a payment to health plans and health
insurance issuers [in the individual or small group market within
the state] . . . if the actuarial risk of the enrollees of such plans or
coverage for a year is greater than the average actuarial risk of all
enrollees in all plans and coverage in such State for such year that
are not self-insured group health plans (which are subject to the
provisions of the Employee Retirement Income Security Act of
1974). ACA, Pub. L. No. 111-148, § 1343 (codified at 42 U.S.C. §
18063).
46.
The express directive and clear purpose of Section 1343 is to assess
payments only for “actuarial risk” – i.e. how sick an enrollee is.
47.
But the Risk Adjustment methodology developed by CMS instead
assesses payments for differences in premiums, consumer choice of metallic tier, and length of
member enrollment. CMS thereby sweeps in numerous factors that have nothing to do with
actuarial risk. As a result, CMS has created a program that dictates which insurers will be
winners or losers based on issues that have nothing to do with the health of their members. Risk
Adjustment rewards insurers that sell the most expensive products, that do not grow, and that do
not offer products on the public marketplace.
48.
To maintain a viable business, an insurance company must collect more in
premiums than it pays out in collective expenses. The higher an insurer’s expenses, whatever
their nature might be, the higher it must set its premiums. In a well-functioning competitive
market, carriers will be forced to innovate to cut their costs so they can lower their premiums and
attract more members. That is precisely what Minuteman has done. But rather than reward
Minuteman for driving innovation and competition, the Risk Adjustment methodology
improperly punishes Minuteman and undermines the purpose of the statute and the ACA.
-11-
49.
This is the collective result of many flaws in the Risk Adjustment
methodology, including: (1) use of the statewide average premium; (2) a built-in bias against
Bronze plans; (3) undervaluing the costs associated with enrollees who do not have an HCC risk
factor; and (4) failing to accurately calculate actuarial risk by undervaluing the risk of partial
year enrollees and ignoring prescription drug utilization data.
FLAW #1: THE STATEWIDE AVERAGE PREMIUM
50.
One of the most problematic aspects of the Risk Adjustment methodology
is its use of the Statewide Average Premium as a factor when calculating the dollars that one
insurer must pay to another in Risk Adjustment.
51.
The payment or assessment amount is a plan’s premium with risk
selection score minus its premium without risk selection score multiplied by the statewide
average premium. That figure is then multiplied by the plan’s total billable member months.
52.
The Statewide Average Premium is, as its name suggests, a calculation of
the average premium charged by all insurers across a given state and then weighted by plan share
of statewide enrollment in the risk pool.
53.
Accordingly, the Statewide Average Premium is largely driven by the
premiums set by the plans with the most market share. As noted supra, in Massachusetts, the
market is dominated by BCBS. Ctr. for Health Info. & Analysis, Enrollment Trends (July 2016).
In New Hampshire, in 2015 Anthem accounted for nearly 60% of individual QHPs offered on
the exchange. NHID, 2015 QHP Monthly Membership Report, available at
https://www.nh.gov/insurance/consumers/documents/mktplc_month_enrl_rpt.pdf.
54.
When calculating Statewide Average Premiums, the prices charged by
these large insurers will skew the “average” closer to their actual, high premium prices.
-12-
55.
Consistent with its business plan and the purpose of the ACA, Minuteman
has built a business model that allows it to deliver lower premiums to its members regardless of
their health status.
56.
Because of its innovative and efficient business model, Minuteman’s
premiums are substantially lower than those of Anthem and BCBS. It is important to note that
Minuteman does not have lower premiums because it has healthier members. In fact,
Minuteman assumed an average risk score (an actuarial population of the market average, 1.0)
when it set its premiums. In other words, Minuteman priced to an average risk population to
ensure that its premium prices would be sufficient to account for the impact of the Risk
Adjustment program. If the Risk Adjustment program were working correctly, and if
Minuteman ended up having a healthier than average population (say, with an actuarial risk of
0.5) then the “extra” premium built into its rates would cover Minuteman’s Risk Adjustment
transfer payment. Of course, that is not how Risk Adjustment works due to its multiple flaws.
57.
In addition, Minuteman sells more Bronze products as compared to other
insurers. That means that Minuteman’s average premium is lower both because all of its
premiums are lower, and also because Minuteman sells a larger proportion of lower cost Bronze
products as compared to other issuers in the market.
58.
The 2014 Statewide Average Premium in Massachusetts was $435 per
month while Minuteman’s average premium was $254 per month. The 2015 Statewide Average
Premium in Massachusetts was $418 per month, while Minuteman’s average premium was $255
per month.
59.
The 2015 Statewide Average Premium in New Hampshire for individual
plans was $379 per month while Minuteman’s average premium was $283. See CMS, Summary
-13-
Report on Transitional Reinsurance Payments and Permanent Risk Adjustment Transfers for the
2015 Benefit Year (June 30, 2016), App. A, available at https://www.cms.gov/CCIIO/Programsand-Initiatives/Premium-Stabilization-Programs/.
60.
The cost efficiencies built into Minuteman’s business model are thus
wiped out by the Risk Adjustment transfer formula’s use of the Statewide Average Premium.
61.
Minuteman’s Risk Adjustment assessment in 2014 was $3,064,679. Of
this amount, $1,162,398 was directly attributable to the use Statewide Average Premium
multiplier instead of Minuteman’s own premiums.
62.
Minuteman’s Risk Adjustment assessment for Massachusetts in 2015 was
$6,110,676. Of this amount, $2,016,290 was directly attributable to the use of the Statewide
Average Premium multiplier instead of using Minuteman’s own premiums.
63.
Similarly, in New Hampshire, Minuteman’s 2015 Risk Adjustment
assessment was $10,540,869. Of that amount, $2,656,898 was directly attributable to the use of
the Statewide Average Premium multiplier instead of Minuteman’s own premiums.
64.
State
New Hampshire (2015)
Massachusetts (2014)
Massachusetts (2015)
65.
These impacts are summarized in the table below:
Minuteman's
Premium
Statewide
Average
Premium
Risk Adjustment
Assessment
RA Amount
Attributable to
Statewide
Average
Premium
$283
$254
$255
$379
$435
$418
$10,540,869
$3,064,679
$6,110,676
$2,656,898
$1,162,398
$2,016,290
For benefit years 2014 and 2015, Minuteman has been directed to pay
over $19.7 million to its competitors, including the largest, most established insurers in each
state; over $5.8 million of the $19.7 million has nothing to do with Minuteman’s members being
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scored as healthier, but is because Minuteman fulfilled its mission and business plan to serve its
enrollees by keeping premiums low. The current methodology is scoring members as healthier
than they really are and then penalizing them for picking a more affordable plan because of the
model’s reliance on the Statewide Average Premium. Over the last two years, CMS has in effect
levied a $5.8 million plus tax on Minuteman for doing exactly what the ACA intended: offering
a low cost, high quality product to consumers.
66.
The Risk Adjustment formula developed and implemented by CMS, at the
direction of the Secretary, is not an actuarial Risk Adjustment formula at all. Rather it is a
premium adjustment formula. By design, it punishes insurers that keep premiums low and
rewards insurers that charge the highest rates.
67.
The greater a low cost plan deviates from the Statewide Average
Premium, the harder it is hit by the Risk Adjustment formula. The lower a plan’s premiums are
compared to the Statewide Average Premium, the higher the percent of that plan’s Risk
Adjustment assessment is directly attributable to lower premiums. CMS, through its illegal Risk
Adjustment formula, has structured a system where carriers are penalized for competing with
lower premium prices and are rewarded for raising rates. The same dynamic works in reverse:
the higher an issuer’s premiums are above the Statewide Average Premium, the lower its
proportionate Risk Adjustment assessment.
68.
Despite the clear purposes of the ACA to foster competition and
innovation and to lower health care costs, the Risk Adjustment methodology developed and
implemented by CMS stifles competition and ensures that consumers will suffer ever increasing
premiums.
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69.
A November 2015 white paper published by the CHOICES coalition with
the technical assistance of Rick Foster, former CMS chief actuary, identified how the Risk
Adjustment methodology failed to adjust for actuarial risk. CHOICES, et. al., Technical Issues
with ACA Risk Adjustment and Risk Corridor Programs, and Financial Impact on New, FastGrowing, and Efficient Health Plans (Nov. 4, 2015). That paper detailed seven specific
problems, one of which was “use of the Statewide market average premium in the risk transfer
formula.” Id. at 9. That white paper concluded:
To the extent that a plan’s actual premiums are significantly lower
(or higher) than the market average, then its estimated premium
difference will be significantly exaggerated. In particular, for
efficient, high-performing plans focusing on thorough care
management, cost-efficient care, effective provider networks, low
administrative costs, and, in some cases, low nonprofit margins,
member premiums will generally be well below average in an area,
for a given mix of enrollees. If such a plan’s premium is, say, 20%
below the market average, then the risk transfer formula’s estimate
of the plan’s premium related to unallowed health factors will be
20% greater than the reality.
***
Use of a plan’s actual average premium in the risk transfer
formula, rather than the Statewide market average premium, would
eliminate this significant source of estimation error and result in
much fairer transfers among plans. Id.
70.
CMS has acknowledged problems with the Risk Adjustment formula,
including the use of the Statewide Average Premium. On March 24, 2016, CMS issued a
Discussion Paper in advance of its March 31, 2016 HHS-Operated Risk Adjustment
Methodology Meeting. See CMS, March 31, 2016, HHS-Operated Risk Adjustment
Methodology Meeting: Discussion Paper (Mar. 24, 2016). In that Discussion Paper, CMS
wrote:
[T]he Statewide average premium is intended to reflect average
administrative expenses and average claims costs for issuers in a
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market and State. We received comments from the public who
believe that the inclusion of administrative costs in the Statewide
average premium incorrectly increases risk adjustment transfers
based on costs that are unrelated to the risk of the enrollee
population.
***
[W]e understand the concern that including fixed administrative
costs in the Statewide average premium may increase risk
adjustment transfers for all issuers based on a percentage of costs
that are not related to enrollee risk. Id. at 92.
CMS concluded that it is considering the possibility of future adjustments “beyond the 2018
benefit year.” Id. at 93.
71.
The March 24, 2016 Discussion Paper also expressly acknowledged the
bias built into the Risk Adjustment methodology against small, efficient insurers like
Minuteman:
[A]lthough a number of sources of premium variation – such as
metal level, age, and geographic cost factors – are explicitly
addressed in the transfer equation, others – such as network
differences, plan efficiency, or effective care coordination or
disease management – are not. We are exploring a number of
ways of addressing such plan differences in our methodology,
including through potentially modifying the transfer equation,
perhaps by modifying the equation using a plan’s own premium…
Id.
72.
Despite acknowledging the problems and witnessing the devastating
consequences of this formula, the Proposed Rule makes no changes to address the improper use
of the Statewide Average Premium in the Risk Adjustment formula. I urge CMS and HHS to
cease using the Statewide Average Premium in the Risk Adjustment formula and to use each
issuer’s own average premium instead. This change should be made retroactive and be for plan
benefit years 2014, 2015, 2016, 2017, 2018, and all future years.
-17-
FLAW # 2: BIAS AGAINST BRONZE PLANS
73.
Under the ACA, health insurance policies offered on the public exchanges,
like those offered by Minuteman in New Hampshire and Massachusetts, must adopt certain
standardized terms and conditions for differing types of coverage. Those standards are
categorized by metallic levels: Bronze, Silver, Gold and Platinum.
74.
The metallic levels differ in how costs are shared between issuer and
enrollee. In Bronze plans, the issuer must cover 60% of health care costs, while the issuer covers
70% in Silver, 80% in Gold, and 90% in Platinum. Bronze plans have the lowest premiums but
the highest deductibles. Platinum plans, by contrast, have the highest premiums and the lowest
deductibles. As a result, consumers who do not anticipate significant health care needs and/or
are price-sensitive tend to purchase Bronze or Silver products as opposed to Gold or Platinum
products, because of the lower monthly premium expense.
75.
Instead of building the Risk Adjustment formula to transfer funds based
on underlying member risk, CMS instead built the Risk Adjustment formula to penalize issuers
that sell Bronze products – i.e. issuers who cater to price sensitive consumers. Once the Risk
Adjustment formula is applied, insurance companies always pay out money on Bronze products.
This cannot be a function of adjusting solely for actuarial risk of the member population. It is
instead a function of adjusting for the nature of the insurance plan, resulting in issuers that sell
low cost Bronze plans subsidizing those who sell more expensive Gold and Platinum plans to
members with the same actuarial profile.
76.
CMS’s own data shows that in 2014, there was no scenario under which
an insurer would receive Risk Adjustment transfer payments for a Bronze plan. Under the Risk
Adjustment formula, insurers of all sizes in the small group and individual markets were subject
to a Risk Adjustment assessment with respect to their Bronze plans. See CMS, HHS-Operated
-18-
Risk Adjustment Methodology Meeting (Mar. 31, 2016), at 31, available at
https://www.regtap.info/uploads/library/RA_ConferenceSlides_033116_5CR_040516.pdf.
77.
Because insurers must always pay out Risk Adjustment dollars on Bronze
products, those products are likely to have a negative margin after Risk Adjustment. That result
is illustrated in Minuteman’s own claims data. After Risk Adjustment, Minuteman’s medical
loss ratio for Bronze members is 109.2%, more than any other metallic tier and well in excess of
the total amount of premium collected for those members.
78.
CMS’s Risk Adjustment methodology once again uses a factor – this time
differential weighting by metallic level – wholly unrelated to actuarial risk. By making a Bronze
plan a money-loser no matter how healthy or sick the insured population is, CMS has
discouraged insurers from offering Bronze plan designs altogether – a wild policy overreach well
beyond the limited Risk Adjustment program that Congress intended, and to the detriment of
many consumers who desire and rely on these low-cost products. Not surprisingly, plans around
-19-
the country are starting to drop their on-exchange Bronze products. See e.g., Bronze Woes Raise
Flags That Issuers Could Drop Entire Metal Tier, INSIDEHEALTHPOLICY (May 4, 2016),
available at https://insidehealthpolicy.com/daily-news/bronze-woes-raise-flags-issuers-coulddrop-entire-metal-tier; Michelle Andrews, Virginia Insurer’s Decision to Drop Bronze Plans
Prompts Concerns, KAISER HEALTH NEWS (May 27, 2016), available at http://khn.org/news/vainsurers-decision-to-drop-bronze-plans-prompts-concerns.
79.
Congress surely did not intend, and definitely did not direct, HHS/CMS to
penalize mission-driven issuers who expand accessibility to affordable Bronze products and
reward issuers that cater to consumers who purchase more expensive products.
80.
Wiping out Bronze plans is not the result of adjusting for actuarial risk. It
is the result of improperly weighting plans by metallic level, separate and apart from the risk
profile of their enrollees.
81.
The Proposed Rule does not even attempt to address the problem of bias
against Bronze plans. Failure to stabilize the Bronze plan situation will inappropriately drive up
Bronze prices and further drive out middle-income and healthier consumers, worsen the risk
pool, and increase the likelihood of a market-wide death spiral.
FLAW #3: UNDERVALUING MEMBERS WITHOUT AN HCC SCORE
82.
The Risk Adjustment formula begins by calculating a risk score for each
enrollee. The risk score is intended to reflect the relative health status and, correspondingly, the
relative anticipated cost of care that person will utilize. The higher the risk score, the sicker the
individual and the greater the anticipated health care costs.
83.
The calculation for an individual’s risk score begins with a coefficient (i.e.
an assigned numeric value), which is based only on age and gender. That coefficient will be
increased if the enrollee has been diagnosed with one or more hierarchal condition categories
-20-
(“HCCs”) that is documented during the plan year. Each HCC has a corresponding coefficient,
with higher values intended to represent more serious and costly health conditions.
84.
HCC coefficients are added to the age/gender coefficient to calculate an
enrollees’ overall risk score. Additional adjustments may be made for disease interaction and
severity.
85.
Enrollees who do not have an HCC are essentially deemed to be perfectly
healthy, having only the risk that is reflected in their base coefficient. The Risk Adjustment
methodology presumes these enrollees will not utilize health care services and will cost insurers
little to no money.
86.
These assumptions are demonstrably false.
87.
In reality, enrollees with no HCCs nevertheless utilize health care services,
and insurers therefore incur associated costs – costs that invariably exceed the minimal
assumptions built into the Risk Adjustment model. Even healthy enrollees must utilize
preventive care services and sometimes get sick and need medical care. An individual with no
HCC could easily have a year where she contracts strep throat or the flu or experiences a
catastrophic injury that is not captured by the HCCs.
88.
There is a wide middle ground between being perfectly healthy and being
so chronically ill as to merit an HCC score. For example, even though a diagnosis of Type 2
diabetes would trigger an HCC score, a severely overweight adult whose laboratory test results
indicate a strong potential to develop diabetes in the future would not receive an HCC score. But
such an individual needs clinical intervention immediately in the form of monitoring, nutritional
guidance, and medication. In effect, by not adjusting a risk score until a patient is severely ill
-21-
CMS penalizes early and aggressive preventive care and rewards delaying care until a patient is
severely ill and lands in a hospital emergency room.
89.
The Risk Adjustment methodology over-adjusts for this “healthy”
population. Once the Risk Adjustment transfer formula is applied, insurers end up paying more
money than they collect in premiums for this group of members. According to Minuteman’s
data, after application of Risk Adjustment, the medical loss ratio for its members without an
HCC score exceeds 100%.
Number of
HCCs
0 HCCs
More than 1 HCC
90.
Risk Adjusted
MLR
102.7%
68.8%
This means that Minuteman must pay out in medical costs more than it
receives in premium payments from these enrollees – an unsustainable proposition. Notably,
before application of Risk Adjustment, this same population has a medical loss ratio sustainably
below 100%.
91.
Under the Risk Adjustment formula, individuals with no HCCs are
liabilities to insurance companies because the cost of having them enrolled exceeds the
premiums collected. While Congress wanted to ensure that plans did not discriminate against the
most chronically ill individuals, it did not authorize a reverse discrimination against covering
everyone else. The Risk Adjustment formula artificially inflates the costs of covering anyone
without a severe chronic illness, driving premiums up and making health insurance coverage a
less viable option for relatively healthy individuals. But without the participation of healthier
individuals, no insurance market can function.
-22-
92.
On July 15, 2016, Richard Foster submitted a memorandum to CHOICES
on this issue, stating “The current HHS-HCC risk adjustment model established by CMS is
known to understate risk scores for relatively healthy individuals and to overstate them for those
with significant health conditions.” Memorandum from Richard S. Foster to CHOICES Exec.
Comm. (July 15, 2016), at 1, available at
http://www.choicescoalition.org/documents/HHS%20HCC%20RA%20model%20bias%20adjust
ment%20memorandum.pdf.
93.
Foster has identified a simple fix to this problem: swapping the risk
scores that were used by CMS with risk scores that more accurately represent the actual costs
associated with the HCCs. These adjustments can be made based on existing data. Foster’s
analysis shows that this relatively easy fix “would eliminate virtually all of the tendency in the
existing risk adjustment model to understate risk scores for healthy individuals and groups and to
overstate risk scores for those with significant health conditions.” Id. at 2.
94.
I urge the immediate adoption of Mr. Foster’s recommended solutions and
their retrospective application to all past years.
FLAW #4: FAILING TO MEASURE ACTUARIAL RISK WITH REASONABLE
ACCURACY BY UNDERVALUING PARTIAL YEAR ENROLLEES AND IGNORING
USEFUL FACTORS SUCH AS PRESCRIPTION DRUG UTILIZATION
95.
The Risk Adjustment formula in past has not accounted for partial year
enrollees and did not factor in prescription drug data. Failing to include these factors renders the
Risk Adjustment methodology actuarially unsound and at odds with the statute.
96.
The Risk Adjustment methodology has rewarded issuers who do not
attract partial year enrollees, separate and apart from actuarial risk of the insurer’s population.
The methodology in the past entirely failed to adequately account for individuals who are
enrolled for less than a full year, which is commonly referred to as “partial year enrollment.”
-23-
97.
The risk scores for these individuals often understate their health status
and corresponding cost to the insurer. This is because a partial year enrollee, who starts with
their baseline risk coefficient based on age and gender, may not receive an HCC diagnosis during
the portion of the year in which he/she is enrolled in the health plan. Thus, the issuer lacks full
knowledge of the enrollee’s health status.
98.
This is true even if the enrollee is filling prescriptions or otherwise
utilizing health care services related to the un-recorded HCC diagnosis. A common scenario is a
diabetic patient who does not receive a diagnosis during his partial year enrollment, but
nevertheless is filling prescriptions for insulin. Without the diagnosis, this patient’s risk score
will not reflect that he has diabetes.
99.
The problem with partial year enrollment is purely one of timing – if the
enrollee visits a doctor and receives an HCC diagnosis that is properly transmitted to the issuer,
the enrollee’s risk score will be adjusted to reflect the HCC. However, if the enrollee does not
receive the diagnosis from his or her doctor during his/her enrollment in the plan, the issuer will
have no knowledge of it and the enrollee’s risk score will be understated.
100.
This timing problem becomes obvious when looking at the risk adjusted
medical loss ratio of patients compared to their duration of enrollment. Minuteman’s 2015 New
Hampshire data starkly show the impact of enrollment duration on Risk Adjusted medical loss
ratio:
Enrollment
Duration of
Member
Under 6 months
Over 6 months
Risk Adjusted
MLR
122.1%
90.4%
-24-
CMS’s Risk Adjustment methodology has thus historically failed to account for a factor – partial
year enrollment – which results in issuers being penalized for the duration of their members’
enrollment, a penalty which is wholly unrelated to actuarial risk. This must be remedied.
101.
Similarly, the Risk Adjustment methodology historically failed to include
prescription drug information, thereby distorting relative risk scores, and rendering the
methodology actuarially unsound.
102.
Consider the diabetes patient used as an example above: he has been
managing his diabetes with insulin, but has not been to a physician recently and thus has no HCC
code.
103.
The insulin prescription plainly indicates that he is a diabetic, but that is of
no consequence. The Government’s Risk Adjustment methodology did not consider prescription
drug data, even though it is readily available and often a reliable source of information regarding
an individual’s health status.
104.
I am pleased that the Proposed Rule attempts to include prescription drug
data in the Risk Adjustment formula and to adjust for the bias against partial year enrollees.
These changes should be implemented immediately and applied retrospectively to all prior years.
105.
As explained more fully in the Axene Report, I am concerned that
Minuteman has not had sufficient time and information to assess and comment upon these
aspects of the Proposed Rule and I urge CMS to extend the comment period by ninety days and
to provide full and complete backup data and formulas.
-25-
I declare the foregoing to be true and correct under penalty of perjury under the
laws of the United States.
Dated: 10/6/2016
Thomas D. Policelli
-26-
Minuteman Appendix C – House Committee Report
Date
September 13, 2016
Title / Description
Implementing Obamacare: A
Review of CMS’ Management
of the Failed CO-OP Program
Authors
US House of
Representatives
Committee on Energy
and Commerce
No.
C-1
MINUTEMAN
APPENDIX C
DOCUMENT C-1
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON ENERGY AND COMMERCE
CHAIRMAN FRED UPTON
The Oversight Series
Accountability to the American People
Implementing Obamacare: A Review of CMS’
Management of the Failed CO-OP Program
Prepared by the Energy and Commerce Committee, Majority Staff
September 13, 2016
energycommerce.house.gov
I.
Table of Contents
I.
Table Of Contents .............................................................................................................. 1
II.
Executive Summary .......................................................................................................... 3
III.
Findings .............................................................................................................................. 5
IV.
Background ........................................................................................................................ 6
A.
The ACA Authorizes CMS To Establish And Regulate CO-Ops........................... 7
B.
Early Concerns About The CO-OP Program Prompts Committee
Investigation .............................................................................................................................. 9
V.
CO-OPs Face Unpredictable Enrollment And Volatile Risk Programs, Leading To
Closures ....................................................................................................................................... 13
A.
Enrollment Extremes Led To Financial Insolvency ............................................... 13
1.
The Impact Of Low Enrollment ............................................................................. 14
2.
The Impact Of High Enrollment ............................................................................ 15
B.
PPACA’s Premium Stabilization Directly Caused Several CO-OPs To Cease
Operations ............................................................................................................................... 16
1.
The Risk Corridor Program .................................................................................... 16
2.
The Risk Adjustment Program............................................................................... 19
VI. State Regulators Led Oversight Efforts Despite The Shared Responsibility With
CMS……………………………………………………………………………………………...23
VII. CMS Failed To Act To Mitigate CO-OP Failures ........................................................ 28
A.
CMS Oversight Of CO-OPs Is Ineffective ............................................................... 28
1.
CMS Caps Were Reactionary, Contained Errors, And Did Not Result In
Meaningful Oversight ........................................................................................................ 29
2.
CMS Failed To Notify CO-OPs About Risk Corridor Payment Shortage ....... 34
3.
CMS Failed To Provide Technical Assistance Amidst Risk Adjustment
Concerns............................................................................................................................... 36
B.
CMS Delayed Rulemakings That Could Have Helped CO-OPs Survive ........... 38
1.
