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The home for VPR's coverage of health and health industry issues affecting the state of Vermont.

Analysis: Many Twists And Turns In Health CO-OP Saga

The Vermont Health CO-OP has formally requested that the state’s top financial regulator reconsider her recent refusal to grant the company a license to sell health insurance on the federally-financed Exchange, which will begin enrolling customers Jan. 1, 2014. 

In an order dated May 22, Susan Donegan, commissioner of the Department of Financial Regulation, denied the CO-OP’s application on several grounds, including its potential financial viability, the quality of its governance, the presence of conflicts of interest in its business model and the prospect that Vermont could move to a single payer system in 2017.

Even if the commissioner reopens the case, the CO-OP will face a huge challenge getting an operating insurance company in place in time to begin competing with the Blues and MVP by October 1st

In discussing the order, Donegan said that the CO-OP had two options if it wished to overturn the result. The first would be to appeal the decision to the Vermont Supreme Court; the second would be to submit a new application. 

The CO-OP rejected these two alternatives in favor of a request that Donegan reconsider her original decision on the grounds that the CO-OP has remedied four of the major flaws set forth in the original decision. 

The CO-OP strategy appears to in some sort of regulatory limbo, however, since Donegan is under no obligation to consider an appeal for reconsideration.

There is no “clock” that calls for a decision within a prescribed time, as there is for an application. And the commissioner refuses to say anything about it publicly, including when she might respond to it, or even whether she will consider at all.

Still, the 30-page document is in fact sitting in the commissioner’s office. The specific changes set forth in the request for reconsideration include:

  • New proposed rates which are much closer to the rates put forth by Blue Cross and MVP. The rates in the CO-OP application were some 15 percent higher than the other insurers, which threw into question the CO-OP’s estimate of the number of customers it could attract to its plans.
  • The removal of Mitchell Fleischer, the head of the Fleischer Jacobs Group from the chairmanship of the CO-OP board, and in fact, from the board itself. The CO-OP was paying Fleischer $126,000 a year, far more than what the board chairs at Blue Cross and MVP draw. ($28,900 and $48,750 respectively.)
  • The addition of five corporate heavy weights to the board to lend it more credibility. These included M. Jerome Diamond, former Vermont attorney general now in private practice; David Kibbe, a Pennsylvania health insurance executive; and Chuck Butler, an aide to former Vermont Gov. Richard Snelling and a long time Blue Cross executive in Vermont and Montana. 
  • The elimination of a provision in their business plan that required customers to use only Fleischer Jacobs analysts to advise them on what insurance plan to buy from the Exchange. That was not only a conflict of interest with Fleischer Jacobs, it is also contrary to Vermont law.

In addition to the proposed changes to the original application, the CO-OP request included arguments that the commissioner has the legal authority to reconsider a decision if she chooses, that the issue with the rates and hence the company viability should be considered in the light of the fact that it is a new company in a fast-moving environment, and that the state would benefit from having a cooperative structure involved in the Exchange.

So, what are their chances? 

Probably no better than even, if that. And even if the commissioner reopens the case, the CO-OP will face a huge challenge getting an operating insurance company in place in time to begin competing with the Blues and MVP by October 1st, the start date for enrolling patients in the Exchange. 

There is no way to tell for sure how much time the CO-OP has to get a decision from the Commissioner, but the best guess is the August 1st. If Donegan does agree to reopen the case, the CO-OP would still have to get its new rates analyzed by DFR actuaries and assessed again by the Green Mountain Care Board and its actuaries; it is the board that makes the final determination on rates.

The financial viability of the CO-OP is likely to be the central issue if the CO-OP gets another chance. It’s reasonable to assume that the CO-OP’s action in strengthening its board and removing the conflict of interest with Fleischer and his brokerage firm can be considered serious steps to remedy flaws in the original application. 

Whether the new rates and hence the company’s competitive posture in the marketplace satisfies the commissioner that the company could be financially viable is more problematic. One obvious question is whether the new CO-OP rates are “shadow” pricing. When Blue Cross and MVP submitted their rates last March, neither had any idea what the other’s proposed rates would be. The CO-OP, by contrast, has access to the other company’s prices. 

In any case, if Commissioner Donegan reconsiders, it will be those rates and the question of financial viability that will lie at the heart of the decision that she will have to make.

Hampered By The New Health Care Reality That Created It

If the Vermont CO-OP saga has been unusual for Vermont regulators and health care bureaucrats, it has been equally unusual in business and political terms. The federally financed coops established under Obamacare are the residue of the national debate over a “public option” for health insurance. Coops, which are very popular particularly in the northern Midwest, usually link producers or purchasers of any product as a way to eliminate middlemen and get a better deal for coop members. 

While there was no shortage of that sort of rhetoric in the Vermont case, the CO-OP now in play arose at the initiative of the classic middleman—the Fleischer Jacobs group. Beginning in the late 1980s, Mitch Fleischer, the president of the firm, built a lucrative business advising small and medium sized businesses on how to purchase health care insurance for their employees. There were other aspects to the business, but health insurance was a significant part of it.

The advent of health care reform at both the federal and state levels posed an obvious threat to the Fleischer Jacobs business. Guiding small business owners through the labyrinth of offerings on the Exchange would become the function of the Exchange administrator; in Vermont, state government will pay for “navigators” whose services wouldn’t cost the small business anything. And Governor Peter Shumlin’s single payer initiative held out the prospect for eliminating insurance companies altogether. 

There was no stopping the reform momentum in Vermont, however, so Fleischer struck on the coop idea and he and his South Burlington-based team had initial success. Major politicians, including Governor Peter Shumlin and Congressman Peter Welch welcomed the coop idea warmly. 

