Vermont’s top financial regulator has no regrets about being the nation’s only state insurance commissioner to refuse to license an Obamacare co-operative.
Susan L. Donegan was commissioner for Vermont’s Division of Insurance in 2013 when she refused to issue a license to the proposed Vermont Health CO-OP, saying it failed to meet state standards. Her action barred the Obamacare non-profit from selling health insurance in the state.
She quickly came under fire in Sen. Bernie Sander’s deep-blue home state, where co-ops are immensely popular. Today, she looks like a prescient state official who likely saved thousands of Vermonters from buying their health insurance from a doomed insurer.
That’s because 13 of the 24 co-ops set up under Obamacare have collapsed, costing the federal treasury $1.3 billion. More than 800,000 co-op customers now find themselves without health insurance coverage and are scrambling to find new policies due to the co-op failures.
Turns out that some of the biggest problems she identified two years ago in her state also doomed co-ops across the country. In an exclusive interview, Donegan talked with the Daily Caller News Foundation for nearly an hour to recount her decision, its aftermath and the lessons she learned about the federal co-op program.
Denying a license to the health co-op was not an easy decision for Donegan, who first joined Democratic Gov. Peter Shumlin’s administration as a deputy insurance commissioner in 2010.
First, she already knew when the co-op’s application arrived at her her office that federal officials in Washington, D.C., had pre-approved the co-op’s plan and allocated to it $33 million in taxpayer funds.
Second, she knew the co-ops were an important part of President Obama’s signature health reform effort. Obama is extremely popular in Vermont, having garnered 67 percent of the vote in his 2008 and 2012 campaigns.
The small New England state also is the land of co-ops. Doug Dimento, a spokesman for Cabot Farmers Co-operative Creamery, which started in 1919, says co-ops in Vermont represent a way of life. His co-operative has 1,200 dairy farmer members and enjoyed $1.1 billion in revenue last year.
“We have maple sugar marketing co-ops,” he told TheDCNF. “There’s dairy co-ops, there’s beef co-ops, there’s grain co-ops, there’s apple co-ops, there’s consumer’s co-ops. There’s well over 100 co-ops.”
Donegan sensed trouble as soon as she read the co-op’s application. There were optimistic and questionable forecasts, a board filled with friends, sweetheart deals, high salaries, deep conflicts of interest and a staff with little business expertise.
She believed the Obamacare co-op model — as presented by Centers for Medicare and Medicaid Services officials in Washington, D.C. — was deeply flawed for Vermont.
“The model was not sustainable,” she said. And referring to the 13 co-op’s that have failed: “I think perhaps, my thoughts back then may have borne themselves out in some way.”
Donegan said she and her staff “really had to scrub numbers many times, work with actuaries, make sure what we were seeing was going to be a company to be able to sustain itself. And every time we kept doing that, we just kept coming up short, saying ‘you know there are a lot of things that aren’t just working.’ It really gave us pause. The numbers weren’t there.”
Among the first deficiencies Donegan discovered was that as a federally designed model, the co-op immediately would be burdened with $33 million liability in federal loans despite having no cash flow, no customers and no tangible assets.
Solid capitalization is essential in the insurance business where money is its lifeblood. However, when the federal co-ops were established, CMS instructed state regulators to treat the liabilities as “assets,” which didn’t sit well with Donegan.
“This is basically going to be funded with a loan from the federal government. When you have a loan, that means you have to pay it back at some point. It was going to be a burden to pay that back. So what happens when you have a debt that can’t be met,” she said. “We realized that there was going already to be a burden financially on the company from Day One.”
Her small army of insurance experts, actuaries, accountants and forensic economists also had other questions, including its optimistic membership forecast of 19,000. Then there was the lack of staff with experience in either business or insurance, a common flaw among the Obamacare co-ops.
“This was a highly risky operation to begin with,” Donegan told TheDCNF. “But when we looked at the Vermont proposed board itself, we wanted to make sure we had folks who had business experience, understood a balance sheet, who had the kind of judgment that you would want in a board and who would act independently over the management. And we just didn’t see that.”
She also discovered that like many other of the federally established health co-ops, it was wracked with poor governance. The board was filled with conflicts of interest and insiders who would be in positions to exploit the company for personal gain.
“It was a board, as you see in our order, that was put together as friends of friends. You can’t have a board like that. You have to have folks who understand what governance was about and are willing to take the risks and responsibilities of that position,” she said.
Another of the early problems Donegan discovered was the co-op’s newly installed president, Mitchell Fleischer, owned Fleischer-Jacob, an insurance brokerage firm that got a sweetheart contract worth from $500,000 $2 million. He also paid himself $120,000 a year in a salary, while other commercial insurance company leaders were paid as little as $28,000.
“I had corporate governance issues,” she said. “That quickly pushed it over the edge for me. I had conflicts of interest. I had board members that were clueless. That added to a very quick decision.”
In its 37-page decision, Donegan’s Department of Financial Regulation determined in May 2013 that the co-op would suffer cumulative losses of $9 million in the first three years of operation, if it achieved 50 percent of its target enrollment.
She told the public that insolvency put Vermonters at risk. “If solvency is in jeopardy, you’re not protecting consumers,” she said the day her department announced its refusal to license the co-op.
Nevertheless, the co-op and its supporters fought back. Christine Oliver, the co-op’s CEO and a former Shumlin appointee, said she was “blindsided.”
One account reported that Oliver “has continued to make her way across the Vermont media landscape, blasting back at Donegan’s decision. Oliver and co-op founder Mitchell Fleischer even tried to bring Democratic Gov. Peter Shumlin into the fray.”
Donegan said she was vigorously attacked, recalling that “the co-op itself was very vocal with the press, wanting to know why we were not just happily cutting a license. There were folks who were not happy with me. I did get some emails that were sort of little angry emails.”
She was particularly vulnerable because of the state’s favorable history with co-operatives.
“The word co-op is a very emotional word in a lot of places, especially in Vermont,” Donegan said. “We’ve had a history of co-ops for decades. We have food co-ops, farmer co-ops. I remember one email in particular that said, ‘Commissioner, please, please let this company be licensed. I buy my food and eggs at a co-op. I want to buy my insurance at a co-op.”
Donegan says she was sympathetic. “I understood that point of view. But I don’t think that person would have wanted to buy insurance from a company that was not going to make it more than a year or two. Then they would have been in a different situation.”
As it turned out Shumlin supported her. “He understood my recommendation and my final decision that we were not going to license the company. And he was absolutely supportive,” she said.
Schumlin promoted her in 2013 to serve as his commissioner for his newly reorganized Department of Financial Regulation, which oversees all financial businesses in the state.
“The worst thing that I could have done was to license an entity that arguably would have been pretty close to being in financially hazardous condition,” she told TheDCNF. “To do that almost upon granting a license seemed wrong.”
Donegan said the current string of co-op closings and the loss of insurance coverage for hundreds of thousands is “staggering.”
Looking back at the controversy, she said she would refuse to license the co-op again if presented with the same kind of weaknesses. “I would rather than turn down a company that’s not quite up to snuff than to put any policyholders in jeopardy,” she said.
Donegan said she also understood that there were creditors who did not get paid when the co-op closed down.
Dr. Mandy Cohen, chief of staff at the Centers for Medicare and Medicaid Services that manages the federal co-op program testified before the House Energy and Commerce Committee on Nov. 5 that the U.S. Government did lose funds on the Vermont co-op. “There was some funding that was used in their startup funds that was not recovered,” she said.