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OBLIMINATION by Scot Vorse
On July 22, a federal appeals court panel dealt a potentially serious blow to Obamacare by ruling that individuals in health exchanges run by the federal government in 36 states are not eligible for billions of dollars in tax credits. Since then, several facts have emerged which cast further doubt whether the intent of Obamacare was that subsidies should only be available for state-run Obamacare exchanges.
This week, additional evidence surfaced related to the development of HealthCare.gov, the Federal Exchange website. Specifically, the Department of Health and Human Services (“HHS”) original contract to develop the Obamacare website did not include any specific language related to tax credit functionality for consumers on the federal exchange, an admission which creates significant additional uncertainty on the Obama administration’s argument that the statement by the Obamacare “architect” that only state-run exchanges are eligible for tax credits was “a typo.”
CGI, the primary contractor for building HealthCare.gov, signed the original contract with HHS on September 30, 2011 for $56 million.According to the contract, the system was to include two main functions: (1) “a Federal Exchange (“FX”) that serves the needs of individuals within states where those states do not have their own state-run exchange” and (2) “the Data Services Hub, which provides common services and interfaces to federal agency information.”
The original contract statement of work contained only five references to “tax credits,” all of which related to the second function and administrative services. The statement of work did include one general statement that “As such, the FX may perform all the core functions as any state exchange would provide a subset of the services to augment the capabilities built by the state“.
However, most importantly, the original contract does not include any specific language related to technology which would allow consumers, who sign up using the Federal Exchange website, to determine their individual tax credit eligibility, and calculate and display comparative pricing options after any tax credits.
Therefore, it is only common sense that, if the law was intended to provide tax credits to the residents of states included in the Federal Exchange, the HealthCare.gov original design contract would have included functionality to provide tax credits to individuals in these states.
Shortly after Obamacare was enacted, HHS provided guidance documents to states regarding tax credit technology and systems – On November 3, 2010, HHS produced a document titled Guidance for Exchange and Medicaid Information Technology (IT) Systems. The stated purpose of the document was to “assist states as they design, develop, implement, and operate technology and systems projects in support of the Affordable Care Act relating to the establishment and operation of Health Insurance Exchanges as well as coverage expansions and improvements under Medicaid and the Children’s Health Insurance Program (CHIP), and premium tax credits and cost-sharing reductions under the Affordable Care Act.” By stating in the introductory paragraph that “IT systems should be simple and seamless in identifying people who qualify for tax credits”, HHS made it clear that tax credits for consumers was one of its highest priorities for Exchanges technology.
The 2010 HHS document emphasized a “Collaborative IT Development Approach” between HHS and “states responsible for implementation of the exchanges” – The HHS guidance document states “Improving the availability of high-quality health care coverage to families and individuals will be achieved through a collaborative, intensive partnership between Centers for Medicare & Medicaid Services (“CMS”), OCIIO, and states responsible for implementation of the Exchanges.” Therefore, HHS was not only aware of but also closely managed the states’ technological efforts regarding tax credits.
Between November 2010 and September 30, 2011, HHS distributed numerous otherdocuments highlighting specific required consumer tax credit functionality for “Exchanges” – In addition to Guidance for Exchange and Medicaid IT Systems, HHS distributed numerous other guidance documents for states which included specific tax credit functionality requirements. These documents included Exchange Reference Architecture: Foundation Guidance and Financial Management Blueprint – Business Architecture Supplement.
For example, the eighth version of the Financial Management Blueprint guidance document dated August 9, 2011 stated “The APTC will assist qualifying Individuals participating in the Exchange with premium payment amounts while the CSR will control and limit the cost burden for out-of-pocket spending for qualifying Individuals. The Exchange will determine the APTC and/or CSR of the qualifying Individual. The Exchange will record and submit this information to CMS so that payments can be made on behalf of the qualifying Individual to the Issuer. CMS will also provide the Exchange with information regarding the payments made.” The document also highlights “The processes to be performed by States are mandatory unless noted as optional.”
It is important to note that there were several drafts of each of these documents distributed prior to September 30, 2011.
Prior to September 30, 2011, State-Operated Exchange Contracts Included the “Mandatory” Consumer Tax Credit Functionality – In early 2012, most states that established their own exchanges either already had a contract in place or, at a minimum, had issued a Request for Proposal (“RFP”) that required the contractor to deliver a system that included consumer tax credit eligibility and calculating and displaying comparative pricing options capabilities. According to the statereforum.org web site, CGI was a contractor on some of the state-operated exchanges and therefore should have had knowledge of the state-based exchanges tax credit functionality.
A senior HHS executive stated that he expects only a “small handful” of states will not set up their own exchange – On July 15, 2011, around the time the Federal Exchange contract and work statement were being drafted, Steven Larsen, a Director in the Office of Consumer Information and Insurance Oversight at HHS, was asked at the Annual National Governors meeting how many states he believed would not establish an exchange. Larsen said “I don’t think it is a decent number. I don’t know what the number is . . . I am hoping and I expect that that will change and at the end of the day sure there may be I hope a small handful of states that will ask us to do everything.” See Saturday July 16 – Session 2, Q + A, minute 33.
As we know, 36of the 50 states did not establish an exchange.
The Federal Exchange contract did not contain any consumer tax credit functionality language – The original contract with CGI was signed on September 30, 2011 which was several months after “mandatory” Exchange guidelines had been established by HHS. Although HHS had been closely “collaborating” for months with the states, the Federal Exchange contract did not have the same consumer tax credit functionality language that was included in state contracts and RFP’s.
