as you know, the affordable care act allocated $4 billion to start the program. the idea to stimulate new local competition in an industry that has a history of being difficult for small companies to enter. some entering markets that hadn't seen a new competitor in decades. let me first collar phi our oversight per view. the federal government is not granted authority for the states. analyzing certifying rates and surplus levels and determining who's qualified to offer insurance during open enrollment. cms's responsibility is to award and oversee funds and maximize the likelihood that taxpayer funds are returned. co-ops were selected and the remaining 15% of funds who were awards during 2015 loans were made through an evaluation process.

by the time i took this job in 2015, having come out of the private sector. all the loan funding had been obligated and my principle focus was to ensure we had the best possible oversight practices, one of the first things i did was hire an independent consulting firm to do a risk assessment of all the companies fresh. our approach was driven by three unique challenges. first, the challenges co-ops have had should not be viewed as a co op problem. but as a small business start-up problem in a very difficult industry. i hazard to say that all the small companies experience similar challenges. co op and nonco op. while we were making loans with companies to 30 to 50 employees, they are competing with companies with multiple thousands of people and worth tens of billions of dollar s in capital. trial and error is a part of

creating success. in this situation, with the limited capital available, and competing against giants. the co-ops had very little room for error. second, as mr. cumaha there will elaborate, during 2014, there was very limited actual performance information available. for the co op oversite team to evaluate co-ops. unlike every other business. in insurance you get to make pricing decision per year, and you live to see the outcome. this is why our decisions were largely made prior to the third open enrollment period. finally, all of the loan funding had been granted. our strongest remaining tool is to call the loan. which we can tell you, we did not take lightly. as it had ramifications for disrupting consumers as you

know, and would certainly not have increased the availability of co op loans. we set up an extremely active oversight process. we created other oversite tools. new methods of gathering information, and focused decisions around key events. the best way to maximize the opportunity for federal loans to be repaid is if the co op makes it through the start-up stage, when most failures occur, and reaches a point of stability. absent that, i have expected our team to be sober in their assessments and make difficult judgments. and they have. making recommendations to withhold funds to place co-ops on corrective action plans. and to shut down operations when that's what the analysis suggested. knowledgeable and capable an executive as there is in these

matters. he and his team hasn't hesitated to make important calls. we too go through after action review to see what we would do differently and can improve. ultimately, our goal at cms is to make sure the programs were charged with are working as they should for american families. more than 90% of americans have health coverage, even in states where co-ops proved unsuccessful, the overall uninsured rate decreased by 20%. and has continued to improve. challenges like the ones we're discussing today are part of every program we must always be ready to work with them transparently. and the best interest of taxpayers and consumers. thank you, mr. chairman for allowing me these few minutes. we'll be pleased to take your questions.

>> the team at cms has been charged to specifically oversee the federal loans made to these start-ups with the goal of maximizing the return to taxpayer funds, supporting the co op so the consumers have access to uninterrupted competitive insurance coverage and providing information to state departments of insurance so they can make the best possible decisions about the future of the co-ops in the state. like andy, i came to cms from the private sector. i've overseen four successful health insurance changes. leveraging our experience we worked with the teams to build and improve the oversight operation for the co op loans that includes tailored oversight protocols, a formal risk committee, and enhanced monitoring process. reviews from independent firms, and utilize the knowledge of top

professionals and actuaries. the life blood of any oversight process is data driven decision making. i will pick up on something andy said. our oversite team at cms makes the best decisions they can, based on the information available at the time. i think it's important to explain more about the information available to the co-ops, to the state departments of insurance and cms. in insurance, you know your revenues relatively quickly. what you don't know for some time are your real claims costs, because of the back weighted nature of how care is consumed in the year, and the lag time in how claims are submitted, processed and paid. due to the lag in claims data. as we neared the end of 2014, meaningful and complete data from the first and second quarters of the year was all that was available. the first reliable financial

information on the co-ops, 2014 performance from actual claims only became available in the middle of 2015. this was well after pricing decisions for plan year 2015 were made by the co-ops, well after funding decisions needed to be made by cms and well after certification and licensing decisions needed to be made by the state departments of insurance for 2015 open enrollment. even when information is not readily available, we aggressively gather and analyze the information we can on program performance and early warning signs. we used each of the oversight tools at our disposal to support and correct the co-ops on issues identified. in 2015 we conducted 27 financial and operational reviews, 16 in person visits and had 43 communications. not to mention hundreds of phone calls with the co-ops. this work is done in close collaboration with the state

departments of insurance who have the full authority over all insurers in their state. as andy said, we have several oversight tools, short of calling a loan, including corrective action plans and using the leverage of cash disbursements when possible. to push for performance improvement. approximately 1/3 of the time, we have withheld some or all of the requested disbursement until the company's more clearly demonstrated the need or took some other action. this tool had limitations as not funding a cash disbursement would cause a company to be out of state compliance. ultimately default on their loan. even with the oversight and support provided by cms and the departments of insurance. having operated insurance businesses, i can tell you that the outcomes of these companies are very much in their own hands. more so than either their regulators or lenders. for the existing co-ops, we are now reviewing their fourth

quarter financials. and the results of the most recent open enrollment period. plan year 2016 is a critical year for these co-ops. they must move from start-up to stability. for the co-ops that are in the wind down process, we are working with the department of justice to use every tool at our disposal. at the request of doj, putting a hold on tens of millions of funds as the process plays out. c m s will continue to work closely with this subcommittee to provide the best outcome. we appreciate the subcommittee's interest and i'm happy to answer any of your questions. >> thank you, we will have a number of questions. i appreciate your both being here and your testimony.

some of what you said confuses me. you talk about not having much information. hhs had monthly financial data to work with. you received the quarterly financial reports. q 1 by mid may. q 2 by mid-august. i don't think that's accurate. it's interesting also when you say our strongest tool is to call the loan. you have a lot of other tools, and mr. cunahan laid out some of those tools to deal with those co-ops. we talked about enhanced oversight plans.

these are all very valuable tools and i know you're using them now more frequently. throughout 2014. hhs did not use the tools at all. five of those 12 we talked about, were not put on corrective action despite the fact you were receiving these regular monthly and financial quarterly losses. by the end of the year, 10 of the 12 had exceeded their worst case scenario offices. by at least 300%. 263 milli$263 million i just do it's accurate to say you didn't have information. and there was a lag time that made it impossible to respond. the loan agreement says enhanced oversight plans should be used

when the plan performs inconsistently to the agreement. how could underperforming by 300% not be considered underperforming? >> these are very appropriate questions, and questions i have asked myself to go back and look at 2014. a lot of this is before my time, you may remember that 2014 in the exchanges got off to what i might char itably call a slow start. open enrollment had to be extended and so member ship didn't start to come in until late. the way health insurance works, there are deductibles. you don't really get an accurate picture. i've been in this business a

long time. certainly in my view, the question i ask is, did the people, on the co op team have enough information to shut down a co op or call a loan? because if they did not disburse it. they would put the plan out of compliance. the situation we had in nebraska and iowa. as i look back, about things we would have done differently, i will say that co opportunity should never have been allowed to go into the 2015 year. i think that's a fair criticism in looking back, i think that's something -- i look at the co-ops, the evaluations, many of them were ahead of their business plan, some were behind. i can tell you that the expression that once you have

your first customer, it's very true. in this case, the team did the best job they could, in evaluating the information they had. three, six months into the start-up. when i look at it, and this is a reasonable person could reach a different judgment. i find it difficult to criticize them with the exception of co opportunity for not closing those -- for letting those co-ops move forward into the 2015 open enrollment year, reset their prices, which was allotted to them. they also thought they should move in, and to move forward and see what happened in 2015. looking back on judgment today, we have information we didn't have then about how the claims developed. i think these are fair questions. >> i guess what i would add is based on my experience. start-up insurance companies are high risk, over half of them

fail, they take 3 to 5 years to stabilize and mature. you know, it's seductive to look back and say, look at what happened after a certain amount of period, and say, you should have done something here it takes -- if you look at open enrollment, when it ended. it took us until october and november to have any credible experience. there's modest utilization, it continues to get better in the fourth and fifth and sixth months. er you'vers set their rates for 2015, they were setting their rates on manual rates not based on experience. 2016 was the first year in which issuers had credible claims experience. a lot of different factors, it's dynamic and complicated. >> i know you weren't there, i think it is totally inappropriate for you all to say

they did the best job they could with the information they had. and this is a problem with start- start-ups. we're talking about taxpayer money. 700,000 people losing their health care. and somehow you guys seem to be saying that's fine. in terms of start-ups, these co-ops failed at a much higher rate. they did that despite the fact that no start up has. millions of dollars in subsidized government loans. you've been in business a while, won the you have loved to have those millions of dollars in subsidized loans. let's talk about that, by march 2014, two of the co-ops, this is 2014, co opportunity already exceeded their projections for the year. they exceeded their scenario by more than 150% within the first month of enrollment. new york co op had more than

doubled. there was plenty of information out there, and again, you weren't there, i'm not blaming you personally, for hhs not to take some responsibility. were there any objective standards for deciding, when a performance would trigger an enhanced oversight plan? >> yes. >> what were those. >> it depended. there was a serious chairman, what those could be. >> what were the objectives. >> let me tell you something we gave you guys this report to look at, and we're trying to be fair here. it's a thorough report. you gave us some comments, we took your comments, here's what we heard. she told the subcommittee there was no standard. no standard, no objective standard. she said there isn't an objective standard by the way.

