Co-op failure shows laxity invites wasting tax monies

Legal but ethically questionable transactions attached to the failure of a health insurance nonprofit in Louisiana suggest state law should change to reduce the future chances of wastage of taxpayer dollars.

Last month, the Louisiana Health Cooperative announced it would cease operations at the end of the year. It is one of 23 state-based entities created under the auspices of the Patient Protection and Affordable Care Act (“Obamacare”) by borrowing taxpayer dollars to provide health insurance now required by law. Only one is (barely) making money; most are losing considerable sums and the biggest loser already has closed, with many more expected to join it and Louisiana’s in the future.

Of course, these projects were doomed from the start, undone by the same flawed ideology behind Obamacare. Recognize that Obamacare is at heart a wealth redistribution scheme, designed to provide low- or no-cost health insurance to a segment of the population while the vast majority pay for the subsidization through higher taxes and also suffer higher insurance rates and deductibles. It secondarily is an enrichment scheme for health insurers and providers, by artificially creating business for these. Only incidentally does it affect overall health outcomes – and more likely in a negative rather than positive way because most insurance offered under Obamacare has been from Medicaid, not the commercial market.

As Obamacare continues to push up premiums beyond what would be expected from normal medical inflation due to a supply squeeze on providers and from regulatory costs, it has given larger insurers an advantage in cost control – putting at disadvantage precisely organizations like the co-ops while industry consolidation puts more upward pressure on premiums and deductibles. But a hallmark of Obamacare is to ignore reality to favor ideology, and its wish that creating these co-ops as mechanisms to increase competition to hold down prices remains an article of unfulfilled faith.

So the $56 million taxpayers tossed in for the Louisiana version, and likely the billions spent on other states’, never may be recovered. Yet a handful made out in the state: a few individuals connected to the organization who served as its officers also simultaneously having their employers awarded generous contracts to perform certain services for the entity. After one individual affiliated with a firm awarded a consultant contract served as its chief executive officer (who some years before had been forced to pay a settlement for insider stock trading), his successor was state Rep. Greg Cromer, who drew a 2013 and 2014 salary of over $100,000. All in all, at least $3.6 million seems to have went to such individuals who had an existing fiduciary duty with or policy-making position over the organization.

However, that is not a violation of state law, where only disclosure is required. Board members did disclose their consultant relationships, and Cromer did report his position and $100,000+ salary in his personal financial disclosure forms mandated for legislators. (Current Louisiana State University Board of Supervisors member, former state legislator, and New Orleans city official at the time of her service Ann Duplessis also was a director, but while drawing no direct compensation, she illegally failed to report her relationship to the group.) Still, when taxpayer dollars are involved in their revenues regardless whether federal, state, or local in origin, caution dictates that officers and directors of these have no relationship with contracting parties or government.

That’s because “non-profits” are that in spirit only. For one thing, they are allowed to have a “profit” as long as the excess of revenues over expenditures goes to certain uses. For another, no set restrictions exist on making expenditures, only that the generally and reasonably serve the purpose of the organization. So, for example, employees can enjoy generous salaries and benefits that translate into high administrative expenses, including contractual arrangements, without repercussions.

The Louisiana Health Cooperative shows just how living off the taxpayer may provide insufficient incentives to hold down costs. Its 2013 Internal Revenue Service Form 990 (the latest available; apparently contravening the law it did not meet its May 15 deadline to submit its year 2014 form) shows its expenses as almost 15 times revenues, with most of that expense going to contracts, about half of that amount connected to a board member and/or officer.

This is not to say dishonesty occurred in its dealing with the loan proceeds. It is to say that the decision-making process using taxpayer dollars may have been warped in favor of certain, even qualified, interests over others because of these affiliations, and that a lack of incentives for prudence in spending may have affected the patterns of the organization’s expenditures, with these leading to its demise and waste of taxpayer money. In fact, the very presence of such funding with little connection to the principals' own fortunes may have encouraged the starting up such an enterprise of such dubious chances of success.

In the interest of fairness and honesty and to compel best fiduciary performance, Louisiana law should include this stipulation regarding consultancy contracts for nonprofits, including a prohibition on former officeholders who held policy control over an organization spanning two years after their service in these offices from participation. It’s a reasonable restriction to increase confidence that tax dollars, regardless of source and form, get spent wisely.