CMS Tightened Some Provisions Governing Special Enrollment Periods After
Complaints From Insurers................................................................................................. 38
2.
CMS Loosened Requirements For Composition Of Boards Of Directors,
Permitting Outside Investors For The First Time .......................................................... 40
1
VIII. The Future Of The Remaining CO-OPs Is Uncertain ................................................. 43
IX.
Consequences Of The CO-OP Failures......................................................................... 46
A.
Co-Ops That Failed In The Middle Of The Year Left Others Responsible To Pay
Claims....................................................................................................................................... 46
B.
CMS’ Oversight Did Not Protect Taxpayer Dollars............................................... 49
X.
Conclusion ........................................................................................................................ 51
XI.
Recommendations ........................................................................................................... 52
XII.
Appendix .......................................................................................................................... 53
2
II.
Executive Summary
In March 2010, President Obama signed the Patient Protection and Affordable Care Act
(PPACA) into law. Because the law required individuals to purchase health care insurance,
lawmakers and stakeholders anticipated an unprecedented number of new, previously-uninsured
individuals signing up for health care insurance. To help achieve the law’s objective of
increasing choice in health care insurance plans, Section 1322 of the PPACA established the
Consumer Operated and Oriented Plan (CO-OP) program. The law authorized the Secretary of
Health and Human Services (HHS) to provide loans to help establish CO-OPs, thus increasing
choice and creating competition among insurers. The Centers for Medicare and Medicaid
Services (CMS) funded 24 CO-OPs in 23 states.
The CO-OPs were established with loan terms, set by CMS, which disadvantaged COOPs from the start. Limitations on the CO-OPs ability to seek outside capital, restrictions for
board their composition, and a lack of prior claims experience are some of the handicaps that
hindered the CO-OPs from the onset. As a result, they faced numerous challenges that set them
up for failure.
Instability with premium stabilization programs such as Risk Corridor and Risk
Adjustment, in addition to CO-OP enrollment extremes, hindered the CO-OP’s financial
stability, and it was not long before they began to fail. The Risk Corridor, a temporary three-year
program, was created to protect insurers in the event that claims costs exceeded initial projected
losses, by providing transfer payments to insurers with significant financial losses. On October 1,
2015, CMS announced that the risk corridor payments would be only 12.6 percent of what was
initially calculated and promised, resulting in CMS paying out $2.5 billion less than what they
had represented would be paid to the insurers. This extreme shortfall in funds undercut the
financial planning and therefore the financial stability of the CO-OPs. Further, despite numerous
inquiries from the CO-OPs, CMS failed to notify the CO-OPs that the risk corridor payment was
going to fall short of initial projections leaving the CO-OPs blindsided on October 1, 2015.
The Risk Adjustment program was created to protect against adverse risk selection in the
marketplace, by requiring insurance companies with healthier individuals to make payments to
insurance companies with sicker individuals to offset costs. On June 30, 2016, HHS released the
initial Risk Adjustment scores for 2015—the first year that CO-OPs had to make payments into
the program—and the data indicated that all but one of the remaining CO-OPs were responsible
for making substantial risk adjustment payments. In many cases, these payments exceeded the
CO-OP’s capital. This announcement triggered a domino effect, in which many CO-OPs
announced they would be shutting down their doors.
Closures of the CO-OPs—particularly ones that occurred outside of the open enrollment
period—left consumers scrambling to find health care insurance in order to maintain their health
insurance coverage. These closures left those consumers with fewer and likely less affordable
choices for health insurance. For the CO-OPs that didn’t have enough capital to pay outstanding
claims, other entities, such as other health insurance companies or Insurance Commissioners,
were left to find alternative ways to pay the doctors that were left with outstanding claims.
3
CMS’ mismanagement and ineffective oversight also contributed to the failure of the COOPs. CMS’s primary oversight mechanism for the CO-OPs is a Corrective Action Plan (CAP).
When CMS identifies an issues regarding financial instability, compliance, or operational and
management issues within the CO-OP, the CO-OP was placed on a CAP in an attempt to alert
the CO-OP of the issue, and further identify why this put the CO-OP at risk, and suggest ways to
remedy the situation and ensure that they were in compliance with the terms of the loan
agreement. These CAPs often were reactionary to a problem that the CO-OP was already aware
of and contained errors and outdated information. The committee’s investigation found the CAPs
to be unsuccessful and burdensome on the CO-OPs.
Less than three years into the program, only six of the original 23 CO-OPs remain,
indicating the future of existing CO-OPs remains uncertain. Several CO-OPs—both ones that are
still open and ones that have since closed—have filed lawsuits against the federal government
regarded the PPACA’s flawed premium stabilization programs which contributed to CO-OP’s
financial insolvency. Moreover, a recent HHS-OIG report has found that the remaining CO-OPs
are becoming financially insolvent, thus, reducing the likelihood that the federal government will
be repaid for startup loans. Not only does the failure of CO-OPs waste taxpayer dollars, it also
leaves hundreds of thousands of individuals displaced with insurance coverage—the exact
opposite objective of the Affordable Care Act. As Congress continues to discover red flags
regarding the viability of the program, it is imperative that CMS is held accountable to oversee
the administration of the remaining CO-OPs.
4
III. Findings
 CO-OPs either failed to meet enrollment targets or surpassed enrollment capacity, and both
scenarios created financial insolvency.
 CMS paid approximately $2.5 billion less than anticipated in Risk Corridor payments.
 HHS and Congress designed the Risk Corridor program to be budget neutral.
 State regulators notified CO-OPs of violations of state laws, requested enrollment freezes,
and weighed in on potential loan conversions.
 CMS issued CAPs in response to oversight conducted not by CMS, but rather by state
regulators and the HHS OIG.
 CMS issued CAPs that contained obvious errors and outdated information.
 CMS failed to notify CO-OPs before October 1, 2015, that Risk Corridor payments would be
less than CMS’ initial calculations.
 CMS failed to provide technical assistance as CO-OPs raised Risk Adjustment concerns.
 CMS has not enforced the rules on Special Enrollment Periods, contributing to unpredictable
enrollment figures.
 By delaying rulemaking, CMS gave CO-OPs only four months to secure outside investors.
 Operational CO-OPs are not likely to pay back loans because of potential insolvency.
5
IV. Background
President Obama signed the Patient Protection and Affordable Care Act into law on
March 23, 2010.1 The law imposed new taxes and regulations for health care insurance on
individuals and families, including a mandate requiring individuals to purchase insurance or pay
a tax. The PPACA also created an entirely new framework for individuals and small businesses
to purchase health care insurance, known as a health care insurance exchange. Exchanges
operate in all 50 states and the District of Columbia, with the stated goal of facilitating the
purchase of health insurance by individuals and small businesses as required under the law.2
Because the law required individuals to purchase health care insurance, lawmakers and
stakeholders anticipated an unprecedented number of new, previously-uninsured individuals
would sign up for coverage at the start of open enrollment.
To help achieve the law’s objective of increasing choice in health care insurance plans,
Section 1322 of the PPACA established the Consumer Operated and Oriented Plan program. A
CO-OP is a non-profit health insurance organization that is directed by its customers, and sells
individual and small business health insurance plans through the exchanges established by
PPACA.3 The law authorized the Secretary of Health and Human Services to provide loans to
help establish CO-OPs, thus increasing choice and creating competition among insurers.
Organizations such as small business coalitions, physician and hospital providers and
associations, agricultural organizations and unions have all applied for and received loans to
establish a CO-OP through this program.
Although Congress initially allotted $6 billion for the program, subsequent legislation
rescinded over half of the initial funding. The Centers for Medicare and Medicaid Service
(CMS), the agency within HHS charged with implementing the CO-OP program, ultimately
provided loans totaling $2.4 billion to 24 CO-OPs in 23 states.
On January 1, 2014 – the first day plans were available through the PPACA – 23 out of
the original 24 CO-OPs offered health insurance coverage through the new health insurance
marketplaces in 23 states. At their peak, over one million individuals were enrolled in health
insurance plans offered by one of the CO-OPs.
However, of the 23 CO-OPs that sold health insurance plans, 17 have closed to date.4 Of
those, 10 CO-OPs failed within a span of four months between July 2015 and December 2015.
1
Patient Protection and Affordable Care Act, Pub. L. No 111-148, 124 Stat. 119 (2010).
Id.
3
Originally, all the members of the Board of Directors were required to enroll in a plan through the CO-OP. HHS
recently loosened those rules to require that a majority of the Board must have CO-OP plans. This will be discussed
further in Section VII(B)(2).
4
This total does not include Vermont’s CO-OP, which state regulators dissolved before it enrolled a single person.
Despite receiving an award approved for over $33 million, Vermont’s CO-OP failed to meet the state’s insurance
standards and was denied a license to sell health insurance. Vermont’s former Chief Executive has said it will be
unable to repay $4.5 million that had been spent. See State of Vt. Dep’t of Fin. Regulation, In the Matter of:
Application by the Proposed Vermont Health CO-OP for a Certificate of Public Good and Certificate of Authority to
Commence Business as a Domestic Mutual Insurance Company, Docket No. 12-041-I (May 22, 2013); Jerry
2
6
CMS awarded these 17 failed CO-OPs just over $1.8 billion in taxpayer dollars, and to date,
none of those CO-OPs have paid back the taxpayer-funded loans. Currently, only six CO-OPs
are in operation.
These failures resulted in significant social costs and individual hardships. The committee
examined the reasons behind these failures, and concluded that the failure of the 17 CO-OPs can
be attributed to both fundamental flaws in the underlying law that placed CO-OPs at a
disadvantage from the beginning, and failures by CMS to manage CO-OPs so that they could
succeed and pay back taxpayer-funded loans. These same challenges continue to plague the
remaining six operating CO-OPs, and a number of them face uncertain futures.
A. The ACA Authorizes CMS to Establish and Regulate CO-OPs
Section 1322 of the PPACA established the CO-OP program, to provide consumers more
choices in their healthcare plans and increase competition among insurers. According to CMS,
CO-OPs were designed to be “directed by their customers and designed to offer individuals and
small businesses additional affordable, consumer-friendly, and high-quality health insurance
options.”5
CMS awarded $2.4 billion in federally funded loans to the 24 CO-OPs established under
the law through two types of loans – start-up loans and solvency loans. Start-up loans were
intended to assist CO-OPs with start-up activities and initial operations and must be repaid
within five years. Solvency loans were intended to enable CO-OPs to meet the capital reserve
requirements of the various states in which the applicants sought a license to sell insurance;6 COOPs are required to repay solvency loans with interest within 15 years. Each CO-OP received
both types of loans. Of the $2.4 billion in loans to CO-OPs, $358 million were in the form of
start-up loans and $2.08 billion were for solvency loans. Further, under the terms of the program,
CO-OPs must pay any outstanding debts or obligations before repaying the loan funds to CMS.
CMS made initial start-up loans to the 24 CO-OPs from February 2012 to December
2012. The following chart details the schedule of loans. The chart also shows the dates the 17 of
the 23 failed, including the 10 that failed between July 2015 and December 2015. The data in the
chart was published on CMS’ website.7
Markon, Health co-ops, created to foster competition and lower insurance costs, are facing danger, THE WASH.
POST Oct. 22, 2013.
5
The Center for Consumer Information & Insurance Oversight, New Federal Loan Program Helps Nonprofits
Create Customer-Driven Health Insurers, available at: https://www.cms.gov/CCIIO/Resources/Fact-Sheets-andFAQs/coop_final_rule.html (last visited August 29, 2016).
6 State regulators require insurance companies to maintain certain levels of capital in order to conduct business.
Requirements differ by state.
7
See Center for Consumer Information, supra note 5.
7
Name of CO-OP
Compass Cooperative Mutual Health Network,
Inc. d/b/a Meritus Health Partners (Arizona)
Colorado Health Insurance Cooperative, Inc.
(CHI) d/b/a Colorado HealthOp
HealthyCT, Inc. d/b/a HealthyCT (Connecticut)
Land of Lincoln Health Mutual Health
Insurance Company (formerly Metropolitan
Chicago Healthcare Council CO-OP) d/b/a Land
of Lincoln Health (Illinois)
CoOportunity Health (formerly Midwest
Members Health) (Iowa and Nebraska)
Kentucky Health Cooperative, Inc. (Kentucky
and West Virginia)
Louisiana Health Cooperative, Inc.
Award
Amount
$93,313,233
Award
Date
June 7, 2012
Date of Closure
Announcement
October 30, 2015
$72,335,129
July 23,
2012
June 7, 2012
December
21, 2012
October 16, 2015
February 17,
2012
June 19,
2012
September
27, 2012
March 23,
2012
September
27, 2012
August 13,
2012
May 17,
2012
February 17,
2012
May 17,
2012
February 17,
2012
February 17,
2012
February 17,
2012
October 12,
2012
January 23, 2015
February 21,
2012
March 23,
2012
March 27,
2012
August 29,
2012
July 6, 2012
October 16, 2015
February 17,
2012
N/A
$127,980,768
$160,154,812
$145,312,100
$146,494,772
$65,790,660
Maine Community Health Options (MCHO)
$132,316,124
Evergreen Health Cooperative Inc. (Maryland)
$65,450,900
Minuteman Health, Inc. (Massachusetts and
New Hampshire)
Michigan Consumer's Healthcare CO-OP
$156,442,995
Montana Health Cooperative
$85,019,688
Nevada Health Cooperative (formerly
Hospitality Health CO-OP)
Freelancers CO-OP of New Jersey d/b/a Health
Republic Insurance of New Jersey
New Mexico Health Connections
$65,925,396
Freelancers Health Service Corporation d/b/a
Health Republic Insurance of New York
Coordinated Health Mutual, Inc. (Formerly
Coordinated Health Plans of Ohio, Inc.) d/b/a
InHealth Mutual (Ohio)
Freelancers CO-OP of Oregon d/b/a Health
Republic Insurance of Oregon
Oregon's Health CO-OP (Formerly Community
Care of Oregon)
Consumers' Choice Health Insurance Company
(CCHIC) (South Carolina)
Community Health Alliance Mutual Insurance
Company (Tennessee)
Arches Mutual Insurance Company (Formerly
Arches Community Healthcare) (Utah)
Common Ground Healthcare Cooperative
(Wisconsin)
$265,133,000
$71,534,300
$109,074,550
$77,317,782
$129,225,604
$60,648,505
$56,656,900
$87,578,208
$73,306,700
$89,650,303
$107,739,354
8
July 5, 2016
July 12, 2016
October 9, 2015
July 24, 2015
N/A
N/A
N/A
November 3, 2015
N/A
August 25, 2015
September 12, 2016
N/A
September 25, 2015
May 26, 2016
July 8, 2016
October 22, 2015
October 14, 2015
October 27, 2015
B. Early Concerns about the CO-OP Program Prompts Committee
Investigation
Even before CMS awarded the first loan to a CO-OP, there were signals that the program
would not be a good investment for the taxpayer. In 2009, Senator John Rockefeller (D-WV)
expressed concern about the viability of the CO-OP model for providing health care insurance,
calling it a “dying business model for health insurance”:
[T]here has been no significant research into consumer co-ops as a model
for health insurance. What we do know, however, is that this model was
tried in the early part of the 20th century and largely failed…This is a dying
business model for health insurance…I believe it is irresponsible to invest
over $6 billion in a concept that has not proven to provide quality,
affordable health care.8
PPACA imposed restrictions on the use of federal funds, and CO-OPs were
unable to use federal funds for marketing purposes or to attempt to influence legislation.9
Also, regulations issued pursuant to PPACA imposed additional restrictions, such as
restricting board membership to CO-OP enrollees.10 The law also made the CO-OPs –
entirely new businesses in a new marketplace – subject to the complexities and volatility
of the Risk Corridor and Risk Adjustment programs.
Not surprisingly, even before CMS awarded loans to any of the CO-OPs, both HHS and
the Office of Management and Budget (OMB) projected significant losses of taxpayer dollars
because of the taxpayer-funded loans made through this program. In its 2011 proposed rule to
implement the CO-OP program, HHS estimated that the CO-OPs would fail to repay
approximately one-third of the loans, predicting that only “65 percent of the Solvency Loans and
60 percent of the Start-up Loans” would be repaid.
The capital requirements for CO-OPs would be financed, in part, by
member premiums and in part by the $3.8 billion dollars available for loans
over the next five years. The net Federal costs of these loans to CO-OPs are
“transfers.” The net transfer costs resulting from default and loss of interest
over the relevant 5 year (Start-up Loan) and 15 year (Solvency Loan)
periods are estimated later in this analysis, in Table 1. We estimate that 65
percent of the Solvency Loans and 60 percent of the Start-up Loans will be
repaid.11
8
Letter from John D. Rockefeller, Chairman, S. Comm. on Commerce, Sci., & Transp., to S. Comm. on Fin.
Chairman Max Baucus and S. Comm. on Fin. Ranking Member Charles Grassley (Sept. 16, 2009).
9
PPACA Section 1322
10
“Patient Protection and Affordable Care Act; Establishment of Consumer Operated and Oriented Plan (CO-OP)
Program,” 76 FR 77392 (December 13, 2011).
11
“Patient Protection and Affordable Care Act; Establishment of Consumer Operated and Oriented Plan (CO-OP)
Program,” 76 Federal Register 139 (July 20, 2011), p. 43247.
9
HHS’ final rule further assessed CO-OP’s repayment terms and acknowledged that “[t]he
business plan, disbursement schedule, and repayment terms will vary for each loan recipient. As
such, these transfers are uncertain, and will vary from loan to loan.”12 One year later, as part of
its proposed budget for fiscal year 2013, OMB also projected significant losses.13 In the
following chart, OMB predicted that the federal government would not recover approximately
37 percent of startup loans, and approximately 43 percent of solvency loans. This projected loss
is characterized in the chart as a “loan subsidy:”
Based on these troubling projections, the committee launched an investigation of the COOP program. In April of 2012, after OMB projected that CO-OPs would be unable to repay over
40 percent of the loans offered through the program, the committee sent a letter to then CMS
Acting Administrator Marilyn Tavenner, requesting information and documents about CMS’s
implementation of the program, and expressed concern that the CO-OPs would not be financially
viable.14
In its July 12, 2012, response to the committee, CMS stated that the loan subsidy rate,
43.21 percent, in the President’s Budget is a “general budget assumption factor used in all
federal loan programs.”15 CMS noted that figure includes “important program features such as
discounted loan rates and flexible repayment schedules” which CMS said would help CO-OPs
succeed so they could repay loans. Further, the default rate assumed in the 43.21 percent subsidy
rate is defined as “scheduled principle and interest not received on time.” CMS argued that
delayed repayment could in fact be a “sign of growth.”
Congress’ concerns were not assuaged by these arguments. Initially, the PPACA allotted
$6 billion16 for the CO-OP program, and the administration set a goal to establish a CO-OP in
“Patient Protection and Affordable Care Act; Establishment of Consumer Operated and Oriented Plan (CO-OP)
Program,” 76 FR 77392 (December 13, 2011), p. 77392 -77415.
13
Office of Management and Budget, Budget of the U.S. Government, Fiscal Year 2013, available at
https://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/cr_supp.pdf. p. 3
14
Letter from Hon. Fred Upton, Chairman, H. Comm. on Energy & Commerce, to Marilyn Tavenner, Acting
Administrator, Centers for Medicare & Medicaid Serv. (April 24, 2012), available at
https://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/letters/20120424CMS.pdf
15
Letter from Marilyn Tavenner, Acting Administrator, Centers for Medicare & Medicaid Services, to Fred Upton,
Chairman, H. Comm. on Energy & Commerce. (July 12, 2012), on file with the Committee.
16
See Kaiser Family Foundation, Summary of the Affordable Care Act, Kaiser Family Foundation: Health Reform,
(April 25, 2013), available at: http://kff.org/health-reform/fact-sheet/summary-of-the-affordable-care-act/
12
10
each of the 50 states.17 However, concerns about the solvency of the CO-OPs and their ability to
repay taxpayer-funded loans led Congress to rescind partial funding for the program.18
Ultimately, Congress rescinded funding for the program three times. In April 2011, Congress
passed a continuing resolution, signed by President Obama, which cut $2.2 billion from the
program.19 In December 2011, Congress cut an additional $400 million in its Omnibus
Appropriations Act.20 Then, in January 2013, Congress rescinded another $2.3 billion from the
program.21
By the time Congress made its last rescission in January 2013, CMS had already
awarded $1.98 billion in taxpayer-funded loans to 24 CO-OPs. Another 26 potential CO-OPs had
applied for funding through the program, but Congress rescinded funding before CMS awarded
any additional loans.22 The funding restrictions, however, did not affect loans to the original 24
CO-OPs. In fact, some of the 24 CO-OPs received $350 million in additional funding from CMS
in December 2014. Altogether, funding to the 24 CO-OPs totaled $2.4 billion.
In July 2013, the HHS Office of the Inspector General (HHS OIG) released its first audit
of the CO-OP program. In this audit, the HHS OIG identified factors that could adversely affect
the CO-OP program, including limited private monetary support and startup expenditures that
exceeded available funding, despite large federal loans from CMS. The HHS OIG audit found
that “11 of 16 CO-OPs reported estimated startup expenditures in their applications that
exceeded the total startup funding provided by CMS.”23
The HHS OIG released another audit in July 2015 that found most of the 23 CO-OPs
reviewed had not met their initial program enrollment and profitability projections. In 13 of the
23 CO-OPs, member enrollment was considerably lower than the CO-OPs’ initial annual
projections, and 21 of the 23 CO-OPs incurred net losses from January 1, through December 31,
2014.24 More than half of the 23 CO-OPs had net losses of at least $15 million for this period.
The HHS OIG explained that “low enrollments and net losses might limit the ability of some
17
Amy Goldstein, Financial Health Shaky at Many Obamacare Insurance Co-Ops, WASH. POST, Oct. 10, 2015,
available at https://www.washingtonpost.com/national/health-science/financial-health-shaky-at-many-obamacareinsurance-co-ops/2015/10/08/2ab8f3ec-6c66-11e5-9bfe-e59f5e244f92_story.html
18
CO-OP plans are prohibited from using loans for marketing purposes, prohibited from working with insurers
already in operation and they have to enroll members and contract with providers. Because of these factors, the
solvency of the CO-OPs’ was risky. See e.g. Avik Roy, Six Solyndras: Obamacare Blows $3 Billion on Faulty COOP Insurance Loans, FORBES, May 30, 2012, available at:
http://www.forbes.com/sites/theapothecary/2012/05/30/six-solyndras-obamacare-blows-3-billion-on-faulty-co-opinsurance-loans/#4f246825d013
19
Pub. L. No. 112−10, 125 Stat. 38 (April 15, 2011).
20
Pub. L. No. 112-74, 125 Stat. 786 (Dec. 23, 2011)
21
Pub. L. No. 112-240, 126 Stat. 2313, 2362 (Jan. 2, 2013).
22
National Alliance of State Health CO-OPs, Health Insurance CO-OPs Outraged at Cuts to CO-OP Loan
Program, Jan. 3, 2013, available at: http://nashco.org/health-insurance-co-ops-outraged-at-cuts-to-co-op-loanprogram/.
23
Office of Inspector Gen., Dep’t of Health and Human Servs., The Centers for Medicare & Medicaid Services
Awarded Consumer Operated and Oriented Plan Program Loans in Accordance with Federal Requirements, and
Continued Oversight is Needed, Audit no. A-05-12-00043 (July 2013).
24
Office of Inspector Gen., Dep’t of Health and Human Servs., Actual Enrollment and Profitability Was Lower
Than Projections Made By The Consumer Operated and Oriented Plans and Might Affect Their Ability To Repay
Loans Provided Under the Affordable Care Act, Audit no. A-05-14-00055 (July 2015).
11
CO-OPs to repay startup and solvency loans.”25 In the four months following the release of this
audit, 10 CO-OPs collapsed. Seven additional CO-OPs failed the following year.
The committee’s Oversight and Investigations Subcommittee convened a hearing on
November 5, 2015, titled “Examining the Costly Failures of ObamaCare’s CO-OP Insurance
Loans.”26 The hearing featured testimony from state regulators, CO-OP representatives, the HHS
OIG, and CMS Chief of Staff Mandy Cohen. At the hearing, and throughout its investigation, the
committee sought to understand the factors that contributed to the collapse of 17 CO-OPs, to
date, and CMS’ process to recover loans awarded to CO-OPs that failed. The committee has also
examined the effectiveness of CMS’ oversight mechanisms to monitor CO-OPs, and steps that
CMS, CO-OPs and state regulators can take to help CO-OPs repay the loans and minimize loss
to taxpayers.
Following the hearing, the committee sent a letter to CMS’ Acting Administrator Andrew
Slavitt on November 24, 2015, requesting additional information and documents regarding the
CO-OP program.27 CMS has provided all of the oversight plans issued by CMS to the struggling
CO-OPs, known as Corrective Action Plans (CAP). In addition, the CAPs for existing CO-OPs
were made available to committee staff for review in camera at CMS.