The original contract was to deliver a completed fully operating system – The agreement is clear that this was not an initial phase for the project. CGI was to provide a finished product and as the contract stated “These requirements are for systems development and delivery of a federally operated Federal Exchange.”
The modified HHS website contract has tax credit functionality for the Federal Exchange – A modified contract was signed on August 28, 2012, only a year prior to the launch of Obamacare. The modified contract had only one new material addition. This three page addition made 11 additional references to “tax credits” and specifically added a consumer “decision engine” or tool related to tax credit eligibility, or calculating and displaying comparative pricing options after tax credits for people signing up using the federal exchange. This language was consistent with the type and level of detail included in the state contracts and RFP’s.
Specifically, the modified contract work statement states: “The Contractor shall develop and create shared technologies for use by Centers for Medicare & Medicaid Services CMS to leverage a Health Insurance Exchange Enterprise Rating and Decision Engine (ERDE). An ERDE will facilitate consumers and beneficiaries to compare, select, and enroll in health and insurance plans by dynamically and virtually computing options, alternatives, person-based scenarios that convert knowledge of the situation into user decision support functionality.”
Functionalities specifically required of ERDE include:
- “Eligibility determinations for Exchange participation, premium tax credits, and cost sharing reductions”
- “Key functions within this functional area include: Eligibility determinations for Premium tax credits”
- “Exchange Website and Premium Tax Credit and Cost-sharing Reduction Calculator”
- “In addition, each Exchange website will need to provide access to an electronic calculator that allows individuals to view a preliminary actual cost of their coverage once premium tax credits have been applied to their premiums, as well as the impact of cost-sharing reductions, if they are eligible.”
- “Additionally, ERDE shall be capable of displaying Premium Tax credits and lower cost sharing information for those beneficiaries qualifying for additional help.”
- “Calculation Module: Calculation module will complete complex insurance calculations. For example, the Calculation module will account for Premium Tax credit of an individual, Family, or Small Business/Group and provide accurate information on Premium, Deductible, and Out-of-pocket costs.”
GAO Report: “increased cost” resulted from “finalized regulations” – A July 2014 Government Accountability Office (“GAO”) report regarding Healthcare.gov stated the modified contract “Obligates an additional $35.8 million, primarily to provide for new and increased system requirements resulting from program office decisions and finalized regulations.” The report added:
“In April 2013, CMS added almost $28 million to the FFM task order to cover work that that was needed because of the increasingly complex requirements, such as additional requirements to verify income for eligibility determination purposes. The FFM contractor said some of these costs resulted from CMS’s decisions to start product development before regulations and requirements were finalized, and then to change the FFM design as the project was ongoing, which delayed and disrupted the contractor’s work and required them to perform rework. In addition, CMS decisions that appeared to be final were reopened, requiring work that had been completed by the contractor to be modified to account for the new direction. This included changes to various templates used in the plan management module and the application used by insurance issuers, as well as on-going changes to the user interface in the eligibility and enrollment module. According to the FFM contractor, CMS changed the design of the user interface to match another part of the system after months of work had been completed, resulting in additional costs and delays.”
Adding tax credit functionality to the website contract, only after the regulations had been finalized in 2012, runs counter to the Obama administration narrative that Congress always intended to allow tax credits to be provided in both state and federally run exchanges.
This change to the contract was material – The change was very significant as evidenced by the approximately $36 million, or 65% increase, over the original contract price tag for this modification. The fact that such a significant change occurred so close to the rollout certainly contributed to Obamacare’s disastrous launch. Rich Weinstein, source of the originally surfaced Jonathan Gruber video and contributor to Colossus of Rhodey, notes: “This is no speak-o. The fact that the module to determine eligibility and calculate subsidies on the Federal Exchange was added to the CGI contract after the draft regulations were written, and at such enormous cost, is another clear indication that the language of the Affordable Care Act was written as intended and that the Administration knew it. Subsidies were only meant for State based exchanges.”
HHS Postponed Some Capabilities to Meet Deadlines – According to the July GAO report, “By March 2013, CMS recognized the need to extend the task orders’ periods of performance in order to allow more time for development. CMS contract documents from that time estimated that only 65 percent of the Federal Facilitated Marketplace (“FFM”) and 75 percent of the data hub would be ready by September 2013, when development was scheduled to be completed. Recognizing that neither the FFM nor the data hub would function as originally intended by the beginning of the initial enrollment period, CMS made trade-offs in an attempt to provide necessary system functions by the October 1, 2013, deadline. Specifically, CMS prioritized the elements of the system needed for the launch, such as the FFM eligibility and enrollment module, and postponed the financial module, which would not be needed until post enrollment.”
The last minute addition by HHS raises an interesting question: Why would HHS and Obamacare supporters claim that the president’s health care law contained a “typo” and the intent was always that all states are eligible for subsidies if the HHS website was originally designed to do the exact opposite?
Oblimination – hoping for change and the reversal of Obama’s failed policies.
Scot K. Vorse is a retired investment banker having spent much of his career at Goldman, Sachs & Co. and is a graduate of Harvard Business School. Mr. Vorse is currently the President of Vorsetrade, a software company based on patent pending technology which uses barter logic and technology used by government entities to reallocate excess assets.