Obama Administration May Have Used CO-OP Grants to Reward Political Allies

Published June 29, 2012

A prominent House Committee Chairman is questioning whether the White House has used President Obama’s health care law to direct hundreds of millions of dollars in support to political allies ineligible to receive it.

In February, the Department of Health and Human Services (HHS) awarded nearly $640 million in low-interest loans primarily to seven labor unions and community organizers located in eight states. The loans will be used to fund health insurance plans under the Accountable Care Act (ACA), President Obama’s sweeping health care reform.

The Freelancers Union, which hauled in about $340 million of the funds, appears to be ineligible under the Affordable Care Act (ACA), says Rep. Dave Camp (R-MI), chairman of the House Committee on Ways and Means.

According to Camp’s office, the Freelancers Union offers health insurance to union members and their dependents in the state of New York through Freelancers Insurance Company, which it owns. But according to Section 1322(c)(2)(A) of Obama’s law, organizations are ineligible to receive the loans awarded by the administration if “the organization or a related entity (or a predecessor of either) was a health insurance issuer on July 16, 2009.”

The law also forbids any organization from receiving this type of funding if it was “sponsored by a state or local government,” and it requires that loan recipients be not-for profit entities. According to Camp’s office, the Freelancers Insurance Company fails on both counts.

CO-OPs or Kickbacks?

The loans Camp criticized were granted to Consumer Operated and Oriented Plans (CO-OPs) authorized by Obama’s law, and are scheduled to begin operating in 2014. The CO-OPs participate in Obama’s health insurance exchanges, a government-controlled marketplace where individuals and small businesses can shop for health insurance coverage.

According to Dr. Roger Stark, a physician and health care policy analyst at the Washington Policy Center, the CO-OPs were a substitute for the public option. The poster-child model is Group Health Cooperative, based in Seattle, which is essentially an insurance company that employs its doctors and functions like an HMO.

“If Camp’s facts are correct—and I have no reason to doubt them—then clearly the administration is playing political favorites in handing out the loans, and may be totally illegal in doing so,” said Stark.

Linda Gorman, director of the Health Care Policy Center at the Independence Institute, says Obama’s law is full of kickbacks for favored groups.

“Increasing taxes to give billions of dollars to labor unions and other favored nonprofits for creating new forms of health insurance that will be better than that provided by private insurers will be as successful as increasing taxes to give billions to so-called green energy firms for creating new forms of energy that will replace the private companies that provide fossil fuels,” Gorman said.

Difficult Road for CO-OPs

In addition to the claims of illegality by Camp and others, the new community health care plans will still face difficulties entering the market against larger, more established health insurers, according to Dr. Doug Perednia, author of Overhauling America’s Healthcare Machine.

“Naive is perhaps the most charitable way to describe it,” said Perednia.

Perednia says CO-OPs haven’t been any more successful at holding the line on premiums and insurance costs than conventional insurers.

“As just one example, Group Health Cooperative of Eau Claire, Wisconsin recently decided to drop coverage for thousands of patients after it was refused a rate increase of 13 percent. The only model that has produced statistically lower costs is high-deductible insurance combined with a savings option such as a health savings account,” said Perednia. “Coincidentally, this is the only type of health plan the Obama administration is specifically attempting to eliminate, through their implementation of the rules surrounding medical loss ratios.”

Speculative Savings

Perednia says the idea CO-OPs will be able to save significant amounts of money is just speculation.

“If the Medicare ACO demonstration project proved anything, it was that most of the organizations involved were unable to reduce healthcare expenditures, even when given substantial financial and political incentives to do so,” said Perednia.

So why would hospitals, labor unions, and others be jumping at the chance to launch a CO-OP?

“It’s an opportunity to play with other people’s money. Those $15 million in start-up and $100 million in reserve costs may not save any health care dollars, but they will certainly generate administrative salaries and short-term revenue for a wide variety of organizations all across the country,” Perednia explains. “If you’re the president of a nonprofit or labor union looking for additional sources of revenue, this one’s as good as any.”

Playing Favorites

Devon Herrick, a senior fellow at the National Center for Policy Analysis, says these loans are unlikely to have a significant impact.

“It appears the administration is playing favorites with unions. However, it’s doubtful that the unions and community groups will be more successful than health insurers at covering their members,” said Herrick. “Insurers have extensive experience underwriting health plans. The federal loans will likely enrich unions and the executives who administer the plans, but the coverage is unlikely to be any more efficient than commercial insurers.”

Perednia says the test of success is when these organizations, not the taxpayers, put their own money behind the idea.

“The real test of the promise, savings potential, and long-term viability of the CO-OP model would be if organizations like hospitals, public health activists, and Freelancers Union decided to put up their own money to launch these efforts, or even if they were required to share in any losses. Until that happens, there’s no reason to believe that they have a better idea,” said Perednia.