to say there is and was an objective standard for deciding an oversight plan, that's not what we learned. as manager of this portfolio, don't you think it would have been good to have some kind of metric? >> thank you. and the thing i would say, i think what the team does goes a level further than just having a standard land. they get into these businesses because they're at an early and precarious stage. we sent our teams out into the field not just to evaluate but to provide technical assistance and the best advice we can. i will tell you even when we put a co op on an enhanced oversight plan. it's not a silver bullet. the co-ops themselves have to perform they have to price

right, they have to sell, they have to service. and the departments of insurance are watching them every step of the way to make sure that they are doing it right, i think everyone watches with a set of nervousness, because these are such early and precarious operations. it is absolutely -- i can speak more to the time since i've been here and kevin's been here. very intense activity. >> we're talking about 2014 into 2015. and i don't know what the level of losses needed to be. you did not have standards in place that enabled you to react quickly enough to be able to save this taxpayer dollars hemorrhaging and all the patients who lost their health care. senator sass, i'll turn to you. >> before i go to my questions, i want to acknowledge something

mr. slavitt said a while ago. >> more broadly, as far as distinguishing between different regulatory responsibilities at hhs and state departments of insurance, i understood in your opening statement, you said many of these issues are failures of state departments of insurance. and i think you said the primary responsibility of hhs was to maximize potential repayment of loans to the taxpayer, is that correct? >> i wouldn't use the word failures, but i think you have the sense right, there's a delineation of responsibilities. >> let's distinguish between co opportunity which you've acknowledged was the failure of oversight, should never have been able to go from 2014 to 2015. the next 11 that failed and the 11 that remain. if one of your primary responsibilities is to maximize repayment to the fisk and the

taxpayer, do you expect there will be any repayment to taxpayers from co opportunity? >> i think it's too early to say, let me walk you through how we're approaching this. that's the fairest way to answer your question. >> the place is insul vant. . >> there's three sources of funds that we look to. and the department of justice is in the lead on this, they would be happy to answer your questions on these more specifically. and because i do want to maximize these recoveries, i don't want to say anything in this hearing. briefly, three things that we look at, first after the co op, they're going to do through the first six months of the year, there's this lag effect. all the claims are still coming in. second, there are a series of receivables that we have -- and mr. cunahan said, we've just put a hold on some funds that are -- that the co-ops have been

expecting, that's a second source of funds. >> what are those? >> who -- i mean, the receivables for things like the reassurance payment, things like that. >> risk assessment. okay. >> that's the second source of funds, and then the third source of funds, there are lawsuits and judgments both with contractors and vendors, and in many of these situations, and i -- again, i don't want to venture into someone else's fight. co-ops have felt poorly served by some of their vendors in terms of providing them financial information to see the full picture. that's a source -- that's also a potential source. so the doj is looking at all three of those categories, taking the lead and pursuing the federal government's interest opinion i think it will take some time to play this out in the case of all these situations. obviously we don't expect 100 recovery or close to that. we're expecting between those sources and the strategy they pursue, there will be funding recovered for the taxpayers. >> if you had to guess, what

percentage of their $1.2 billion will taxpayers receive? >> i can't guess. it would be irresponsible for me to guess, i don't want to buy us our opportunities here. >> would a fair bet on over/under be 100 dollars? >> they're not going to repay any of these monies. >> they're not going to take that bait, i want the department of justice as they've asked me to do to let them do their jobs. >> to this point about what state departments of insurance, particularly in iowa and nebraska should have done, if we can look at exhibit book page 35, it reads that the cash on hand. co opportunity health will be assumed to achieve a total enrollment of 26,000 which is 55,000 more than original projections. that's pretty extraordinary.

>> page 35. >> is this what i'm looking at? >> the co opportunity additional solvency loan funding report the second page of that, point 1 is about enrollment. and it says that co opportunity. >> we don't have it? >> i'm not seeing this. >> this chart? >> the overenrollment in co opportunity is extraordinary, both of you having had private sector experience. i've not worked in the insurance space like you all have, but i've never heard of any start-up business overperforming its projected volume of subscriber base by anything like this.

i think you're going to say this is a department of insurance in iowa and nebraska problem, i guess i have two lines of questioning there, were you talking to them? and if not, what basis would your department possibly have concluded they were solvent. we're talking widely across nebraska we have 93 counties and two metropolitan regions. we have a whole bunch of cattle country. pricing in rural cases is complicated. we have a catholic health system, a university of nebraska system. trying to project utilization and rates is difficult. we have a rough sense of how pricing should work, anybody

that knew anything knew that co opportunity was pricing way too cheap. they didn't know what they were doing. you all gave them additional money. so either you should have known they were going to -- >> i'm not going to pass the buck. looking at it, we both should have flown. a couple things as we've done our autopsy on that situation. we do think that underpriced, perhaps. and also that their benefit designs attracted a sicker population, when things go bad, they go bad fast. kevin spent a ton of time

talking to them. he can talk through constant dialogue. when things start to go fast, they go fast in an awful hurry. if someone beats their projections and revenue, some will look at that as a good thing. look at how great i'm doing, more people like our product. others will look at it and say you underpriced your product. they don't have a chance to project it through the year, they have to live with whatever price they set. what do we do about entering the next year, that's a point in time when they should have known. as you pointed out, the situation deteriorated pretty rapidly, i think it became apparent to everybody involved and everybody looking at the data that both the departments and ourselves that we should have feign action. >> the 100 -- and i'll go to you, and then i know i have to yield back to the chairman. 120,000 people who became

uninsured in nebraska and iowa, became uninsured with plans they reenrolled in, had knowledge basically that they were going to be uninsured by the end of 2015. i'll acknowledge that, you have people who were uninsured for the 11 months of 2015, obviously that is a complete regulatory travesty. it begs questions, what kinds of technical assistance was provided to these insurers. >> i think folks got covered, opted for another plan. the other 60% were covered by the guaranteed fund. >> i don't think anybody lost coverage. >> typically born by the insurers, we can talk about the merits and challenges of that. our priority at the time was to set up a team to focus on each individual in iowa and nebraska, and track their cases to make sure that people got coverage. it was disruptive for them i'm

not going to excuse that. >> you know, you made some good insights about the market in nebraska. we depend on the visions of insurance to have that same kind of insight, much more than we're going to have. the rates you actuarily developed. they have to be presented to the actuary in the actuarial departments. they do a pretty good job of trying to understand what the rates ought to be. we trust them. and as andy said, we got intimately involved in that transition. you look back and say you know, could we have done something differently, in retrospect, you bet. but what we tried to do is acknowledge, move on, learn from it and make sure those patients in both states got coverage. >> thank you. >> let me just follow up on one of the questions you had, which is will these federal loans ever be repaid.

the answer was we are not going to talk about it, that the department of justice is working on it. the real answer of course is no. our investigation shows that in the aggregate, the failed co-opco-ops non-loan liabilities, not even counting what they owe the treasury, exceed $1.13 billion which is 93% greater than the reported assets. so just in case you didn't know that, if you get asked that question again, i think your answer is where's it going to come from. we are talking about failed co-ops, non-loan liabilities, forgetting the $1.2 billion we talked about, exceed $1.13 billion which is 93% greater than the reported assets. so i think it's a near certainty that you are going to have a complete loss here in addition to the dislocation that we talked about. let's talk for a second about another issue that was raised briefly but one that concerns me a lot and i think continues to

be a huge problem with the way in which this was handled back in 2014 and 2015 and that's the issue of unpaid medical claims. in certain states, as you know, there's a substantial amount of unpaid claims and give you one example would be new york. health republic of new york currently has $157 million in assets, according to the latest balance sheet it has $379.5 million in unpaid medical claims. so their unpaid medical claims are well in excess of their assets. the shortfall of about $221 million. even if all the assets were devote td to pay doctors and hospitals and clinics and patients that relied on it for their insurance payments, in other states that shortfall might be covered by state-wide guarantee funds and was talked about today, including nebraska, in which other insurance companies basically chip in to cover the losses. or sometimes it's an unfunded mandate on the states. but in new york, the co-op's

unpaid medical claims are not covered by a guarantee fund. i guess, mr. counihan, my question to you is what's going to happen to these claims? doctors, hospitals, patients are likely to go unpaid, right? >> you know, i know the new york situation extremely well. >> what's going to happen? >> in all likelihood, i don't know the complete answer to that question yet. they are still going through a complicated wind-down process. so in all honesty it's premature for me to say. but you're right in what you said which is new york is a state that does not have a guarantee fund for health insurance. they have guarantee funds for many other insurance coverages at present, they don't have one for health insurance. >> the experts tell us that if anything, the year end claims numbers are likely to turn out even worse than they are now. that it's not going down. it's going up. and i just done know how you can imagine that these claims are going to be paid when again, you

have a balance sheet that shows $379.5 million in unpaid medical claims. shortfall over its assets of $222 million. even again if all the assets were just devoted to these unpaid medical claims. >> i don't know that they are. i would like to -- >> are what? >> i don't know that they are going to be paid. i would like to, though, talk a little bit about new york in this context but i also have to say the numbers you quoted me about assets and liabilities, with due respect, i need time to review this report. it was given -- some of our staff got to review it in camera yesterday and i'm not willing to accept that those are accurate numbers until i have had a chance to review. >> with all due respect, you're a smart guy. why should we be having to give you the numbers that are publicly available? get the numbers yourself. >> i have the numbers. >> you should have already had these numbers. you're saying you don't trust our numbers. again, we showed you this report. we gave you the chance to respond to it. that's unusual, as you know.

