the practical considerations were want to get elected you want to get eelected. it's one thing to be elected the first black president but to get reelected as the first black president maybe even more remarkable. maybe even more difficult. he had to overcome certain barriers because when he ran the first time, pretty much in terms of national policy. he with senator for a little while. he was a clean slate on which people could ascribe thei the h, dreams, ambitions and project onto his thin body their ideals. but nowdon't like. ..

>> may make it difficult to get

through the questions unless we get started now. i think at least former colleagues have indicated they would join us today, so we will see senators coming in or out the day. busy day. let's bring the hearing to order. i want to thank my-- noting senator mccaskill will not be with us today. as some of you know, she is home in missouri attending to very important health issues and we wish her well. we know she will be back with us soon, i hope as soon as next week. i will say i suggested we postpone this hearing until she got back and her answer was: no, there is lots of work for the subcommittee to do and we should allow the senate business to go on, which is the way she has. i appreciate her attitude. she will submit questions for the record and i want to on the half the subcommittee think her staff, senator mccaskill's staff in preparing for this hearing. we are here today to discuss the administrations unfortunate

adventure in a healthcare start a business is how i look at this. the a for the care act had is something called the consumer operated and oriented plan called the co-op which was a-- we are not successful in advocating for this. under the co-op program the department of health and human services awarded $2.4 billion in taxpayer money to 23 nonprofit health insurance co-ops. as of today, of those 23, 12 have failed. these 12 collectively received about $1.2 billion. this was taxpayer money that is almost certainly lost. when we talk about that later in the q&a-- their collapse by the way, also caused 740,000 people in 14 states to lose their health insurance provider and

have to scramble to find new coverage, most with little or no time. to the last nine months, our sympathy has carefully investigated these failures. we wanted to know whether hhs, when it played the role as investor made good or bad decisions with taxpayer money. unfortunately, what we found out is a lot about decisions were made. a majority staff report released today, we details findings in this report is here and you all should have it. we detailed finding an hhs and they are where the serious problems concerning the failed crop in rome at strategy, management. before the department ever proved that initial loans. once the co-op got going in 2014, things went south in a hurry in terms of financial losses and enrollment figures that deviated from the cost of production's. the failed co-ops ultimately racked up $376 million in losses in 2014 and more than a billion dollars in losses in 2015.

but, despite getting regular reports the co-ops were hemorrhaging posh, hhs took essentially no corrective action for over a year. worse, the department approved additional awards to three of the now failed co-ops. this happen in 2014. this was despite clear warnings that these co-ops did not have reliable plans returning things around. the majority staff report claims these findings in great detail and without objection the report is to be made part of the record. let me give you highlights. when hhs approved a startup loans for the failed co-op in 2012 and asked reputable firm to consult to evaluate the co-op proposed loan application business plans. we reviewed the analysis as part of the investigation here's what we found: you'll probably hear from witnesses that they do the co-ops a quote passing score. but, it was based on a grading scale set by hhs and the word

warned hhs of specific concerns with the veil co-ops. it foreshadow the problems we will talk about today, the promise to come. they said among other things i'm in the nfl co-ops did not identify their senior leadership team, seven of the 12 serious deficiencies in their enrollment strategy and later turned out to be the chief reason for co-op failure. many submitted budgets incomplete, unreasonable, not cost-effective did not align with the co-op financial productions. those projections were not so hot either. they warned several co-ops relied on unreasonable projections about their-- just one example they noted co-op opportunity, caught for i will, nebraska that i imagine the senator will talk about later had a target profit quote much lower than industry benchmark" of the 4.8%. that was in her statement and he stated, target and profit margin was 0%. nevertheless, hhs approved all

loan applications of the failed co-ops in the tune of $1.2 billion. after the entered the market place and 2014, co-op's financial health deteriorated. hhs knew it. the department received key financial information from the co-ops including monthly reports and quickly financial statements and they showed starting almost immediately the failed co-ops experienced severe financial losses that exceeded even the worst case scenarios outlined in the loan outpatient to hhs. commendably by the end of 2014 that co-ops exceeded their projection worst-case scenario losses by at least $263 million. four times above the production. the crops enrollment numbers on a less problematic agree to the 2014 monthly report submitted. five of the failed co-ops dramatically underperformed enrollment productions while five others overshot their projections by wide margins. both errors can cause serious financial losses and they did. low enrollment means insufficient income, but excessively high enrollment was even greater threat to solvency because it multiplies losses

rather than profits when premiums are at a price. as many of the co-op premiums were. despite having that information, hhs did not step in. that apartment loan agreements with the co-ops entitled it to a voting number of accountability tools or borrow is missing the mark, but hhs chose to take a pass in next looks at me-- inexplicably for a year they took no part in action nor did they put any co-op oversight. five of the 12 failed co-ops were never subject to corrective oversight. five of the 12 failed co-ops were never subject to corrective action by hhs. hhs waited until september 2015, to put five others on corrective action. two months later, all 12 co-ops fail. hhs also had the power to stop the funds if i financial liability was in doubt. never did. never did to the bitter end.

