Feds Will Struggle to Recoup Loans to Failed Obamacare Co-Ops

Controversial bookkeeping rule allowed co-ops to treat debt as an asset

August 10, 2016

The federal government is unlikely to recover all of the taxpayer funds lent to failed Obamacare co-ops, according to an audit by the inspector general for the Department of Health and Human Services.

The 23 co-ops that were created under Obamacare received $2.4 billion in taxpayer funds from the Centers for Medicare and Medicaid Services, of which $358 million were designated for "startup" loans.

The startup loans were to be repaid within five years, as opposed to other loans that were to be repaid within 15 years.

The Centers for Medicare and Medicaid Services released a memo on July 9, 2015 informing the co-ops that they could convert their startup loans into surplus notes by amending their loan agreements.

"Under the terms of a surplus note, co-ops are not required to make any repayment on the surplus note that could lead to financial distress or default," the audit explains. "Co-ops that converted their startup loans into surplus notes could record and report these loans as capital and surplus rather than as debt in financial filings with regulators."

The audit found that 12 co-ops had undergone this conversion on or before December 31, 2015.

According to the agency, converting startup loans to surplus notes improved co-ops’ financial standing in the short term.

"Although the conversions provided increased levels of capital and surplus, 4 of the 12 co-ops approved for conversions ceased operations within 6 months after the conversion," the audit stated. "[The Centers for Medicare and Medicaid Services] did not adequately document the potential impact of the conversions on the federal government’s ability to recover the loan payments if the co-ops were to fail."

"The conversion of the startup loans into surplus notes likely reduces the federal government’s ability to recover the loan funds if a co-op ceases operations and liquidates its assets," the audit said.

For example, the federal government was third in line to be repaid by Michigan’s co-op before it converted its startup loan, but fell into eighth place after the conversion took place. The Michigan co-op is now closed.

Although conversions helped co-ops increase their capital, they weren’t enough for some co-ops to fulfill risk-based capital requirements.

"Despite the conversions allowing co-ops to record the startup loans as capital and surplus instead of debt, risk-based capital percentages were at levels below the [agency] requirement of 500 percent for 4 of the 8 operational co-ops," the audit states.

The Centers for Medicare and Medicaid Services maintains that co-ops are still being held to the repayment terms of startup loans.

"Understanding that co-ops face additional requirements compared to other issuers in the insurance field, the Centers for Medicare and Medicaid Services has allowed co-ops to utilize certain financial restructuring changes consistent with authority provided in the Affordable Care Act, such as converting startup loans into surplus notes," said Andrew Slavitt, acting administrator at the agency.

"Although co-ops were allowed to convert startup loans into surplus notes, co-ops are still subject to repayment terms of startup loans, including beginning the repayment process within the 5-year time frame," he said.

Ed Haislmaier, a senior research fellow in health policy studies at the Heritage Foundation, questioned the ability of failing co-ops to pay back taxpayer loans.

"Technically, Slavitt is right. The co-ops are supposed to repay the money, but we’re talking about entities that are going bankrupt and being liquidated," Haislmaier said. "So what is the probability that it will actually be paid back? Vanishingly small."

"In effect, the taxpayer gets left holding the bag and everyone else gets their money first," he said. "This is a well-developed pattern with the Obama administration, especially with respect to the Affordable Care Act."

Senator Orrin Hatch (R., Utah) asked Slavitt in January whether or not the loans would be repaid to taxpayers.

"We clearly have a fiduciary responsibility to use every tool that we have," Slavitt responded. "The Department of Justice [and] we are working now hand in hand on these collections and making sure that we maximize the returns."

"I think there are three broad sources that we are looking at that are going to be a source of return funds for taxpayers on the federal level," he said. "First, as you point out, there are a series of receivables that some of these co-ops have, second there are audit and legal actions that I think are appropriate in some cases that we’re working with DOJ on, and third and finally there will be cash in the co-ops themselves when they get through paying the providers and paying off claims."

Sen. Rob Portman (R., Ohio) responded that the $1.2 billion dollars spent on the co-ops had been wasted.

"I heard you say earlier you thought some of that money might be recouped," Portman said. "I would make the point that, to my view, none of it has been recouped, zero. These are failed enterprises, so I think saying $1.2 billion has been wasted is probably accurate."

In May, Republicans accused Slavitt of giving false testimony to Congress when he said that state-based Obamacare exchanges returned more than $200 million in grant dollars to the federal government.

"Mr. Slavitt’s testimony misled the committee in two ways: he misstated the amount of grant money returned to the Treasury, and he wrongfully implied that the funds were returned because of improper spending and CMS oversight efforts," the committee said.

Slavitt stood by his remarks. "Mr. Slavitt clearly stated in his testimony that the over $200 million returned was unspent dollars or improperly spent dollars from the grant program," an agency spokesman said at the time. "CMS has always been clear with the Committee, providing a detailed accounting of the grant funds on request, as well as multiple briefings and calls for the Chairman and his staff."