To gain a better understanding of the functioning of this program, the committee also
requested information and documents from the CO-OPs themselves. On May 16, 2016, the
committee requested that each of the 11 CO-OPs then in existence provide information and
documents about the CO-OP loan process, the financial viability of the CO-OP, CMS’ oversight
processes, and policy changes that could help the CO-OP pay back taxpayer funded-loans.28 A
copy of the committee’s letter can be found in the Appendix. The committee received
substantive responses from the 10 CO-OPs, although three have since failed. One CO-OP,
InHealth Mutual of Ohio, did not reply because state regulators closed the CO-OP weeks after
the committee sent its request letter.
The documents produced by 10 CO-OPs, hearing testimony, briefings with the National
Alliance of State Health CO-OPs, and reports issued by the HHS OIG have allowed the
committee to assess the factors contributing to the failure of the CO-OP program, and CMS’
oversight relationship with CO-OPs. The committee has found that fundamental flaws in the COOP program, along with premium stabilization challenges and CMS’ mismanagement and lack
of oversight contributed to the failures of the CO-OPs.
Office of Inspector Gen., Dep’t of Health and Human Servs., Actual Enrollment and Profitability Was Lower
Than Projections Made By The Consumer Operated and Oriented Plans and Might Affect Their Ability To Repay
Loans Provided Under the Affordable Care Act, Audit no. A-05-14-00055 (July 2015).
26
H. Comm. on Energy & Commerce, Subcomm. on Oversight & Investigations, Examining the Costly Failures of
Obamacare’s CO-OP Insurance Loans, 114th Cong. (Nov. 5, 2015).
27
Letter from Hon. Fred Upton, Chairman, H. Comm. on Energy & Commerce, to Andrew Slavitt, Acting
Administrator, Centers for Medicare & Medicaid Serv. (November 24, 2015), available at:
https://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/114/Letters/20151124CMS.p
df.
28
See, e.g., Letter from Hon. Fred Upton, Chairman, H. Comm. on Energy & Commerce, to Cathy Mahaffey, Chief
Executive Office, Common Ground Healthcare Cooperative (May 16, 2016).
25
12
V.
CO-OPs Face Unpredictable Enrollment and Volatile Risk
Programs, Leading to Closures
Ultimately, the root cause of the CO-OPs failure stems from poor policies established
through the PPACA and CMS’s lack of flexibility or action to help CO-OPs succeed. HHS,
OMB, and HHS OIG all acknowledged that the CO-OPs faced fundamental obstacles. The
committee’s investigation found that CO-OPs were poorly situated to succeed from the very
beginning largely due to the inflexibilities of the underlying law, CO-OPs faced extremes in
enrollment numbers and were more vulnerable than other insurance providers to the volatility of
the Risk Adjustment and Risk Corridor programs. From January 1, 2014 – the first day CO-OPs
offered plans through the PPACA – to the issuance of this report, 17 CO-OPs have shut down,
causing approximately 885,600 members to lose insurance coverage.29 The fast and massive
failure rate for the CO-OP program has not only squandered millions of taxpayer funds, but also
caused hundreds of thousands of individuals to have displaced insurance coverage.
A. Enrollment Extremes Led to Financial Insolvency
FINDING:
CO-OPs either failed to meet enrollment targets or surpassed enrollment
capacity, and both scenarios created financial insolvency.
Shortly after CO-OPs began selling health care insurance plans through exchanges
established by PPACA, problems became evident with both higher-than-expected enrollment and
lower-than-expected enrollment. In 2014, over half of the CO-OPs fell short of meeting their
enrollment targets, and overall, member enrollment was considerably lower than initial
projections.30 However, nine of the 23 CO-OPs surpassed enrollment projections. Large
enrollment margins stemming from both failing to enroll enough individuals, and enrolling too
many individuals crippled the financial solvency of CO-OPs. The following chart reflects the
actual enrollment versus projected enrollment for the CO-OPs as of December 31, 2014, and also
provides a percentage of projected enrollments for each CO-OP:31
29
U.S. Health Policy Gateway, Nonprofit Consumer Operated and Oriented Plan Organizations, U.S. Health Policy
Gateway.Com, available at: http://ushealthpolicygateway.com/vii-key-policy-issues-regulation-and-reform/patientprotection-and-affordable-care-act-ppaca/ppaca-repeal/components-of-aca-not-working-well/components-of-acanot-working-well-health-exchanges/nonprofit-consumer-operated-and-oriented-plan-organizations-co-ops/
30
Office of Inspector Gen., Dep’t of Health and Human Servs., Actual Enrollment and Profitability Was Lower
Than Projections Made By The Consumer Operated and Oriented Plans and Might Affect Their Ability To Repay
Loans Provided Under the Affordable Care Act, Audit no. A-05-14-00055 (July 2015).
31
Id.
13
1. The Impact of Low Enrollment
In 2014, a majority of the CO-OPs enrolled fewer individuals than projected.32 Notably
CO-OPs in Arizona, Illinois, Massachusetts, Oregon, and Tennessee failed to enroll 10 percent
of their initial projections.33 In a 2015 report, HHS OIG determined a number of CO-OPs failed
to achieve projected enrollment targets for the following reasons:

Marketplace technical difficulties (i.e. website crashes, long wait times, inability for
site to capture all customer information);

Delays in obtaining licenses to sell insurance on the exchange;
32
Id.
Community Health Alliance (CHA), Tennessee’s CO-OP enrolled fewer than 1,000 individuals in five of eight
rating areas, against its goal of 25,000 in 2014. In 2015, CHA’s enrollment grew exponentially, and the CO-OP
faced problems from exceeding enrollment capacity, which is further discussed in Section V of this report. Also see,
Jeff Byers, Tennessee Health Co-OP to Stop Offering Coverage in 2016, Healthcare Dive, Oct. 14, 2015, available
at: http://www.healthcaredive.com/news/tennessee-health-co-op-to-stop-offering-coverage-in-2016/407340/
33
14

CO-OP management changes affecting ability to market and sell health plans;

CO-OPs pricing plans higher than other health insurers with more name-brand
recognition.34
As a result of low enrollment, CO-OPs were not able to cover medical claims expenses
that exceeded the income from premiums collected, ultimately contributing to losses.35
This negative outcome should not have come as a surprise to CMS. For example, in a
2013 audit, HHS OIG advised CMS that unpredictable circumstances, such as limited
enrollment, would impede CO-OPs from becoming operational.36 HHS OIG explicitly mentioned
that such circumstances would increase the risk of CO-OPs exhausting all startup funding before
establishing sufficient operating income to become self-supporting.37 This very scenario came to
fruition for several CO-OPs. In 2015, Louisiana, Nevada, and one of the two Oregon CO-OPs
announced plans to wind down operations after two unsuccessful enrollment periods led to
insolvency.38
2. The Impact of High Enrollment
Higher enrollment proved to be an even greater challenge than low enrollment for the
CO-OPs. If the CO-OP did not set premiums adequately, the CO-OP is not able to remain
financially solvent. This too, negatively affects the viability of CO-OPs because the greater the
enrollment, the greater the costs to run an insurance company and cover claims.
In contrast, too many enrollees can also present a threat to the viability of CO-OP. Table
1 on the preceding page shows how several CO-OPs exceeded their 2014 initial enrollment
projections, an outcome which has proven even more hazardous than lower enrollment for the
financial stability of CO-OPs. Several CO-OPs experienced rapid enrollment growth, thus
exceeding the CO-OP’s capacity to effectively handle administrative aspects of the program such
as, paperwork, issuing insurance cards, and maintaining customer service centers.39 The inability
to manage the mounting costs forced these CO-OPs into insolvency. For example, the PPACA’s
largest CO-OP, Freelancers Health Service Corporation, known as Health Republic Insurance of
34
Id.
Id.
36
Office of Inspector Gen., Dep’t of Health and Human Servs., The Centers for Medicare & Medicaid Services
Awarded Consumer Operated and Oriented Plan Program Loans in Accordance with Federal Requirements, and
Continued Oversight is Needed, Audit no. A-05-12-00043 (July 2013).
37
Office of Inspector Gen., Dep’t of Health and Human Servs., Actual Enrollment and Profitability Was Lower
Than Projections Made By The Consumer Operated and Oriented Plans and Might Affect Their Ability To Repay
Loans Provided Under the Affordable Care Act, Audit no. A-05-14-00055 (July 2015).
38
Associated Press, Oregon Health Insurance CO-OP to Shut Down, KEZI.com, (October 16, 2015), available at:
http://www.kezi.com/news/Oregon_Health_Insurance_Co-Op_to_Shut_Down.html; Louisiana Health Cooperative,
News Release: LAHC Forgoes Participation in Open Enrollment, (July 24, 2015), available at:
http://www.mylahc.org/news/NEWS-RELEASE---LAHC-forgoes-participation-in-Open-Enrollment, Nevada
Health COOP, Nevada Health CO-OP in Receivership, (October, 14, 2015), available at:
http://nevadahealthcoop.org/
39
See Office of Inspector Gen., supra note 37.
35
15
New York, enrolled over 155,000 individuals in 2014, exceeding projections by 500 percent.40
Despite its massive enrollment, New York state authorities ordered the CO-OP to stop writing
new policies after determining the CO-OP was financially insolvent.41
B. PPACA’s Premium Stabilization Directly Caused Several COOPs to Cease Operations
The premium stabilization programs in the PPACA – particularly the Risk Adjustment
and Risk Corridor programs caused financial strain to the CO-OPS. In an effort to safeguard
insurance companies against various financial risks associated with implementation of the law,
the PPACA established premium stabilization programs to all non-grandfathered42 health plans
in the individual and small group markets, inside and outside the State-Based Exchanges and the
Federally-Facilitated Exchanges. The Risk Corridor program is intended to balance costs from
insurance companies that experience deficits from issuer losses. The Risk Adjustment program is
intended to balance costs of insurance companies that provide coverage to sicker patients.
1. The Risk Corridor Program
Section 1342 of the PPACA requires HHS to set up a temporary43 Risk Corridor program
to help reduce pricing uncertainty in the new health insurance exchanges.44 The program allows
the federal government, specifically HHS, to share risk with insurers.45
Under the Risk Corridor program, if the CO-OP’s actual claims exceed at least three
percent of its projected claims, HHS is responsible for reimbursing the CO-OP for half of the
excess through Risk Corridor transfer payments.46 If the actual claims for the CO-OP exceed
eight percent beyond what was projected, HHS is responsible for covering 80 percent of the
40
Anna Wilde, Mathews, Regulators to Shut Down Health Republic Insurance of New York: Officials Cite
Likelihood that Health Cooperative Would Become Financially Insolvent, WALL STREET J., September 25, 2015,
available at: http://www.wsj.com/articles/regulators-to-shut-down-health-republic-insurance-of-new-york1443222742
41
Id.
42
Grandfathered health plans are insurance policies that were purchased on or before March 23, 2010, and are
exempted from PPACA rules such as Risk Adjustment. See, Center for Consumer Info. & Ins. Oversight,
Amendment to Regulation on “Grandfathered” Health Plans under the Affordable Care Act, Centers for Medicare
& Medicaid Serv., available at:
https://www.cms.gov/CCIIO/Resources/Files/factsheet_grandfather_amendment.html.
43
The temporary risk corridors program protects qualified health plans from uncertainty in rate setting from 2014 to
2016 by having the federal government share risk in losses and gains. See, Center for Consumer Info. & Ins.
Oversight, Premium Stabilization Programs, Centers for Medicare & Medicaid Serv., available at:
https://www.cms.gov/CCIIO/Programs-and-Initiatives/Premium-Stabilization-Programs/
44
See 42 U.S.C. § 18062-Establishment of Risk Corridors for Plans in Individual and Small Group Markets
45
American Academy of Actuaries, Fact Sheet: ACA Risk-Sharing Mechanisms, The 3Rs (Risk Adjustment, Risk
Corridor, and Reinsurance) Explained, 2013), available at:
http://actuary.org/files/ACA_Risk_Share_Fact_Sheet_FINAL120413.pdf
46
Id.
16
excess.47 If actual claims fall below expected claims by more than three percent, the CO-OP pays
HHS at least 50 percent of the excess.48
FINDING:
CMS paid approximately $2.5 billion less than anticipated in Risk Corridor
payments.
The CO-OP’s costs exceeded the amount that they anticipated and therefore CO-OPs
were left in a financial deficit and were entitled to receive Risk Corridor payments. 49 However,
on October 1, 2015, CMS announced that Risk Corridor payments would be only 12.6 percent of
the initial calculated amounts. Accordingly, CMS paid out $2.5 billion less than what CO-OPs
were expecting.50
Not surprisingly, the decision to pay only 12.6 percent of estimated costs proved
disastrous for a number of CO-OPs. For example, in 2014, the Kentucky CO-OP’s losses were
approximately $50 million, and decreased to $4 million during the first half of 2015.51 Kentucky
expected to reach financial solvency toward the end of year 2016, however, after CMS
announced they could only pay 12.6 percent of Risk Corridor transfer payments, the CO-OP
announced plans to shut down.52
Kentucky was not the only CO-OP to immediately shut its doors after CMS announced
the Risk Corridor program was not fully funded. Prior to CMS’ announcement, a CO-OP serving
the state of Colorado, Colorado HealthOP, was in a financially strong position with cash reserves
and flourishing enrollment.53 The CO-OP was even projected to make a profit in 2016. However,
after learning that risk corridor payments were less than expected, the CO-OP’s solvency
plummeted overnight and it ultimately shuttered its operations.54 As a result, Colorado taxpayers
and consumers suffered significant ramifications – approximately 40 percent of Coloradans who
purchased insurance through the exchange in 2015, were forced out of the coverage they chose.55
In addition, the shutdown caused the CO-OP to default on $72 million in federal start-up and
solvency funding – all of which the CO-OP was on track to pay if they could continue to
operate.56
47
Id.
Id.
49
Per PPACA’s Risk Corridor Program, if the CO-OP’s actual claims exceed at least three percent of its projected
claims, HHS is responsible for reimbursing the CO-OP for half of the excess, through Risk Adjustment transfer
payments. If the actual claims for the CO-OP exceed eight percent beyond what was projected, HHS is responsible
for covering 80 percent of the excess.
50
Hurman, Bob, Feds Short Insurers $2.5 Billion on Exchange Plan Losses, Modern Healthcare, October 1, 2015.
51
King, Robert, Kentucky Insurer Shuts Down, Washington Examiner, (October 9, 2015), available at:
http://www.washingtonexaminer.com/kentucky-insurer-shuts-down/article/2573818
52
Id.
53
Colorado HealthOP Press Release, Colorado HealthOP Vows to Fight for Member Interests After Division of
Insurance’s Closure Decision, (October 16, 2015), available at: https://cohealthop.org/health-cooperative-closurepress-release/
54
Id.
55
Id.
56
Id.
48
17
Moreover, several CO-OPs filed lawsuits against the federal government after learning
they would receive millions less than promised in Risk Corridor payments. Before shutting its
door, Land of Lincoln Health, the CO-OP serving the state of Illinois, filed a lawsuit against the
Government on June 23, 2016. The CO-OP is seeking approximately $73 million for risk
corridor payments the Government failed to deliver as promised.57 On February 24, 2016, Health
Republic Insurance Company, the CO-OP serving Oregon, filed a complaint against the federal
government, stating it is owed $7.1 million in risk corridor payments for 2014, and $15 million
for 2015.58 In addition, the Insurance Commissioner for the state of Iowa, Nick Gerhard, filed a
lawsuit against the government on May 3, 2016, alleging that the government owes Iowa COOP, Co-Opportunity, over $113.6 million in risk corridor payments, which it is unable to pay
because they exceed the amount that can be collected from insurers that owed money to the
program.59 Gerhard argues that if the funds promised to the CO-OPs from the government were
made available, the CO-OP could have covered the claims of its participants and repay loans
owed to the federal government.60
FINDING:
HHS and Congress designed the Risk Corridor program to be budget
neutral.
Congress has been criticized for CMS’s decision to limit Risk Corridor payments to 12.6
percent because a provision in the 2015 Omnibus Appropriations bill which codified the Risk
Corridor program as “budget neutral.”61 However, well before the adoption of this provision,
CMS had already indicated its intention to make the program budget neutral, based on other
similar programs. In January 2014, Aaron Albright, a spokesperson for CMS confirmed that the
Risk Corridor program was, in fact, designed and modeled to be budget neutral since its
inception:
The temporary risk corridor provision in the Affordable Care Act is an
important protection for consumers and insurers as millions of Americans
transition to a new coverage in a brand new marketplace. The policy,
modeled on the risk corridor provision in [Medicare] Part D that was
supported on a bipartisan basis, was established to be budget neutral, and
we intend to implement it as designed.62
57
Carla Johnson, Illinois Insurance CO-OP Sues Feds Over Health Law Payments, The Courier, June 23, 2016,
available at: http://www.lincolncourier.com/news/20160623/illinois-insurance-co-op-sues-feds-over-health-lawpayments
58
Bell, Allison, Oregon CO-OP sues for $5 billion in risk corridor cash, Life Health Pro, Feb 25, 2016, available
at: http://www.lifehealthpro.com/2016/02/25/oregon-co-op-sues-for-5-billion-in-risk-corridors
59
Keenan, Chelsea, Iowa Insurance Division Files Lawsuit Against Federal Government: Iowa Seeks $20 Million
Connected with CoOpportunity Failure, The Gazette, (May 3, 2016), available at:
http://www.thegazette.com/subject/news/health/iowa-insurance-division-files-lawsuit-against-federal-government20160503
60
Id.
61
Consolidated and Further Continuing Appropriations Act, Pub. L. 113–235, 128 Stat. 2130 (Dec.
16, 2014).
62
Louise Radnofsky and Jennifer Corbett Dooren, Explaining ‘Risk Corridors,’ The Next Obamacare Issue, WALL
STREET J., January 22, 2014, available at: http://blogs.wsj.com/washwire/2014/01/22/explaining-risk-corridorsthe-next-obamacare-issue/ (Emphasis added).
18
On April, 2014, CMS issued a memorandum which confirmed Mr. Albright’s statement:
“[I]n the HHS Notice of Benefit and Payment Parameters for 2015 final rule
(79 FR 13744) and the Exchange and Insurance Market Standards for 2015
and Beyond NRPM (79 FR 15808), HHS indicated that it intends to
implement the risk corridor program in a budget neutral manner.”63
Thus, the 2015 Omnibus Appropriations bill should be viewed as confirming the approach the
Administration had already committed to take.
2. The Risk Adjustment Program
The Risk Adjustment program is another premium stabilization program which attempts
to balance costs for insurance companies faced with paying high insurance claims for insuring
sicker patients. The Risk Adjustment program requires insurance companies with lower-risk or
healthier individuals to distribute funds to plans with higher-risk or sicker individuals.64 Risk
Adjustment is a concept applied to other health insurance programs, yet its application and
formula vary depending on the program.65
For the CO-OP program, each insurance plan receives a health insurance risk score,
based on the average risk scores assigned to each individual enrolled into the plan.66 Risk scores
indicate how costly an individual is anticipated to be for a plan to insure (i.e., a relative measure
of the individual’s actuarial risk to the plan). Plans are responsible for uploading individual
enrollment and claims data into a CMS server, which generates the plans’ risk score calculation.
CO-OPs were not required to make Risk Adjustment transfer payments until 2016, because prior
diagnosis data to calculate Risk Adjustment was not made available from CMS. 67
The PPACA authorized HHS to utilize criteria and methods similar to those utilized
under Medicare Part C or D to implement risk adjustment.68 However, unlike the Medicare Part
C and D programs, in which Risk Adjustment was calculated using previous diagnosis data from
other Medicare programs, the Risk Adjustment data for PPACA’s individual and small group
markets was unknown.69 HHS had to assume several figures, which ultimately affected the
Dep’t of Health and Human Serv., Centers for Medicare & Medicaid Serv., Center for Consumer Information &
Insurance Oversight, Risk Corridors and Budget Neutrality, (April 11, 2014), available at:
https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/faq-risk-corridors-04-11-2014.pdf
64
See Kaiser Family Foundation, Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk
Corridors, Kaiser Family Foundation: Health Reform, (Jan. 22, 2014), available at: http://kff.org/healthreform/issue-brief/explaining-health-care-reform-risk-adjustment-reinsurance-and-risk-corridors/
65
Medicare Advantage, plans on the State Based Exchanged and Federally Facilitated Exchange all use various risk
adjustment formulas to compensate for claims from higher-risk individuals.
66
Individual risk scores are comprised of diagnosis codes, which are categorized into Hierarchical Category Codes
(HCCs). Each HCC carries a specific numeric value- the more complex a diagnosis, the higher the HCC value, and
therefore, a higher risk score is generated. CMS determines sets the HCCs numeric value.
67
Id. at 61
68
Dep’t of Health and Human Serv., Centers for Medicare & Medicaid Serv., Center for Consumer Information &
Insurance Oversight, March 31, 2016, HHS-Operated Risk Adjustment Methodology Meeting, CMS Discussion
Paper, (March 24, 2016).
69
Id.
63
19
actuarial risk in the market.70 The HHS Risk Adjustment transfer payments did not account for
various differences across plans, and forced a majority of CO-OPs to make Risk Adjustment
payments, rather than receive such payments to offset costs from insuring sicker patients.
In March 2016, CMS issued a white paper addressing the Risk Adjustment methodology,
and acknowledged how various parameters set by the PPACA ultimately hindered the Risk
Adjustment methodology from offsetting premium risk.71 Specifically, CMS cited how the fact
that “[t]he Affordable Care Act established four tiers of plan actuarial value, or ‘metal levels’
plus catastrophic plans, which are risk adjusted in a separate risk pool” complicated HHS’ Risk
Adjustment methodology. CMS explained:
The presence in the market of plans with different actuarial values posed a
challenge for the risk adjustment methodology - how to preserve premium
differences that reflect differences in generosity of plan coverage. Risk
adjustment transfers should counteract the effects of risk selection…72
If the Risk Adjustment methodology allocated for differences in various plans established by the
PPACA, transfer payments would not have required certain plans, such as CO-OPs in a rural
areas or those with a smaller population base, to pay higher Risk Adjustment payments.
On June 30, 2016, the date HHS first released risk adjustment scores for the 2015 benefit
year, the data indicated that all but one of the CO-OPs was responsible for making substantial
risk adjustment payments. In many cases, these payments exceeded the amount of the CO-OPs
capital, and as a result, the Risk Adjustment Program jeopardized the financial solvency of the
CO-OPs. The following table shows the net income for each CO-OP before having to make risk
adjustment payments, and their net income after having to pay into the risk adjustment
program:73
70
Id.
Id.
72
Id.
73
Katherine Hempstead, Risk Adjustment and Co-Op Financial Status, Robert Wood Johnson Foundation, July 11,
2016, available at: http://www.rwjf.org/en/library/research/2016/07/risk-adjustment-coop-finance-status.html
71
20
Rather than providing increased payments to health insurance issuers that attract higherrisk populations, the flawed methodology caused CO-OPs to make Risk Adjustment payments.
The methodology that CMS used to implement this program, however, was widely criticized for
being unpredictable and favoring large insurance companies over newer entrants like CO-OPs.74
CMS acknowledged this in its interim final rule:
Based on our experience operating the 2014 benefit year risk adjustment
program, HHS has become aware that certain issuers, including some new,
rapidly growing, and smaller issuers, owed substantial risk adjustment
charges that they did not anticipate.75
Further, CMS noted its plan to update and improve the risk adjustment methodology, and
encouraged states to examine ways to “ease this transition” for new entrants to the health
insurance market, like CO-OPs:
We encourage States to examine whether any local approaches, under State
legal authority, are warranted to help ease this transition to new health
insurance markets. Additionally, we will also continue to seek ways to
improve the risk adjustment methodology. We updated the risk adjustment
models in the 2017 Payment Notice, and we are exploring future
improvements to the HHS risk adjustment methodology.76
This new rule, however, simply acknowledges that the agency’s current methodology
harms smaller issuers like CO-OPs, promises to improve the methodology going forward, and
encourages states to alleviate the harm to smaller insurers through local mechanisms, if possible.
74
45 C.F.R. Parts 155 and 156 (2016).
Id.
76
Id.
75
21
CMS did not actually make any concrete changes to the risk adjustment methodology that would
help CO-OPs before the next open enrollment period.
While CMS has taken important steps to give CO-OPs additional resources to stay afloat,
CMS’s delay in issuing this rule – after 17 CO-OPs have already failed – may prove it to be
pointless. CMS has been aware of issues surrounding SEPs, private capital, and the risk
adjustment methodology since the programs’ inception. Unfortunately, reports from the HHS
OIG and direct pleas from CO-OP leadership have not been enough to spur CMS to take timely
action. Now that CMS has taken steps to help CO-OPs succeed, it may be too late. CMS has not
acted in the interest of CO-OPs or of federal taxpayers.
This past June, Evergreen Health, the CO-OP serving Illinois, filed a lawsuit claiming
that private insurers have gamed the system to avoid making risk adjustment payments.77
Evergreen’s CEO, Peter Beilenson, argued that Evergreen was unfairly labeled as healthier
because private insurers encouraged their less healthy enrollees visit physicians in order to make
individuals appear to be less healthy.78 As a result of risk adjustment, Evergreen is expected to
owe between $18-22 million in risk adjustment payments.79
Stephanie Armour, Maryland’s Health CO-OP Sues Over Health Law’s Risk-Adjustment Formula, WALL
STREET J., June 13, 2016, available at: http://www.wsj.com/articles/marylands-health-co-op-sues-over-healthlaws-risk-adjustment-formula-1465847988.