instead, over the course of 2014 and 2015, hhs dispersed $848 million in federal loan dollars to the failed co-ops even as they lost more than $1.4 billion. and that's about 1.65 in losses, dollar city five in losses for every dollar hhs gave them. think about that. more unbelievable, near the end of 2014 hhs approved additional solvency loans for three of the failed co-ops and age are being shut down by state regular readers for having insufficient capital despite clear warning signs that the co-ops could not do things around. you again hhs did not complete external review and their plants improve the finances going forward. according to deloitte, they'd trumped these view of the application and did not evaluate for example the likelihood each co-op would achieve sustainable operation. i would have thought was the whole point. but, even the limited analysis hhs allowed the lord to come-- conduct pointed to warning signs

that the new york co-op and kentucky co-op did not have sound plans to regain footing. these co-ops alone received $355 million in additional solvency loans from the taxpayers. all failed, by the way. kentucky co-op collapsed after suffering losses of over $50 million in 2014, one-- another $150 million in 2015. companies operating losses exceeded $163 million. most staggering of all after hhs gave the new york co-op $90 million to prolong its life rather than allowed to scale down the co-op went on to lose another $544 million in 2015. the financial aftermath of all of this is dire and the subcommittee of the recent financial statements and the statements show none of the failed co-ops have repaid a single dollar come and not a single, principal or interest. of the $1.2 billion in federal loans they received. in my view, it's unlikely they will pay any significant fraction back.

the latest statement show that they'll co-ops the loan liabilities exceed $1.13 billion. this is 93% greater than the reported assets. including many that expect to receive on top of that they $01.2 billion to the federal government. we should not hold our breath on repayment. the american taxpayer is not only creditor that stands to suffer large losses. the latest balance sheets we obtained shall fail co-ops have more than $700 million in unpaid medical claims to doctors, and hospitals, unpaid medical claims. in some states these losses will be absorbed by other insurance companies, which means by the policyholder of other insurance comedies it would have to pay increased other insurance companies of increased premium and will go back to our constituents. again, the taxpayer. in other states doctors, hospitals and individual patients stand to suffer large out-of-pocket losses due to the failures. we will talk-- talk about this more relationship to the new

york co-op. these failed co-ops are an experiment gone wrong and real people got her including more than 700,000 americans who lost their health plan. today, i plan to ask hhs whether they accept responsible before the taxpayer waste, disruption to consumers and loss of doctors and hospitals that the co-op failures have brought. at this point, i like to ask my colleagues if they would like to make opening statements. all are welcome to do so. senator says arrived to sir-- first. is a mentioned earlier, you have done a lot of work on the issue of cooperative and he and its effect on your constituents in nebraska and i appreciate you being involved in this issue and i wonder if you have opening statements. >> thank you for your leadership and for holding this important hearing today i would first like to acknowledge our colligan ranking member senator mccaskill

we wish her well. today's hearing is about the families who lost her health care plans and about taxpayers who were swindled, the bureaucrats who mismanage the program and it's about the local government who had to cut budgets from firefighters and schools to make up for washington's failures. everyone in this room, republican and democrat have a duty to get the whole story and a formal care act co-op program crated 23 non- for-profit health insurers using $2.4 billion of quote unquote loans from the taxpayer. less than a year into operation the financial condition of many of the co-ops was unstable at best as today's report being released by the committee shows the own private consultant, deloitte, warned this was a case despite the cms continued to disburse loans and began awarding additional loans to these troubled co-ops. since then, 12 of the 23 have gone out of business, representing co-op failure rate of more than 50%. sadly, 740,000 americans covered by these 12 defunct insurance companies were given $1.2 billion in so-called loans from the taxpayer. as we have suspected for some time the subcommittee's report

concludes these loans will never be repaid. when these companies fail the imposed varying degrees of disruption on their enrollees and the markets in which they operated. unfortunate, the mess caused by this program began in my state with the abrupt failure of opportunity help. it was headquartered in ireland, but operated in both nebraska and iowa and the newly created insurer was given a total of $145 million in taxpayer-funded loans. things that seem to be going well at first from cooperative to the announced they signed up far far more enrollees than they anticipated. however, despite ample funding and more than enough enrollees come onto summer 16, 2014, as people were signing up for the 2015 coverage of the iowa insurance commissioner place call opportunity under supervision order. one month later, in january of last year the iowa insurance commissioner said rehabilitation co-ops and he would be impossible and he sought a court order for liquidation. after just one year of operation the new not for profit health insurer would collapse

completely. when cooperative and he failed 120,000 enrollees, a majority being nebraskans have their coverage canceled and were forced to find a insurance. because the collateral damage from cooperative and he failure does not in there, were nebraskans, cooperative and he owed millions of dollars as a chairman has mentioned to doctors and hospitals for claims or to release will not be repaid. to address the insurance collapse the state of nebraska has a guarantee fund that pays claims in the event of insurance collapse such as cooperative and he's and the guarantee fund is financed by assessments on other insurance companies selling similar plans in our state, prices that were upmarket race of michael opportunity offered originally and that's why they had far to me enrollees because it was not competent to run the program. to help pay for core opportunity unpaid claims, insurance in nebraska was assessed bees totaling about $47 million last year alone. it should be noted the sum was not enough to cover core opportunity's losses and the guarantee fund had to take out a long. as core opportunity has no

remaining assets it is impossible that the guarantee fund will ever be repaid the $47 million. in other words, it will be assessed into other insurers in the market. these insurers had to take opportunities outstanding bills and there is no reason to believe that cooperative that he will ever pay any of this money back. as a result, nebraska patch revenues will be decreased by $47 million because these insurers sums it really able to over five year period to reduce their tax pod-- why building to the state in the amount of their contributions to be a local opportunity. my state will have much less revenue to pay for priorities like education, roads, firefighters and other local government issues. nebraskans want to pay for core opportunity failure again, first as individuals became uninsured and now it's taxpayers have to bail out core opportunity. on top of the $145 million that they as taxpayers made in federal loans to go opportunity and as previously mentioned above another co-ops have failed. likely initiating variations of the same story across 11 more states. depending on the viability of

