Vermont's insurance commissioner denied a license to a new statewide Obamacare health care cooperative because it is "fatally flawed" and likely to be insolvent within three years, The Washington Examiner has learned.

Commissioner Susan L. Donegan of the Vermont Department of Financial Regulation also criticized Vermont Health CO-OP's business practices, especially an "illegal" contract that would generate as much as $500,000 in income for a company owned by its president.

Donegan further criticized what she described as the co-op's "deceptive" consumer advertising.

Vermont Health CO-OP is one of 24 non-profit health-care cooperatives funded under a $2 billion provision of the Patient Protection and Affordable Care Act, or Obamacare. The co-ops are intended to compete with private sector health insurance companies.

Vermont Health CO-OP received $33 million from the U.S. Department of Health and Human Services. The funds are officially considered a loan to be repaid under generous terms.

The Obamacare co-ops must be approved by state officials before they can sell health insurance policies to residents.

Donegan said in a May 22 decision that Vermont Health CO-OP would not be competitive with commercial insurers because its premiums would be 17 percent higher for the same policies offered by competitors.

She predicted the health co-op would lose money each year, attract too few customers and face insolvency in only three years.

The Vermont report is the first time a state regulator has warned of an Obamacare co-op business plan being likely to fail. The Vermont co-op was to begin selling policies on Oct.1, 2013.

Last year, the White House Office of Management and Budget predicted about four in 10 of the Obamacare co-ops would fail.

The Vermont case is also the first time a state insurance department opened up the books on an Obamacare co-op. The HHS has never made public how it chooses who gets awards under the $2 billion program. Department officials have also refused to respond to multiple congressional inquiries about the program.

The Washington Examiner's review of the 24 co-ops found multiple cases of co-op officers who had previously filed for bankruptcy, created fictitious resumes, faced federal sanctions, delivered poor consumer services, and compiled lengthy records of failed start-up ventures.

Donegan singled out Vermont CO-OP president Mitchell Fleischer for arranging a sole source, non-competitive sweetheart contract with his own company, Fleischer Jacobs & Associates, valued at up to $500,000.

The CO-OP was paying Fleischer's firm least $26,786 per month "for a potential total of more than $5000,000 before even beginning insurance operations," the Commissioner complained. She said the contract "is illegal and creates a conflict for Mr. Fleisher."

The Vermont Commissioner also singled out Fleischer for his $126,000 salary, noting it was four times the compensation of his counterpart at Blue Cross Blue Shield of Vermont. Health care activists have long criticized the high salaries of private insurers.

Donegan said the salary issue highlighted the co-op's poor governance. "The CO-OP's compensation practices exhibit a lack of oversight by the board of directors and an outsized influence by the president of the board," she said.

The co-op's board only met once after HHS awarded the $33 million and conducted no real business.

Earlier this year when Vermont Health CO-OP began advertising, Donegan's office ordered the organization to "stop all promotion and advertising that could be misleading to Vermonter."

Another factor in Donegan's conclusion that the nonprofit was doomed to fail, was its "unjustifiably high target enrollment assumptions and proposed rates."

She also criticized the co-op's price/benefit offerings, saying "CO-OP plans would consistently offer consumers fewer benefits than competitors for a similar price," and that projected enrollment "will be significantly lower than the CO-OPs forecasts," she said.

"Within three years of beginning of operations, there is a high risk that the CO-OP would be insolvent," Donegan said. "The CO-OP's significant liabilities and high proposed rates will make it extremely difficult for the CO-OP to remain insolvent."

John Morrison, president of National Association of State Health Care Organizations, a trade group, said the Vermont decision "is certainly disappointing news."

Morrison said "the decision underscores the high level of scrutiny all health insurance co-ops are currently receiving" and noted that co-ops in 17 other states have been licensed by their jurisdictions' insurance authorities.

Christine Oliver, Vermont Health CO-OP's chief executive officer, said the organization would appeal Donegan's decision. "To say we were blindsided by this decision is an understatement," she told the Associated Press.

Richard Pollock is a member of The Washington Examiner Watchdog investigative reporting team. He can be reached at