78
Id.
79
Id.
77
22
VI. State Regulators Led Oversight Efforts Despite the Shared
Responsibility with CMS
The oversight of the CO-OPs is shared between CMS and the state regulators. CMS’s
responsibilities include setting the eligibility standards, loan terms, policies, determining loan
recipients, disbursing funds, monitoring CO-OP financial controls, and ensuring compliance with
statutory and regulatory requirements.80 More recently, CMS has issued CAPS or enhanced
oversight plans to the CO-OPs when problems were identified with the CO-OP. These plans
were intended to provide technical assistance or withhold loan disbursements if necessary. This
will be discussed further in Section VII.
State regulators have their own set of responsibilities when it comes to the CO-OPs.
Primarily, they are responsible for “licensing, monitoring financial solvency and market conduct,
and approving premium rates and contract forms.”81 Further, state regulators are primarily
responsible for winding down operations when CO-OPs close.82 Because state regulators are
primarily tasked with protecting the interests of consumers in their states, state regulators are
forced to make tough decisions between encouraging competition in state markets and protecting
consumers from financially unstable CO-OPs.
FINDING:
State regulators notified CO-OPs of violations of state laws, requested
enrollment freezes, and weighed in on potential loan conversions.
In Colorado, state regulators made the unpopular decision to shut down a CO-OP with a
large number of enrollees, prompting a lawsuit. One of the two CO-OPs in Colorado, HealthOP,
insured 80,000 individuals, almost 40 percent of Coloradans who had health insurance through
the state exchange in 2015.83 CMS awarded HealthOP over $70 million in loans and projections
estimated that the CO-OP was on track to be profitable in 2016.84 When CMS announced that
insurance companies would only be receiving 12.6 percent of what they requested through the
Risk Corridor program, Colorado’s HealthOP only received $2 million, instead of an expected
$16.2 million.85
With the shortfall in what HealthOP expected to receive from the Risk Corridor program,
the HealthOP was forced to default on the $72 million in loans received from CMS.86 On
October 16, 2015, Colorado’s Division of Insurance (DOI) made the executive decision to shut
80
Timothy Jost, ACA Round-Up: CO-OP Oversight And Reconciling Cost-Sharing Reduction Payments (Update),
Health Affairs Blog, March 18, 2016, available at: http://healthaffairs.org/blog/2016/03/18/aca-roundup-co-opoversight-and-reconciling-cost-sharing-reduction-payments/.
81
Id.
82
Id.
83
Kristen Wyatt, Largest Health Insurer On Colorado Exchange Collapses, CBS Denver, Oct. 16, 2015, available
at: http://denver.cbslocal.com/2015/10/16/largest-health-insurer-on-colorado-exchange-collapses/.
84
Nat Stein, Here’s What Happened to Colorado HealthOP, The Colorado Independent, Oct. 23, 2015, available at:
http://www.coloradoindependent.com/155753/heres-what-happened-to-colorados-health-co-op.
85
Id.
86
Id.
23
HealthOP down due to fear of whether or not the CO-OP would be able to remain financially
stable through the next enrollment period.87
In response to the DOI announcement, Colorado HealthOP CEO Julia Hutchins released
a statement describing DOI’s decision as “irresponsible and premature.”88 She stated:
We are astonished and disappointed by the Colorado Division of
Insurance’s decision. It is both irresponsible and premature. Colorado
HealthOP is a profitable start-up insurance company that is in a strong
financial position and, for two years, has served the critical needs of
Coloradans by enhancing competition in the Colorado insurance market,
driving down prices in the state health insurance marketplace and offering
new, innovative choices to its more than 80,000 members throughout
Colorado. By choosing this course of action, the Division has let local and
national politics hurt Coloradans’ access to low-cost healthcare options and
assessed Colorado taxpayers with significant avoidable costs. For this
reason, Colorado HealthOP will continue its fight, pursuing all possible
remedies, to serve Colorado.89
In response to HealthOP’s disappointment, the Colorado Insurance Commissioner
pointed the finger at the Risk Corridor shortfall, and emphasized the state’s responsibility to
protect consumers from the confusion that arises when a CO-OP fails after enrolling customers
for the year. In a formal release, Colorado Insurance Commissioner Marguerite Salazar stated:
Our decision is a direct result of this shortfall by CMS, and I sympathize
with the HealthOP, but the Division has requirements and it has to protect
consumers… It is a key function of Colorado Division of Insurance to make
sure that insurance carriers are financially stable enough to pay the claims
of their policyholders. While Colorado HealthOP can continue to pay
claims for the rest of 2015, we cannot allow it to sell or renew policies on
the exchange for 2016.
…
It is truly unfortunate, but the Division had to act now, before open
enrollment gets started November 1st. To delay any longer would
undermine the open enrollment process, impacting the entire health
insurance market in Colorado and negatively impacting Colorado
87
Colorado HealthOP Press Release, Colorado HealthOP Vows to Fight for Member Interests After Division of
Insurance’s Closure Decision, (Oct. 16, 2015), available at: https://cohealthop.org/health-cooperative-closure-pressrelease/.
88
Id.
89
Id.
24
consumers. And it would have been even more costly to consumers if this
action had to take place once 2016 started.90
HealthOP filed a lawsuit, in response to the Insurance Commissioner’s order, and
requested that the court issue an injunction on the Division of Insurance’s decision to shut down
the CO-OP.91 An injunction would have permitted HealthOP to sell plans through the Colorado
state exchange while the court considered the merits of HealthOP’s claim. The court denied the
injunction and HealthOP eventually closed its operations.92
While state regulators have little to no control over federal policies like the Risk Corridor
program, state regulators do exert some influence over CMS. Tennessee’s Department of
Commerce and Insurance Commissioner Julie Mix McPeak contributed heavily to CMS’s
considerations of the loan conversion and enrollment caps regarding Tennessee’s CO-OP,
Community Health Alliance (CHA). CHA received startup loans totaling over $73 million
dollars and insured approximately 27,000 customers.93
Due to its low-cost plans CHA attracted more consumers than expected, creating severe
financial challenges for the CO-OP. After struggling financially, CHA attempted to convert startup loans to surplus notes, which would make it artificially appear that the CO-OP had more
capital. Unlike startup loans, CO-OPs could record and report surplus notes as capital, rather
than as debt in their financial filings. Several other CO-OPs had adopted this practice, pursuant
to a memo CMS issued to CO-OPs in July of 2015.94
At the committee’s November 5, 2015, hearing, Tennessee’s Insurance Commissioner
McPeak explained her concerns about CHA’s request for a loan conversion. She testified:
[Community Health Alliances’] only ability to cure its net worth deficiency
was to increase surplus with additional contributions. The Company asked
the Department if the $18.5M startup loan could be counted as surplus if the
loan terms were changed to be identical to the terms of the CMS solvency
contributions. The Department did not think that option was appropriate but
told the Company that Statutory Accounting Principles would require the
90
State of Colorado, Colorado Department of Regulatory Agencies, Press Release, Division of Insurance moves to
protect Colorado consumers, takes action against HealthOP, October 16, 2015, available at:
https://www.colorado.gov/pacific/dora/node/116051.
91
Mark Harden, Colorado HealthOP sues state over pending shutdown, Denver Business Journal, Oct. 19, 2015,
available at: http://www.bizjournals.com/denver/news/2015/10/19/colorado-healthop-sues-state-over-pendingshutdown.html.
92
John Daley, Colorado HealthOP Shuts Down After Failed Resurrection Bid,
Colorado Public Radio, Oct. 20, 2015, available at: https://www.cpr.org/news/newsbeat/colorado-healthop-shutsdown-after-failed-resurrection-bid
93
Jamie McGee, Community Health Alliance ending coverage for 27K enrollees, The Tennessean, Oct. 14, 2015,
available at: http://www.tennessean.com/story/money/2015/10/14/community-health-alliance-ending-coverage-27ktennesseans/73928626/
94
Memorandum from Kelly O’Brien, Centers for Medicare & Medicaid Serv. CO-OP Division Director to CO-OP
Project Officers, Amending CO-OP Loans Agreement to Apply Surplus Notes to Start-up Loans, (July 9, 2016),
available at: http://www.cagw.org/sites/default/files/users/user98/Converting%20Startup%20Loans%20to%20Surplus%20Notes%20Guidance%207-9-15%20final.pdf.
25
loan money to be classified as surplus if CMS and CHA bilaterally altered
the loan agreement terms. CMS, after review with the Department,
ultimately concluded that the loan conversion was not prudent given the
competitive market in Tennessee and the financial struggles at the company
and refused to allow the loan to be re-characterized.95
Despite the CO-OP’s request for CMS to convert the loans, due to concerns from
Commissioner McPeak, CMS did not allow CHA to convert its start-up loans to surplus notes. In
addition expressing concerns about the loan conversion, in a January 8, 2015, letter to HHS
Secretary Burwell, Commissioner McPeak requested an enrollment freeze for Tennessee’s COOP due to the company’s financial condition:96
As a result of Commissioner McPeak’s letter, HHS pulled the CO-OP’s plans off the federal
exchange on January 15, 2015, so that individuals were no longer allowed to sign up for plans
offered through CHA. In October 2015, the Tennessee Department of Commerce and Insurance
made the decision to wind down CHA and policy holders would have to seek new health
insurance coverage in 2016.97
In addition to making decisions about CO-OP closures and regulating enrollment caps,
state regulators have also issued corrective orders and notices when CO-OPs violate state laws.
In October of 2014, the New Jersey Department of Banking and Insurance (DOBI) issued an
Executed Consent Order against the New Jersey CO-OP, Freelancers Consumer Operated and
Oriented Program of New Jersey, d/b/a Health Republic of New Jersey (HRNJ).98 The Executed
Consent Order stated that HRNJ did not comply with several state laws including: (1) submitting
erroneous certificates of compliance, (2) failed to provide detailed disclosures to members, (3)
95
H. Comm. on Energy & Commerce, Subcomm. on Oversight & Investigations, Examining the Costly Failures of
Obamacare’s CO-OP Insurance Loans, 114th Cong. (Nov. 5, 2015), available at:
http://docs.house.gov/meetings/IF/IF02/20151105/104146/HHRG-114-IF02-Wstate-McPeakJ-20151105.pdf.
96
H. Comm. on Energy & Commerce, Subcomm. on Oversight & Investigations, Examining the Costly Failures of
Obamacare’s CO-OP Insurance Loans, 114th Cong. (Nov. 5, 2015), available at:
http://docs.house.gov/meetings/IF/IF02/20151105/104146/HHRG-114-IF02-Wstate-McPeakJ-20151105.pdf
97
McGee, Jamie, Community Health Alliance ending coverage for 27K enrollees, The Tennessean, (Oct. 14, 2015),
available at: http://www.tennessean.com/story/money/2015/10/14/community-health-alliance-ending-coverage-27ktennesseans/73928626/.
98
State of New Jersey, Department of Banking and Insurance, Order No. E14-124, (October 16, 2014), available at
http://www.state.nj.us/dobi/division_insurance/enforcement/e14_124.pdf.
26
posted inaccurate information about plans to its website. DBOI levied a $400,000 fine because of
the violations.99
Maine’s CO-OP, Maine Community Health Options (CHO), came under regulatory
supervision of the Maine Bureau of Insurance (BOI) after the CO-OP reported a $17.2 million
loss during the third quarter.100 According to a statement by the Maine BOI, the CO-OP was
under the “highest level possible” of supervision.101 In addition, the BOI requested that CHO cap
enrollment, but CMS could not remove CHO’s plans from the website until December 27, 2015.
The BOI stated:
With CHO’s report in October 2015 of its third quarter loss, the BOI
increased its level of regulatory supervision to the highest level possible
short of a judicial proceeding. The BOI also asked CHO to stop writing new
underpriced individual health insurance as soon as possible but CMS and
the FFM could not “suppress” CHO on the website until December 27,
2015. Consequently, individual health insurance membership continued to
increase beyond the levels expected in CHO’s
2016 plan.102
While state regulators assume some responsibility for the oversight of CO-OPs, state
commissioners operate to protect consumers in their states, to ensure that CO-OPs are financially
sound to sell health care insurance plans for the entire year and pay the entirety of their claims.
The state regulators’ primary responsibility is not the success of CO-OPs so that taxpayers can
recoup their investments. That responsibility lies solely with CMS.
99
State of New Jersey, Department of Banking and Insurance, Order No. E14-124, (October 16, 2014), available at
http://www.state.nj.us/dobi/division_insurance/enforcement/e14_124.pdf.
100
Maine Bureau of Insurance, Dep’t of Professional & Financial Regulation, Bureau of Insurance Statement
Regarding Maine Community Health Options, (March 14, 2016), available at:
http://www.maine.gov/pfr/insurance/ACA/BOI_Statement_on_Community_Health_Options.pdf.
101
Id.
102
Id.
27
VII. CMS Failed to Act to Mitigate CO-OP Failures
As detailed in the previous discussion, in some cases, the law was not written in a way to
allow the CO-OPs to succeed. However, CMS failed to act where there were opportunities to
help the CO-OPs succeed. The committee’s oversight has determined that CMS did not
effectively manage and oversee the CO-OP program. Regardless of the flaws in the law itself,
CMS failed to mitigate the problems faced by CO-OPs and failed to safeguard taxpayer dollars
that they loaned out to these CO-OPs. By reviewing the CAPs issued by CMS to the CO-OPs,
the committee found that CMS’ oversight was perfunctory and based on the oversight of outside
entities such as HHS OIG or state regulators. CMS also failed to enforce the terms of the loan
agreement which allowed CMS to terminate the agreement if it was determined the CO-OP was
not viable. Further, when the viability of CO-OPs was in question in late 2014, CMS awarded an
additional $350 million taxpayer dollars to six CO-OPs; four of which have since failed.
A. CMS Oversight of CO-OPs Is Ineffective
Section 1322 of the PPACA established the CO-OP program and authorized HHS to
disburse loans to establish and operate CO-OPs. CMS is responsible for implementing the COOP program and overseeing the expenditure of federal funds pursuant to the CO-OP loan
agreements. In the subcommittee’s hearing on the management of the CO-OPs program on
November 5, 2015, CMS Chief of Staff Mandy Cohen described CMS’ responsibilities and
activities regarding the CO-OP program. She testified:
In implementing the CO-OP program as required by statute and with the
funds available, CMS has been engaged in evaluating applications,
monitoring financial performance, conducting oversight, and supporting
state departments of insurance, which serve as the primary regulator of
insurance issuers in the states.103
CMS has utilized one main oversight mechanism – the CAP.104 When CMS has identified
an issue concerning a CO-OP’s finances, compliance with federal or state laws, operations or
management, CMS has placed that CO-OP under a CAP. The purpose of the CAP is to resolve
the problem that necessitated the CAP through a collaboration between CMS and the CO-OP.
However, from documents reviewed by the committee, it appears that CAPs have had little, if
no, positive effect on CO-OP outcomes.
In July 2013, the HHS OIG issued a report that evaluated CMS’ early implementation of
the CO-OP program, including CMS’ oversight policies regarding the CO-OPs. The HHS OIG
conducted the audit, titled “Early Implementation of the Consumer Operated and Oriented Plan
Loan Program,” because of the “financial and operational challenges” that CO-OPs would likely
103
H. Comm. on Energy & Commerce, Subcomm. on Oversight & Investigations, Examining the Costly Failures of
Obamacare’s CO-OP Insurance Loans, 114th Cong. (Nov. 5, 2015).
104
CMS also has placed CO-OPs on “Enhanced Oversight” plans, which appear to be substantially similar to
Corrective Action Plan, in that it identifies concerns with the CO-OP and requests additional information and
documents to address those concerns.
28
face in the insurance market, and because of the short time frame allowed to implement the COOP program.105 At the time of the audit, CMS had awarded $1.98 billion to 24 CO-OPs. From
interviewing CMS officials and staff, the HHS OIG concluded that the CMS oversight strategy
included “frequent monitoring” and “early intervention.” Specifically, the report stated:
CMS established a prospective oversight system to safeguard CO-OP
funding and ensure timely implementation of the program. CMS described
its oversight as an “early warning system” to address problems before they
undermine a CO-OP’s progress.106
Despite the HHS OIG’s findings at the outset of the program, the committee found that
CMS’ oversight system is ineffective in practice. CMS’ monitoring of the CO-OPs, while
perhaps frequent, has not resulted in meaningful improvements to the CO-OPs’ fortunes. Further,
rather than an “early warning system” to address problems as they emerged, CMS has been late
to identify problems, as well as possible solutions, to help CO-OPs succeed. One of CMS’ most
touted oversight mechanisms, the CAP, has not been an effective tool.
1. CMS CAPs Were Reactionary, Contained Errors, and Did Not Result
in Meaningful Oversight
FINDING:
CMS issued CAPs in response to oversight conducted not by CMS, but
rather State regulators and the HHS OIG.
Through the course of its investigation, the committee obtained 11 of the CAPs issued by
CMS, as well as the responses sent back to CMS from the CO-OPs. The committee has also
reviewed the CAPs for CO-OPs still in operation. Despite CMS’ stated goals of proactively
monitoring CO-OPs and maintaining early warning systems to identify problems before they
progress, the committee found that CMS issued many CAPs just months before CO-OPs closed
down. Further, it appears CMS issued CAPs either in reaction to letters sent to CO-OPs by state
regulators notifying them of state law violations, or in reaction to an HHS OIG report that was
issued in July 2015, warning that CO-OPs’ profitability was lower than projections and they
might be unable to repay taxpayer-funded loans.107 Two CO-OPs failed less than a month after
receiving a CAP from CMS, and five CO-OPs that failed in 2015 never received a CAP.
105
H. Comm. on Energy & Commerce, Subcomm. on Oversight & Investigations, Examining the Costly Failures of
Obamacare’s CO-OP Insurance Loans, 114th Cong. (Nov. 5, 2015).
106
Office of Inspector Gen., Dep’t of Health and Human Services, The Centers for Medicare & Medicaid Services
Awarded Consumer Operated and Oriented Plan Program Loans in Accordance with Federal Requirements, and
Continued Oversight is Needed, Audit no. A-05-12-00043 (July 2013).
107
Office of Inspector Gen., Dep’t of Health and Human Services, Actual Enrollment and Profitability Was Lower
Than Projections Made By The Consumer Operated and Oriented Plans and Might Affect Their Ability To Repay
Loans Provided Under the Affordable Care Act, Audit no. A-05-14-00055 (July 2015).
29
For the CO-OPs that have closed, see the chart indicating the date CMS issued a CAP,
and the date of the CO-OP closure:
Name of Former CO-OP
CoOportunity Health - Iowa
and Nebraska
Louisiana Health
Cooperative, Inc.
Nevada Health Cooperative
Health Republic Insurance of
New York
Kentucky Health Care
Cooperative - Kentucky and
West Virginia
Community Health Alliance
Mutual Insurance Company Tennessee
Colorado HealthOP
Health Republic Insurance of
Oregon
Consumers’ Choice Health
Insurance Company - South
Carolina
Arches Mutual Insurance
Company – Utah
Meritus Health Partners –
Arizona
Consumers Mutual Insurance
– Michigan
InHealth Mutual – Ohio
HealthyCT – Connecticut
Oregon Health’s CO-OP –
Oregon
Land of Lincoln Health –
Illinois
Date Corrective Action
Plan Issued by CMS
No CAP
Date of Closure
Announcement
January 23, 2015
January 2, 2015
July 24, 2015
No CAP
No CAP
August 25, 2015
September 25, 2015
September 18, 2015
October 9, 2015
February 3, 2015
October 14, 2015
September 10, 2015
September 22, 2015
October 16, 2015
October 16, 2015
No CAP
October 22, 2015
No CAP
October 27, 2015
September 28, 2015
October 31, 2015
September 22, 2015
November 4, 2015
September 28, 2015
October 5, 2015
September 23, 2015
May 26, 2016
July 5, 2016
July 8, 2016
May 24, 2016
July 12, 2016
In the two instances that CMS issued CAPs before the HHS OIG report was released,
those CO-OPs had received letters from the state insurance regulators that indicated the CO-OP
had violated state laws. It appears CMS issued those CAPs in direct response to the state
regulator letters. In all instances, therefore, CMS issued CAPs in reaction to an outside force –
either the HHS OIG or state regulators. This suggests that CMS’s own oversight processes were
so deficient that they could not identify the significant problems that CO-OPs faced, until
another regulator or auditor brought them to light.
30
FINDING:
CMS issued CAPs that contained obvious errors and outdated information.
When CMS did issue a CAP, it often contained errors or cited outdated information. This
shows that CAPs were not a priority for CMS, and that CMS lacked a meaningful understanding
of the true problems that the CO-OPs faced. The numerous errors also suggest that the meetings
and communications between CO-OPs and CMS were not substantive and that the CAPs were an
ineffective oversight mechanism. This section includes numerous examples of problematic
CAPs. For those CO-OPs that are still in operation, the committee has redacted the names of the
CO-OPs.
A CAP issued on September 22, 2015 to Consumers Mutual Insurance of Michigan
(CMI) contained inaccuracies regarding state requirements for Medicaid and network plan
designs. CMI noted those errors in its October 23, 2015 response to CMS.108
Letter from Consumer’s Mutual Insurance of Michigan, to Mr. Seinos, Centers for Medicare & Medicaid Serv.
(October 23, 2015).
108
31
CMS relied upon outdated information regarding the narrow network plan designs, and
CMI had to remind CMS that the agency had been “notified of the withdrawal of the plans”
previously.109 This suggests that the CMS staff responsible for issuing the CAPs may not be in
receipt of the most updated information, or that CMS staff may not be coordinating as needed
across departments.
109
Consumers Mutual Insurance of Michigan, document on file with Committee.
32
Another CO-OP that received a CAP from CMS noticed obvious errors. The CAP letter
noted “concerns regarding [contractor’s] performance have been raised by state regulators since
2014, and include issues such as billing errors, a claims backlog, and consumer complaints.”110
CMS continued: “CMS is concerned about [CO-OP’s] operations and ability to meet the
demanding needs of large groups given your current challenges with [contractor’s]
performance.”111
In its response to the agency, the CO-OP corrected CMS’ mistaken notion that the COOP received consumer complaints:
The [state insurance department] is the regulatory agency that oversees
Consumer Complaints and they have stated the [CO-OP] does not have an
issue in this area… As far as the CAP letter response and based on
discussions with the CMS team, no additional details (milestones, strategies
for resolution, etc.) are required at this time.112
The CO-OP noted another error in the CAP regarding medical management:
With regard to effective medical management, the [CO-OP] team asked
again for specifics. To [CO-OP’s] knowledge, there have been no previous
discussions of any issues on this topic and this is an area where [CO-OP]
excels…113
In this case, CMS demonstrated a lack of targeted analysis and detail when it comes to
evaluating the needs of the individual CO-OP. Given the errors in this particular CAP, it appears
CMS used outdated information or failed to do research on the specific needs of the CO-OP.
Another CO-OP noted serious deficiencies and errors in its CAP. In a CAP letter sent in
September 2015, CMS indicated problems with the CO-OP’s medical management and recent
enrollment growth. In a response letter to the agency, the CO-OP stated:
[CMS’] letter stated ‘for example, [CO-OP] does not generate ongoing
medical management performance reports nor does it provide claims-based
reporting to its providers including prescription drug costs.’
Correction: [CO-OP] does review ongoing medical management reports.
They are generated quarterly and a copy of the most recent reports were
provided to CMS/Navigant prior to the site visit.114
110
CMS Corrective Action Plan to [Redacted CO-OP], document on file with Committee.
Id.
112
Response Letter from [Redacted CO-OP] to CMS, document on file with Committee.
113
Id.
114
Response Letter from [Redacted CO-OP] to CMS, document on file with Committee.
111
33
The CO-OP leadership further noted:
I agree with the statement that [CO-OP’s] significant enrollment growth has
caused ‘unexpected financial challenges’ and your recognition of ‘actions
to mitigate financial risk.’ However, I strongly disagree with the assumption
made in your letter that ‘robust marketing’ toward maintaining our current
enrollment levels will somehow help us out of this situation… A more
responsible route is to reduce our enrollment.115
Here, the CO-OP strongly disputed not only the errors within the CAP, but the strategies
CMS suggested to address the CO-OP’s enrollment levels.
Finally, the CAPs were not only error-ridden, but also unhelpful to the CO-OPs. In
briefings with committee staff, leaders of various CO-OPs communicated dissatisfaction with
CMS’ oversight, particularly the CAP process. Instead of providing technical expertise, CAPs
focused on less important factors, such as job-searching to fill open positions on the CO-OP
leadership team.116 CO-OPs also expressed frustration that the CAPs were not solution-oriented
but rather stated the obvious about the struggles the CO-OPs face.117 Given the lack of detail and
in-depth analysis, as well as outright errors, to date, CAPs appear to be a perfunctory process that
gives little, if no value to the CO-OPs.