the 11 remaining co-ops, it could happen more states in the years to come. indeed, of the 11 co-ops remaining in operation we know as heavier 25, cms placed eight of the 11 under corrective action plans. in addition, updated financial reports show conditions here are greatly worsen for four co-ops with data available for the fourth quarter 2015. despite the mess, cms is today offered little in terms of explanation for the province. i have been questioning that apartment since last night about all this after only one failure. we now have 12 and potentially more on the horizon. i spent-- except for letters to your agency over the course of this time and have been working alongside chairman portman in the ranking member to request documents. hhs owes all cooperative and he enrollees in all federal taxpayers and particularly taxpayers in my state and answer. i look for it to the hearing and hope for new and actual substantive answers and-- thank you. >> thank you, senator sasse.

>> i wanted to the chairman holding this important hearing. i don't have an opening statement, thank you. >> thank you. we will now call our first panel of witnesses for this morning's hearing. andy slavitt is the acting administrator for the center-- centers for medicare and medicaid services, cms picked before coming administration was prince will deputy administrator beginning in july 2014, before joining cms he was group executive vice president for optimum where he oversaw delivery of clinical, technical and operational solutions to healthcare client answer-- including the department of health and human services. kevin counihan is the marketplace chief executive and cms deputy administered her. before joining cms he served as ceo of connecticut's health insurance exchange access connecticut. i appreciate both of you being with us this morning and we look forward to your testimony for it

is custom to swear and all witnesses and at this time we ask you to stand and raise your right hand. do you swear the testimony you're about to give before the subcommittee will be the truth, the whole truth and nothing but the truth so hope you got? >> yes. >> having heard in the affirmative i appreciate you being here again and you are written testimony, you should know, will be printed in the record in its entirety and we would ask you to limit your oral testimony to five minutes each. mr. slavitt, we will hear from you first. >> thank you. i also want to offer my best to ranking matter-- ranking member mccaskill as well and to give it in addition to producing in this hearing on the co-op health insurance companies. i know you are all aware of the challenges that the cops face. 12 having closed their doors prior to the end of 2015. i understand the questions that you have about how cms provides oversight to co-ops, how cms

makes award decisions, and is cms's level of account ability when a co-op closes. as you know the affordable care act allocated over $2 billion to start the cooperative. to stimulate new local competition in industry has a history of being very difficult for small-company surrender. with some entry markets that had not seen a new competitor in decades. let me first clarify oversight per view. under law, the federal government is not granted authority reserved for the states analyzing actual warily certified rates and surplus levels and determining who is both i'd to offer insurance during open enrollment. cms is responsibly is to award and oversee funds and ultimately maximize the likelihood taxpayer funds are returned. co-ops were selected in 85% of the loans made prior to the start of the first open enrollment in 2015. the remaining 15% of funds were awarded during 2014. loans were made through an evaluation process the award

additional 97.7 windows without having any third party opinion as to what this new business plan likely workers the consequence was that co-op lost 77.52014 million, $544 million in 2015. and again we talked about the consequences of the human toll which is families, individuals, not just having to be dislocated but now facing the possibility of these claims that have not been paid. doctors, hospitals, clinics could come back on them. so they paid once, pay their premiums. they did everything they were told it and now they have this risk. so i guess i would hope that you would say if you had to do it over again you actually ask for the third party analysis and opinion in initial launch is a was substantially similar with that let me turn to chairman of the committee who has joined us and thank him for his help with regard to psi generally.

>> thank you, mr. chairman. i appreciate you calling this hearing. apologize i couldn't hear earlier. i had a business meeting which had some important resolutions we had to be passing. so i missed a lot of the detailed testimony, questions and answers. i really don't want to hop into are some of the people have tread. so let me kind of pullback and let's go to the obvious. mr. slavitt, your background is in the private sector, direct? >> that's correct. >> you came from optima which is a division of united health? >> yes. >> what was the average profit margin of united health after-tax? >> four, five, 6% brad spevock relatively low. on average public corporations have pretax a 10% and after-tax about 5%. not a widely profitable or

outrageously profitable industry, direct? >> that's correct. >> from your standpoint i know you're new to the position, wouldn't you have kind of real concerns as a private sector ensure that none, under the old system and the government set up a bunch of these co-ops that they're going to subsidize them with these risk corridors and reinsurance plans, weren't you concerned maybe these co-ops might tend to try to gain market share by underpricing their premiums? >> you ask a really good, difficult question. >> so i would like just a basic obvious answer to it. from the private sector, isn't that a legitimate concern? isn't that exactly what happened? >> well so, so these companies that have not had new competitors in many cases in decades, so of course i think you are correct, the companies would not like to see someone come in and offer -- >> i am saying what was the natural result of was going to

happen with these government when co-ops. they were going to come in, try to gain market share, underprice their product based on what our laws ration would be, correct? and isn't that exactly what happened? isn't that exactly what the american taxpayer is on the hook for a $2.5 billion in loans? >> these are loans to local nonprofit companies who i don't think had as a goal, i would imagine they had a have as a goo price things us out of business. i think they cleared in many -- >> that's exactly what happened though, direct? >> yes. >> do you ever believe for a moment president obama's insurance under obamacare the cost of family health care would decline by $2500 per year? did you ever think that was possible? again coming from the insurance industry where you know the profit margin is about 5%, there's about $1 trillion of to put a trillion dollars we spent annually in 2012 runs to