we made all the changes that you suggested. but you are saying you can't trust our numbers. you should know these numbers. this is your job. not to know what the assets and liabilities are of these companies, let me give you some more numbers because they're accurate. a report points out that in three states with no guarantee fund coverage, no guarantee fund here, failed co-ops are reporting $500 million in unpaid claims and not nearly enough assets to cover them. and we are talking about new york as i said but also kentucky, louisiana. imagine that. you sign up for health insurance, the obamacare marketplace, you pay your premiums on time, you do everything right, you play by the rules, and then your insurance company goes bust. then what happens? the hospital can sue you for your unpaid bill. even though you have done everything right. i mean, i just think it's amazing that you guys aren't more concerned about this. can you give all those patients assurance that's not going to happen, they are not going to get a bill and have to pay twice?

>> we certainly are concerned about all these wind-downs. the wind-downs are complicated processes both from the standpoint of the patient who i think are the first priority, the physicians and hospitals who you discuss in the context of new york, and also the federal government interests. so you know, there are precedents through the course of history of health insurance companies winding down. there are processes that states run, states have jurisdiction over that process. we try to represent our own interests in that process of the federal government, but i will say we have -- and you may criticize us for this, but we have released funds, in fact, we released $30 million of funds last year under my authority to co-ops that were closing down so that they could pay claims for consumers. and you could argue that that was $30 million that could have been in the federal treasury, but we believed it was an obligation. >> $30 million of taxpayer money. it's the same people. these are taxpayers who have found themselves losing their

health insurance and now potentially facing claims from providers because their health insurance company, it was a federally established, federally subsidized health care company, went bust. there's a real human cost. let me tell you what the new york co-oppositi situation is. this is how we got into that mess. it vastly overshot its enrollment targets while underpricing its premiums leading to multiplying financial losses. all this information was available to you guys. in response, it considered scaling down its operations and reducing membership to a sustainable level but hhs gave the co-op $90.7 million so you talk about giving them more money, which it used to scale up and add about 58,000 enrollees in 2015. okay? so you made it worse. the resulting losses led to a $544 million loss, sent those enrollees scrambling for new coverage and again left doctors, hospitals and patients with

medical costs worth hundreds of millions of dolla+0r(t&háhp &hc% that's what happened. and so as you give out more taxpayer money, i hope you will look at that example of new york and who did that help? at the end of the day? it certainly didn't help those individuals, those families who are now facing this prospect of having to pay twice and undergo the dislocation we talked about. >> i would like to try to respond and in doing so i want to make sure that in the course of saying i want to review your numbers, the more important point isn't lost that if there are individual cases where individuals are in difficult situation, not getting covered, we have a unit that sets up -- that set up that looks at all these kind of cases. i want to know of any of these specific cases because that will be a very high priority for us. in the whether or not your numbers and our numbers match, that's less material to me in making sure i communicate if there are situations you hear of in any of those states. new york is an interesting situation and mr. counihan will

be able to talk about this because he spent days and days and days on end in multiple trips to new york. we conducted separate special audits for new york. what's interesting about new york is when the original loan was made, as i look back on the reports that were before my time, new york had scored over 90%, i think the highest if not one of the highest scores, and even when i hired an independent auditing firm, when i took the job in february, new york was not identified as high risk, and so there was a narrative or a belief, again, based upon the fact that claims hadn't come in yet, from many independent sources that new york was doing really well. we saw some early warning signs and kevin and i ordered an independent audit and sent auditors up there in i believe the third quarter, and presented to the state and to the co-op that they were going to see losses they hadn't yet expected. i think what happened in new york if i can get into the specific example, is their

financial systems weren't as accurate and so the reports that they were sending us around the profitability of that large book of business wasn't accurate and it wasn't until we did this independent audit and you can correct me if i have gotten this in any way incorrect, that we realized that this was a situation that was going to come back and hurt them. we spent a significant amount of time on the situation to try to prevent the damage that we are talking about right now, but kevin, you can -- >> i think you said it well. >> well, if there had been proper oversight back in 2014, we would have been able to address this issue because they did overshoot substantially their enrollment targets and again, underpricing premiums, overshooting enrollment targets leads to this multiplying effect we talked about and that's exactly what happened. then we gave them more money and it created even more problems. that's the reality. i want to give senator sasse an opportunity to ask a question.

i will come back for one more round. >> thank you. i would like to look at the report. i know that you said you haven't had a chance to read all of it in detail but i want to point to two pages that i think are fairly self-explanatory. the main report, can we go to pages 56 and 57. roman numeral iv, misconceptions concerning the co-op program. when i asked a few minutes ago if you really thought that any of these 12 failed co-ops were conceivably ever going to repay the taxpayer, you said potentially their accounts receivable would become a source of some of the funding that might come back to the taxpayer. i asked what that meant and you said the reinsurance program might be yielding funds for some of these failed co-ops. if you go to page 56 and 57, i would like, again, as the chairman said, these are publicly available numbers. i would like you to just walk me through what this table means. i think what it means is that the co-ops had much healthier populations than the overall

obamacare or affordable care act marketplace. if that's true, this means that on net, our co-ops paid in $116 million to the reinsurance program. they're not getting any money back. i mean, here and there you may have one. the arizona example, meritus health partners, they say they will receive $2 million of reinsurance payments but on net, these insurers including co-opportunity in my state, if you look at co-opportunity on page 56, entry three, they on net paid in $6.4 million because they had healthier populations than the insurance marketplace as a whole. which i think humbly contradicts the entire line of answers you gave in our last exchange. >> that would be bad if it did. i think the confusion, these are complicated programs, is between risk adjustment which you're referring to and reinsurance. >> you're right. i should have used the term risk adjustment. let's go forward with that.

>> risk adjustment is one source, one potential source of receivable. so is reinsurance. and so is risk corridors because no one really has a good feel for how much had corridors are going to pay in coming years so those are reserved separately. all three of those are potential sources of funds and as i mentioned, we just put a hold on tens of millions of dollars of receivables to co-ops that they have been expecting from those sources. so those funds are available. >> okay. tens of millions. we are talking about $1.2 billion, though. let's have our numerator and denominator right. how much are we talking about? $30 million? >> i don't have the exact figure. >> that's 2% of the total we are talking about today. say your tens of millions is $90 million. we are still at less than 5% of the real question here, right? >> from that particular hold. correct. >> okay. there are other sources? >> that hold doesn't represent the entirety of what the

receivables would be. i know it would be helpful if i could give you an estimate and i understand why you would want me -- why it would be helpful to give you an estimate and i hope you understand why i am reluctant to start negotiating publicly some figure and i also think it's irresponsible because i will be wrong almost no matter what number i say. but to your general point, we are not -- do i expect we will recover 95% or 100% of these loans, no, i don't. >> do you really expect we will recover 10% of these loans? you don't? >> i don't know. >> what's the universe that could ever get us to 10%? >> i think i went through the categories. i don't know that i could be more specific. but i would be happy -- >> i know. but i don't want the categories. i want the tax payers' money. >> i would be happy to follow up, go through this report, which i have not had a chance to go through, i'm sure there will be things in there that will be helpful to us. we do have our own sets of numbers and sit down and try to see how much information we can provide you. >> okay.