2. CMS Failed to Notify CO-OPs about Risk Corridor payment shortage
The Risk Corridor program was created with the intention of aiding insurers in a volatile
market. However, the design of the program was fundamentally flawed as PPACA did not
anticipate losses by a majority of insurers, nor take into consideration full market conditions.118
While CMS is not responsible for the poor design of the Risk Corridor program, CMS was in
charge of implementing both the Risk Corridor and CO-OPs programs.119
FINDING:
CMS failed to notify CO-OPs before October 1, 2015 that Risk Corridor
payments would be less than CMS’ initial calculations.
115
Id.
National Alliance of State Health CO-OPs, Briefing with Committee Staff, August 10, 2016.
117
Id.
118
The Risk Corridor program was intended to offset losses resulting from inadequate premium setting, by requiring
profitable insurers to make Risk Corridor payments to insurers experiencing deficits. In the event that the insurers’
deficits reached a certain percentage, HHS was responsible for issuing Risk Corridor payments. A majority of
insurers experienced deficits, and therefore, the Risk Corridor was not fully funded. Additionally, the Risk
Adjustment methodology was established using unavailable data, negatively impacting actuarial risk estimated by
insureds.
119
See Stephanie Armour, More Health Co-OPs Face Collapse: Colorado’s CO-OP and One in Oregon are
Folding, Joining Six Others; Coalition Considers Legal Action, WALL STREET J., Oct.16, 2015, available at:
http://www.wsj.com/articles/more-health-co-ops-face-collapse-1445034912; Robert Laszewski, Crocodile Tears
Over the Failing Obamacare Co-Ops: The Canaries in the Obamacare Coal Mine, Forbes: Healthcare, Fiscal, Tax,
Oct. 26, 2015, available at: http://www.forbes.com/sites/robertlaszewski2/2015/10/26/crocodile-tears-over-thefailing-obamacare-co-ops-the-canaries-in-the-obamacare-coal-mine/#5de152846803.
116
34
The committee learned that CMS failed to provide timely notification to CO-OPs when
the Risk Corridor program lacked sufficient funding to make transfer payments. As a result, the
CO-OPs had a limited window of time to make adjustments causing some to immediately close.
Prior to making its 12.6 percent announcement on October 1, 2015, CMS continuously
represented to CO-OPs that the Risk Corridor program was fully funded, and that CO-OPs would
receive projected Risk Corridor payments.120 CMS had planned to publish preliminary estimates
for the Risk Corridor program on August 14, 2015.121 Citing material differences in the data,
CMS postponed the announcement by nearly six weeks, to October 1, 2015. During this time,
CMS did not give CO-OPs any insight into the shortfall in Risk Corridor payments. The delay of
announcement and the lack of notification from CMS blindsided the CO-OPs, leaving no
opportunity to prepare for this financial setback.
Worse still, the committee learned that prior to CMS’s announcement, several CO-OPs
attempted to ask CMS for updates on the Risk Corridor payments, and CMS maintained that the
CO-OPs could expect the Risk Corridor payments to be paid in full. For example, the Illinois
CO-OP, Land of Lincoln, informed the committee that CMS continuously maintained the Risk
Corridor program was fully funded, and that the CO-OP would be paid as planned. In response to
the committee’s May 2016 letter, Land of Lincoln stated:
[L]and of Lincoln Health learned that the risk corridor payment would be
12.6 percent on October 1, 2015 when CMS released its official
announcement on the matter. Prior to that date, CMS continually
maintained that the risk corridor program would be fully funded and paid as
planned. As late as September 26, 2015, CMS representatives informed a
room full of executives of the CO-OP program at the annual NASHCO
conference in Denver, Colorado that they expected the program would be
paid in full. Several CO-OPs learned the very next week that this was not
true for 2015 and were forced to close almost immediately.122
Another CO-OP informed the committee that they asked CMS to confirm calculated risk corridor
payments owed to the CO-OP for months, yet never received any feedback until CMS’
announcement on October 1, 2015:
[CO-OP] learned that the risk corridor payment would be 12.6% of the
calculated amount on 10/1/2015. [CO-OP] had been asking for months to
get confirmation on the risk corridor payout due to reports that the
collection of risk corridor payments in would not meet the requested
120
See e.g. Letter from Jason Montrie, Land of Lincoln Mutual Health Insurance Company, to Hon. Fred Upton,
Chairman, Oversight and Investigations Subcommittee for the House Commit. Energy and Commerce, (May 31,
2016).
121
Centers for Medicare and Medicaid Services, Press Release: The Three Rs: An Overview, (Oct. 1, 2015),
available at: https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2015-Fact-sheets-items/2015-1001.html
122
Letter from Jason Montrie, Land of Lincoln Mutual Health Insurance Company, to Hon. Fred Upton, Chairman,
Oversight and Investigations Subcommittee for the House Commit. Energy and Commerce, (May 31, 2016).
(Emphasis Added).
35
payments out. No confirmation was provided to communicate that the
payment would be less than 100% of the calculated amount until [CO-OP]
received the letter from CMS on 10/1/2015.123
Another CO-OP informed the committee that they expected to receive $44 million form the Risk
Corridor program, but only received $5.7 million—creating a $38.3 million deficit.124
3. CMS Failed to Provide Technical Assistance Amidst Risk Adjustment
Concerns
FINDING:
CMS failed to provide technical assistance as CO-OPs raised Risk
Adjustment concerns.
The CO-OPs informed the committee that they raised several concerns regarding the
impact of Risk Adjustment payments, before shutting down. Despite these concerns, CMS failed
to provide CO-OPs with technical assistance. For example, Connecticut’s CO-OP, HealthyCT,
informed the committee that they identified several scenarios that hindered its ability to repay
loans, and continually made CMS aware of its financial position as it relates to risk adjustment:
[H]ealthy CT has continually made CMS aware of its financial position as
it relates to the risk adjustment program. Although no formal discussions
related to closures have taken place, CMS remains aware the the continued
administration of the risk adjustment program in the format prescribed has
the potential to cause major financial implications to HealthyCT.125
On July 5, 2014, the state of Connecticut’s insurance department, announced that
HealthyCT, Connecticut’s CO-OP, was placed under an order of supervision, prohibiting the
company from writing new business or renewing existing business in Connecticut effective
immediately.126 The Connecticut state Commissioner provided the following statement citing
reasons for the CO-OP’s wind down:
Unfortunately HealthyCT’s financial health is unstable, having been
seriously jeopardized by federal requirements issued June 30, 2016 that it
pay $13.4 million to the U.S. Department of Health and Human Services,
Centers for Medicare & Medicaid Services as part of the Affordable Care
Act’s Risk Adjustment Program,” the Commissioner said. As a result, it
became evident that this risk adjustment mandate would put the company
under significant financial strain. This order of supervision provides for an
123
Letter from [Redacted CO-OP] to the Committee, document on file with the Committee. (Emphasis Added).
Letter from [Redacted CO-OP] to the Committee, document on file with the Committee.
125
Letter from Kenneth Lalime, CEO, Healthy CT, to Hon. Fred Upton, Chairman, Oversight and Investigations
Subcommittee for the House Commit. Energy and Commerce, (June 17, 2016).
126
Connecticut Insurance Department, Insurance Department Places HealthyCT Under Order of Supervision, (July
5, 2016), available at: http://www.ct.gov/cid/cwp/view.asp?a=1269&Q=582452.
124
36
orderly run-off of the company’s claim payment under close regulatory
oversight.127
Another CO-OP informed the committee that CMS failed to provide technical assistance
and identify ways to improve its performance, “[C]MS has not provided technical assistance with
improving [CO-OP’s] performance or discuss [CO-OP’s] current financial status or ability for
loan repayment.”128 Illinois’s CO-OP, Land of Lincoln, also informed the committee that CMS
neglected to facilitate discussions on improving the CO-OPs performance, or provide technical
assistance:
[N]o specific discussions on the subjects of technical performance
assistance or technical finance assistance have been initiated by CMS to
date other than enhanced oversight procedures and general performance
reviews conducted by third party consulting firms.129
In contrast to these statements by the CO-OPs, in a response letter to the committee,
CMS stated that the agency took several measures to improve finances for the CO-OPs,
including technical assistance with respect to the risk adjustment submissions:
You asked specifically about the actions we are taking to improve the COOPs’ finances. CMS is focused on increasing the capital options available
to CO-OPs. On January 27, 2016, CMS released guidance indicating that
we are exploring ways to help CO-OPs diversify their boards and grow and
raise capital, while still preserving the fundamentally member-run nature of
the CO-OP program. Additionally, CMS is interested in considering
improvements to the risk adjustment methodology and has announced a
March 31, 2106 meeting to solicit feedback from stakeholders. CMS is
providing technical assistance to the CO-OPs to improve the completeness
and accuracy of their risk adjustment submissions.130
Numerous obstacles contributed to the ultimate demise of the failed CO-OPs, including
inadequate enrollment margins that crippled CO-OPs ability to manage costs, and ineffective
premium stabilization programs, which, rather than helping, financially devastated a number of
CO-OPs.
127
Id.
Letter from [Redacted CO-OP] to the Committee, document on file with the Committee.
129
Letter from Jason Montrie, Land of Lincoln Mutual Health Insurance Company, to Hon. Fred Upton, Chairman,
Oversight and Investigations Subcommittee for the House Commit. Energy and Commerce, (May 31, 2016).
130
Letter from Andrew Slavitt, Administrator, CMS, to Hon. Tim Murphy Chairman, Subcommittee on Oversight
and Investigations, (Feb. 11, 2016).
128
37
B. CMS Delayed Rulemakings That Could Have Helped CO-OPs
Survive
After years of turmoil and criticism of its management of the CO-OPs program, on May
11, 2016, CMS issued an interim final rule to change the rules surrounding Special Enrollment
Periods, outside investments and composition of the Boards of Directors, and the implementation
of the risk adjustment program. These three issues are among the most critical for CO-OPs
survival. These changes, however, may come too late as only six CO-OPs remain, and CMS has
not addressed these three issues in full.
While CMS’ failure to enforce its already-permissive rules surrounding special
enrollments have harmed all insurers, as new fledgling companies, CO-OPs have less ability to
absorb the losses of individuals who abuse special enrollment periods and only obtain insurance
coverage when they become sick. In addition, CO-OPs have long requested that CMS allow
them to seek outside investors to make the CO-OPs more viable. While CMS eased those
restrictions in the interim final rule, CO-OPs may not have time before open enrollment to secure
outside investors. Finally, CMS acknowledged that its Risk Adjustment methodology needed to
be improved. Its methodology had been criticized for one, its unpredictability, and two, unfair
treatment of newer entrants into the market, like CO-OPs.
1. CMS Tightened Some Provisions Governing Special Enrollment
Periods After Complaints from Insurers
In 2012, HHS issued regulations creating Special Enrollment Periods (SEP) for the
federal and state exchanges selling individuals health care insurance plans.131 If an individual
qualifies for a special enrollment period, that individual can sign up for health care insurance on
the federal or state based exchanges established under the PPACA, outside of the open
enrollment period that generally runs from late fall through early winter. While the SEPs have
changed year to year, the current regulation provides for SEPs under the following
circumstances:132
131
45 C.F.R. § 155.420
Healthcare.gov, Special Enrollment Periods for Complex Issues, available at: https://www.healthcare.gov/seplist/ (last visited Aug. 31, 2016).
132
38
To enroll in health insurance during a SEP, an individual must fall under one of the above
categories, but CMS has not enforced this rule.
FINDING:
CMS has not enforced the rules on SEPs, contributing to unpredictable
enrollment figures.
Individuals have been able to sign up for coverage during a SEP without showing any
documentation that the individual qualifies for that SEP.133 Many insurers have voiced concerns
that these permissive policies destabilize the markets and drive up premiums.134 For CO-OPs,
which have slimmer margins and smaller enrollee populations than more established providers,
abuse of SEPs creates uncertainty and financial instability.
133
Robert Pear, Insurers Say Costs Are Climbing as More Enroll Past Health Act Deadline, N.Y. TIMES, Jan. 9,
2016, available at:
http://www.nytimes.com/2016/01/10/us/politics/insurers-say-costs-are-climbing-as-more-enroll-past-health-actdeadline.html?_r=2
134
Id.
39
In February 2016, CMS announced an initiative to enforce SEPs in the 38 states that use
HealthCare.gov by requiring documentation for some SEP events, such as loss of coverage, a
permanent move, and birth of a child.135 However, these enforcement mechanisms do not apply
to the 12 state-based exchanges and do not cover all categories of SEPs. Further, the individual is
placed on temporary coverage until CMS receives the documentation, which entitles qualified
individuals to subsidies under entitlement programs like the Advanced Premium Tax Credit and
the Cost Sharing Reduction Program.
In May 2016 interim final rule, CMS narrowed one SEP factor that was a potential cause
for abuse – the “permanent move” category. This new rule requires individuals requesting a SEP
because they have moved out of state to have minimal essential coverage for one or more days in
the 60 days preceding the permanent move, unless they moved from outside of the U.S. or a U.S.
territory.136 CMS noted that the change would ensure “individuals are not moving for the sole
purpose of obtaining health coverage outside of the open enrollment period.”137
It is unfortunate that CMS has taken over two years to enforce any aspects of the SEPs
given the substantial number of individuals who utilize SEPs. For example, from February 23,
2015, to June 30, 2015, 943,934 individuals enrolled through a SEP using HealthCare.gov.138
Given the lack of guidance and enforcement, it is likely that individuals have misused the SEP,
whether purposefully or inadvertently. Further, there are significant gaps in CMS’ new
enforcement actions, such as providing temporary coverage for the individual before CMS
verifies the individual qualifies for the SEP. If CMS enforced the SEPs when the exchanges
opened in January 2014, it is likely insurers, especially vulnerable insurers like the CO-OPs,
would have suffered less financial hardship and uncertainty.
2. CMS Loosened Requirements for Composition of Boards of
Directors, Permitting Outside Investors for the First Time
Under previous HHS regulations, each CO-OP must be governed by a Board of
Directors, and each board member must be elected by a majority vote of a quorum of the CO-OP
members that are 18 or older. In addition, the board members must be members of the CO-OP.139
This provision essentially prohibits fledgling CO-OPs from leveraging outside investors or
capital, because prospective business partners will be reluctant to invest if they cannot sit on the
Board. This problem was well-known to CMS as far back as mid-2013. In the July 2013 report
that evaluated the CMS’ early implementation of the CO-OP program, HHS OIG noted that “11
of 16 CO-OPs reported estimated startup expenditures in their applications that exceeded the
135
Centers for Medicare & Medicaid Serv., Fact Sheet: Special Enrollment Confirmation Process (Feb. 24, 2016),
available at: https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2016-Fact-sheets-items/2016-0224.html.
136
45 C.F.R. Parts 155 and 156 (2016).
137
Id.
138
See Centers for Medicare & Medicaid, supra note 135.
139
45 CFR 156.515(b)(1)
40
total startup funding provided by CMS.”140 HHS OIG cited limited private monetary support and
budget startup expenditures as a factor that would hinder the CO-OPs’ ability to meet startup
costs.141
During the subcommittee’s November 5, 2015, hearing on the management of the CO-OP
program, representatives of two CO-OPs testified that CMS should remove restrictions that
prevent CO-OPs from raising outside capital. Peter Beilenson, CEO and President of the
Evergreen Health Cooperative, highlighted this point in his written testimony. He stated:
A possible solution is to allow individual CO-OPs to raise capital to
meet these solvency needs. CMS has recently indicated they may
entertain this potential solution, and it would seem to be an important
step in the right direction. In fact, the ability to obtain private capital
was one of the measures by which the original CO-OP applications were
judged. CMS could amend the loan agreements as this prohibition on
obtaining additional capital is not required under ACA Section 1322.142
Likewise, in his written statement submitted for the record, John Morrison, Co-Founder
and Former President of the National Alliance of State Health CO-OPs, stated that access to
private capital is one of many steps CMS could take that would help CO-OPs succeed.143
In the May 2016 interim final rule, CMS finally loosened some of the restrictions that had
previously prohibited CO-OPs from accessing outside capital. The CMS rule states:
We are amending these standards to require that only a majority of directors
be elected by the members and to remove the requirement that a majority of
voting directors be members of the CO-OP. This revision allows entities
offering loans, investments, and services to participate on the board of
directors, as is common practice in the private sector, while
maintaining the overall control of the board by the members of the COOP. We are making this change in response to program experience
demonstrating that the inability to grant designated board positions to
prospective partners or investors may create obstacles to potentially
favorable business arrangements for CO-OPs.144
Office of Inspector Gen., Dep’t of Health and Human Servs., The Centers for Medicare & Medicaid Services
Awarded Consumer Operated and Oriented Plan Program Loans in Accordance with Federal Requirements, and
Continued Oversight is Needed, Audit no. A-05-12-00043 (July 2013).
141
Office of Inspector Gen., Dep’t of Health and Human Servs., The Centers for Medicare & Medicaid Services
Awarded Consumer Operated and Oriented Plan Program Loans in Accordance with Federal Requirements, and
Continued Oversight is Needed, Audit no. A-05-12-00043 (July 2013).
142
H. Comm. on Energy & Commerce, Subcomm. on Oversight & Investigations, Examining the Costly Failures of
Obamacare’s CO-OP Insurance Loans, 114th Cong. (Nov. 5, 2015).
143
H. Comm. on Energy & Commerce, Subcomm. on Oversight & Investigations, Examining the Costly Failures of
Obamacare’s CO-OP Insurance Loans, 114th Cong. (Nov. 5, 2015).
144
45 CFR Parts 155 and 156 (emphasis added).
140
41
Since CMS released the rule in May, the remaining six of 23 CO-OPs have only four
months to secure outside investors and formalize legal agreements with business partners before
state regulators determine which CO-OPs may offer plans on the markets during open enrollment
starting November 1, 2016.
FINDING:
By delaying rulemaking, CMS gave CO-OPs only four months to secure
outside investors.
If a CO-OP is not deemed to be financially secure, state regulators may shut down the
CO-OP before open enrollment begins on November 1. State regulators generally approve
insurance plans in late summer.145 While large investment deals generally take at least six
months, CO-OPs must operate on an accelerated timeline of only three to four months, from
mid-May to the end of August.146 In addition, CMS must approve certain aspects of the deal,
such as conflict of interest provisions, which lengthens the amount of time of the deal. In a
briefing with the committee, several CO-OPs were skeptical that few, if any, CO-OPs would be
able to secure outside investors on this abbreviated timeline granted by CMS.147 If CMS had
approved this financial structure years ago, it is possible the CO-OPs would have secured outside
financing and been able to repay taxpayer-funded loans that were otherwise forfeited.
145
National Association of Insurance Commissioners, State Insurance Regulation: History, Purpose and Structure,
(last updated June 13, 2016), available at: http://www.naic.org/cipr_topics/topic_risk_based_capital.htm
146
Briefing with National Alliance of State Health CO-OPs, August 10, 2016.
147
Id.
42
VIII. The Future of the Remaining CO-OPs is Uncertain
To date, and as discussed in previous sections, 17 of the original 23 CO-OPs have ceased
operations, leaving only six CO-OPs operational in eight states. As CO-OPs are now responsible
for making substantial risk adjustment payments and experience deficits from less-than-projected
risk corridor payments, the financial solvency of the remaining CO-OPs is a concern.
While six CO-OPs remain operational, four have fallen into categories of potential
financial insolvency according to a recent analysis of their risk-based capital (RBC).148 RBC
estimates the minimum amount of capital needed to support the issuer’s business operations, and
is a measurement used to forecast the financial sustainability of an insurance carrier.149 The RBC
can be expressed as either a percentage or a ratio, and consists of an insurance carrier’s total riskbased capital divided by the sum of its total risk-weighted assets and adjustments to riskweighted assets.150 CMS required CO-OPs to maintain an RBC of 500 percent, but allowed for
lower levels to increase the long-term sustainability of some CO-OPs.151 The following chart
illustrates risk-based capital ratios before and after risk adjustment payments for CO-OPs that
were operational as of July 11, 2016.152
148
Katherine Hempstead, Risk Adjustment and Co-Op Financial Status, Robert Wood Johnson Foundation, July 11,
2016, available at: http://www.rwjf.org/en/library/research/2016/07/risk-adjustment-coop-finance-status.html
149
National Association of Insurance Commissioners, Risk-Based Capital, The Center for Insurance Policy and
Research, (last updated June 13, 2016), available at: http://www.naic.org/cipr_topics/topic_risk_based_capital.htm
150
Id.
151
U.S. Dep’t of Health & Human Serv., Office of Inspector General, Conversions of Startup Loans Into Surplus
Notes by Consumer Operated and Oriented Plans Were Allowable But Not Always Effective, A-05-1600019,
(August 2016).
152
Katherine Hempstead, Risk Adjustment and Co-Op Financial Status, Robert Wood Johnson Foundation, July 11,
2016, available at: http://www.rwjf.org/en/library/research/2016/07/risk-adjustment-coop-finance-status.html
43
FINDING:
Operational CO-OPs are not likely to pay back loans because of potential
insolvency.
Findings from a recent HHS OIG report on the conversions of CO-OP startup loans
indicate that despite receiving increased levels of capital through federal government loans, the
risk based capital percentages for the remaining CO-OPs were at levels below the CMS
requirement.153 As of December 31, 2015, RBC for four of the then-eight operating CO-OPs,
Wisconsin, Montana, Maine, and Illinois, fell below 500 percent.154 Consequently, HHS OIG
determined that these CO-OPs are less likely to pay back loans issued to them due to becoming
insolvent. CMS has agreed with HHS OIG’s request to quantify the likely impact on the federal
government’s ability to recover loan payments: 155
U.S. Dep’t of Health & Human Serv, Office of Inspector General, Conversions of Startup Loans Into Surplus
Notes by Consumer Operated and Oriented Plans Were Allowable But Not Always Effective, A-05-1600019,
(August 2016).
154
Id.
155
Id.
153
44
While CMS has agreed to assess the overall impact on the federal government’s ability to
recover loan payments, the committee questions CMS’ capability to deliver based CMS’
attempted oversight efforts that ultimately lead to the failure of 17 CO-OPs.
The examples outlined in this report have demonstrated how fundamental flaws from the
premium stabilization programs, in addition to inadequate oversight from CMS can dismantle the
viability of CO-OPs overnight. Colorado HealthOP, the former CO-OP serving Colorado,
demonstrated how even the strongest of CO-OPs can quickly shut operations overnight due to
financial insolvency. For example, Colorado HealthOP managed to maintain cash reserves and
was projected to make a profit in 2016. However, after learning that Risk Corridor payments
were less than expected, the CO-OP’s solvency plummeted overnight and ultimately shuttered
operations.156 This abrupt shutdown caused approximately 40 percent of Coloradans who
purchased insurance through the exchange in 2015, and were forced out of the coverage they
chose.157 In addition, the shutdown caused the CO-OP to default on $72 million in federal startup and solvency funding – all of which the CO-OP was on track to pay if they could continue to
operate.158 HHS OIG’s recent report, which examined the risk based capital of remaining COOPs provides yet another indicator, that a majority of the operational CO-OPs are projected to be
insolvent.
156
Id.
Id.
158
Id.
157
45
IX. Consequences of the CO-OP Failures
The failure of 17 CO-OPs has created confusion and contributed to marketplace
volatility. In addition to its impact on the markets, CO-OP failures have also negatively affected
individuals enrolled in plans offered by the CO-OPs. These failures also represent a loss of
millions of taxpayer dollars since it is unlikely that any of the failed CO-OPS will repay any of
their federally funded loans. Of the 17 CO-OPs that failed, CMS had awarded those CO-OPs
over one billion dollars collectively.
A. CO-OPs That Failed in the Middle of the Year Left Others
Responsible to Pay Claims
In June 2014, when all 23 CO-OPs were still operational, there were 486,552 individuals
covered by health insurance plans provided by a CO-OP.159 The two CO-OPs with the highest
enrollment numbers—CoOportunity Health, which served Iowa and Nebraska, and Health
Republic Insurance of New York—failed after individuals had already enrolled in plans for the
following year, forcing consumers to quickly find another health care insurance plan to prevent
gaps in coverage. At the time of the closures, it was estimated that CoOportunity enrolled
120,000 individuals and it was estimated that Health Republic Insurance of New York had
enrolled over 200,000 individuals. The experiences of these two CO-OPs illustrate how the
closure of CO-OPs can create uncertainty for individuals and providers.
Iowa and Nebraska - CoOportunity Health
CoOportunity, a CO-OP operating in Iowa and Nebraska, enrolled over 120,000
individuals in 2014,160 amounting to one fifth of CO-OP enrollees nationally. CoOportunity grew
to become the second largest CO-OP in the nation and had far exceeded its enrollment projection
of 15,000.161
Of the $145 million in federal loans CoOportunity received, CMS awarded $32.7 million
of additional solvency funding in September 2014, just three months before the state of Iowa
took possession of the CO-OP’s assets.162 Despite having the second highest enrollment numbers
in the nation, on January 23, 2015, CoOportunity closed after it was determined “that the [CO-
Office of Inspector Gen., Dep’t of Health and Human Services, Actual Enrollment and Profitability Was Lower
Than Projections Made By The Consumer Operated and Oriented Plans and Might Affect Their Ability To Repay
Loans Provided Under the Affordable Care Act, Audit no. A-05-14-00055 (July 2015).