insurance companies. the average after-tax profits is about 4.4%. so again that's about 45-$50 billion of profit out of a $2,800,000,000,000 a year margin. did you ever think for a minute that this magic on this government run health care system would deliver health care costs $2500 less per year per family speak with the way i interpret that $2500 made on that entry questioning credits that would be reduction in trend under the affordable care act which -- >> do you think that's the way the american people heard that? >> i think that's how some people heard it. >> the majority when you listen to present obama and supporters of the bill promised that if you pass this wonderful bill that the average cost we declined by $2500 was do think people thought that would be otherwise it would go up higher by $2500?

>> when i look at the text, that's not interpreted. also 20 million new people have health insurance or we have an under insured rate under 10% i don't anybody could have are fully predicted the outcome of a new law of the site as bashing size and complexity. there some good things and some bad things. we are talking to one of the biggest challenges. >> did you ever participate in high-risk pools in different states? >> i'm aware of them, i'm sure. >> another promise obama made and other supporters of the domain is if you like your health care plan you can keep it, period. again coming from the private sector understand how those high-risk pools, by the way we had one in wisconsin, 20,000 people were getting coverage that they liked, that they could afford. coming from the private sector looking at obamacare law you knew those high-risk pools would be gone, correct? that people go been injured in high-risk pools would not have

access to those health care plans, direct? to give any doubt those things would survive? in other words, did you believe president obama's repeated assurance and promised that if you like your health care plan you can keep it, period? did you ever for a minute believe that calling? >> what i believe was the would begin to get coverage in the marketplace so that everybody could get coverage. whether or not -- >> you do not believe his claim that if you like your health care plan you can keep at? >> i think what happened is there were folks that have coverage that was below a standard that the affordable care act set and some of those people did, in fact, lose their coverage. >> insurance products change as networks narrow. people might lose, if they lose a health care plan, if they lose a plan they could afford that divide in the high-risk pool they give them access to a doctor, if they were forced under different plan, maybe a comparable plan, maybe one with better deductibles although that hasn't happened, they are being forced into another plan might

cause of endless access to the doctor they trusted? >> the affordable care act created a higher standard. >> so president obama's repeated assurance that if you like your doctor you can keep the doctor, period, was incorrect, wasn't at? >> here's my perspective speed i really want an answer to the question. >> hospitals and physicians have been moving in and out of health care networks for 30 years and i don't think anything in the affordable care act change that fact. so yes, i guess is the answer to that. >> my point is those promises by president obama were ruled politifact 2013 light of the year. coming from the private sector, had you made this kind of assurances to your policyholders? do you think your company would still be in business had your business, had you as ceo or as a senior manager of one of those businesses conducted that level of massive consumer fraud, what would've happened to the private sector business?

you wouldn't be around, would you? you would be facing enormous number of lawsuits. >> i think our interpretations are a little bit different but i understand your point. >> so again getting back to the issue at hand, part of this hearing is that cms has long $2.5 billion to co-ops that obviously were not going to be able to survive, continue to pump money into these co-ops knowing they would never be able to repay them, you have not done due diligence, the review of these things have not been rigorous. now the american taxpayer will be on the hook for a $2.5 billion and that's assuming you don't continued to pump money into these failing enterprises. anybody want, do you want to refute that? >> i guess what i would suggest and i don't know, repeat a lot

of the things that was said so far today but clearly, starting up a small entrance come is one of the biggest challenges imaginable, particularly because as you said they face significant entrenched competitors with years of history, houses of people. these are small enterprises and i think it's fair to say the risk the pleasure is quite high. what we tried to do the best we can think will accept our share of responsibly and criticism certainly is to oversee these programs to maximize the opportunity to get these co-ops through the early start of stage to a point where they can be stable and the federal taxpayer can get his money back. in some cases where not been able to do that and in some cases those companies have not put for strategies which succeeded and i would acknowledge that. >> that's great you accept responsibility of an american taxpayer will be on the hook for $2.5 billion. that's unfortunate. thank you, mr. chairman. >> thank you, and again gentlemen, thank you for coming today and giving us your

perspective. i want to just and if i could on to point. one is there was discussion about the stage role and i want to be clear about one thing. i'm happy to hear your response to this, but to shift the blame to the states i think is inappropriate. hhs had authority and sole authority to be able to stop these disbursements when making for the co-ops were not likely to be financially viable and sustainable. we talked a lot about that today. it's not the state. the loan guarantee doesn't give that power to the states. it is h. it is hhs has sole and absolute discretion determine of the agreement and hhs had the power to withhold these disbursements when the co-ops did not perform under the corrective action plans we've talked about which were not put in place. for five of the 12 failed, they were never put in place, never. for another five you waited until september of 2015.

