Failing Obamacare Co-ops Give Execs Lavish Pay, And May Violate the Law
Taxpayer-funded Obamacare health insurance co-ops may be running afoul of the law by giving extravagant paychecks to their top executives, according to a Daily Caller News Foundation investigation.
More than a million Americans have enrolled in the 23 non-profit Obamacare co-ops since they began in 2011. The co-ops were intended to be consumer-operated non-profits focused on delivering healthcare to the working poor and others needing health insurance.
Eighteen of the 23 co-ops paid their top executives prodigious salaries ranging from $263,000 to $587,000, according to 2013 IRS tax filings.
The high take-home pay for the “nonprofit” executives appears to violate both federal law and Obamacare rules prohibiting “excessive executive compensation.”
The co-ops were originally funded in 2011 with $2 billion under Obamacare in an experiment to provide tax-paid competition to private sector health insurance providers.
Most of the Obamacare co-op executives are paid more than members of Congress, Supreme Court justices, U.S. cabinet secretaries and the governors of all 50 states.
Fears about excessive compensation were raised in 2011 by a key Obamacare co-op advisory board, which set rules for the untested co-ops.
At a March 24, 2011, Washington, D.C. meeting, advisory board members openly agonized about the possibility of “unjust enrichment” by unscrupulous founders who sought to capture millions of dollars at the presumably “non-profit” cooperatives. They could not agree, however, on regulatory language to prohibit it.
The DCNF probe found that their fears were justified.
The six-figure co-op salaries are two to four times higher than the $135,000 median executive healthcare pay reported in an October 2014 nonprofit CEO compensation study published by Charity Navigator. Charity Navigator is a nonpartisan group that tracks philanthropic and charitable organizations.
The Department of Health and Human Services’ Centers for Medicare and Medicaid Services, which oversees the federally funded co-ops, warned them in December 2011 that federal law bars the use of tax funds “to cover excessive executive compensation.”
Aaron Albright, a CMS spokesman, told DCNF that “the use of federal co-op loan funds is prohibited from, among other restrictions, providing excessive executive compensation.”
Albright did not define “excessive” compensation but he suggested that CMS approved the high salaries because his centers “review employment agreements for top executives of co-ops for compliance with the loan agreement.”
A section of the Bipartisan Budget Act of 2013 established limits for federal contractor executive compensation at $487,000. At least five co-op executives were paid above those limits, including South Carolina, Arizona, Illinois, Massachusetts and Louisiana.
The co-ops were also required by CMS to conduct surveys to “reflect the market rate for a similar position in your area.” Despite the government’s directive, however, only half of the co-ops conducted a review, according to their IRS forms.
The high co-op salaries also appear to conflict with President Obama’s personal campaign against high executive pay, which included his 2009 appointment of a “compensation czar” to investigate executive salaries at private companies.
Taxpayer advocates contacted by DCNF were outraged by the generous pay, especially in light of the perilous financial conditions that have many of the co-ops facing doubtful futures.
“I think it’s pretty shocking that they’re making that much money and what’s even worse is that most of these co-ops are failing,” said Elizabeth Wright, health and science director for Citizens Against Government Waste, a conservative non-profit advocacy group that has exposed wasteful federal spending since 1984.
Wright pointed to the collapse in December 2014 of the Iowa-based Co-Opportunity Health as a prime example of Obamacare co-op mismanagement. Co-Opportunity received $177 million in federal start-up loans before state regulators took it over and declared it in “hazardous” condition.
Before its collapse, David Lyons, Co-Opportunity’s president and CEO received $261,000 in compensation. Stephen Ringlee, Co-Opportunity’s CFO, received $257,000, despite having failed in several previous startups. Clifford Gold, its COO, took in $288,000.
Their pay was seven times the income for individual workers in Iowa, according to U.S. Census Bureau data.
“This is really, really shocking, especially when you see how abysmally these co-ops are performing,” said Grace-Marie Turner, president of the Galen Institute and a critic of Obamacare.
“What they have done is the worst of both worlds. Their organizations are failing and they’re paying CEO’s exorbitant salaries that are completely in contrast with the concept the co-ops were supposed to stand for,” Turner said.
Wright said it appears the co-ops have turned the familiar private-sector principle of “pay-for-performance” on its head in determining executive compensation: “They seem to be more careful managing their salaries than they are running the organizations they’re running.”