160
Steve Jordan, Troubled Iowa Insurer CoOportunity Health May be Liquidated, Omaha World-Herald, Dec.24,
2014, available at: http://www.omaha.com/money/troubled-iowa-insurer-cooportunity-health-may-beliquidated/article_825f0962-8b7d-11e4-b6d3-ef7555754633.html
161
Iowa, Nebraska Officials Seek to Close Insurance Co-Op, Insurance Journal, Jan. 25, 2015, available at:
http://www.insurancejournal.com/news/midwest/2015/01/25/355274.htm.
162
U.S. Dep’t of Health & Human Serv, Centers for Medicare and Medicaid Services, Center for Consumer
Information and Insurance Oversight, “Loan Program Helps Support Customer-Driven Non-Profit Health Insurers”,
Dec. 16, 2014, https://www.cms.gov/CCIIO/Resources/Grants/new-loan-program.html
159
46
OP’s] medical claims would exceed its cash on hand.”163 On March 2, 2015, an Iowa district
court found that the CO-OPs operating losses were over $163 million and it had $50 million
more in liabilities than assets.164 The court ultimately filed a final order of liquidation and request
for other relief authorizing the Commissioner of Insurance, Nick Gerhart, to liquidate the COOP.165 As a result, Commissioner Gerhart was directed to take possession of all assets and
administer those assets with supervision by the court.166
Initially, CoOportunity customers has just two weeks to find another plan, in order to
avoid gaps in coverage or face penalties under law, because the 2015 open enrollment period for
the PPACA closed on February 15, 2015.167 Because of the narrow timeframe, CMS set up a
“special enrollment period,” allowing former CoOportunity customers until April 29, 2015, to
select a plan through the PPACA.168
In addition to consumers left scrambling to find new coverage, providers were left
wondering how the millions of dollars in outstanding claims would be paid, if at all. Ultimately,
Iowa’s Insurance Commissioner, Nick Gerhart, deemed that the special insurance-guarantee
fund, a fund administered by a state to protect policy holders in the event that an insurance
company defaults on benefit payments or becomes insolvent, would pay the outstanding
claims.169 CoOportunity did not pay back any of its federal loans to CMS.
New York - Freelancers Health Service Corporation d/b/a Health Republic Insurance of
New York
CMS awarded a CO-OP in New York, Health Republic of New York, more than $265
million dollars, which includes the additional $90 million in solvency funding that CMS awarded
on September 26, 2015.170 Health Republic had the highest enrollment numbers in the nation,
163
Iowa, Nebraska Officials Seek to Close Insurance Co-Op, Insurance Journal, Jan. 25, 2015, available at:
http://www.insurancejournal.com/news/midwest/2015/01/25/355274.htm.
164
State of Iowa, ex. rel. Nick Gerhart, Commissioner of Insurance v. CoOportunity Health, Inc. Case Number
EQCE077579, Final Order of Liquidation, March 2, 2015. available at:
http://www.iid.state.ia.us/sites/default/files/press_release/2015/03/02/final_order_of_liquidation_pdf_17399.pdf
165
State of Iowa, ex rel. Nick Gerhart, Commissioner of Insurance v. CoOportunity Health Inc., Case Number
EQCE077579, Final Order of Liquidation, March 2, 2015. available at:
http://www.iid.state.ia.us/sites/default/files/press_release/2015/03/02/final_order_of_liquidation_pdf_17399.pdf
166
Website of CoOportunity Health, “Notice of Liquidation of CoOportunity Health,” available at:
http://www.iid.state.ia.us/sites/default/files/press_release/2015/03/02/liquidation_notice_pdf_60339.pdf
167
Website of CoOportunity Health, “CoOportunity Health Liquidation: Updated Frequently Asked Questions for
Individuals,” March 2, 2015, available at:
http://www.iid.state.ia.us/sites/default/files/press_release/2015/03/02/cooportunity_health_liquidation_frequently_as
ked_q_79570.pdf
168
Anna Wilde Mathews, State Regulator to Shut Down Insurer CoOportunity Health, WALL STREET J., Jan. 23,
2015, available at: http://www.wsj.com/articles/state-regulator-to-shut-down-insurer-cooportunity-health1422052829.
169
David B. Caruso, Sudden Collapse of Health Co-Op in N.Y. Leaves Doctors Owed Millions,
Insurance Journal, (Nov. 30, 2015), available at:
http://www.insurancejournal.com/news/east/2015/11/30/390214.htm.
170
Dep’t of Health & Human Serv., Centers for Medicare & Medicaid Serv., Center for Consumer Information &
Insurance Oversight, “Loan Program Helps Support Customer-Driven Non-Profit Health Insurers,” Dec. 16, 2014,
available at: https://www.cms.gov/CCIIO/Resources/Grants/new-loan-program.html.
47
insuring more than 200,000 individuals.171 Health Republic of New York enrolled 19 percent of
the people who purchased plans through New York State Exchange. Despite high enrollment
numbers, Health Republic of New York lost $35 million in 2014, and $52.7 million in the first
half of 2015.172 Facing severe financial problems, state regulators made the decision for the COOP to shut down by the end of November 2015.
New York’s Department of Financial Services (DFS), and agency responsible for
allowing Health Republic to sell health insurance in the state, faced criticism for not acting on
the warning signs that signaled Health Republic was struggling financially.173 For months, it was
clear that Health Republic did not have rates sufficient to remain financially viable. DFS
claimed that Health Republic’s finances were much worse than what was reported to the state.
Based on the information provided to the state, it was believed that Health Republic would be
viable through 2015, however the finances were such that it would not be able to stay open
through the end of November.174
Members of Congress called for an independent investigation to examine whether the
CO-OP’s failure was the result “of incompetence or dishonesty on Health Republic’s part, or
negligence on the part of DFS.”175 A three-month investigation by Crain’s New York Business
found that Health Republic was unsteady since its creation in 2012. The investigation found that
management deliberately set low premium rates to attract more consumers, regulators approved
the low rates and then did not allow Health Republic to raise the rates once it was realized that
the low rates threatened the company’s solvency. In addition, there were numerous management
changes resulting in bad decisions made by inexperienced individuals, and the CO-OP also
received poor services from outside vendors.176
Similar to the situation in Iowa and Nebraska, consumers had to quickly find new health
insurance to avoid a gap in coverage. New York consumers were left with very little time to find
a new plan in order to maintain coverage in the month of December. The mid-year shut down
also left medical providers, who treated the more than 200,000 patients covered by the CO-OP,
with outstanding claims of over $200 million dollars.177
171
David B. Caruso, Sudden Collapse of Health Co-Op in N.Y. Leaves Doctors Owed Millions,
The Big Story, Nov.30, 2015, available at: http://www.insurancejournal.com/news/east/2015/11/30/390214.htm.
172
Louise Norris, CO-OP Health Plans: Patients’ Interests First, healthinsurance.org, Aug. 3, 2016, available at:
https://www.healthinsurance.org/obamacare/co-op-health-plans-put-patients-interests-first/.
173
Dan Goldberg and Josefa Velasquez, Cuomo says health co-op collapse, and aftermath, isn't all on state,
POLITICO, Nov.6, 2015, available at: http://www.politico.com/states/new-york/albany/story/2015/11/cuomo-sayshealth-co-op-collapse-and-aftermath-isnt-all-on-state-027658.
174
Id.
175
Id.
176
Michael Waldholz, The Short and Chaotic Life of an Obamacare Darling, Crain’s New York Business, April 17,
2016, available at: http://www.crainsnewyork.com/article/20160417/HEALTH_CARE/160419890/a-crainsinvestigation-shows-how-health-republic-insurance-of-new-york-the-company-that-was-supposed-to-be-aboutpeople-not-profits-misled-its-customers-and-ran-itself-into-the-ground.
177
David B. Caruso, Health CO-OP Failure in NY Leaves Doctors Owed Millions, The Big Story, Nov. 24, 2015,
http://bigstory.ap.org/article/5d10ae825dc748b89be3ffa07dcdd86d/health-co-op-failure-ny-leaves-doctors-owedmillions
48
B. CMS’ Oversight Did Not Protect Taxpayer Dollars
In addition to the shortcomings cited above, there is little evidence to suggest that CAPs
have resulted in any concrete outcomes. Through the loan agreements entered into between the
CO-OPs and CMS, both parties have the authority to terminate the loan agreement for various
reasons. CMS outlined the reasons the agency could terminate the CO-OP loans in its CO-OP
“Funding Announcement Opportunity”:178
These factors are generally vague and broad, giving CMS leeway to take corrective
action, terminate loans and protect taxpayer funds that are endangered by a CO-OP with a
precarious financial position.
In many of the CAPs, CMS used boilerplate language that threatened to terminate the
CO-OP’s loan agreement:
U.S. Dep’t of Health & Human Serv., Centers for Medicare and Medicaid Services, Consumer Operated and
Oriented Plan Program, Invitation to Apply, Loan Funding Opportunity Number: OO-COO-11-001
CFDA: 93.545, (Dec. 9, 2011).
178
49
Despite the language in the loan agreements and CAPs, CMS has never terminated a
loan, even when CO-OPs did not comply with the terms of the loans as required, or when the
CO-OPs violations fell squarely into the categories outlined by CMS’ in Funding Opportunity
Announcement. The agency’s failure to terminate CO-OP loans before state regulators shut
down the CO-OPs, prevented CMS from recovering taxpayer dollars from CO-OPs that would
have failed anyway. Even worse, CMS awarded additional loans in December 2014 to struggling
CO-OPs.
CMS awarded loans totaling more than $350 million to six CO-OPs in late 2014. See the
chart of the loan awards these CO-OPs received:
CO-OP
Additional Award
Amount
Health Republic of New $90,688,000
York
Kentucky Health Care
$65,000,000
Cooperative
Maine Community
$64,810,000
Health Options
Common Ground
$51,117,899
Health Cooperative
(Wisconsin)
HealthyCT
$48,427,000
(Connecticut)
CoOportunity Health
$32,700,000
Of those six CO-OPs, four have since failed. One of the two remaining CO-OPs is Maine
Community Health Options, which has been put under supervision by state regulators. By
awarding additional loans to struggling CO-OPs, failing to enforce the terms of the loan
agreement, and failing to terminate loans when it would have been prudent to do so, CMS did
not exercise good judgment to protect taxpayer dollars.
50
X.
Conclusion
Despite numerous warnings about the weaknesses of the CO-OPs before their
implementation, HHS approved and moved forward with the program. Less than three years into
the program, only six CO-OPs remain operational in eight states. The large number of failures
and an increase in lawsuits filed from both failed and operational CO-OPs indicates the design
and application of the program were inherently flawed, and various provisions to assist CO-OPs
were not effectively implemented. Moreover, a review of the remaining CO-OPs risk-based
capital demonstrates how CO-OPs’ risks far outweigh their assets and therefore, CO-OPs are
likely to become insolvent.
As more and more CO-OPs shutter due to insolvency, the CO-OP program creates the
very problem it was intended to solve – reducing the number of uninsured individuals while
fostering healthy competition in the health insurance marketplace. Each CO-OP that winds down
leaves hundreds of thousands of individuals scrambling for coverage, while costing taxpayers
millions of dollars. Given CMS’ ineffective oversight and failure to improve the program, the
committee is gravely concerned about the viability of the remaining CO-OPs, and the likelihood
to recover federal taxpayer loans awarded through the program.
51
XI. Recommendations
1. Monitor CMS’ oversight for remaining CO-OPs. Request that the Department of
Health and Human Services Office of the Inspector General conduct evaluations and
inspections on CMS’ oversight mechanisms for the CO-OPs, specifically the Corrective
Action Plans and Enhanced Oversight Plans.
2. Exempt individuals from the individual mandate penalty if their coverage under a
plan offered by a CO-OP is terminated due to the failure of the CO-OP. Individuals
who make a good faith effort to comply with the individual mandate should not be
punished as a result of their plan no longer being offered.
3. Alter Risk Adjustment Formula by Imposing Limits on Risk Adjustment Payables.
CMS should impose limits on risk adjustment transfers for CO-OPs, in which payments
are no more than a certain percentage of a CO-OP’s gross premium. This
recommendation will alleviate smaller CO-OPs that face high payments exceeding their
smaller premium base, thus, creating insolvency.
4. Require transparency from CMS for Risk Corridor Transfer Payment Availability.
CMS needs to regularly notify and inform remaining CO-OPs about the availability of
funds for the Risk Corridor program, in order to allow appropriate budgeting for COOPs.
52
XII. Appendix
The following pages in the Appendix are copies of a letter sent by the Committee on Energy and
Commerce on May 16, 2016.
The Committee on Energy and Commerce sent the same letter to all 11 of the CO-OPs that were
still in operation as of the date of the letter.
53
Minuteman Appendix D - Minuteman Comments
Date
Title / Description
Author
No.
June 22, 2015
Letter to Kevin Counihan,
Director & Marketplace CEO,
CMS re Massachusetts Risk
Adjustment Program
Thomas D. Policelli, CEO
D-1
December 21, 2015
Letter to CMS re Patient
Protection and Affordable Care
Act; HHS Notice of Benefit and
Payment Parameters for 2017
(CMS-9937-P)
Julie Myers, Regulatory
Counsel
D-2
May 31, 2016
Impact of ACA ‘Risk
Adjustment’ Program on COOPS
and Their Valuation
Minuteman Health
D-3
July 5, 2016
Letter to Andrew M. Slavitt,
Acting Administrator, CMS, re
Amendments to the Risk
Adjustment Program, Special
Enrollment Periods, and the
Consumer Operated and Oriented
Plan Program CMS-9933-IFC
Julie Myers, Regulatory
Counsel
D-4
MINUTEMAN
APPENDIX D
DOCUMENT D-1
1
June 22, 2015
Kevin Counihan
Director & Marketplace Chief Executive Officer
Centers for Medicare & Medicaid Services
U.S. Department of Health and Human Services
Hubert H. Humphrey Building, Room 445-G
200 Independence Avenue, SW
Washington, DC 20201
RE: Massachusetts Risk Adjustment Program
Dear Director & Marketplace Chief Executive Officer Counihan:
I am writing to you to share Minuteman Health, Inc. (“MHI”)’s concerns about the implementation of
the federal Risk Adjustment Program in Massachusetts. Specifically, MHI is writing to request that the
Centers for Medicare and Medicaid Services (“CMS”) grant Massachusetts a full waiver from the Risk
Adjustment Program. Failing to do so will disrupt the Massachusetts market and ultimately harm the
Commonwealth’s residents in the form of higher premiums and more limited choice.
A waiver from federal Risk Adjustment is appropriate because the program solves for a problem that
largely does not exist in Massachusetts. Market participants have had access to guaranteed issue and
renewability, individual and employer mandates and premium subsidies under state law since as early as
the mid-1990s. Additionally, Massachusetts has the lowest rate of uninsured individuals in the nation
with just 4% of total population being uninsured. 1 Taken together, these factors significantly reduce the
risk of adverse selection and premium destabilization as a result of ACA implementation.
Furthermore, if implemented as currently design, Risk Adjustment will force premiums for the most
affordable products in the market significantly higher than they would be without Risk Adjustment,
effectively penalizing cost-effective, narrow network designs. Thus, the true impact of Risk Adjustment
in Massachusetts is to destabilize rather than stabilize the market by forcing smaller, less established
issuers to pay an estimated $82.5 million to larger, more entrenched insurers. 2
This enormous payout will jeopardize access to affordable health insurance because issuers paying out
will either have to drastically raise premiums to recover the cost of adjustment or risk their solvency.
Forcing Massachusetts’ smaller and new issuers out of the market will in turn reduce overall
competition and lead to a rise in premiums to the detriment of the Commonwealth’s citizens, flying in
1
2
Kaiser Family Foundation. State Health Facts. Health Insurance Coverage of the Total Population. 2013.
Felice J. Freyer. Health Insurers Object to Paying Blue Cross. Boston Globe. January 25, 2015.
855-MHI-1776
| 179 Lincoln Street, Boston, MA 02111
| www.minutemanhealth.org
Mailing Address: PO Box 120025, Boston, MA 02111
2
the face of the goals of both Massachusetts and national health reform. Thus, we strongly advocate that
CMS grant Massachusetts a full waiver from the federal Risk Adjustment Program.
Alternatively, if a full waiver is not possible, MHI requests that CMS grant Massachusetts a one year
implementation delay. Implementing Risk Adjustment in Massachusetts is premature at this time
because the state methodology does not account for two of the state’s unique subsidized programs,
which ultimately distorts the commercial risk pool, or the state’s transitional rating factors.
Additionally, there are significant concerns about the reliability of Massachusetts’ risk adjustment data,
including recent data with duplicative member months and the inclusion of non-risk adjusted members.
In the absence of a full waiver, a one year delay would provide the Commonwealth with necessary
flexibility to address these critical issues and allow for responsible implementation of the program.
Finally, we strongly urge CMS to consider the alternative Risk Adjustment approaches outlined below
regardless of whether CMS grants Massachusetts a one year implementation delay:
1. Calculate Risk Adjustment Based on Issuer Average Premium: CMS should allow
Massachusetts to calculate Risk Adjustment on issuer average premium instead of market-wide
weighted average premiums. Average market premium unfairly penalize narrow network plans
because these plans tend to draw more cost-conscious members and are made up of a lower metallic
tier mix. Additionally, issuers will be force to make payments based on a premium average that does
not reflect the cost-savings associated with limited provider networks.
2. Risk Adjust Based on Network Type: We suggest that narrow-networks be adjusted in a separate
risk pool from broader network products. Narrow and/or geographically distinct provider networks
have member and product characteristics that are very distinct from broad network products, much in
the same way that Catastrophic plans and student health plans, which are also placed into separate
risk pools, differ from metallic tier plans.
We welcome the opportunity to work with CMS to find a common-sense solution that balances the goals
of Risk Adjustment with the paramount needs of market stability and issuer solvency. Please contact
Susan Brown, General Counsel, at [email protected] or at 857-265-3322 if you have
any additional questions or concerns.
Sincerely,
Thomas D. Policelli
Chief Executive Officer, Minuteman Health, Inc.
855-MHI-1776
| 179 Lincoln Street, Boston, MA 02111
| www.minutemanhealth.org
Mailing Address: PO Box 120025, Boston, MA 02111
MINUTEMAN
APPENDIX D
DOCUMENT D-2
December 21, 2015
Centers for Medicare and Medicaid Services
Department of Health and Human Services
Attention: CMS-9937-P
P.O. Box 8016
Baltimore, MD 21244-8016
RE: Patient Protection and Affordable Care Act; HHS Notice of Benefit and
Payment Parameters for 2017 (CMS-9937-P)
Submitted Electronically
Dear Center for Medicare and Medicaid Services:
Minuteman Health, Inc. (“MHI”) appreciates the opportunity to comment to the
Department of Health and Human Services (“HHS”) on the proposed rule published in the
Federal Register on December 2, 2015 (80 Fed Reg 231) regarding payment and benefit
parameters for the individual and small group markets for benefit years begin ning on or
after January 1, 2017.
MHI is a Massachusetts-based member-governed health insurance company, or
Consumer Operated and Oriented Plan (“CO-OP”), established under Section 1322 of the
Patient Protection and Affordable Care Act of 2010 (“ACA”). 1 Our company sells
individual, small group, and large group health insurance products in Massachusetts and
New Hampshire.
MHI’s mission is to deliver high quality, low cost care by giving our members an
unprecedented voice in how MHI is managed. We accomplish this mission by giving our
members the right to elect MHI’s Board of Directors or run as Board members themselves
and to participate in the annual Members’ meeting. As a private nonprofit, we are
committed to reinvesting profits in our members in the form of lower premiums or
increased benefits.
Below, we have outlined our comments, questions and concerns related to the
Proposed Benefit and Payment Parameters for 2017.
1
42 USC § 18042
1
Part 147-Health Insurance Reform Requirements for the Group and Individual
Health Insurance Markets
Fair Health Insurance Premiums (§147.102)
MHI supports HHS’s proposal to generally define the principal place of business for
rating purposes as the area where the greatest number of employees work or reside and believ e
this proposal will assist carriers in appropriately rating their small groups. MHI also agrees
that the child age rating factors are inadequate and do not address the unique health risks
posed by children of different ages. Flat age factors do not account for the higher risk of
babies and infants, teenage mothers, and adolescent males. Inclusion of age rating factors
will enable age rating factors to be more accurate, and will therefore guard against market
disruption or inadequate premium pricing.
MHI is concerned that HHS’ desire to make rating areas consistent with services
areas could have unforeseen consequences that limit competition and limit product
innovation. For example, in states with only one rating area, issuers would be prohibited
from doing business in that state unless the issuer is able to establish a state -wide service
area. This might not always be possible; providers may be unwilling to contract with
carriers in certain geographies or there may be a portion of a rating area in a
geographically isolated location. For example, if a state has one rating area and a plan has
a service area in 9 of 10 counties within the rating area, the 10 th county may be rural and
lack a sufficient amount of providers to meet service area requirements.2 There may also
be providers within the 10 th county that are unwilling to contract with the carrier at an
acceptable rate. In either of these instances, the carrier should not be prohibited from
issuing insurance in the remaining counties of the rating area.
Carriers would not only be prevented from fairly servicing states with few rating
areas, but would also be thwarted from developing innovative products. Many carriers are
working to develop low cost, high quality products through initiatives such as limited
networks, tiered products, and provider collaborations within specific geographic areas or
with particular types of provider organizations, such as ACOs. For example, a carrier
could develop a value-based product aimed at diabetics living within the service area of a
medical home provider specializing in diabetes management. A carrier could also develop
a limited network product with low cost, high quality providers in a certain geographic
area. If HHS requires issuer service areas to coincide with rating areas, these types of
innovative product designs could be limited or eliminated entirely.
2
New Hampshire, a state in which MHI sells health insurance only has one defined rating area. Please see
The Center for Consumer Information & Insurance Oversight, Market Rating Reforms--State Specific
Geographic Rating Areas. Updated May 28, 2014. Available at https://www.cms.gov/CCIIO/Programs-andInitiatives/Health-Insurance-Market-Reforms/nh-gra.html
2
MHI recommends that in the event HHS does finalize the rule to require rating
areas and service areas to be identical, HHS implements an exception process – perhaps
similar to the network adequacy process that many states employ – to allow issuers to
justify and receive approval for implementation of products or services areas that are
smaller than the rating area. Ultimately, MHI believes the issue of rating areas and
service area is best left to state regulators, and encourages HHS to not finalize this
proposal.
Part 153 – Standards Related to Reinsurance, Risk Corridors and Risk Adjustment
under the Affordable Care Act
Sequestration
The so-called “3Rs” were implemented to provide market predictability and
stability. Unfortunately, the programs as implemented have caused wide-spread
instability. The reinsurance program is vastly overfunded. The risk adjustment program
is forcing low cost, high growth, and new issuers to pay out enormous percentages of
premium – in the magnitude of 40, 50, 60, and even 70% of total premium – to issuers that
choose not to grow to serve this new population. The unintended volatility of the risk
adjustment program in turn has resulted in a massive underfunding of the risk corridor
program. As a result of the destabilizing and compounding impact of these two
programs, issuers across the country are facing capital shortfalls. At best, this Risk
Adjustment-driven volatility will drive up prices for the lower-cost and provider-centric
plans. Worst case, it will force such products from the market. MHI cannot recommend
strongly enough that HHS act urgently to adjust the programs before more low cost
issuers are forced out of business and premiums rise.
MHI recommends that HHS do everything in its power to stabilize the funding of
the programs. First, MHI recommends that HHS use surplus funds in the reinsurance
program to fund the deficit in the risk corridor program. HHS still has unspent
contributions from 2014 that can be used to fund increased reinsurance recoveries in 2015 or
2016. According to Milliman, to the extent that market-wide enrollment levels come in lower
than expected in 2015 and 2016 there is likely to be higher-than-expected per member
reinsurance recoveries.3 If higher reinsurance recoveries result in these years, risk corridor
receivables will be reduced – similar to what occurred this year due to the asymmetry in
financial results by the size of the insurer. Secondly, we recommend that HHS encourage
issuers to recognize all outstanding risk corridor payments owed to issuers as offsets to
other government overpayments, such as Cost Sharing Reductions (CSR) and Advanced
Premium Tax Credits (APTC).
3
Katterman, Scott. Headwinds cause 2014 risk corridor funding shortfall. October 5, 2015. Available at
http://www.milliman.com/insight/2015/Headwinds-cause-2014-risk-corridor-funding-shortfall/
3
Provisions and Parameters for the Permanent Risk Adjustment Program (§153.320)
The current risk adjustment program has serious technical and methodological
flaws which adversely impact new, rapid-growth, value-driven insurance plans. As HHS
is well aware, these programmatic flaws have driven the withdrawal or outright failure of
a number of marketplace plans. In addition, the wild variability in the program results as
compared to expectations has forced plans, regulators, and auditors alike to question the
ability of plans to close their year-end books or to adequately price insurance premiums.