i just want to be clear in the record and be happy to hear your comments on this by shifting the blame to the states is that where the appropriate accountability to be. it was hhs, despite plenty warnings that watched these co-ops lose on that at $1.4 billion even as they fail to take corrective action for more than a year. and in some cases again not at all. any comments? >> you are correct, there's no question that we have the discretion to hold back cash to disperse from the co-ops. about a third of the cases when there was a request for cash, the team didn't make a disbursement. but i think the challenge, the challenge that we have, it's an important question, is ultimately if we don't disperse cash at some point to a startup, co-op, we are most assuredly

putting that co-op out of business and most assuredly putting some of their consumers at risk. so the team has to make very tough choices. if they find the co-op they are so not going to be any guarantee those co-ops are going to succeed. if they find the correct that's already been made. if they don't find it there almost certainly been out of compliance and out of business. i've would suggest that he made every decision he or i would suggest is not as if the team is turning a blind eye and that there were lots of good choices in this oversight process as you very well know. overseeing a small company in a complex environment is challenging. in my defense of the team is not a defense of every decision made. it's just as i've gone back and continually tried to ask the question with the information given the two choices they have become and i think not within the fact because someone oversight plan come at the end of the day we don't withhold

cash. you can't force an action but once we withhold cash, people don't get paid, claims don't get paid and the loans never come back to us. that's the difficult challenge that we face, and recognizing that you are suggesting we could've done a better job. >> there were plenty of tools including the corrective action plans and enhanced oversight plans, short of terminating. the rail is over 700,000 consumers find themselves not just dislocated of some facing the possibility of paying twice. that's a tragedy. we thank you for your testimony today. we will go on to the second panel. thank you.

>> [inaudible conversations] >> dr. harrington, thank you for being here. we are going to move it quickly because we have a vote coming up and with lots of questions for you know you've got a presentation for us. doctor star trek and is the purpose of health care management insurance risk management and business economics and public policy at the university of pennsylvania wharton school. it is also the chair of the health care management

department, senior fellow with the institute for health economics and action scholar at the american enterprise institute and was president of the american risk and insurance association and risks areas of society. his research focuses on the affordable care act impact on insurance market in insurance financial regulatory issues. he's a true expert and we appreciate his input to our report and his being here today. we look forward to your testimony. it's the custom of the subcommittee to swear in a what is it. so if you would mind, stand and raise your right hand. [witnesses were sworn in] >> excellent. bulet the record reflect the witness answered in the affirmative. your testimony will be printed entirely in the record as we talked about and we would ask you to limit your oral testimony. i think we initiated initial ashy to do in 10 minutes. if you could do it even shorter that would be great because i know that questions. and you for input and we look

forward to your testimony. >> thank you, chairman portman, and chairman johnson. i published widely on interest pricing and price regulation capital and insolvency risk, causes of insolvency, prediction regulation to risk-based capital requirements, state guaranty fund. i've done prior work on co-ops financial conditions. i've not read the majority report. i haven't seen anything about corrective action plans. i did review a lot of documents for preparing my testimony. especially for iowa and nebraska, new york, south carolina and tennessee including business plans, these of those days, pro forma financial, additional funding request, the lloyd reviews and financial information provided to subcommittee staff. it awarded 2.4 foregoing dollars of low cars or interest federal loans to 20 co-ops, 359 was for startup loans, 2 billion was for

solvency loans to meet state regulatory capital requirements. 12 of the co-ops have close. the longevity still providing coverage in 2016 is uncertain. future closures seem likely. eight of the 11 are reported to be subject to some cms corrective action plan. the close of co-ops deficits will depend on the resolution of a lot of claims, and the final tally of what their costs are is i will elaborate a little bit, very little of the one point to 4 billion in federal loans to be repaid to those, from those close to co-ops. release of the week to meet their obligations, and some require significant state guaranty fund assessment. .co off season difficult operational challenges and aca 2014 reforms pose major challenges and risks associated with pricing and utilization of the previous uninsured in transition a previously insured

people to aca compliant plans. the co-ops were inherently vulnerable due to unpredictable high claim costs including for many adverse selection from established carriers renewing their 2014 plan. especially enrollee growth outpaced projections are they had little ability to diverse by pricing and claims risk across geographies co-op segment of the own experience in data to consider pricing. they were plausibly pro-to a winner's curse, pricing to load generating large enrollment and losing lots of money. pricing answered a remain high for 2015 premium rates which had to be filed in the summer of 2014 when the co-ops still had little data to assess claims experience and the adequacy of premiums. ensures muscled substantial capital to achieve a high solvency probability. academic literature stresses it

depends on the amount of capital at risk him on the firm's value as a going concern which could be lost from financial distress come on sensitivity of customers demand to insolvency risk, and on external monitoring. co-ops financial strength and growth and potential for underpricing should have been a central focus from the program's inception to co-ops faced considerable pressure to capture market share. they had almost no private capital, no going concern value, no financial ratings and it was likely many potential customers would be insensitive to insolvency risk. very importantly history indicates insolvent insurers have charge low prices and growing rapidly. with inadequate reported claim liabilities, ultimately producing claim costs much larger than reported. there's risk that insurers will try to grow their way out of financial trouble hoping are gambling for survival. this history also suggests the

co-ops financial strength and potential adverse consequences of rapid growth should have been paramount especially given slow development of information on claims. the uproot co-ops toward applications including detailed business plans, feasibility studies including actuarial projections of growth, profitability and ability to repay government loans. originally for startup loans were recorded as a debt on the financial statements but to meet state requirements all solvency loans were triggered as surplus notes. subordinates all claims came as capital for the purpose of meeting regulatory requirements. actuarial analyses supporting solvency loan towards and disbursements and roll the assumption over a long horizon. the analyses i reviewed contained what i would consider modest stress test, not combined or considered much higher than projected implement combine with worse than expected claim cause. the baseline pricing assumptions