Shumlin’s insurance regulators signed on to Fleischer’s application for federal funds, which he got; some $6 million in start-up funds, and $27 million for the reserves that the new insurance company would need to operate. Both were to be in the form of loans, but the federal underpinning seemed like a golden guarantee. 

The underlying rationale continued to be the effort to keep the Fleischer Jacobs business from fading away. The evidence for that judgment is the fact that the application for an insurance license said that businesses seeking advice on how to purchase health insurance could only use the Fleischer Jacobs brokers for that role. 

Moreover, it was clear that Fleischer himself was actually running the CO-OP as well as his original business. Christine Oliver, an attorney with extensive government management experience in both Vermont and Ohio, is the CO-OP CEO.

Fleischer was technically chairman of the CO-OP board of trustees, but he was paying himself more like an operating officer and as the CO-OP itself said subsequently, he was spending a large percentage of his time on it and the key to its success. 

The fact that Fleischer obviously hoped to armor his original firm against damage from health care reform speaks to at least part of his motivation, but by itself it didn’t vitiate the whole coop idea. Fleischer is very well respected as a businessman, and there was no inherent barrier to the CO-OP getting into the hunt for business that would kick off on Oct. 1, when enrollment for the Exchange can begin. 

But the execution of the license campaign seemed, well, a little slack. The CO-OP was informed clearly and early that the exclusive contract with the Fleischer Jacobs brokers was not only a conflict of interest for the CO-OP, but was actually against the law in Vermont. Yet, they left the provision in the application.

“We could have taken it out overnight,” Oliver said in an interview later. But they didn’t take it out, and it counted against them in the rejection of their application.

The rates they would charge were central to the whole effort, but the numbers produced by the CO-OP’s actuary came out of far left field—they used a health care cost trend of more than seven percent, a credible figure nationally, but one which had no relevance to Vermont, where the Green Mountain Care board has made it clear that it is aiming at something less than four percent.

That meant that their overall costs would be 15 higher than the Blues or MVP—a damaging misstep. 

Finally, the makeup of the original board was obviously deficient—they didn’t really need a strong board because Mitch Fleischer himself was steering the whole ship. But in matters of regulation, things have to look good. And the board didn’t. 

In any event, as noted above, the CO-OP has essentially fixed everything they can about the flawed application. There is still a very substantive issue about whether the CO-OP is financially viable, but the fact that they have federal support is certainly in their favor.

                                                      CO-OP Goes On The Offensive

But if their execution of their campaign has been shaky, their political posture over the past month and a half has been puzzling indeed.

The reality is that the Vermont CO-OP needs to get a break from Commissioner Susan Donegan if they are to survive. They thought they had laid the political groundwork for special treatment because of the vocal support from the governor and because they were a new health care insurer in a state with limited options.

All of the substantive points in the CO-OP response could have been argued without the strong tone of personal attack

That obviously hasn’t been enough, though, and now they are at the mercy of the commissioner. Their strategy in the face of that reality: they hammered Donegan from pillar to post, personally.

Christine Oliver put out a series of statements that claimed that Donegan was perhaps not really experienced enough to carry out the review, that she had made a flood of mistakes and had misled the public, and they also attacked her integrity by suggesting that she might have been influenced by Vermont Blue Cross to deny the CO-OP application to help the Blues competitively.

“The recent decision (by the commissioner) contains many inaccurate and misleading statements,” Oliver said in a statement on May 28. “So many that it’s hard to know where to begin…DFR has not licensed a new health insurance provider in more than 50 years so due diligence is appropriate,” she wrote. “To say we were blindsided by the decision is an understatement.   

There is no honest way to leap from our last exchange with DFR to the order that was issued. It doesn’t add up on so many levels.” 

Oliver went on to argue that DFR had “misled Vermonters” particularly on the issue of their rates, which she said were placeholder rates that would have been reduced during the review process and which would have left at least some of their rates lower than the Blues and MVP.

As for the overall financial structure of the firm, all the critical risk would be borne by the federal government. “The illusion of risk to the consumer is patently false,” she said.  

All of the substantive points in the CO-OP response could have been argued without the strong tone of personal attack. For example: On experience: “no new licensure for 50 years.” On honesty: “misleading” and “patently false” and “no honest way” to get to the decision. 

In a wide ranging interview with Mark Johnson on WDEV on May 29, Oliver elaborated on all of these points; in the process she suggested that Donegan might have tilted the scales against the CO-OP in order to enhance the competitive environment for Vermont Blue Cross.    

In the public commentary process during the spring, a Blue Cross official had written a letter raising a question about the CO-OP application for a license.

The process was clearly “political” she asserted, and added, “Blue Cross is the biggest 800 pound gorilla in the room…Blue Cross carries a lot of weight in this town.

“I don’t know what that means,” she said, “it just doesn’t ring true to me.” 

There is no evidence whatsoever that Blue Cross made any improper representations to Donegan in the case; but even if they had, well Blue Cross is a private company in a scrappy business. 

What was striking was the inference that Donegan might have countenanced such a foray. If that were true, it would destroy Donegan’s integrity and credibility as a regulator. The likelihood of Donegan doing something like that lies somewhere south of zero.

If you need somebody to give you a second chance, to cut you some slack, is it really wise to attack their character and professional performance like that? 

So: strange. The CO-OP waits in limbo. Donegan is silent.

Hamilton E. Davis is a longtime journalist, who has written for the Providence Journal and the Burlington Free Press.
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