Unless HHS addresses the risk adjustment issues, more plans will withdraw from the
market or fail entirely and existing plans will be forced to increase premiums to account
for unpredictable and massive volatility in the risk adjustment payments transfer, both of
which will lead to a reduction of competition and higher premiums for consumers.
MHI appreciates that HHS is closely examining the risk adjustment program,
proposing updates to the methodology, and allowing stakeholders to take an active part in this
important discussion. We agree with many of HHS’s proposals including recalibrating the
risk adjustment model and recalculating the weights assigned to Hierarchical Condition
Categories (HCC) and demographic factors using the most recent data available. We also
agree with investigating methodologies that capture partial year enrollees, as the methodology
does not currently account for persistency; that is, older insurers which have more historical,
persistent claims data are better able to capture diagnostic data for enrollees with chronic
conditions than newer health insurers that may only have partial year data on their members,
or no data whatsoever. We would ask that HHS focus on giving sufficient weight to
substance abuse and behavioral health services that we have found are not coded to
adequately compensate for the cost of such services. Therapies in general, as well as nonchronic acute care services, have also not been accounted for sufficiently in the current risk
score.
We agree with HHS’s consideration to incorporate prescription drug data into the
methodology, but emphasize that there is little risk that providers would alter their
prescribing behavior to better “game” the system. Providers may already be incentivized
to “upcode” under the current methodology and we would not want to discourage the use
of prescription drug data, one of the simplest, most effective, and most reliable indicators
of health status, in the methodology. Establishing diagnoses from claims data on health care
encounters requires considerable time. In contrast, many chronic conditions can be identified
much more quickly and economically by a patient’s use of specific prescription drugs.
We also support HHS’s proposition to incorporate preventive services into its
simulation of plan liability, however we feel even more can be done to enrich the
calculation of HCC risk scores. By basing the calculation on more factors and
incorporating not only preventive services and prescription data, but Current Procedural
4
Terminology (“CPT”) codes to reflect where plan enrollees are getting procedures, the
HCC score will more accurately account for members’ medical utilization. Services are
often administered in an outpatient setting and can be incorporated into the risk
adjustment score through use of CPT codes. Currently, the highest value HCCs are based
largely upon inpatient diagnoses and therefore miss a large portion of the population
utilizing care. MHI would like to see HHS develop a methodology that is more in line
with Medicare and Medicaid – those methodologies that value outcomes and not merely
the utilization of inpatient resources.
The changes proposed by HHS and supported by MHI, while useful, are
completely insufficient to mitigate the extreme dysfunction that risk adjustment has
introduced into the market. ACA mandates that the risk adjustment program “provide
stability for health insurance issuers in the individual and small group market.” 4 The
current risk adjustment program entirely fails to meet this mandate, and therefore amounts
to an ultra vires program. If HHS does not take more decisive action now, additional
plans will withdraw from the market and premiums will continue to rise. HHS must take
immediate action to address the chaotic financial situation in which fast-growing, providercentric, and highly efficient plans such as MHI find themselves. A few simple examples that
underscore the absurdity of the risk adjustment program as currently implemented, without
even addressing complicated methodological issues, include:

Small, low cost issuers across the country are paying out enormous amounts to large,
established issuers. For example, Preferred Medical Plan of FL, a small issuer
focused on providing affordable insurance to the individual market, paid out over
$97m in risk adjustment – accounting for nearly 40% of premium – while Blue Cross
Blue Shield of FL received over $221m. Similarly, MHI paid out 71% of premium,
while Blue Cross Blue Shield of MA received nearly $52m.5 The risk adjustment
program should not amount to a subsidy of rich issuers by poor issuers. Neither Blue
Cross plan grew significantly to serve this new population, and were rewarded for not
having done so. Those who did step up to offer cost-effective products were in effect
punished for having done so under the Risk Adjustment mechanism in place today.
4
Patient Protection and Affordable Care Act; Standards Related to Reinsurance, Risk Corridors and Risk
Adjustment, Final Rule, March 23, 2012, pg 17220, at http://www.gpo.gov/fdsys/pkg/FR-2012-0323/pdf/2012-6594.pdf
5
In Massachusetts Blue Cross Blue Shield HMO Blue, Inc. received $49,839,020 received and Blue Cross
Blue Shield of Mass., Inc. received $1,836,923. Please see Memorandum to Health Connector Board
Directors re 2014 Risk Adjustment Settlement Update, July 6, 2015, pg 3. Available at
https://betterhealthconnector.com/wp-content/uploads/board_meetings/2015/2015-07-09/BoardMemo-Risk-Adjustment-Update-070615.pdf
5

Issuers that received large reinsurance payments (meaning they had very unhealthy
members as determined by simple subtraction of large dollar claims) also paid out
large risk adjustment payments (meaning they had populations that were scored as
being very healthy members by the flawed Risk Adjustment mechanism). This
inconsistent outcome illustrates how poorly the risk adjustment methodology correctly
identifies and quantifies underlying member risk.

Use of the state-wide-average premium in calculating the risk adjustment transfer
requires issuers to pay out money simply because they offer less expensive premiums,
entirely unrelated to the health status of their population. This perverse incentive
means that low cost issuers are penalized while expensive issuers are rewarded.

Issuers across the country were unable to accurately predict their risk adjustment
transfer. Both simulations and quarterly financials show that predictions regarding
transfer amounts were wildly variable and ultimately were not close to the actual
transfer amount. The lack of predictability not only makes it impossible for issuers to
correctly price premiums (since premium rate filings are due before final risk
adjustment payment invoices are generated), it also demonstrates that the methodology
is unreliable.

Under the methodology, issuers can pay out over 100% of premiums even though they
are paying out claims. Similarly, if members do not have any HCC codes, issuers
might be required to payout as much as 90% of premium on those members – meaning
that issuers can be forced to lose money on members without HCCs.
The Consumers for Health Options, Insurance Coverage in Exchanges in States
(CHOICES Coalition), a multi-state coalition of health care plans comprised of non-profit,
investor-owned, health system-sponsored, risk-bearing, start-up and decades-old issuers,
recently published a white paper with technical assistance provided by Richard S. Foster,
who served as Chief Actuary of the Centers for Medicare & Medicaid Services from 1995
through 2012. That paper identified significant flaws in the risk adjustment program and
identified several short-term “circuit breaker” solutions HHS can implement to assist
those health plans struggling in the aftermath of risk adjustment and risk corridor
programmatic failures.6 Those solutions include:

Exempting new, fast-growing plans from risk adjustment for the first 3 to 5 plan years,
in recognition of their difficulty in obtaining complete HCC diagnoses for their
enrollees. Gradually phasing-in risk adjustment or instituting a threshold applying
6
Letter to the Honorable Sylvia Burwell dated November 4, 2015 from CHOICES. Available at
http://nashco.org/wp-content/uploads/2015/11/CHOICES-White-Paper-on-Risk-Adjustment-Issues.pdf
6
only to plans who cover at least 100,000 lives are eligible to participate in the risk
adjustment and risk corridors.

Applying a “credibility-based” approach to participation in risk adjustment,
accounting for both overall plan size and the proportion of members who have not
previously been enrolled with their current insurer. Plans with very low credibility
would be excluded from risk adjustment altogether, and others would participate
proportionally until fully credible.

Placing an upper bound of 2% of premium on the amount of a plan’s risk adjustment
transfer charge, to avoid financial harm to insurers and undue premium increases for
members resulting from limitations in the risk adjustment program.7

Recalculating 2014 and later risk transfer payments and charges for all plans with
below average premiums in a State, using the plans’ own average premium amount or
average claims cost, to avoid the unjustified leveraging of these transfers for efficient
plans when based on the statewide market average premium.
Use of these short-term solutions will enable HHS to stabilize the insurance market
and avoid rapid premium escalation while HHS convenes the appropriate experts to
reexamine the methodology and make appropriate changes to mitigate unintended
consequences.
We attached and incorporate by reference the full CHOICES white paper which
explains in greater detail exactly how risk adjustment has not only destabilized the market
but had penalized high growth, low cost carriers. That paper also identified
methodological issues that HHS should consider while reevaluating the methodology.
HHS has a duty and an obligation to stabilize the market and make whole carriers who
were attempting to provide the exact type of innovative, high quality, affordable health
care options envisioned under the ACA.
While exploring such solutions, MHI also suggests that HHS consider requiring all
carriers to offer plans on the exchanges (as Massachusetts currently does with respect to
the Massachusetts state based exchange, the “Connector”). Risk adjustment may work
more efficiently if every carrier were equally exposed to the exchange population’s risk
and were required to offer products through the same distribution channel.
7
While CHOICES recommends placing an upper bound of 10% on the amount of a plan’s risk adjustment
transfer charge, updated modeling shows that 2% is a more appropriate upper bound for market
stabilization purposes. Further, MHI understands that HHS’ risk adjustment modeling showed that no
plan would ever be exposed to a greater than 2% of premium risk adjustment payment.
7
Distributed Data Collection for the HHS-Operated Programs: Evaluation of Quality and
Quality of EDGE Data Submissions (§143.710(f))
HHS has proposed that the 2015 default charge for insurers that failed to establish a
dedicated distributed data environment or submitted inadequate data be based on the
90th percentile risk transfer amount. While we understand that HHS believes that plans
now have more experience and are less likely to have technical difficulties with the EDGE
server, basing the default charge on the 90th percentile is simply too high, if not punitive.
MHI requests that HHS retain basing the default charge on the 75 th percentile. While plans
may have gained a better grasp on data submission requirements, the stabilization
programs are still relatively new and plans or their vendors may make mistakes.
Furthermore, there are already regulations that address carriers who willfully fail to
participate in the program – there is no need to subject carriers who inadvertently submit
inadequate data to such drastic penalties.
HHS has proposed that small insurers with 500 billable member months or fewer be
exempt from such penalties and simply pay a charge of 14 percent of premium rather than
set up an EDGE server. MHI is in favor of such an exemption for small insurers, but feel
that the threshold should be 720,000 billable member months (60,000 members) in order to
be “credible” by any actuarial measures. If a carrier covers fewer than 60,000 members,
the market experience is more volatile and makes it harder to forecast future rates. If
HHS chooses to keep the threshold lower at 500 billable member months, then we ask HHS
consider a process by which larger, small carriers gain full credibility before having to
participate in the 3Rs.
Part 154- Health Insurance Issuer Rate Increases: Disclosure and Review
Disclosure and Review Provisions: Rate Increases Subject to Review (§154.200)
HHS has proposed that insurers submit rate filings using the Unified Rate Review
Template (“URRT”) to HHS when seeking not only an increase, but when maintaining or
decreasing their current rates. We believe this will pose an unnecessary administrative
burden on health plans. Carriers are already required to include information about
premium changes to members annually and state insurance regulators review rates before
plans are made public.8 We emphasize that publicizing rate filings before they are finalized
8
Healthcare.gov. Your 2016 Health Insurance Letters. Available at https://www.healthcare.gov/keep-or-changeplan/notices/ and instructions for issuers renewing coverage. Please also see Guidance from CMS, Distribution
of Information Regarding Advance Payments of the Premium Tax Credit (APTC) and Cost-Sharing Reductions
(CSR) in Federal Standard Notices for Coverage Offered through the Federally-facilitated Marketplace. June 12,
2015 available at https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/Guidance-onDistribution-of-Information-Regarding-APTC-and-CSR-061215.pdf. Please also see Insurance Standards
Bulletin Series – INFORMATION from CMS Jackie Garner, Acting Director, Center for Consumer Information
8
creates a competitive disadvantage for plans, and we caution HHS in its proposal to make
public all rate filing information that is not trade secret or confidential commercial or
financial information.
Part 155 – Exchange Establishment Standards and Other Related Standards under
the Affordable Care Act
Annual eligibility redetermination (§155.335)
MHI appreciates that HHS has decided to revisit the annual redetermination
regulation at §155.335. Automatic reenrollment has caused confusion, unnecessarily
inflated premiums and has prevented consumers from choosing a plan that is right for
them. HHS’s proposed new re-enrollment hierarchy, which allows a current silver level
QHP member in a discontinuing plan to be renewed into a silver level QHP product
offered by the same issuer most similar to the enrollee’s current product is an
improvement. This proposed change will prevent a member from being disqualified from
a potential subsidy tied to the AV value of the plan. If issuers are not given discretion to
determine the most similar product in which an enrollee should be automatically re enrolled, we urge HHS to specify standards for what makes a plan similar including
premiums price, network similarities, and AV value.
We do not support HHS’s proposal to allow an enrollee to opt for default reenrollment into a low cost plan if the enrollee’s current plan’s premium increased from the
prior year or increased relative to the premium of other similar plans by more than a
certain percentage. Like HHS, MHI believes that consumers place a high value on low
premiums when selecting a plan, but feel that the best way to facilitate consumer
satisfaction is to require consumers to affirmatively reenroll in a new plan or product.
We believe that affirmative reenrollment is the only way to ensure that consumers
evaluate and understand their plan’s provider networks, maximum out-of-pocket costs,
prescription drug coverage and benefit designs. Automatically re-enrolling the member
based solely on price prevents them from learning how their health plan works. We urge
HHS to revise §155.335 to reflect an active reenrollment process.
Exchange Functions in the Individual Market: Termination of coverage (§155.430)
MHI agrees that a consumer qualifying for retroactive coverage must make a
binder payment for all premiums due for the period of retroactive coverage and will only
receive prospective coverage if he or she pay for at least one month. MHI is concerned,
& Insurance Oversight. September 2, 2014. Available at https://www.cms.gov/cciio/resources/regulations-andguidance/downloads/renewal-notices-9-3-14-final.pdf
9
however, by HHS’s proposal to amend the rules regarding the three-month grace period.
If a re-enrolling member is not required to pay a binder payment for coverage for the new
year and is protected by the three-month grace period, it is possible that carriers will pay
claims during those three months that are often difficult to “claw back” from providers
once learning that the member will not continue with the carrier.
We are also concerned by the proposal to allow an enrollee who was unable to
terminate coverage due to a technical error having up to 60 days after discovering the
error to terminate the coverage retroactively when the error was “unintentional,
inadvertent or erroneous.” Without strict verification requirements, the ability for a
member to retroactively terminate could be abused. We request that HHS propagate a rule
that providers must permit payors to deny claims retroactively for eligibility reasons . We
only feel it fair that providers also abide by grace periods and must return funds to payors
when the payor determines that the consumer was not a current or eligible member. If
such a grace period is not also imposed on providers, carriers will be left exposed to
claims for which they are legitimately not responsible.
To the extent HHS forces issuers to cover members through a grace period or to
allow retro-disenrollment, HHS must provide corresponding assurances that issuers will
not be penalized by that requirement. Many payors are forced by providers to
contractually agree that the payor will not retroactively deny claims for eligibility
purposes. This puts payors in an untenable position. Much like the quid-pro-quo for
guaranteed issue was universal coverage, there is a need to balance these requirements .
Therefore, in the event that HHS requires issuers to permit retroactive disenrollment and
continues to require issuers to recognize a 90 day grace period, HHS should formally
codify a rule prohibiting providers and payors from entering into a contract that w ould
prohibit payors from retroactive claims denials based on eligibility. If HHS does not
establish such a prohibition, the weakest, smallest, and least expensive payors – those
with the least market power – will be the ones most harmed by these requirements.
Functions of a SHOP (§155.705) and Exchange Functions: Certification of Qualified
Health Plans (§155.1000)
MHI believes that states should recommend additional models of employee choice
and believe that HHS should defer to the state entities regarding offerings on the SHOP.
Nevertheless, we do support HHS’s proposal to expand the SHOP options for both
employees and employers in 2017 through the “vertical employee choice” model and
support the proposal to allow employers to offer a choice of any plan in a single actuarial
level of coverage or the level above it. MHI continues to believe that the SHOP platform
will foster competition and shopping for small employers and their employees, facilitating
choice and lower premiums.
10
Similarly, MHI proposes that public sector entities such as municipalities and
school boards have access to the SHOP even though such groups are not technically
“small groups.” SHOP creates an opportunity for groups to have a choice in selecting
their health insurance. Extending this opportunity to public sector entities has proven
effective in Massachusetts where the Group Insurance Commission (GIC) represents state
employees and offers each employee a variety of plans issued across carriers. In its
current form, the GIC is a private state exchange, but this concept would work on the
SHOP and aligns with HHS’s proposals to give employers the option to offer employees
more choices on the SHOP in 2017.
MHI feels that HHS should not be the arbiter of plan certification and have the
power to deny certification to plans that do not meet certain requirements in the “interest s
of qualified individuals and qualified employers.” While we recognize that HHS is
charged with this determination under Section 1311(s)(1)(B) of the Affordable Care Act,
we nonetheless feel that the individual states are the entities which should decide what is
in the best interests for its citizen purchasers of health insurance. State systems are more
sensitive to local social and economic interests than the federal government and
effectively protect consumers by ensuring that carriers offer quality products. As such,
we request that all administration of plan certification remain at the state level.
Part 156 – Health Insurance Issuer Standards under the Affordable Care Act,
Including Standards Related to Exchanges
Standardized Plan Options (§156.20)
We understand that to simplify the consumer plan selection process, HHS is
proposing to establish “standardized options” in the individual market FFEs which would
offer options that include a single provider tier, a fixed in network deductible, a fixed
annual limitation on cost sharing, and standardized copayments and coinsurance for a set
of EHBs. As an issuer in Massachusetts, a state which already offers standardized plan
designs, we can attest that consumers are better able to compare the value of the networks
and network discounts through display of these products. However, MHI believes that the
individual states should be responsible for the administration of the standardized plan
options. As we have noted several times above, state regulators understand their
populations’ needs and are best equipped to design appropriate plans for their citizens .
The proposed rule states that HHS may consider limiting the number of plans
carriers can sell in future plan years. MHI does not support this idea. Limiting the
number of plans an issuer can offer will stifle innovation; carriers may react to such a
restriction by only offering products that have proven to be the most popular rather than
risk introduction of original and cost-effective plans. If HHS does limit non-standardized
11
options, we suggest it exclude certain types of products from the capped amount .
Products that offer limited or tiered networks, value-based design products created to
serve certain chronically ill populations, Accountable Care Organization (ACO) products,
medical home products, Federal Employees Health Benefits (FEHB), Multi-State Plans
(MSP), standard products and other products designated by HHS as being part of a policy
initiatives should not be counted toward the carriers’ total number of product offerings.
By excluding such products from the cap, plans can continue to innovate while HHS can
limit the proliferation of redundant products. HHS may also consider a petition process
for carriers to have their plans excluded from the cap for justifiable reasons.
Essential Health Benefits: Prescription Drug Benefits (§156.122)
As stated in the proposed rule, HHS recognizes the various standards with which
issuers must comply in relation to prescription drug requests. We support HHS’s
consideration to amend the rule and allow for plans in states which have coverage appeals
laws or regulations satisfy the federal standard at §156.122 if the plan complies with the
state’s coverage appeals laws. We feel that members will still have the ability to request
and gain access to clinically appropriate drugs not covered by the plan, but would like to
emphasize that formularies are specifically designed to cover members’ needs and choices
in the most affordable manner. In general, non-formulary items are more expensive and
duplicative to medications found on the formulary with the exception of those drugs
whose sole purposes is a non-covered benefit (i.e. cosmetic).
AV Calculation for Determining Level of Coverage (§156.135)
We support HHS’s proposal to allow for greater flexibility in designing the AV
calculator, however we would like to underscore the importance of finalizing the calculator
earlier than last year and urge HHS to release the final calculator before the end of 2015.
Carriers need time to adjust their Plans and Benefits Template as part of their QHP
applications and it is very difficult to achieve these deadlines when the calculator is
released not far before federal and state due dates for plan submissions.
Network Adequacy Standards (§156.230)
In the proposed rule, HHS states that QHP insurers in the FFE would be required to
provide 30 days’ notice, or notice as soon as practicable to patients if the carrier will no
longer contract with a provider regardless of whether the termination is for-cause. QHP
issuers in the FFE would also be required to allow enrollees under treatment by a provider
terminated without cause to continue treatment for up to 90 days if the patient is in an
ongoing course of treatment. MHI does not agree with these requirements. Both states in
which MHI operates have stringent network adequacy standards which cover member
12
notification and continuity of care, and feel that HHS should defer to these state laws.9
Overlapping requirements will be unduly burdensome and confusing to consumers.
Finally, we disagree with HHS’s consideration of a rating system for
Healthcare.gov that would classify plans into three different categories by network breadth .
If a product meets network adequacy standards, then it is counterintuitive to steer
consumers away from affordable, select-network products promising high quality providers
by labeling them as somehow inferior to broader network plans. If HHS does finalize this
proposal, we ask it consider issues such as how to best reflect out of area access to wrap
providers at a different cost share level and/or access to out of area providers of a
contingent state where members often cross state borders for care.
Quality Standards: Patient Safety Standards for QHP Issuers (§156.1110)
HHS has proposed that QHPs must collect documentation to ensure that their
participating hospitals with more than 50 beds create a comprehensive person-oriented
discharge program, track patient safety events and implement evidence-based patient safety
standards. We feel that such continued monitoring of hospital compliance beyond initial
credentialing would require costly medical record review and would be prohibitive for
smaller health plans. If this proposed measure becomes final, we request that smaller
health plans be exempt from reporting.
Administrative Appeals (§156.1220)
HHS has proposed to shorten the deadline for filing a request for reconsideration in
§156.1220(a)(3) from 60 to 30 calendar days. Shortening this time frame would not
provide sufficient time for carriers to request reconsiderations. Under §156.1220 carriers
are permitted to contest the amount of APTCs or CSRs within 60 calendar days after the
date of the final reconsideration notification. Truncating this timeframe may come into
conflict with provisions that require carriers to provide a three-month grace period for
individuals enrolled through the exchange who receive APTCs and/or CSRs. Carriers
need a longer period of time, not shorter, to submit reconsideration for such claims.
Carriers may not even be aware of the need to file such a request for reconsideration until
it is too late since the grace period is 30 days longer than the current deadline . We request
that HHS extend the window to 120 days to adjust for any APTC and CSR changes as
9
Both Massachusetts and New Hampshire have robust network adequacy standards and both states are
engaged in conversation about updating those provisions to best accommodate consumers. Please refer
to the New Hampshire Insurance Department, Network Adequacy Working Group, available at
http://www.nh.gov/insurance/legal/nhid_nwadequacy_wg.htm to see New Hampshire’s activities related
to the updating its network adequacy regulation and Mass. Gen. Laws Ann. ch. 176J §11 available at
https://malegislature.gov/Laws/SessionLaws/Acts/2012/Chapter61
13
well as any updates which may come from the Health Insurance Casework System
(HICS).
Third Party Payments of Health Plan Premiums (§156.1250) and Notices (156.1256)
HHS is proposing to require that carriers accept premium payments from grantees
backed by the government and from other third parties payers such as charitable
organizations. A carte blanche requirement that payors accept premium payments and/or
cost sharing amounts from third parties, including charitable organizations, could
introduce significant unpredictable high-cost utilization and therefore an increase in
premiums. For example, imagine a situation in which a charitable organization enrolled
and paid for all uninsured individuals that presented to an emergency room for treatment .
Further, it would be in the best interest of the third party payor to direct consumers to the
lowest cost product (to reduce that entities’ costs for premium and/or cost sharing
amounts), which would in turn result in a few issuers bearing the overwhelming burden of
unanticipated utilization. We urge that HHS should not implement this proposed rule
unless it can identify and put in place appropriate safeguards to ensure unintended
utilization does not occur. We also ask that if this provision is finalized, carriers which sell
plans both on and off the exchanges would be subject to it.
HHS is also proposing a requirement that insurers notify enrollees of benefit display
errors that might have affected their plan selection within 30 days of discovery of the error ,
and that carriers make a special enrollment period available for enrollees to select a
different QHP. We urge HHS to revise this proposal to require notification to occur
within 30 days of the date that the error is corrected by CMS. By way of example,
MHI identified a display error on the exchange last year. Once the error was discovered
and CMS was notified, it took HHS nearly three months to correct the error. In the
meantime, members continued to enroll in a plan that was not accurately displayed.
Therefore, when MHI launched its outreach campaign to notify implicated members, MHI
had to contact not only those members that purchased the product prior to the discovery of
the error, but also those members that purchased the product in the three month window
between when CMS was notified of the error and when CMS actually corrected the
exchange to display the correct information.
Part 158—Issuer Use of Premium Revenue: Reporting and Rebate Requirements
Reporting of Incurred Claims (§§ 158.103 and 158.140(a))
HHS has proposed amending the definition of unpaid claims reserves and
requirements, allowing carriers to utilize a 6 month rather than a 3 month run-out period.
MHI fully supports the longer claims run-out period to account for any lag in claims
14
payouts. We also support amending the MLR regulation to permit the counting of health
insurance issuer’s investments in fraud prevention activities toward incurred claims.
Conclusion
MHI is committed to the continued success of the Marketplaces and looks forward
to provide innovative products to support the growth and success of the ACA. We
appreciate the opportunity to comment on the Proposed Benefit and Payment Parameters
for 2017. Please contact Julie Myers, Regulatory Counsel at Minuteman Health, Inc. if
you have additional questions or concerns.