your distinction between risk adjustment and reinsurance and the risk corridors is important technically, obviously that's true, but it's still based on the underlying premise that maybe the co-ops failed because they had a much sicker population. i think what the risk insurance numbers on page 56 and 57 show us is that the co-op enrollees were actually healthier than the average population. so the broad idea that these co-ops failed because they sort of accidentally attracted a much sicker population, i don't think we have any evidence that shows that to be the case. >> i don't think i made that claim. if i did, certainly that would be a sweeping generalization that i wouldn't make. i also don't know that they had a healthier population because of the risk adjustment. i think the co-ops would tell you that they had a sicker population but they weren't able to get their numbers submitted for risk adjustment appropriately and kevin can walk through that if you would like. >> sure. i would love to hear that. >> okay. well, essentially, senator, the risk adjustment program is

highly sensitive to claim coding. so -- and diagnostic codes. and if they're not done properly or thoroughly, that can have a real impact on the financials of that co-op and on the risk adjustment. we clearly have a terrific example with one of those, who has subsequently corrected that. again, no heroes or villains. we are all learning. >> in a nutshell, their financial systems were behind at the time -- >> understood. but i'm not looking for villains. i'm thinking we need to acknowledge the utter incompetence of trying to plan a program like this. i'm not asserting that anyone here is evilly motivated. but whether or not anybody is competent to oversee this program, i haven't seen any evidence of that yet. so humbly, i'm not asserting villain. i'm just saying that the more you look at these numbers, the less plausible it is that anybody knew what they were doing when they looked at these co-ops when one of the sort of core answers for why this subsegment of the larger

affordable care act population marketplace could have failed would have been because the co-ops attracted an unusually sick population. it doesn't seem like we have any evidence that suggests that. it would appear again, just based on the snapshot we have from the risk adjustment market, that a net pay in of $116 million isn't a net zero and isn't a net pay out. i think your evidence would suggest these are healthier than average which makes it even harder to understand how we wouldn't have recognized that we were going to have a failure rate of more than 50% among the co-ops. >> thank you, mr. chairman. >> thank you, senator sasse. we are in the third round here, mr. chairman. i don't want to catch you unaware but if you are interested in asking a question i would like you to go before me since i know you have other hearings to attend. let's follow up on new york. because mr. slavitt, you indicated that you spent a lot of time looking at that and in particular you said mr. counihan had spent time. you made a statement that said

that you thought that your team again had done the best job they could with information that they had. when hhs awarded additional solvency loans to these three failed co-ops, kentucky, new york and co-opportunity when they were in danger of missing their capital requirements, you had to know they were in financial trouble and at risk of being shut down by state regulators, yet you invested hundreds of millions of additional dollars in taxpayer dollars. in your written testimony, you confirm what you said today, you say that in evaluating additional solvency loan applications quote, cms undertook a rigorous review process to substantially similar to what was conducted for the initial rounds of loans. that's your testimony. let's explore that for a minute. let's take again, new york as an example because you both talked about that earlier, how you spent a lot of time on that. like all co-ops its initial loan application involved third party

review of its business plan by deloitte. we talked about that earlier. which included extensive discussion of the reasonableness of proposed budgets, finances and business plans. let's turn to the first page, page one of the hearing exhibit package. that's this package. on page one of the packet, you see the analysis done of the new york co-op's application for additional solvency loan. right at the top, the first sentence reads, quote, deloitte will not provide an opinion regarding the reasonableness of the proposed changes to each co-op's business plan, nor provide an opinion regarding the likelihood of each co-op achieving sustainable operations based on the revised business plan, end quote. so this notion that it was substantially similar to what was conducted in the initial round of loans is just not accurate. deloitte did not provide the

analysis. i'm told, by the way, by some of your people, that they said you guys didn't give them enough to do time to do it because you wanted to get the money out the door. but deloitte did not do that analysis. in light of that, do you stand by your testimony that this review was rigorous and substantially similar to the review provided to initial loan applications which did include again, this third party analysis of whether the co-op's business plans were reasonable? >> i know i don't need to keep stipulating it was before my time. >> i understand that. in your testimony, you were making the statements that are important for this hearing, because we are talking about again, this question of competence as we said earlier, but also accountability and what can we learn from this. if you are saying everything was done right, we did the analysis, just as we did with the initial loans it's just not accurate. >> it's a fair question, absolutely. i think the way i interpret that statement is that they are not ultimately accountable for these

decisions. we are. that's absolutely krkt. the purpose -- >> wait. they're saying they didn't provide an opinion. period. period. not that here's our opinion but you guys are ultimately accountable. they did provide opinions on the initial loans. we talked about that. we talked about it. you guys set up the standards and i talked about the concerns they raised in each of those where there should have been a red flag but here, they didn't even do it. that's the point. >> you know, i think the team, what they were doing, the risk committee was getting multiple sets of eyes and i think what the deloitte team is saying is hey, you can't count on what you're seeing from us to be what they're warranting, at least the way i read this, they're warranting that they shouldn't -- we shouldn't count on their analysis in making this judgment. i think -- >> they didn't do an analysis. that's the point. so here's my question to you. who did do the analysis? who did do the analysis when additional taxpayer dollars were given to new york?

who did the analysis? we have asked you all this, by the way, for several months now. we can't get an answer. that's one reason i'm asking you, because we don't know. >> i believe they did do analysis. i believe they did render an opinion. >> who's they? >> deloite? >> look at the document. this is page one. page one right here. this is from deloitte. will not provide an opinion regarding the reasonableness of proposed changes, nor provide an opinion regarding the likelihood of sustainable operations. >> are you saying because they didn't render an opinion they didn't do analysis? >> yeah. >> did they? >> yes. >> why wouldn't you provide us that analysis? >> that's what it is. that's what this is. this is analysis. they provided analysis and what they said is use this analysis, make your decision, we are not providing an opinion. >> you are saying they didn't provide opinions for the initial loans? >> no. not saying that. >> that's what your statement says.

rigorous review process substantially similar. you think substantially similar means in one case there's an opinion, in other case there's not an opinion and those are substantially similar? >> i think -- >> you wanted to get the money out the door. that's what we're told. so look -- >> i think i would find the work substantially similar enough that i would stand by that statement. regardless of the fact that they said hey, we're not willing to say that this is an opinion. i think the work is substantially similar. i understand you don't think that it is. >> well, look, you probably had some internal experts analyze the question and therefore, you felt like you didn't need deloitte to do it which is probably what you are more, you know, accurate answer would be. my view is you needed the third party analysis and the third party opinion. again, let's recap what happened in new york. health republic of new york applies for additional sol veinsj loan.

it was projecting a loss of $68.2 million in 2014. $23 million in the next year. so we know the co-op's original business plan wasn't working. the original projections were wildly off the mark. the losses were 14 times greater. yet you awarded the co-op an additional $90.7 million without having any third party opinion as to whether its new business plan was reasonable or likely to work. the consequence was that the co-op lost $77.5 million in 2014, $544 million, more than half a billion dollars in 2015. 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 that these claims that have not been paid to doctors, hospitals, clinics, could come back on them. so they paid once, they paid their premiums, they did everything they were told to do 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 would actually ask for that third party analysis that -- and opinion that you had in the initial loans that you say 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 -- generally but specifically this investigation. >> thank you. i appreciate you calling this hearing. apologize i couldn't be here earlier. i had senate foreign relations business meeting which had some important resolutions we had to be passing. i missed a lot of the detailed testimony, questions and answers. i really don't want to hop into where some other people have tread. so let me kind of pull back and let's go to the obvious. mr. slavitt, your background is in the private sector, correct? >> that's correct, senator. >> you came from optima, a division of united health? >> yes, sir.

>> what was the average profit margin of united health? after tax? >> 4%, 5%, 6%, perhaps. >> relatively low. on average, public cooperations have pre-tax about 10%, after tax about 5%, correct? not a wildly profitable or outrageously profitable type of industry, correct? >> that's correct. >> from your standpoint, i know you are new to the position, wouldn't you have kind of real concerns as a private sector insurer under the old system that when the government set up a bunch of these co-ops, that they were going to subsidize them with these risk corridors and reinsurance plans? weren't you a little concerned that maybe these co-ops might try to gain market share by underpricing their premiums? >> so you know, you ask a really good, difficult question. >> i would like just a basic obvious answer to it. from the private sector.

isn't that a real legitimate concern? isn't that exactly what happened? >> well, so these companies entered markets that had 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 if and offer -- >> i'm saying what was the natural result of what was going to happen with these government-run co-ops? they were going to come in and try to gain market share, they were going to underprice their product based on what their loss ratio would be, correct? and isn't that exactly what happened? isn't that exactly why the american taxpayer on the hook for about $2.5 billion now in loans? >> these were loans to local non-profit companies who i don't think had as a goal, i wouldn't imagine they had as a goal to price themselves out of business. i think they clearly -- >> that's exactly what happened, though, correct? >> that's correct, in many cases. yes. >> did you in the private sector, did you ever believe for a moment president obama's insurance that if under obama

care, the cost of family insurance would decline by $2500 a year? would you ever think that was possible coming from the insurance industry where you know that the profit margin is about 5%, there's about $1 trillion of the $2.8 trillion we spent annually in 2012 runs through insurance companies. the average after tax profits of the top seven is about 4.4%. so again, that's about $45 billion to $50 billion of profit out of $2,800 billion a year market. did you ever think for a minute that this magic, this government-run health care system would actually deliver health care costs, $2500 less per year per family? >> so the way i interpret that $2500, maybe i'm not interpreting it correctly, is that would be the reduction in health care cost 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.