did build in something for potentially sicker population. as we heard some co-ops experienced vastly larger involvement than projected, greatly increasing the need for capital or they should have been a cause for alarm. most co-ops chairmen low premium rates compared with competitors. other co-ops with relatively high premiums have very little enrollment in 2014. some co-ops continued rapid growth in 2015, further increasing the need for capital. so with logan will reduce rates and grew rapidly in 2015. six co-ops were approved for $355.5 million in additional solvency loans in the last four months of 2014. three later closed. regulatory takeover of co-op or in late december occurred six weeks after disbursement of its additional 30 $2.7 million insolvency loan award and

following the denial of a late october request for another 85 million. health republic of nukes sought an additional 70.5 million in late october of 2014 which was denied following cms approval of an additional 90.7 million in september. the additional solvency loans exhausted the co-op programs to $.44 billion in funding. cms did not have the funds to approve additional request from co-ops, health republic or any other co-ops. with a state regulators for approval, however, cms had sat in co-ops to surplus notes so they could be countered as capital for meeting target capital requirements. five co-ops converted a total of $82.1 billion in startup loans to surplus notes before the closure. cms accelerated disbursements of solvency loan funding to many co-ops during 2014 and 2015.

a couple quick comments on growth and we heard this this morning. by september 2014 co-opportunity health had over eight times the originally projected number of enrollees for 2014 and 14,000 more enrollees than projected for 2020. if you have the lowest rates in nebraska and the lowest rates in the iowa small group market and the lowest rates of at least one rating region in the iowa individual market. regarding new york, health republic of new york, june 2015 and robert was over four times the baseline 2015 projection, over three times the projected high in will that scenario for 2015, and more than double the baseline projection for 2020. health republic generally had lowest premiums in the regions that operator it received rate increases for 2015 but its rate still generally remained a low

compared with competitors. i've done some analysis to back out of the aca risk stabilization programs just on health republic of new york, if they had received the anti-risk corridor requested at the time they still would've lost $50 a month or the entire 18 months of operation on a per member basis. they were losing about $150, or $150 per month. updated financial provided to the subcommittee for 10 other close co-op suggest little, if any, other federal loans would be repaid. assets were less than -- other obligations for seven of the 10 and only marginally greater than those obligations in the other three states. colorado, south carolina project substantial guaranty funds assessments. the co-op programs experienced raises a number of the questions be on the fundamental issue of whether the program made

economic sense when it enacted which will difficult to do should be evaluated without 20/20 hindsight. was it appropriate and prudent to push for the co-ops in operations in 2014 as opposed to waiting a year or two before selling tens of thousands of policies in an uncertain environment? second, why was the low premium rates charged by some co-ops not viewed as a signal to potential trouble from the get-go especially when the plans and refineries anticipated relatively high provider reimbursement and administrative expenses? third, why were some co-ops permitted to enroll far more customers than their projections as opposed to having some formal or informal speed limits imposed by cms and/or state regulators? and forth, why didn't cms daily solvency loan disbursements or possibly terminate loan agreements when confronted with enrollment far greater than projected and early evidence of

operating losses? my time has expired happy to take questions. >> thank you, dr. harrington. you were right on time but we ask you to do and you have asked key question from many of which you know have been discussed today with hhs. i'd like to go to my colleagues first for the questions and i know they're busy. we have a vote at 11:30 a.m. so we'll try to keep the questions and interes answers as short as possible. >> thank you, mr. chairman. dr. harrington come on what you just go to basic economics on this. let's talk about premiums that we are people are paying. we have janet in wisconsin before the health care law was implemented with bingo to understand $6 per month. issuefisher she spent $787 per . i held a telephone town hall yesterday and i know have permission to use the gentleman said that he is claiming prior to obamacare who spent $400 a

month and now he spent $1000 per month. these are for lesser policies. their deductibles or higher, premiums are higher. because the co-ops, as i said in my earlier question, give me the private sector companies obvious what was going to happen. use the word inherently vulnerable. it was obvious what was going to happen. the experience people have had of skyrocketing premiums, these have been constrained because co-ops, correct, and the marketplace? they are under marking -- if anything premiums have skyrocketed to the point they're going to. would you agree? >> i would agree at least in 2014 and 2015 the co-ops have a restraining influence on premiums. i'm not as sure as about 2060 because i haven't reviewed the filing. >> again is up right now but going forward we know how these

losses are going to be recovered. certainly the american taxpayer will lose the loans but also that payments to providers, these losses are going to be spread over other insurers in state and vendor action is going to be, what? >> i think the big issue is that it is becoming more apparent that the cost of a new risk pools under the affordable care act is higher than anticipated and that that will produce higher premiums, and that the rating restrictions in the affordable care act are going to lead to a specially high premiums for certain cohorts. >> subscribe that in greater detail the what do you mean certain cohorts? >> one thing has happened is that prior to the affordable care act rating restrictions people in their 50s and '60s that were in relatively good health were able to get premiums on a restricted basis guaranteed renewable coverage so that the rates would not go up. under the new regime if you're not palatable for any kind of

