NAIC: Failed CO-OPs must pay claims before they repay federal loans

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The National Association of Insurance Commissioners says the Affordable Care Act protects states' rights to oversee the liquidation of failed consumer operated and oriented plans--which would mean CO-OP policyholder claims get paid before the federal government.

In a letter sent to House Speaker Paul Ryan (R-Wis.) and Minority Leader Nancy Pelosi (D-Calif.), NAIC says that it would be illegal for the government to recover start-up loans given to CO-OPs before other parties are paid. NAIC cites an HHS document on the terms of start-up loans that specifically states the federal loans would be subordinate to policyholder claims, and that the federal solvency loans were lower priority that other creditor claims.

Due to state laws, other insurers end up paying for claims of insolvent insurers--in this case, the failing CO-OPs--and are compensated with a dollar-for-dollar state tax credit. CO-OP revenue shortfalls ultimately get financed by state taxpayers, NAIC says, leading the group to conclude that prioritizing the repayment of federal government’s start-up loans during liquidation proceedings would mean state taxpayers have to foot the bill for CO-OPs' policyholder claims.

"Instead of protecting policyholders, the HHS/DOJ abuse of the federal 'super-priority' will have a significant financial impact on policyholders, providers, the states and state taxpayers," the letter says. "It will also disrupt the orderly liquidation process established by the states, confirmed by Congress, and endorsed by HHS when it promulgated [Affordable Care Act] regulations."

The Obama administration has said it would resort to legal action to recover more then $1 billion in federal loans to the CO-OPs, FierceHealthPayer has reported. More than half of the 23 original CO-OPs have failed due to poor financial management in addition to struggles other payers have encountered in the ACA exchange markets, such as higher-than-expected claims costs. A previous analysis from The Commonwealth Fund showed that outsourcing provider network design and claims processing have also hindered CO-OPs’ ability to control costs.  

National Alliance of State Health CO-OPs chairman Martin Hickey, M.D., has said the federal government’s efforts to recoup the loans would be futile. “There’s nothing left to collect,” he said, adding, “will there be a little money left? Yeah, maybe.”