>> you think that's what the majority of americans heard when they listened to president obama and supporters of the bill promise that if you pass this wonderful bill, that the average cost for insurance per family will decline by $2500? you think people thought that will just be as you go up higher by $2500? >> when i look at the text of that statement, that's how i interpret it. also that 20 million new people have health insurance. we have an uninsured rate below 10%. i think all of those things, i don't think anybody could have perfectly predicted the outcome of a new law of this size and complexity and i think there is sr certainly some very good things and certainly some challenges. we are talking about one of the biggest challenges today. >> did you ever participate in high risk pools in different states? >> i'm aware of them. sure. >> okay. another promise obama made and other supporters of the bill made is if you like your health care plan you can keep it, period. again, coming from the private sector, understanding how the high risk pools, by the way, we

had one in wisconsin, about 22,000 people were getting coverage that they liked, they could afford. coming from the private sector looking at obamacare, you knew in the private sector, those high risk pools would be gone, correct? the people that were being insured under the high risk pools would not have access to those health care plans, correct? did you have any doubt those things would survive? in other words, did you believe president obama's repeated insurance and promise that fu like your health care plan, you can keep it, period? did you ever for a minute believe that claim? >> well, what i believe was that there would be guaranteed coverage in the marketplace so that everybody could get coverage. whether or not -- >> you did not believe president obama's claim that if you like your health care plan, you can keep it? >> i think what happened was there were folks that had coverage that was below a standard that the affordable care act set and some of those people did in fact lose their coverage as you well know. >> you also understand insurance products change as networks

narrow. >> sure. >> people might lose, if they lose a health care plan, let's face it, if they lose a plan they could afford that they liked in a high risk pool, that gave them access to a doctor, if they were forced on to a different plan, maybe a comparable plan, maybe one with better deductibles although that hasn't happened, that being forced into another health care plan might cause them to lose access to a doctor they trusted, correct? >> the affordable care act created a higher standard. >> so president obama's repeated assurance that if you liked your doctor you can keep that doctor, period, was incorrect, wasn't it? >> here's my perspective. >> no, i just really want an answer to the question. >> i think hospitals and physicians have been moving in and out of health care networks for 20 and 30 years. i don't think anything in the affordable care act changed that fact. yes, i guess is the answer to that. >> my point is those promises by president obama were ruled politicfax 2013 lie of the year.

had you made those kind of assurances to your policy holders, you think your company would still be in business, had your business, had you as a ceo or senior manager as one of those businesses conducted that level of massive consumer fraud, what would have happened to a 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, the part of this hearing, is that cms' loan $2.4 billion, $2.5 billion to co-ops that obviously were not going to be able to survive, we continued to pump money into these co-ops knowing they would never be able to repay them, you have not done the due diligence, the review of these things have not been rigorous. it was obvious they were never going to be able to pay them back.

now the american taxpayer will be on the hook for about $2.5 billion and that's assuming you don't continue to pump money into these failing enterprises. anybody want to refute that? >> i guess what i would suggest and i don't know that i won't repeat a lot of the things we said so far today, but clearly starting up a small insurance company is one of the biggest challenges imaginable particularly because as you said, they face significant entrenched competitors with years of history, thousands of people and these are small enterprises. i think it's very fair to say the risk of failure of these co-ops is quite high. what we have tried to do to the best we can and i think we will accept our share of responsibility and criticism, certainly, is to oversee these programs, to maximize the opportunity, to get these co-ops through the early three to four year startup stage to the point where they can be stable and the taxpayer can get its money back. in some cases we have not been able to do that. in some cases, those companies

have not put forward strategies which have succeeded in those markets. i would certainly acknowledge that. >> that's great you are accepting the responsibility but the american taxpayer will be on the hook for the $2.4, $2.5 billion. that's unfortunate. thank you, mr. chairman. >> thank you. again, gentlemen, thank you for coming today and giving us your perspective. i want to just end if i could on two points. one is there was a discussion earlier about the state's role here. i just want to be very clear about one thing. i'm happy to hear your response to this. to shift the blame to the states i think is inappropriate. hhs had authority and sole authority to be able to stop the disbursements when it became clear the co-ops were not likely to be financially viable and sustainable. we have talked a lot about that today. it's not the states. the loan guarantee doesn't give that power to the states. it haze hhs, quote, has sole and absolute discretion, end quote, to terminate a loank and hhs had the power to with

hold these disbursements when the co-ops didn't perform under the corrective action plans we talked about which were not put in place for five of the 12 failed co-ops they were never put in place. never. for another five, you waited until september of 2015. so i just want to be clear in the record here and i'm happy to hear your comments on this, that shifting the blame to the states is not where the appropriate accountability ought to be here. it was hhs despite plenty of warnings that watched these co-ops lose on net about $1.4 billion even as they failed to take corrective action for more than a year and in some cases, again, not at all. any comments? >> sure. you are correct. there's no question that we had the discretion to hold back cash to disburse from these co-opes. in about a third of the cases when the team had a request for

cash, the team didn't make that disbursement. but i think the challenge that we have and it's an important question is ultimately, if we don't disburse the 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 fund the co-op they are certainly not going to be any guarantee the co-ops are going to succeed. if they fund the grant that's already been made. if they don't fund it, they are almost certainly putting them out of compliance and putting them out of business. i would suggest for a second that the team made every decision the right way. i would suggest that it's not as if the team was 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. i would say that in my defense of the team, it's not a defense

of every decision they made. it's to certainly not to point fingers at the state. it's to say as i go back and continually tried to ask the questions with the information they were made available given the two choices they had, and i think notwithstanding the fact we can put them on an oversight plan, at the end of the day if we don't withhold cash, you can't force an accident. 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 faced and recognizing that your report suggests you think we could have done a better job. >> well, again, there were plenty of tools including the corrective action plans we talked about and the enhanced oversight plans, short of even terminating but reality is, over 700,000 consumers now find themselves not just dislocated but some of them facing the possibility of paying twice, once with their premium and now for claims that were never paid to health care providers. that's a tragedy. we thank you for your testimony today. appreciate it. we will go to the second panel. thank you.

thank you for being here. we are going to move ahead

quickly because we have a vote coming aun and we have lots of questions for you. dr. scott harrington is the allen b. miller professor of risk management and business economics and public policy at the university of pennsylvania wharton school. he is also the chair of the health care management department. he's a senior fellow with the leonard david institute for health economics and adjunct scholar at the american enterprise institute and was president of the american risk and insurance association and risk theory society. his recent policy research focuses on the affordable care's impact on insurance markets and 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 a custom in the subcommittee to swear in witnesses so if you wouldn't mind, please stand and raise your right hand. do you swear the testimony you are about to give before this sub committee will be the truth, the whole truth and nothing but the truth so help you god? >> i do.

>> excellent. let the record reflect the witness answered in the affirmative. your written testimony will be printed entirely in the record and we would ask you try to limit your oral testimony, i think we initially asked you to do it in ten minutes. if you can do it even a little shorter that will be great because i know we will have questions for you. again, thank you for your input today. we look forward to your testimony. >> thank you, chairman portman and chairman johnson. i publish widely on insurance pricing and price regulation capital and insolvency risks, the causes of insolvency and state guarantee funds. i have done some prior work on co-ops' financial conditions. i have not read the majority report. i have not seen anything about corrective action plans. i did review a lot of documents for preparing my testimony, especially for iowa, nebraska, new york, south carolina and tennessee, including business plans, feasibility studies, pro forma financials, pricing analysis, additional funding

questions, deloitte reviews and some financial information provided to sub committee staff. as we know the co-op program ultimately awarded $2.44 billion of low or zero interest federal loanses to co-ops, $3 million for startup loans, $2 billion for solvency loans to meet state regulatory capital requirements. 12 have closed. the longevity of the 11 co-ops 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 co-op's ultimate resolution will depend on the resolution of claims and the final tally of what the came costs are. as i elaborate, very little if any of the federal loans will be repaid to those -- from those closed co-ops. at least several will be unable to meet their obligations to enrollees and health care

providers and some will require significant state guarantee fund assessments. the co-ops did face significant operational challenges and the aca 2014 reforms posed major challenges and risks associated with pricing and utilization of the previously uninsured in transition of previously insured people to aca compliant plans. the co-ops were inherently vulnerable to unpredictably high claim costs including from many adverse selection from established carriers renewing their 2014 plans, especially if enrollee growth outpaced projections. they had little ability to diversify pricing and claims risk across geographies and products. they had none of their own experience and data to consider in pricing. they were plausibly prone to a wirn's curse, pricing too low, generating large enrollment and losing lots of money. pricing uncertainty remained high for 2015 premium rates which had to be filed in the summer of 2014 when the co-ops

still had relatively little data to assess claim experience and the adequacy of premiums. insurers must hold substantial capital to achieve a high solvency probability. academic literature stresses that insurers and other financial firms solvency incentives depend on the amount of owners' capital at risk, on the firm's value as a going concern which could be lost from financial distress, on the sensitivity of customers' demand to insolvency risk and on external monitoring by lenders and other accounting priorities. co-op's financial strengths, growth and potential for underpricing should have been a central focus from the program's inception. co-ops face considerable pressure to capture market share. they had almost no private capital, no going concern value, no financial ratings and it was likely that many potential customers would be insensitive to insolvency risk. very importantly, history indicates that -- have often

