When Congress struck a deal to avert the fiscal cliff, it also dealt a quiet blow to President Obama’s health overhaul: The new law killed a multibillion-dollar program meant to boost health insurance competition by funding nonprofit health plans.
The decision to end funding for the Consumer Operated and Oriented Plans has left as many as 40 start-ups vying for federal dollars in limbo. Some are considering legal action against the Obama administration, after many spent upwards of $100,000 preparing their applications.
“Currently there are some things in motion,” said Robert Raasch, who had requested a multimillion-dollar loan to set up a nonprofit health plan in Oklahoma. “There may be some legal challenges or some legislative mechanisms we could use. All of that is in discussion.”
The Consumer Operated and Oriented Plan, or CO-OP, program was aimed at spending as much as $6 billion to help launch nonprofit health insurance carriers. It came into favor with Democrats when it became clear that a government-run plan, known as the public option, could not gain enough political support.
In theory, nonprofit health plans could offer lower premiums, which would put pressure on private insurance companies to cut their rates. But over the past three years, the program has come under congressional investigation as Republicans questioned whether the nonprofit plans would make good on their loans, or go belly-up like the solar panel company Solyndra. That manufacturer borrowed more than a half-billion in federal loans, only to go bankrupt in 2011.
A bill proposed by House Leader Rep. Eric Cantor on Dec. 19, meant to cut $100 billion in federal spending, included a provision eliminating the CO-OP program’s remaining funds. That legislation passed the House but died in the Senate.
A more detailed version of this proposal resurfaced in the final fiscal cliff deal negotiated by Vice President Joe Biden and Senate Minority Leader Mitch McConnell (R-Ky.). But it remains unclear why the White House agreed to the provision, and a White House spokesman on Tuesday did not respond to several requests for an explanation.
Even some Affordable Care Act supporters had doubts about whether the start-ups could succeed. They would have needed to repay their federal loans within five years.
“This program didn’t do a lot to get these guys the resources they needed,” said Sabrina Corlette, a research professor at Georgetown University's Health Policy Institute. “These aren’t grants; they’re loans, and there was a really fast time frame for loans to be repaid. You’d have to cobble a lot together incredibly quickly.”
The Department Health and Human Services had already sent out nearly $2 billion to 24 CO-OPs. Those plans are scheduled to begin accepting their first customers in October, when the new health exchanges launch for open enrollment.
The CO-OP program’s funding was cut from $6 billion to $3.4 billion in a previous budget deal. The fiscal cliff deal cuts nearly all of the program’s unobligated funds, about $1 billion, leaving only a small portion of money to administer the CO-OP loans already granted.
The Congressional Budget Office estimates that the change will generate $200 million in savings by 2017.
The decision to end CO-OP funding has hit Robert Schyberg hard. Schyberg had submitted a request for $60 million to launch a plan in West Virginia. He estimates that his organization, HMO Affiliates, spent more than $100,000 preparing the application and numerous hours negotiating with hospitals and physicians, convincing the providers to join their nascent network.
On Nov. 13, Schyberg's colleague received a letter from Medicare noting that they had “been selected to enter into discussions to potentially receive a loan or loans under the CO-OP Program for the State of West Virginia.” Schyberg said he had a meeting scheduled for the last week of December to finalize details of the loan. When it got pushed to Jan. 3, he did not think much of the one-week delay.
“New Year’s Eve happened, and everything changed,” he said.
His colleague received another letter from the Obama administration, on Jan. 9, saying “CMS no longer has authority to enter into new loan agreements with CO-OP applicants, including your organization.”
Todd Whitney remembers staying up all night on New Year’s Eve, racing to meet the year-end deadline to apply for the loan. He planned to launch a nonprofit insurance plan to serve West Florida, from Pensacola to Naples.
“We felt really good about our application,” Whitney said. “We busted our hump over the holidays. I was working up to the minute on New Year’s Eve when everyone was elsewhere. We sent the application in, and now the funding is gone.”
Whitney has reached out to Sen. Bill Nelson and Rep. Kathy Castor, both Democrats from Florida, to see whether a legislative fix could restore the cut dollars. “There’s always a plan B,” he said.
Oklahoma’s Raasch, a lawyer by trade, is looking at whether the states stuck in limbo could sue to restore the funding opportunity. While he describes such plans as “preliminary,” he said he has looked at two possible legal strategies.
One argument would hinge on the equal protection clause, part of the 14th Amendment, which says that “no state shall ... deny to any person within its jurisdiction the equal protection of the laws.”
“We’ve got 24 states who received CO-OP grants and 26 who did not,” Raasch explained. “Since this was a tax, as declared by the Supreme Court, having some states taxed differently than others would be a violation of the equal protection clause.”