“As a president of a non-profit, you need to be a lot more fiscally responsible and fiscally cognizant of what you’re doing, and not just seeing it as a landing pad for a high-paying salary,” said David Williams, president of the Taxpayers Protection Alliance, another conservative non-profit advocacy group that analyzes government spending and programs.
The top paid co-op executive was Thomas Policelli, CEO of Massachusetts’ Minuteman Health. He was awarded $587,000 in 2013, according to the co-op’s tax return. Minuteman was also among worst performing Obamacare co-ops, reporting only 1,700 enrollees at the end of 2014.
Minuteman’s cash-burn rate was 53 percent, with a net operating loss of $21 million last year, according to an analysis by Galen’s Turner and Thomas Miller, a senior health fellow at the American Enterprise Institute.
In nearby Connecticut, HealthyCT paid Kenneth Lalime $352,000. The co-op reported total enrollment of only 7,966 and suffered operating losses of $28 million. Standard & Poor’s estimated its cash-burn rate at 61 percent.
Maryland’s Evergreen Health Cooperative’s Peter Beilenson was paid $263,000. His co-op enrolled only 2,129 customers versus 72,000 for Blue Cross/Blue Shield and compiled a net operating loss of $15 million last year. Evergreen’s burn rate was 125 perecent of its capital through the first three quarters of 2014, according to S&P.
Jerry Burgess, president and CEO of South Carolina’s Consumers Choice Health Insurance Company, got the second highest compensation at $490,000.
Under his leadership, the co-op had a $10 million net operating loss last year. It exhausted half of its federally funded cash-on-hand by the third quarter of 2014, according to A.M. Best, an insurance rating firm.
Burgess’s pay is 14 times the average worker income of $34,266 in South Carolina, according to U.S. Census data.
Ralph Prows earned $355,000 as CEO of Oregon’s Health Co-op. The co-op ended up enrolling only 869 people. Prows resigned earlier this year.
David Young, CFO of Tennessee’s Community Health Alliance, received $280,000 in 2013, seven times the average worker’s take home pay of $37,678.
Community Health also suffered the largest deficit of all the health co-ops, spending 314 percent of its allotted federal revenue in a single year, according to S&P. The Tennessee co-op received $73 million in loan money under Obamacare.
Nevada health co-op has another problem in addition to sky-high salaries — nepotism. Nevada Health co-op is top-heavy with members of the long-troubled UNITE HERE union, which represents casino workers in the state and has been accused of corruption by other union officials.
Tom Zumtobell, the co-op’s CEO, received $414,000 in 2013. He is a former UNITE Here vice president and lives in Reno, 450 miles from the co-op’s Las Vegas headquarters. Kathy Silver received $377,000 as the co-op’s treasurer. Silver is the former board president of the local UNITE HERE chapter.
Bobbette Bond, the co-op’s secretary, hauled in $222,000. She was UNITE HERE’s chief lobbyist. Her husband is Donald “D” Taylor, UNITE HERE’s national president and a director of the co-op.
The Nevada co-op lost $20 million last year and burned through 92 percent of its Obamacare funding in the first three quarters of 2014, according to S&P.
Douglas Smith is CEO of Utah’s Arches Mutual Insurance Company co-op. He received $320,000, nine times the state’s average salary of $32,601. His co-op had a burn rate of 74 percent in the first three quarters of 2014 and operating losses of more than $31 million.
Montana’s Jerry Dworak was paid $306,000 in largely rural Montana where the average income is $37,370. Dworak’s salary was eight times the average income in the state.
Health Connection’s CEO Mark Epstein got $296,000 while running up $9 million in operating losses last year. The New Mexico co-op also burned through 42 percent of its funding, according to S&P.
Kentucky’s co-op has been hailed as a success story, enrolling nearly 67,000 people, which is 82 percent of all private enrollees in the state’s Obamacare exchange.
It’s burn rate, however, was 53 percent, and it had the highest operating losses in the entire nation at $127 million. Jania Miller, Kentucky’s CEO, got $307,000 in compensation, nine times the average take-home pay for a worker there of $35,041.
The only state to show a net profit in 2014 was tiny Maine. Its CEO Kevin Lewis, was paid $264,000.
Although Maine is known for expensive summer homes, its year-round population earns only $39,481 per worker. That means Lewis earned nine times the average worker’s income.
The National Alliance of State Health co-op’s, the industry’s trade association, did not respond to multiple DCNF requests for comment. Nine of the association’s 20 board members were among the highest paid CEOs.