charged low prices and grown rapidly with inadequate reported claim liabilities, ultimately producing claim costs much larger than reported. there is also risk that insurers will try to grow their way out of financial trouble, hoping or gambling for survival. this history in context also suggests the co-op's financial strength and potential adverse consequences of rapid growth should have been paramount, especially given slow development of information on claims. the approved co-op award applications included detailed business plans, feasibility studies including projections of growth, profitability and ability to repay government loans. originally, their startup loans were recorded as debt on their financial statements, but to meet state regulatory requirements, all solvency loans were treated as surplus notes, subordinate to all claims and counted as capital for the purpose of meeting regulatory requirements. analyses supporting solvency loan awards and disbursements

for pricing, claim costs and enrollment assumptions over a long horizon. the analyses i reviewed contained what i would consider modest stress tests. they did not combine or consider much higher than projected enrollment combined with worse than expected claim costs. the baseline pricing assumptions however did build in something for potentially sicker population. now, as we heard this morning, some co-ops experienced vastly larger enrollment than projected, greatly increasing their need for capital. this should have been a cause for alarm. those co-ops generally had low premium rates compared with competitors. other co-ops generally with relatively high premiums had very low enrollment in 2014. some co-ops continued rapid growth in 2014, further increasing their need for capital. some with low enrollment reduced premium 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. the regulatory takeover of co-opportunity health in late december occurred just six weeks after disbursement of its additional $32.7 million solvency loan award approved in september and following the denial of a late october request for another $55 million. health republic of new york 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 program's $2.44 billion in funding. cms did not have the funds to approve additional requests from co-opportunity health, health republic or any other co-ops with state regulators' approval, however, cms permitted seven co-ops to convert startup loans to surplus notes to meet target

capital requirements. five co-ops converted a total of $82.21 million before their closure. cms also accelerated disbursements of solvency loan funding to many co-ops during 2014 and 2015. couple quick comments on growth and we have 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. it generally had the lowest rates in nebraska and the lowest rates in the iowa small group market and the lowest rates in at least one rating region in the iowa individual market. regarding new york health republic of new york, june 2015 enrollment was over four times the baseline 2015 projection,

over three tiemts the projected high enrollment see nar yo for 2014 and more than double the baseline projection for 2020. health republic generally had the lowest premiums in the regions that operated. it received rate increases for 2015 but its rates still generally remained low compared with competitors. i have done some analysis to back out the aca risk stabilization programs just on health republic of new york's june 2015 financials. if they had received their entire risk corridor request at that time they still would have lost $50 a month for their entire 18 months of operation on a per member basis without risk corridor receivables they were losing about $150 per month. updated financials provided to the subcommittee for ten other close co-ops suggest little if any of their federal loans would be repaid.

assets were less than other obligations for seven of the ten and only marginally greater than those obligations in the other three states, colorado and south carolina projects substantial guarantee fund assessments. the co-op programs experience raises a number of key questions beyond the fundamental issue of whether the program made economic sense when enacted which while difficult to do should be evaluated without the benefit of 20/20 hindsight. i will conclude with these. first, was it appropriate and prudent to push for the co-ops to begin operations in 2014 as opposed to waiting a year or two before selling tens of thousands of policies in an uncertain environment. second, why were the low premium rates charged by some co-ops not viewed as a signal of potential trouble from the get-go, especially when their plans and rate filings 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 fourth, why didn't cms delay solvency loan disbursements or possibly terminate loan agreements when confronted with enrollments far greater than projected and early evidence of operating losses. my time's up so i'm happy to take questions. >> thank you, dr. harrington. you were right on time for what we asked you to do. you have asked key questions, many of which as you know have been discussed today with hhs. i would like to go to my colleagues first for their questions and they have come back to the hearing. we have a vote at 11:30 so we will try to keep the questions as short as possible. >> dr. harrington, i really want to go to basic economics on this. let's talk about premiums that real people are paying. we have janice fenniman in

wisconsin who before the health care law was implemented was paying $276 per month. this year she's paying $787 per month. i held a telephone town hall yesterday and i don't have permission to use the gentleman's name but he was claiming that prior to obamacare he was paying $400 a month. now he's paying $1,000 per month. by the way, these are for lesser policies. their deductibles are higher, their premiums are higher. because of the co-ops, again, as i said in my early questioning, to me, the private sector guy, it was obvious what was going to happen here. you used the word inherently vulnerable. it was obvious what was going to happen. so initially, the experience people have already had of skyrocketing premiums, these have been actually constrained because these co-ops, correct, in the marketplace? they are underpricing their premiums which puts pressure on the other health insurers so if anything, premiums have not skyrocketed to the point they are going to. would you agree with that?

>> i would agree that at least in 2014, and 2015, the co-ops had a restraining influence on premiums. i'm not as sure about 2016 because i haven't reviewed the filings. >> kind of the game is up right now, but going forward, we know how these losses are going to be recovered. certainly the american taxpayer lose the loans but also, the providers, these losses are going to be spread over other insurers and states and their reaction is going to be what? >> i think the big issue is that it is becoming more apparent that the cost of the 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 especially high premiums for certain cohorts. >> describe that in greater detail. what do you mean, certain cohorts? >> i think one thing that's happened is that prior to the

affordable care act rating restrictions, people in say their 50s and 60s that were in relatively good health were able to get premiums on a risk rated basis, guaranteed renewable coverage so their rates wouldn't go up with deterioration in their health status. under the new regime, if you are not eligible for any kind of subsidy you now have to buy insurance in a risk pool that limits the amount that can be paid based on your age but nonetheless, is based on a risk pool that includes lots of unhealthy people. i think more and more evidence will show that healthy people that try to buy coverage outside of an employment-based market going forward, if they are in their 50s and early 60s probably are going to face quite a bit higher premiums than what they would have prior to the affordable care act. so that's one of the cohorts. the other cohort would be very young people that are facing higher premiums because of the rating restrictions. >> we have already seen that first year, i think in wisconsin, 27-year-old male on

average experienced like 127% rate increase. 27-year-old female, little under 100%. dramatic increases. let's talk a little about adverse selection and the gaming of the system. we have heard anecdotal reports of this, people -- one of the reasons you need a high level of participation in dental insurance, for example, is otherwise people will just delay getting dental care until they have one month's worth of premiums to go in and get all their care, then they stop coverage. isn't that also what's going to happen with obamacare? to a certain extent? you can't totally predict but you can certainly time certain medical procedures and people game the system, correct? >> yes, to a certain extent. the evidence is that is occurring not only in open enrollment but in 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 but the way they set up the system is cms is forced to enroll individuals without documentation of eligibility. so what's been happening is people sign up, they get the subsidies, they get the prepaid premium tax credits, they also get some tax credits or subsidized deductibles and that type of thing as well. our committee report showed about $750 million of prepaid premium tax credits were paid on behalf of individuals who in the end were unable to prove their eligibility. just speak a little bit to that in terms of again, those are totally predictable, correct? >> i haven't studied the particular issue. i'm familiar with the reports. i think any time you impose a gigantic program with mind-numbing complexity, there are going to be many slippages

and unintended consequences. >> let me finish up, because i know one of the big reasons people passed obamacare is they just hated the idea of anybody making a profit off of health care. i just kind of want to go through the actual figures. this is in 2012. america in total spent about $2,800 billion. i'm just taking a look at the profitability of the top seven companies in health care for 2012. after tax profit is about 4.4%. of the $2.8 trillion, about $1 trillion of that is paid through third party payers, basically insurance companies. so take 4.4% of $1 trillion, that's about $45 billion of profit out of an industry, sector of the economy that is

$2.8 billion large. does that seem like a grotesque level of profit to allocate pricing efficiently and do all the things a free market system actually does? is that out of whack? >> no. >> what's the result of having government come in there and try to stamp out literally 1.6%, that's what that profit represents, 1.6% of total health care spending was profit of insurance companies, in order to wipe that out which is really the goal of obamacare, take a look at the dislocations. we have again, janice paying $276 before obamacare, now paying $787 for a lesser policy. in the end, you think this is' pretty foolish law, pretty damaging 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 in the united states than passing this particular law. >> i would agree with that assessment. thank you, mr. chairman.

