Crony capitalism at the heart of Obamacare

Jeffrey Anderson at the Weekly Standard reports on an Obamacare related scandal at Kathleen Seblius’ Department of HHS. According to Anderson’s source, HHS will use a subsidiary of a private health care company to build and police the insurance exchanges at the heart of Obamacare. And that private health care company will be competing for business in these very exchanges.

Moreover, the person who ran the government entity that awarded the contract to the subsidiary has since accepted a position with a different subsidiary of the same parent company. And, in an attempt to obscure this unseemly contract from public view until after the presidential election, HHS allegedly encouraged the company to hide the transaction from the Securities and Exchange Commission.

Here are the ugly detaiils, as reported by Anderson:

In January, HHS awarded Quality Software Services, Inc. (QSSI) what the Hill describes as “a large contract to build a federal data services hub to help run the complex federal health insurance exchange.” At that time, the director of Obamacare’s newly established Center for Consumer Information and Insurance Oversight (CCIIO) — which the Hill describes as “the office tasked with crafting rules for the national exchange” — was Steve Larsen. Larsen had been the insurance commissioner for Maryland when Obama’s HHS secretary, Kathleen Sebelius, was the insurance commissioner for Kansas, and the two are reportedly close. The CCIIO awarded the Obamacare exchange contract to QSSI while Larsen was the CCIIO’s director, and he played a central role in planning the construction of the exchanges — although it’s not known whether he made the decision to award the contract to QSSI or not.

Under the contract that it signed with HHS, QSSI’s power would be substantial — as QSSI would shape, run, and affect companies’ ability to compete to sell insurance through Obamacare’s federal exchanges. The Hill writes, “A draft statement of work for the contract awarded to QSSI states the contractor should provide services necessary to acquire, certify and decertify health plans offered on a federal exchange.” Moreover, “It stipulates the contractor should monitor agreements with health plans, ensure compliance with federal standards and” — somewhat strikingly — “take corrective action when necessary.”

QSSI, apparently realizing what a valuable asset it had in the contract, started shopping itself around. Meanwhile, Larsen left the CCIIO and took a highly paid position with Optum, a subsidiary of UnitedHealth Group, in June. Sometime this summer, UnitedHealth Group bought QSSI.

The Hill writes that the “quiet nature of the transaction, which was not disclosed to the Securities and Exchange Commission (SEC), has fueled suspicion among industry insiders that UnitedHealth Group may be gaining an advantage for its subsidiary, UnitedHealthcare.” The Hill adds, “One critic familiar with the business rivalries of the insurance industry compared UnitedHealth Group’s purchase of QSSI to the New York Yankees hiring the American League’s umpires.” In other words, UnitedHealth Group, through QSSI, would be able to police the same field in which it would be a competitor.

In addition, QSSI would have access to valuable data. The Obama administration likes to compare Obamacare’s prospective insurance exchanges to websites like Travelocity and Expedia, but the comparison is inapt. Travelocity and Expedia don’t regulate airlines, stipulate the length of runways, or transfer money from younger passengers to older ones. In truth, Obamacare’s federal exchanges will be an extremely complicated technical endeavor to set up and run, as (among other things) they would involve compiling massive amounts of risk-selection data on individual Americans. In addition to raising extraordinary privacy concerns, the data involved would be like gold to insurers. To quote my source, “If you can capture this data, you’re going to win.”

When HHS became aware of UnitedHealth Group’s purchase of QSSI, it couldn’t realistically void the contract, because the Obama administration was already too far behind in setting up the federal exchanges. To void the contract would mean delaying the exchanges’ implementation by many more months. The Hill writes: “[G]iven how late the administration has been in issuing rules for the exchanges, it would be extremely difficult to void a key contract, find another company to perform the work and still meet the 2014 deadline.”

Unwilling to void the contract, HHS instead went to work on setting up a firewall designed to block United-Health Group from gaining access to QSSI’s data, presumably out of a desire to keep UnitedHealth Group from gaining an unfair advantage. Then, likely in concert with the White House — and to the chagrin of many HHS employees — Sebelius and other senior HHS officials decided that word could too easily get out about the firewall project. If it did, it would alert people to UnitedHealth Group’s having gained a potentially huge competitive advantage — a political concern for the White House on the cusp of the election, especially in light of the crony capitalism charges that have plagued this administration. Therefore, HHS, under Sebelius’s leadership, suspended work on the firewall and told United-Health Group not to alert the SEC to the purchase — as UnitedHealth Group was legally required to do within four days of the transaction — until after the election.

As Anderson notes, “the idea of funneling about $1 trillion (according to the Congressional Budget Office) over Obamacare’s real first dozen years (2014-25) from American taxpayers, through Washington, to private insurance companies was always problematic.” But on top of that, the administration will use a subsidiary of one of those insurance companies as an architect and policeman of the exchanges through which this taxpayer money will flow; has enabled the first head of the CCIIO to profit personally from the venture; and may have told a private company to violate federal securities law in order to aid Obama’s reelection prospects.

Not bad for government work.

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