subsidy, you know how to in the risk pool that limits the amount that can be paid based on your age. but nontheless, it's based on a risk pool that includes lots of unhealthy people. i think more and more evidence will show healthy people that try to buy coverage outside of an employment-based market going forward, if they're in the '50s and early 60s probably will face quite a bit higher premiums than what they would have prior to the affordable care act. the other cohort would be very young people that are facing higher premiums because of the rating restrictions. >> we've seen that, and 27 year old male i think on average extremes like 127% rate increase. 27 year old female a little under 100%, still dramatic increases. let's talk about adverse selection beginning of a solution. we've heard reports of its of people, one of the reasons you need a high level of

participation and dental insurance is otherwise people will just delay getting dental care and don't have one month worth upping to go and get all the care and to stop coverage. isn't that also what's going to happen with obamacare? >> next to a certain extent. you can't totally predict but you can time certain medical procedures and people gamed the system, correct? >> just. the evidence is that is occurring not only an open and moment by the special enrollment periods. >> our committee staff did a pretty good job looking at the fact, president obama said trust me, no illegal immigrants are going to be qualifying for obamacare. the way they set up a system is cms is forced to enroll individuals without documentation of eligibility. what's been happening is people sign up, they get the subsidies, the prepaid premium tax credits. they also get some tax credits

or subsidized deductibles and that type of thing as well. our committee report shows about $750 million of prepaid premium tax credits were paid on behalf of individuals who ended and were unable to prove their eligibility. just speak a little bit to that. again totally predictable, correct? >> i haven't studied the particular issue. unfamiliar with the reports that i think anytime you impose a gigantic program with mind numbing complexity, they are going to be many slippages and undetected consequences spent let me finish up because i know one of the big reasons people pass obama gets the hated the idea of anybody making a profit off of health care. i just kind of want to go to the actual figure.

in 2012 america in total spent about $2,800,000,000,000, $2.8 trillion. i had just taken a look at the profitability of the top of seven companies in health care for 2012 and after-tax profit is about 4.4%. of the $2.8 trillion, about 1 trillion is paid through third party, basically insurance companies. take 4.4%, that's about $45 billion of profit out of an industry, sector of the economy that is $2,800,000,000,000 large. does that seem like a grotesque level of profit to allocate pricing efficient and do all the things that free market system actually does? is that out of whack? >> no. spirit in which the result of having government come in and trying to stamp out literally

1.6% of total health care spending profit of insurance coverage in order to wipe out which is really the goal of obamacare, take a look at, we've got begin jan is paying 276 before, nothing $787 for lesser policy. in the end do you think that is a pretty foolish law to real people? >> i opposed the law when it was enacted. i think there were better ways of promoting the growth of insured people penetrated and passing this particular law. >> i would agree with that assessment. thank you, mr. chairman. >> thank you. >> thank you, mr. chairman. i appreciate you being here and bringing the facts to bear for this. like others i would tell you person adverse i talked in my state in oklahoma talk to me about the same issue. they are spending more than they ever have. that deductibles are high.

all other premiums are going higher. they have fewer options than they had before. the hospitals now have more but now the care that they've had in the past because though they have insurance when they walk through the door they cannot afford to use it. we have failed state exchanges around the country from states to try to start on exchange that gone through the process and that is millions of dollars that has been lost in that process. they walk into the co-op issue. it is one more piece on this process where the original design they would be these nonprofit institutions to go compete. in theory they would be nonprofit insurance institutions that were created to compete in areas where there wasn't the insurance available wasn't enough available. so much initial question is did you find the co-op's in their distribution on the tragedy in places her insurance wasn't available? >> that's an excellent question and i haven't studied that.

>> what i have seen is that they were competing in areas where there were not available. they're trying to start up in places where there is a good market already. it is a good marker to already companies available. we put out loans they expected to a 40% loss rate which by the way cfpb is aggressive going after payday lenders 1140% loss rate at a 40% increase in putting down for whatever reason. they thought that was a good idea to do this with the co-op's. which is baffling to me. then they seemed also this unique challenge in places they were and i'm trying to determine what happened. when the co-ops came in and gave arbitrarily low amounts that were not business possible, and that's been proven by more than half of them failing and the rest of them struggling, they put out a pricing strategy. other companies, insurance companies had to try to compete with those co-ops, arbitrarily low costs on it that were not

sustainable which forced them down which i believe some of those insurance companies have now left those markets. we have many states that have fewer insurance options now, not only co-ops leaving but other companies. and we know a connection or is it too early to know whether co-ops in those markets are driving prices lower, forcing other companies to have to try to compete with them and now they have since left the market given even fewer options to the consumer? >> that's an issue that needs to be subject to high quality investigation and research. clearly in principle low prices can have a negative effect on the market over all when they are written well below what the consensus estimate of cost is. i think will find out more over time as people start to dig into this. i would, there was a lot of variation in 2014 among the 23 co-ops. some have high prices. they sold very little business.

in those cases any negative spillover from pricing were not there, but in a few cases where we had this enormous explosive growth during 2014, i think it's at least plausible their adverse effects in terms of pricing in the overall market that could have contributed to poor results in the overall market. one thing we know for sure is that we have a new entrant with no experience with low price, someone should be paying very close attention to the early enrollment and getting whatever they can about early claims and really asking hard questions of when is enough enough? shouldn't we be putting some sort of speed limit or break on this enrollment so that they can't run up an enormous tab that they can't pay? >> they were trying to get private capital from a bank or outside equity groups. what they been able to get these loans based on their model?