>> thank you. chairman johnson. senator lankford? >> thank you, mr. chairman. i appreciate you being here and bringing some of the facts to bear in this. like others on this panel, i would tell you that person after person i talk to in my state of oklahoma talked about the same issue. they are spending more on health care than they ever have, their deductibles are high, all their premiums are going higher, they have fewer options than they had before, the hospitals i talked to now have more benevolent care than they have had in the past because though they have quote unquote insurance when they walk through the koor, they cannot afford to use it. we have failed state exchanges around the country from states that try to start their own exchange that have gone through the process and that is millions of dollars that has been lost in that process. and then we walk no tinto the c issue and one more piece of this process, the original design, there would be these nonprofit institutions that would stand up to go compete. in theory they would be nonprofit insurance institutions

that were created to compete in areas where there wasn't good insurance available or wasn't enough available. so my initial question to you is, did you find the co-ops in their distribution around the country to be in places where insurance wasn't available? >> that's an excellent question. and i haven't studied that. >> what i have seen is that they weren't competing in areas where they weren't available. they were trying to start up in places where there was a good market already. if there's a good market already, there were other companies that are already available in that area. we put out loans that they expected to have a 40% loss rate, which by the way, cfbb is aggressively going after pay day lenders with a 40% loss rate and 40% interest rate they are putting down and for whatever reason, they thought that was a good idea at the beginning to do this with the co-ops which is baffling to me. but then they seem to also have this unique challenge in places that they were in that i'm trying to determine what happened here. when the co-ops came in and gave

arbitrarily low amounts that were not business possible and that's been proven now by more than half of them already failing and the rest of them struggling, they put out a pricing strategy, other companies in the area, their insurance companies in the area had to try to compete with thos costs on it that were clearly not sustainable, which forced them down, which i believe some of the insurance companies have now left those markets. we have many states that have fewer insurance options now, not only the co-op leafing but other companies leaving as well. is it too early to know whether co-ops in those markets were driving prices lower, forcing other companies to have to try to compete with them and then now they have since left the market as well, giving 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 overall when they're

written really well below what the consensus estimate of costs is, and i think we'll find out more over time as people start to dig into this. there's a lot of variation in 2014 among the 23 co-ops. some had relatively high prices. they sell very little business. so in those cases, any negative spillovers from pricing weren't there. but in a few cases where would have this enormous explosive growth during 2014, i think it's at least plausible that there were adverse effects in terms of pricing in the overall market that could have contributed to poor results in the overall market. but one thing we know for sure is that when you have a new entrant with no experience that comes in with a very low price, someone should be paying very close attention to their early enrollment and getting whatever data they can about early claims and really asking the hard question of when is enough enough?

shouldn't we be putting some sort of speed limit or break on this enrollment so they can't run up and enormous tab that they won't be able to pay? >> so if they were trying to get private lending from private equity groups would they have been able to get these loans in your suspicion based on this model? cms testified only 16% of the applicants actually got the loan, which gives the impression, we were very limiting 84% we returned away. so we were really getting the cream of the crop. obviously the cream of the crop, more than half of them are out of the business. 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 actually provided a loan for them? >> that's an important question. the business models that i reviewed i think it would have been really, really difficult to make a sell to any private investors with those models.

do you have something here that we really think is disruptive and beneficial that will allow you to have a better model going forward. and i think it's highly unlikely we would see that. it's likely some significant money has gone into health insurance start-ups and some of them have reported a pretty large losses for 2014 and 2015. so private investment doesn't have a monopoly here on any kind of wisdom. >> private investment is tracking day to day operations. are we going to keep dumping money into this or are we going to keep forcing changes internally to stop being successful? >> private investment in these sorts of situations, the money will be paid out over time based on clear evidence that the performance is being met. and if there are warning signs that things are problematic, the spigot gets shut off. >> instead of saying you can use this money and count it as capital and assets and the rules

change in the middle of this, they're not going to do that? >> no. >> let me ask you another question. the class act was a long-term care insurance program created by obamacare. at the very beginning 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 try to implement it cannot be done under this current model. congress agreed, 2013 pulled out the funding for that. that program went away. they saw immediately that the long-term care insurance that was put into place is not sustainable, studied it and pulled it. the co-ops aggressively went after, started it, and put -- well, $2 billion into something that we're not discovering is just as totally unsustainable. what's different about the class act and their research behind the scenes and the co-ops? >> that's a very difficult

question. i think one thing that's different as i recall is with the class act, you had various independent government agencies doing the actual projections and recognizing that the program had to be financially sustainable in order to go forward. in the co-ops case, it may have been much more uncertainty in the short run. feasibility studies by actuary firms that were putting out scenarios that suggested they might be viable. >> thank you for helping us try to figure out how this happened. i think you raised a lot of questions about whether this should have happened or not.

should they have launched this at a time when there was so much regulatory uncertainty or should they have waited for a year or two? >> there was a real concern that if you missed 2014, you were going to miss the boat. i'm very product to be influenced by hindsight here. but my opinion is it would have made more sense to wait at least a year if not longer. >> kwa. it was a lousy time to start a health start-up in any category. certainly in the insurance sector. you talked about enrollment being a key determinant of health insurers fm performance. if you wouldn't mind just talking about that for a second. i think you said in your testimony there were some speed limits at least in place incredibly sharp deviation from what they projected, both under and over. we talked earlier about this about the over enrollment. it multiplied the problem. then to have this massive overenrollment compared to protections. and yet, there were no red flags

apparently. at least there was no reaction by the federal government pulling back at the taxpayer's support. can you explain why that's so important? >> it's very important given the history. the lames don't come home until a little bit later, you have to really be on your toes in order to guard against this underpricing and rapid growth. it makes sense to be on top of enrollment. i was very puzzled by the lack of public discussion, the lack of commentary about insolvency risk whatsoever in this market. it's as if no one understood that insurance companies do fail and those who fail often are underpriced and grown rapidly. that background, that context, as well as the lack of incentives for safety and sound bness given this type of government funding should have overall made the environment be one of much greater caution

about how these things would be permitted to grow. >> there was information including unenrollment. the underpricing and overenrollment and other fwiz factors were problematic. there were reports and plenty of data. why do they keep putting money out the door and not take the obvious step, which is to cut the losses to the taxpayer and, you know, cut the losses to all these families who ended up losing health care insurance, some of whom now are facing the risk of actual facing providers, somewhere claims against them. even though they paid their premiums, the providers weren't paid because these companies went insolvent.

now these consumers are told they might have to pay for what the company did not pay when they were required to do so. how did this happen? >> i think in part what happens is even though you're getting information, the accuracy of the information about client claim costs would have been there. i have to speculate, but there was a strong -- it seems there's a strong commitment to the co-op program. it will work where insurance companies are making excessive process in excessive administrative costs in markets not sufficiently competitive. it seems to me there was an ideological commitment to the program and the success of the program. having said that, i'll also point out that once 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 definitely will put the company over the edge,

or giving it a little more runway to try to work things out. in those scenarios, when you give a little more runway to let companies try to work things out, you want to make sure if they grow, if 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 enable greater growth, especially when you've got maybe soft information about claims experience at that point in time. a. >> given your academic background here and lots of experience, i respect what you're saying and i think you're right. there was an ideological commitment, your quote, and i think it blinded some of these folks who otherwise would have seen these warning signs. and as you say, it was a commitment, maybe to co-ops or maybe against the insurance companies who thought, as you said, were making excessive profits. i think it also was to get enrollment numbers up under obama care, which is part of the desire by the white house at the time and continues to be.

so i do believe that we have to learn from this. we have to come up with ways to ensure that we aren't going to lose any more, hemorrhage even more taxpayer dollars. a minimum, $1.2 billion appears to be lost. we talked earl yr about that. we couldn't get hhs to auk knowledge that, but the companies who have to repay that actually haves sets far lore than their liabilities, even taking out the loans. forgetting the money that they owe the federal taxpayer. and not a single one has paid a penny in principal or interest. i appreciate your focus on this. i hope you'll continue to work with us on trying to figure out moving forward how we avoid this problem growing even further. and how to deal with this problem in some states where you have consumers who act sklly might get tagged with additional costs.

ultimately they have now found health care. they're now looking at the possibility that these claims might come back on them. do you have any final comments before we go to our vote on that or other topics. again, i want to thank for your willingness to come before us. any final thoughts? >> thank you for allowing me to testify. >> thank you. thanks for your good work in this area. it's been helpful to have you. we're now going to -- do you have any additional questions? what this underscores is literally what a spectacular failure this ideological effort was. you had states that know how to do these things, know how to regula regulate, no how to prevent, insures getting in too much trouble. . if they start getting in trouble, they know how to resolve these things. you have the arrogance of the federal government, spending

$1.5 billion, probably $2.5 billion in support of these things. this is an incredibly important hearing. we're just not getting the press attention to what a spectacular failure obama care is, how couples lost health care plans in high risk pools that they could afford. the premiums have skyrocketed. so i hope this hearing gets a lot of i a tension and i hope your testimony gets a lot of attention. i hope we actually learn lessons. excellent hearing. i want to thank senator mckas skip and her work on the subcommittee. we look forward to her return soon and her good health. i will say we talked a lot today about how this money was lent to these dozen co-ops that failed. others, as i have said are in

big trouble. at a minimum, we're talking about $1.2 billion of taxpayer money that's going to be lost. it will be more than that in the end, we all know that. while this happened, there was not corrective action taken. in some cases, not at all. in other cases, it took more than a year. what we're looking for today is someone to take accountability for it. this was not the fault of these consumers. this was not the fault of the states. this was the fault of hhs, the way the program was structured. the lack of adherence to the basic requirements in these load agreements. so i would hope that we will learn from this and that we can avoid further disruption in this case to over 700,000 consumers in addition, again, to them having the possibility of actually having to pay out of pocket more than their premiums. there are claims that could be brought against consumers, which would be, you know, adding an

additional insult to the taxpayer taxpayers who have spent so much money. with that, we're adjourned.