Sincerely,
Julie Myers
Regulatory Counsel
[email protected]
857.265-3218
P.O. Box 120025
Boston, MA 02112-0025
15
MINUTEMAN
APPENDIX D
DOCUMENT D-3
May 31, 2016
page 1
IMPACT OF ACA ‘RISK ADJUSTMENT’ PROGRAM ON COOPS AND THEIR VALUATION
Overview
The valuation of healthplans has historically been based on standard industry factors. These include
membership volume, cash flow generated, ancillary lines, proprietary technology, etc. Today the biggest
factor in valuing plans like the COOPs is the impact of the federal 3Rs programs. The focus of this paper
is to focus on the Risk Adjustment situation since it is the only element that does not sunset after 2016
and because the impact of the program can be profound in its current iteration.
Risk Adjustment (RA) was designed to move money from health plans with healthier members to those
with sicker members. While a fine idea, the reality is that the program is not working well at all. It is
over-scoring new members as healthier than they are, it is relying on incomplete data, and it
inadvertently penalizes the plans with the lowest premiums.
From an industry perspective, the results have been highly unpredictable. Thus far, only one year of
results have been published. Since those 2014 results were not published June 30, 2015, companies
nationwide were forced to estimate RA transfers. When compared to the eventual results, actuarial
consulting firm Milliman showed that companies’ estimates were wildly off the mark. The results were
far more volatile than had been anticipated by the industry.
This volatility had a real-world impact, with some plans paying out huge percentages of their revenues.
On average, ten percent of revenues was forced to change hands. That is, more than all of the earnings
for the entire industry was determined by the volatile Risk Adjustment program. That is right – a federal
program that is generating unpredictable results swung revenues on average ten percent in an industry
that only earns two percent in a good year. Paying out over 20% of premium was not unusual.
The federal government has realized that the program is generating results that are significantly more
volatile than anticipated, and in new ‘interim final’ rules issued three weeks ago acknowledged that
high-growth plans could be impacted significantly and encouraged states to take what action they could.
Unfortunately, it is unclear that CMS has devised a method for the states to actually do this. Below is
background on this issue, an example of how it disrupts the market, and some suggestions for the feds
and states to consider.
Example – If this were a ‘Normal Year’
Company X
 40,000 members now; up from 15,000 members in 2015
 Provider-focused plan designed to deliver higher quality at premiums 15-25% lower than BCBS
 Heavily exposed to exchange business
 80% of members in individual market receive a subsidy of some amount
This company, as can be seen in the ‘Normal Year’ below on the left, is doing well by traditional
measures. It is delivering efficient care at an affordable price, and it is growing as more consumers learn
that they can save a lot of money over their expensive, broad-market Blue Cross options.
May 31, 2016
page 2
Company X anticipated that Risk Adjustment would be a negative factor. It had to file its 2016 premium
rates during the beginning of 2015, which was before the results of the 2014 Risk Adjustment were
known. With no data therefore available, Company X chose to be conservative. It assumed that it
would have some healthier people since it is newer and growing and that can lead to an initially
healthier population. Company X therefore estimated that it would pay out $3M, or 2% of its 2016
premiums, due to Risk Adjustment. This was a reasonable estimate based upon how voluntary, nonfederal Risk Adjustment programs work – plus or minus 2% of premium is a normal range.
Normal Year
Company X
$M
150
(3)
120
25
2
Company X
projected 2016 revenue
potential Risk Adjustment payable
projected 2016 claims
projected adminstrative expenses
projected growth in surplus
25 current regulated surplus
2 surplus generated to support growth
27 new surplus
Stay in business:
2017 premium increase:
yes
7%
2016 -- What is Happening
$M
150
(20)
120
25
(15)
projected 2016 revenue
new estimate Risk Adjustment payable
projected 2016 claims
projected adminstrative expenses
projected growth in surplus
25 current regulated surplus
(15) surplus generated to support growth
10 new surplus
Stay in business: not likely
2017 premium increase:
35% (if in business)
Example – What is really happening in 2016
As can be seen on the right, Company X is now being told that it will have to pay out $20M, or over 13%
of premium, for Risk Adjustment. This means that it will now show a loss of $15M because it will need
to pay $20M to its competitors.
This will drastically reduce the money available to back up claims and liabilities. These funds are called
‘Regulated Surplus’, and if the company does not have enough it is forced by state laws to withdraw
from the market. In the example above, on the right it is clear that the regulated surplus of Company X
will drop to only $10M. This is typically enough to support a membership of about 20,000 members, not
the 40,000 members now enrolled.
What this means for valuation of COOPs
Paying out a significant portion of capital to a competitor is a direct reduction in the value of the
company. Further, additional significant payments must be assumed until at least 2018 when
unspecified CMS changes may improve the RA calculation.
With a high degree of uncertainty regarding the 2015 RA determination that is due to be released June
30, 2016, establishing a valuation at this time is not realistic.
What this means for 2017 and the market going forward
Two things are likely to happen. First, many healthplans like Company X will exit the market. They will
have to; they just sent the majority of their capital to their competitors. It is very unlikely that they
would be able to recover that money in future years. Typically the industry sees earnings of 2% in a
good year. Earning back 20% would take many years and would only work if the company never lost
May 31, 2016
page 3
money again. That is unlikely to happen. So Company X pulls out, and consumers have fewer choices
and higher premiums as a result. This dynamic applies to COOPs, obviously.
What if Company X were much larger? If the company had other lines of business and could withstand
writing a $20M check, it would then be left with two options. First would be to exit this part of the
market because being forced to lose that much money is meaningful even of a company has a lot of
money to start. The second option would be to remain in the individual and small group markets but to
significantly increase prices. If clients do stick around, the business would now make enough money to
cover writing a huge check to competitors without hitting the foundation of the company’s financials.
So, a bigger version of Company X files for 2017 premiums that are about 35% higher than 2016.
New CMS ‘interim final rule’ regarding state corrective action
States, it is clear, are unclear exactly what they can do in practical terms to affect RA given the CMS
workflow and processes as they understand them. States that are concerned are trying to address two
related items:
1) Maintain competition. If health plans need to pay out enormous sums in the summer of 2016
due to federal calculations for 2015, many of those companies will simply exit the individual and
small group markets. The market needs guard rails in place to keep players – including COOPs
2) Keep 2017 premium rate increases down. If there is not greater certainty regarding Risk
Adjustment going forward, any prudent lower-cost plan will have to raise prices significantly in
order to cover the volatility RA injects into the market. From a COOP perspective, this means
raising prices well beyond the COOP’s own cost structure in order to subsidize the competitors’
cost structure
Potential solutions – CMS – Short term
Assuming CMS intends to continue to have the states take the lead on remediation before federal
changes are made over the 2018-2020 plan years, CMS then needs to give states an operational
pathway to get this done. Currently, our understanding is that CMS has taken the stance that its Risk
Adjustment process must run its course. Payment from one carrier to another must be made. If there
are any shortfalls in funds from one company to another, CMS will act as a collection agency for the
receiving carrier and seize money from other federal payments (called ‘APTC’ and ‘CSR’) to pay off RA
liabilities. After all of this, if a state wants to moderate the RA payouts and stabilize a market then it
must find a way to have insurance companies voluntarily cut each other checks. This is extremely
unlikely to be workable.
Below are three solutions to this problem:
CMS Short-term Solution #1 – State Review
Simply insert a step in the process. Once CMS has processed its Risk Adjustment information, it would
send it to state regulators for review. State regulators may make what determination is appropriate for
their states, and if adjustments are to be made then they happen at that time. CMS then receives the
file back from the states with the confirmed or changed amounts, and the process picks up as currently.
May 31, 2016
page 4
CMS Short-term Solution #2 – Stop co-mingling insurance company money and federal funds
CMS has taken the stance that any RA money owed by an insurer will be subtracted from any federal
subsidies for premium and cost sharing that is owed to the insurer. Since over eighty percent of the
individual exchange population is receiving some sort of subsidy today, the overall portion of an
insurer’s revenues that is coming from the federal government can top fifty percent (many consumers
get only partially subsidized). Currently the federal government is acting as a collection agency for those
hit with large RA bills. It should cease doing so, and it should stop touching taxpayer money.
CMS Short-term Solution #3 – CMS Does Offset Risk Adjustment payables by Risk Corridor recievables
Companies that are being forced to pay out high dollar amounts under RA should, according to the CMS
formulas, then be able to collect from the Risk Corridor (RC) program for plan years 2014-2016. CMS
had been intending to serve as a backstop to the RC program, but the federal funding is now in question.
This funding gap emerged after insurers filed 2016 rates, so the risk to their companies was not priced
in. CMS continues to affirm that the program is in place and that they have an obligation to fund it.
Allowing an offset among the ‘3Rs’ programs – all currently funded exclusively by the insurance industry
itself – could allow a leveling effect that could help stabilize the market. If a company were to be forced
into a steep loss due to volatile RA result – as happened to Company X above – then RC would be
calculated in as well and the total amount of net transfer would be mitigated. This stabilizing move
would cost the taxpayers nothing.
Combined view of CMS short-term solutions
The first solution alone should be undertaken. State regulators, as the feds acknowledge, are the
‘primary regulators’ of the insurance market. They cannot exercise this responsibility if a federal
program that is generating volatile results can wreak havoc with the money that is supposedly under
state authority.
Solutions 2 & 3 present an interesting question if not implemented – why does it make sense to offset
insurance company money with federal funds as is happening today? Shouldn’t insurance company
funds be offset against other insurance company funds before federal money gets involved at all?
Whether or not federal Solution 3 were to be implemented, Solution 2 – keeping insurance company
money and federal money completely separate – is a reasonable and practical approach.
In order to A) keep competition, and B) keep 2017 premium increases lower, these short-term CMS
solutions should be kept in place until the new rules are finalized for the 2018-2020 plan years.
Potential solutions – State-based – Short term
Given the volatility created by the Risk Adjustment program, no solution will be elegant. There is no
perfect mathematical solution to a swirl of chaos, and at this point there is no time to get fancy anyway.
State-based solutions will very likely vary by state. For the single year of results seen thus far, volatility
has varied by state. States with a few long-standing, dominant carriers and little change in insurance
coverage showed less volatility. States tended to show significant RA volatility if they had an influx of
May 31, 2016
page 5
new members and had sharply growing carriers in a competitive market. Note that whether the carriers
were new or not did not matter – Humana and Kaiser both suffered due to RA in markets where they
grew quickly (e.g., Florida and Colorado, respectively).
As shown with the Company X example, it is very hard to build up ‘regulated capital’ in an industry that
generates 2% margin in a good year. Furthermore, additional changes under the federal Affordable Care
Act make it even harder for companies to retain any earnings. In essence, the commercial health
insurance rules today offer insurers a lousy deal – a chance at a tiny, capped upside but an unlimited
potential downside. Risk Adjustment makes this bad deal far worse because the upside is still capped
but the potential downside can get much larger and less predictable.
Until the new federal changes are defined and implemented for 2018-2020, states would need to be
able to A) protect competition and B) stabilize premiums if they put up guard rails in the marketplace.
State Short-term solutions #1 – Limit payouts to multiple of industry earnings
If the state-specific average margin is used as a base-case, then each state can determine what a
reasonable risk level should be for the industry. If in a particular state the historical average earnings is
above the national average and is at 3% of premiums, then that base-case would be higher than a state
like Massachusetts where margin is capped at 1.9% by law. States then set a maximum multiple to that
base rate margin as a limit to how much of a payout can be made. For example, as state may determine
that 1X the state base margin rate of 2% is appropriate; another may determine that 2X a base rate of
3% would be best. The lower the multiple, the lower the volatility and therefore the smaller the
premium increase needed for 2017.
State Short-term solutions #2 – Focus RA payments on sickest populations
Companies that end up with markedly sicker populations will tend to be smaller and larger companies
tend to be closer to the average since, if big enough, they are a large part of the average. Those
companies with high deviations from Medical Loss Ratio targets (that is, claims as percentage of
premium) should receive full RA funds before those within a tight range. Said another way, it is more
important that a carrier with significantly sicker population receive RA funds than a large company that
is scored as being slightly sicker. First, this is because the scoring has been demonstrated to have
enough volatility that a population that is scored as only somewhat sicker is likely within the margin of
error on the program anyway. Secondly, a company that is within a tight range – say plus or minus 2-4%
of premium – finds itself within the normal range of risk that any carrier should experience in any year.
The purpose of Risk Adjustment is not to eliminate risk but rather to protect against extreme risk.
State Short-term solution #3 – decrease volatility
In 2015, Massachusetts attempted to decrease the volatility that it forecast would likely emerge from
the 2014 RA results. As the only state-run RA program, it issued a change that said essentially that RA
receipts and payments would be cut in half at first. This was an imperfect solution to an imperfect
federally-driven formula, but it would have decreased unwarranted volatility and helped stabilize the
market. In 2015, CMS reportedly told Massachusetts that it had no authority to make such a change.
But, given the new federal ‘interim final’ rules, it appears that states could make such a change.
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page 6
Combined view of state short-term solutions
None of the state solutions will do anything unless the federal short-term #1 is put into place. If the feds
do not allows states to actually change the flow of money, then RA remains a purely federal problem
and the federal government fully owns the results.
State-based solutions #1 & 2 would work particularly well together. Coupled with federal short-term
solutions 2 & 3, they would focus risk adjustment on the issue it was supposed to be created to fix –
protecting insurers from taking on risky populations.
Conclusion
The questions regarding how many COOPs are investable and at what valuation are heavily impacted by
the details regarding the Risk Adjustment program. Left unchecked, fewer COOPs are likely to survive
and those that do will have a significantly lower valuation. All we can do from an MSO perspective is
wait until June 30, 2016 when results are published. Any action at this point would need to come from
state and federal policymakers.
MINUTEMAN
APPENDIX D
DOCUMENT D-4
July 5, 2016
Andrew M. Slavitt,
Acting Administrator, Centers for Medicare and Medicaid Services
Center for Consumer Information and Insurance Oversight
200 Independence Avenue SW
Washington, DC 20201
RE: Amendments to the Risk adjustment Program, Special Enrollment Periods, and the
Consumer Operated and Oriented Plan Program CMS-9933-IFC
Submitted Electronically
Dear Mr. Slavitt:
Minuteman Health, Inc. (“MHI”) appreciates the opportunity to comment on the Interim Final
Rule published May 11, 2016. MHI is a Massachusetts-based, member-governed non-profit
health plan selling individual, small group and large group health insurance products in
Massachusetts and New Hampshire. We support several provisions of the Interim Final Rule
(“IFC”) related to special enrollment periods and CO-OP regulations, but feel that the changes to
the risk adjustment program need to be both expedited and further clarified so as to put state
regulators in the best position to take charge of and effectively run the risk adjustment program.
1. Special Enrollment Periods
MHI applauds CMS’s efforts to address fraudulent abuses of SEPs. MHI has seen a recent
increase in fraud associated with the use of SEPs. The resulting costs have been so material that
MHI is discontinuing certain products for the sole reason that it cannot risk continued SEP
abuses. We urge CMS to ensure adequate documentation of SEPs, and further, to identify other
markers of fraudulent activity (e.g., the same phone number and/or address being used on dozens
of enrollment forms by unrelated individuals) to ensure that issuers can continue to make a
variety of products available to the market. In addition, we urge CMS to implement a process
whereby issuers can retroactively disenroll a member who was inappropriately permitted to
enroll through the SEP process if subsequent research shows that the member should not have
been eligible for the SEP.
2. CO-OP Program
Definitions
MHI agrees with CMS’s decision to expand the definition of a “representative” under 45 CFR
156.505 and welcomes the chance to have more diversity and experience amongst our board
members. While CMS has amended the definition of the term “pre-existing issuer” to disqualify
fewer candidates, we feel that CMS is still overly broad in its restrictions on board member
eligibility. CMS should further define pre-existing issuer to exclude high ranking employees of
commercial health insurance issuers operating in different states’ marketplaces from where the
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CO-OP is operating. Employees of insurance companies that operate outside of CO-OPs’ market
areas cannot and do not pose risks related to competiveness, conflicts of interest, or undue
influence by other issuers. Representatives of other commercial health insurance companies have
relevant industry knowledge and experience that is crucial to CO-OP strategic initiatives and
operational oversight. By limiting the pool of qualified candidates, CMS is hindering CO-OP
plans’ evolution into mature and competitive companies and puts CO-OPs at a disadvantage
compared to issuers which do not labor under such restrictions.
CO-OP Standards
MHI supports CMS’s amendments to 45 CFR 156.515(b)(1), but further suggests that CMS
remove the requirements for elections to be contested. Given the complex and highly regulated
nature of health insurance, it is crucial that CO-OPs can establish boards of directors that include
qualified individuals with specialized expertise, consistent with industry guidance and state
regulatory requirements. Group Health of Puget Sound, a member-governed non-profit health
care system that was founded in 1947, has a long tradition of member governance and
participation. It does not require contested elections, does not oblige any of its directors to be
members, and does not prohibit individuals from becoming directors if they are representatives
of other health issuers. Requiring that elections be contested is not logical (many directors may
be appointed regardless of whether they are elected so long as greater than 50% of the board is
comprised of elected directors) and could be harmful if CO-Ops are required to nominate
individuals that are unfit to serve as directors simply to ensure a contested election.
MHI supports CMS’s clarification of 156.515(c)(1). In order to be successful, CO-OPs must be
free to pursue whatever strategic plan is most beneficial for themselves and their members. Any
prohibition on diversifying lines of business would place CO-OPs at a significant disadvantage
as compared to their competitors. It is widely acknowledged that many issuers have been able to
weather the volatility of ACA-implementation by cross-subsidizing their exchange business
losses with profits from other lines of business.
Loan Terms
Over half of the original CO-OPs have now been subject to closure. These closures have
decreased competition (which will lead to an increase in premiums), disrupted patient care, and
cost taxpayers over a billion dollars. We applaud CMS’s efforts to pursue alternatives to CO-OP
closure and wind-down that would preserve competition, ensure continuity of care, and afford
taxpayers an opportunity to recoup any amount of their investment. We urge CMS to continue to
identify ways to ensure the success of the CO-OP program and the best use of tax payer dollars,
not only by identifying ways for CO-OPs to exit the program as appropriate, but also by
modifying the risk adjustment program which is materially harming CO-OPs and transferring tax
payer dollars from non-profit CO-OPs to the largest issuers in the country. CMS must lift all
restrictions on CO-OP operations that do not exist for other issuers in the market, including:
restrictions on conversion to a for-profit corporation; loan purchase by private investors;
marketing; sales in markets outside of the fully-insured individual and small group markets;
requirements to participate on the exchange; significant administrative expenses associated with
the COOP program; and other restrictions that place CO-OPs at an unfair disadvantage as
compared to their competitors.
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3. Risk Adjustment
MHI has long been concerned about the flawed federal risk adjustment program. MHI has
repeatedly raised concerns with CMS about the program, including but not limited to:
-
The use of the state-wide average premium requires issuers to transfer money not because
they have a healthier population of members, but because they are more expensive; this
penalizes issuers that have created high-value products through reduced administrative
and/or reimbursement costs, and rewards the most expensive issuers
-
The methodology creates a situation in which issuers must often pay out greater than
100% of an individual member’s premium through the risk adjustment transfer, even
though that individual has claims and associated administrative expenses; this is
particularly problematic with respect to Bronze products, as seen by recent issuers
announcements regarding the withdraw of Bronze products
-
The inability of issuers nationwide to accurately predict risk adjustment transfer amounts
ensures that issuers must raise premiums in order to ensure that premiums will be
sufficient to cover not only claims, but also unpredictable risk adjustment transfer
payments
-
The risk adjustment program penalizes new and growing issuers that do not have access
to robust or stable claims data, again penalizing innovative new entrants while rewarding
large established issuers
The Consumers for Health Options, Insurance Coverage in Exchanges in States (CHOICES
Coalition), a multi-state coalition of health care plans comprised of non-profit, investor-owned,
health system-sponsored, risk-bearing, start-up and decades-old issuers, authored a white paper
on risk adjustment with technical assistance provided by Richard S. Foster, who served as Chief
Actuary of the Centers for Medicare & Medicaid Services from 1995 through 2012. MHI
incorporates by reference this white paper (which was also sent to Health and Human Services
on November 15, 2015). The CHOICES white paper discusses the significant flaws in the risk
adjustment program and pinpoints several short-term “circuit breaker” solutions similar to what
MHI has proposed above.1 MHI also incorporates by reference a white paper written by Wakely
Consulting in June 2015 which further documents problems with the flawed risk adjustment
methodology at both the state and federal levels.2,3 These two papers together explain in great
detail exactly how risk adjustment has not only destabilized the market but has penalized high
growth, low cost carriers. HHS should consider these papers when reevaluating the risk
adjustment methodology.
1
Letter from CHOICES Coalition to Sylvia Burwell, Secretary of the Department of Health and Human Services
and corresponding white paper (November 4, 2015). Available at http://nashco.org/wpcontent/uploads/2015/11/CHOICES-White-Paper-on-Risk-Adjustment-Issues.pdf.
2
White paper and corresponding executive summary published by Wakley Consulting Group on June, 24 2015.
Please see attachments to the comments submitted on regulations.gov.
3
The Wakely Report analyzes the impact of the Massachusetts Risk Adjustment Program on Massachusetts’ nongroup and small-group merged markets. MA opted to develop its own risk adjustment and risk transfer programs,
rather than using the HHS-HCC model. The MA model is similar in many key respects to the HHS-HCC system
used by all other States and is subject to the same issues described throughout the CHOICES white paper.
3
CMS has indicated in the IFR that there is opportunity for state regulators to ensure that their
respective markets are not unfairly affected by the risk adjustment program. MHI understands
that states that have attempted to take advantage of CMS’s language have been barred from
establishing procedures to modify risk adjustment transfers. It appears that CMS is allowing
procedural considerations to trump the overall good of the marketplace and consumers. MHI
urges CMS to work flexibly and collaboratively with state regulators and issuers to
accommodate their efforts to mitigate the impact of the flawed risk adjustment program.
As the process currently stands, CMS will collect the risk adjustment payments from the new,
rapidly growing, and smaller issuers and pay out the funds under the old methodology. This will
likely benefit and hurt the same plans as in 2015. Instead of repeating the deleterious script from
last year, CMS should (i) run the flawed risk adjustment methodology, then (ii) allow state
insurance regulatory agencies to audit and modify the outcome of that methodology as
appropriate to achieve market stability, and finally (iii) CMS could complete the risk adjustment
transfer process. This type of process will allow the state agencies to determine how to best
distribute the funds amongst carriers to maintain equilibrium in their unique marketplaces. CMS
should further encourage states to seek solutions to issues caused by the current faulty risk
adjustment methodology and inform states by:
-
Publishing information that shows the payout/receivable as a percentage of risk
adjustment-product line for each company;
-
Explaining how risk adjustment is impacting lower-cost, higher-growth plans; and
-
Publishing the risk adjustment payout/receivable as a percentage of surplus (regulated
capital) for each plan.
MHI additionally notes that CMS appears to be acting as a collection agency in a way that may
be harmful to taxpayers. CMS is responsible for collecting and distributing monies from and
among issuers through the reinsurance, risk corridor, and risk adjustment programs (the “3Rs”).
CMS is also responsible for distributing tax payer dollars to issuers through the APTC and CSR
programs (“subsidies”). CMS is apparently mingling the two streams of money – issuer funded
3Rs payments and tax payer funded subsidy payments – by engaging in a complex “netting”
exercise.4 As a result, not only issuer monies but also tax payer dollars are being funneled to the
largest insurance companies through the flawed risk adjustment program.
MHI commends CMS for the work it has already done to identify flaws in the risk adjustment
program. The Discussion Paper, Policy Forum and guidance indicate a desire to improve the risk
adjustment program. Going forward, MHI urges CMS to recognize the broader negative and destabilizing impact the current model has on the market and to act to mitigate that impact. Flaws
in the program must be resolved immediately; program improvements cannot be delayed until
2018 and beyond. Many small or growing carriers simply cannot absorb the financial impacts of
unjustifiably large transfer demands as they grow their capital base. If CMS does not adequately
4
For reasons that are unclear to MHI, CMS is not including issuer Risk Corridor receivable amounts in its netting
exercise. CMS appears to recouping monies from issuers based on reinsurance, risk corridor, risk adjustment, APTC
and CSR liabilities and is distributing monies to issuers based on reinsurance, risk adjustment, APTC and CSR
receivables, but is not crediting issuers who have risk corridor receivables.
4
address inequities in the risk adjustment program, consumers will likely see increased premiums
and a limited choice of health insurance options as more carriers are forced to exit the market. If
CMS cannot implement changes that will correct the risk adjustment program methodology
immediately, then CMS must implement safeguards to ensure that issuers are not materially
harmed pending the implementation of those changes.
By making changes to the risk adjustment program, CO-OP regulations and SEPs in the IFC,
CMS is clearly hoping to stabilize the marketplace and create an atmosphere which allows for
the ACA to function as intended. We thank CMS for considering our comments and look
forward to working with federal and state regulators alike to improve these programs in the
immediate future.
Sincerely,
Julie Myers
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