cms does but only 16% of the applicants got the loan. which gives the impression we were very limiting, 84% returned -- were turned away so we're getting to clean up the cry. more than half are now out of business. so my question is of the business models that were presented could they have gotten private funding or are these individuals presenting a business model that only government would have provided a loan? >> that's an important question. the business models that i reviewed, i think it would've been really, really difficult to make a sale to any private investors with those models. what private investors would be looking for is the have something that we think is disruptive and beneficial that will allow you to have a better model going forward? i think it's highly unlikely they would've seen that. i hasten to add private money has gone into health insurance startups and some of them have

reported a pretty large losses for 2014 and 2015. so private investment doesn't have a monopoly on any kind of -- >> but private investment is also tracking the data operations i figure i could debate or not? notquixotically keep dumping money or force you to make changes to the successful. >> yes. private investment in these situations, the money will be paid out over time based on clear evidence that performance is being met. and if there are warning signs that things are problematic it can get shut off. >> rather than changing the rules and send you can use this money and town as capital and assets and the rules change, they will not do that in the private sector. >> no. spin but the ask a quick question. a class act was created by obamacare. at the very beginning it was steady to be implemented, it was in the law, do it. secretary sebelius came out and

said this is totally unsustainable at the very beginning and said if we tried to implement this it cannot be done under this current model. congress agreed. 2013 to the funding, that program went away. they saw that the long-term care insurance that was put into place is not sustainable, studied it and pulled it. the co-ops they aggressively went after, started it and put overcome well $2 billion into something that when a discovery is just totally unsustainable. what's different about the class act and was the research behind the scenes or the co-ops? >> that's a very difficult question. i think one thing that's different as i recall with the class act you had their use independent government agencies doing the actuarial projections and forecasts with an eye towards budget implications from the beginning. and recognizing that the program had to be financially sustainable in order to go

forward. and the co-ops case there may have been much more uncertainty in the short run about what was likely to happen and the co-op business plans or accompanied by actuarial feasibility studies by major actuarial firms and advisors that were putting out scenarios suggested that they might be liable. >> thank you. i yield back. >> and again, dr. harrington, thanks for your help and expertise ha has been helpful ae are going to this report in time to figure out how this could have happened. i think you raise a lot of great questions about whether this should happen or not. one question you asked in your testimony i would like you to answer is should they have launched these at a time when there's so much regulatory uncertainty or should they have waited a year or two? >> there was this real concern that if you missed 2014 you are going to miss the boat. and i'm very reluctant to be influenced by hindsight but my

opinion is that would make more sense to wait at least a year if not longer. >> i mean, look, it was a lousy time to start a health start act in any category and certainly in the insurance sector. you have talked about enrollment in a key determined of the health insurers financial performance and if you would like talking about that for a second. i think you said speed limits in place, credibly short deviation from what they projected both over and under. we talked about the open enrollment which have massive over enrollment and yet there were no red flags apparently that at least there was no reaction by the federal government in pulling back support can you talk about why that is so important? >> it's important in the history of insurance and solvency is in the pricing problem. you can sell a lot of insurance at low prices because the claims

pokémon to let it later. you always have to be on your toes in order to guard against this sort of underpricing and rapid growth. given the context it made sense to be on top of enrollment. i was puzzled as things rolled out. i was very puzzled by the lack of public discussion, the lack of commentary about and solvency risk whatsoever in this market. it's as if no one understood to insurance companies do fail and those of you often have underpriced and grown rapidly. that background, that context as well as the lack of incentives for safety and soundness given this type of government funding should have over all made the environment, want a much greater caution about how these things would be permitted to grow. >> just to be clear, as compared to some of the testimony we heard earlier, there was information. we have monthly and quarterly pashtun quarterly reports including on enrollment. let me ask you this. kind of speculation on your part

but why did this happen? it was obvious that the underpricing and over enrollment and other business factors were problematic and there were reports and there was plenty of data. why did they keep putting money out the door and not take the obvious step which is cut the losses to the taxpayer and to the losses to all these families who ended up losing health care insurance, some of who are risking -- facing the risk of providers have claims against them even though they did everything right, the providers were not paid because these companies went insolvent and now these consumers are told they might have to pay for what the companies did not pay when they were required to do so. how did this happen? >> i think in part what happened even though you're getting information, the amount, the accuracy of information about claim cost wasn't there. it would be a much bigger bill

that would have been that would have been anticipate. i would have to speculate but there was a strong, it seems there was a strong commitment to the co-op program, a very strong belief that this new model would work in an environment where insurance companies were making excessive profits with administrative costs in markets that work are as nothing sufficiently competitive. it seems to me there was an ideological commitment to the program and to the success of the program. having said that i will point out what you get information that a company might be in trouble there always has been a fine line that regulators have to draw about doing something that will put the company over the edge or giving it more runway to try to work things out. but in those in areas when you get more runway to let companies try to work things out you want to make sure they grow it at all at a very orderly pace. you want to make sure you have the speed limits. the last thing you want to do is to provide more funding to an

even greater growth especially when you've got maybe soft information about claims experience at that point in time. >> given the academic background and lots of experience, i respect what you think they thinthink you are right. it was an ideological commitment, your quote. i think a blinded some of these folks who otherwise would've seen these warning signs. and as you said it was a commitment may be the co-ops may be against the insurance companies who are making excessive profits but i think is also to get involved with numbers up under obamacare which is part of the desired by the white house at the time, and continues to be. i do believe we have to learn from this. i think we have to come up with ways to ensure that we are not going to lose even more taxpayer dollars. ..