>> former republican presidential candidate ben carson is planning to endorse donald trump for president. we'll take you to palm beach,

florida, with a press conference friday morning at 9:00 a.m. eastern over on c-span 2. and in the evening, we'll go to summit, illinois, for a campaign rally with democratic presidential candidate bernie sanders. live at 9:00 p.m. eastern. >> this morning, we talked about campaign 2016 and where candidates stood on healthcare reform. this is about 45 minutes. >> allison kojack is here to talk about what the candidates have proposed for health care. let's talk about donald trump's proposal. first of all, he's going to repeal the affordable care act. he's going to allow insurance to be sold across state lines. allow individuals to fully

deduct premium placements, allow health savings accounts, require price transparency block grant medicaid to states and allow consumers access to safe imported drugs. how is this splar to what we have now? how is it different? >> it's different than what we have now. et ice sort of a greatest hits proposal for what a lot of republicans have been proposing for a long time. the proposal to block grant medicaid had been something governors have wanted and republicans in congress have wanted for a long time. the idea is that if you give them a fixed amount of money they'll have more incentive to save. health savings account, they already exist exactly as mr. trump is proposing. so people already have that option. in terms of the reimportation of drugs, that's more controversial. there are a lot of people who really think that would be a great idea. the pharmaceutical industry doesn't like it one bit.

and economists are mixed about whether that would save money or drive up costs. one thing that's interesting about trump's plan is how it's being received differently by conservatives. the tax credit, or tax deduction, it's a matter of how that's interpreted. he calls it a tax deduction, which largely just ben it ifs high income people. however, if it's a refundable tax credit, meaning no matter how much money you make, you get a certain amount of money towards your health care premium, that's more equalizing and would allow lower income people to have some extra money to buy insurance. that's quite popular among mainstream republican candidates and republican thinkers. the tax deduction, a littleless so. it really only benefits high income people. >> so what would be the reality of getting this passed through congress?

>> the one big roadblock is what happens to all the people who already have insurance through obamacare? there are the people who actually bought insurance through the exchanges about 10 million, 11 million of those. and those people would have to figure out something else. and nobody's given a sort of obvious, what happens to those health care plans. then there's the expanded medicaid. then there's the kids, young adults who have insurance through their parents. all of that is part of the aca. when people say we're going to repeal the whole lot, they're taking away awe of those things. and that's the biggest barrier, i think. the other thing, if that ever were to happen, the other ideas aren't so revolutionary that they couldn't be passed, i don't think. >> a wall street journal headline recently said as the number of uninsured falls, potential fallout to repealing the affordable care act grows for republicans. >> there are certainly people out there who are not happy that they have to buy insurance. and those people it might not be

tough for. but there are a lot of people who wanted insurance and now have it. >> what the impact of donald trump's plan on reducing the cost of health care? >> that's a mixed bag. if you go to a health savings account where people have to comparison shot, perhaps people would be less likely to get an mri. the price transparency, there's debate about that. right now, people don't know what they pay or what things cost, largely because their insurers, they negotiate discounts and lower deals and get doctors to accept lower payments. so that's not out there because companies don't want that out there. the retail price is not really

important. >> candidates want to get rid of so-called obamacare. what else would they do? >> well, ted cruz has absolutely nothing on his website under the headline health care plan. he does say he wants to repeal obamacare and has talked about the medicaid block grant. marco rubio, it's the greatest hits. medicaid block grant, refundable tax credit. then he say he's going to put in place market forces to reduce health care costs. but they were very nonspecific and their campaign has never responded to me about what those would be. john kasich has a very different approach. he wants to appeal obamacare, but wants to first put in place a lot of systems to reduce cost. and a lot of those he's doing in ohio but he's doing through programs funded by the affordable care act. that's a whole other approach that's a little bit different. instead of saying on day one i will repeal obamacare.

>> we'll get to the democrats in a minute. let's get some calls. fayetteville, north carolina, independent. you're up first. good morning, question or comment? >> caller: my question is what happens to the pre-existing condition clauses with all the changes. and these people who have pre-existing conditions, what have mechanism of care is there for hem them? and the insurance companies having to go and mark their stuff through different state and they load that in with a lot of junk policies that don't actually pay the benefit that are needed to pay a potential hospital bill. >> that's a really good question. the pre-existing condition issue

is a major one. i haven't seen it addressed in write by a lot of republican candidates. marco rubio does talk about creating high-risk pools, which would be insurance pools specifically for people with pre-existing conditions or risks. those would, by definition, end up being more expensive. so i'm assuming there will be a subsidy for that. donald trump says we'll keep the pre-existing clause in place, but it's not in his proposal. it's hard to figure out. that's why there's a mandate. get people who are healthy to offset the cost of people with pre-existing conditions. some republican existconomists people should continue having insurance, even if they change policies and that would cover the pre-existing condition, but it would prevent people from getting sick and then buying insurance, which is what drives up rates, largely. >> sandra, a democrat, hi there.

>> caller: thank you for taking my call. i want to speak out on people that are retired. and i was put on disability at the age of 60. i was self-employed from the age of 23. and 30 years i had renal failure, which bankrupted me. i had in the hospital for quite a long time, over two months. fortunately my kidneys started to function again by the grace of god since then i went back to work and still was self-employed. again, i became sick. i was put on disability. i had stents in my legs. i had one kidney functioning with an aortic bypass and a

stent and i'm unable to work. i am now 68, will be 69 this year. and i receive $845 a month. it's barely enough to pay my electric, my water bill and my house payment, which is only $438 a month. it's a crying shame that i have worked so hard that, you know, i cannot go out and even buy myself any clothing or what have you. >> sandra, are you on medicare? >> i am on medicare and medicaid. and it has bankrupt me. the last operation i had was last august as an outpatient that was almost $50,000. i went and at 6:00 a.m. in the morning and was released at

10:00 that night. >> and how much did the government pay of that? >> they paid almost all of it, but the thing of it is is i stilg -- it's not paying for all of my medicine or what have you. >> okay, allison? >> that's actually a big issue these days, not just on medicare, but people are pretty surprised of how much cost sharing there is on medicare. there's been a lot of research showing that in the last several years, five or ten years, the amount that individuals have to foot, pay out of their own pockets, even if they have good insurance is pretty high, and it's growing. and we just did a story about this on npr and talked to somebody in a very similar situation. she was on disability and medicaid and was bankrupted last year. and we talked to some older people on medicare who are sort of drawning under the co-pays and cost sharing that they have

to deal with. >> we're talking about what the 2016 candidates are saying on health care. this came up at last night's debate in florida between the two democrats here's that exchange. >> what secretary clinton is saying is that the united states should continue to be the only major country on earth that doesn't guarantee health care to all of our people. i think if the rest of the world can do it, we can. by the way, not only are we being ripped off by the drug companies, we are spending far, far more per capita on health care than any other major country on earth. you may not think the american people are prepared to stand up to the enshurinsurance companie the drug companies. i think they are. >> this is a very important point in this debate, because i do believe in universal coverage. remember, i fought for it 25

years ago. i believe in it and i know that thanks to the affordable care act, we are now at 90% of universal coverage. i will build on the affordable care act. i will take it further. i will reduce the cost, but i just respectfully disagree between the republicans trying to repeal the first chance we've ever had to get to universal health care and senator sanders wanting to throw us into a contentious debate over single payer. i think the smart approach is build on and protect the affordable care act, make it work, reduce the costs. >> all right, let's break down those two different proposals. where do they stand? is there that much difference between the two of them? >> i think philosophically, there's probably not that much different. other countries guarantee health

kir to people, they do it at a cheaper rate, they pay less for drugs. what hillary clinton is trying to do -- he's trying to revolutionize health care. she's trying to go evolutionarily, if that's a word. she's basically saying the political reality is this isn't going to be able to happen. and she's probably right. people want to repeal obamacare and go back to where we were. she wants to at least preserve obamacare and move forward. they both say they want everybody covered. hillary clinton is taking the realistic view. >> as you were talking, we're showing viewers the highlights of her proposal. what she said there in the debate last night is i want to expand, i want to get even more people covered. does she do that by expanding access to health care, regardless of immigration status by supporting new incentives to encourage medicaid expansion? is that how she builds on obama

care? >> yeah, she builds sort of incrementally like that. there are a lot of people who aren't eligible for obamacare because of their immigration status. that would be an enormous number of people who would have the opportunity to buy insurance if they were eligible. there are about half the states who did not expand medicaid. that was an enormous boone to people. if the states expanded there would be a lot more low income people covered without any cost to them. >> and bernie sanders, senator from vermont ants to do the same thing. in addition to a federally administered single-payer health care program, would give coverage to anyone, including undocumented immigrants. remove co-pays and deductibles and paid for through changes in income tax rates. what do you make of these different proposals.