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The factors that led to once-popular insurer Health Republic’s fall

Members of the New York State Senate Standing

Members of the New York State Senate Standing Committee on Insurance during a fact finding hearing on the demise of the federally backed health insurance company Health Republic Insurance of New York. Jan. 6, 2016, in Albany, N.Y.

Health Republic, the nonprofit federally backed health insurance company that went belly up in November, was doomed to failure from the outset because its prices were too low and the federal government changed the amount of money promised, industry experts and officials say.

“We felt the collapse was too predictable, the state reacted too late and the [financial] hole was too deep,” said Jeffrey Gold, a senior vice president at the Healthcare Association of New York State, which represents medical networks and hospitals statewide. He was one of several dozen participants at a roundtable held by state Sens. James Seward (R-Milford) and Kemp Hannon (R-Garden City) earlier this month in Albany to discuss the insurer’s failure.

On Sept. 25, the state Department of Financial Services announced that Health Republic — the second most popular insurer on the exchange statewide in 2015 — was going out of business by the end of the year because of financial problems. But on Oct. 30, the state agency said it was shutting down Health Republic by the end of November because its finances were “substantially worse than the company previously reported.” As of June 2015, it had reported about $130 million in losses, according to state regulatory filings.

The announcement left about 215,000 New Yorkers — including 16,000 Long Islanders — frantically looking for new coverage, and doctors, hospitals and insurance brokers wondering whether they would ever be paid about $200 million they are owed. It also meant that taxpayers are out about $265 million that Health Republic received in loans from the federal government.

The state said it was launching an investigation into “the inaccurate representations Health Republic made to the state about its financial condition.” And on Dec. 7, Rep. Lee Zeldin (R-Shirley) sent a letter to U.S. Attorney General Loretta Lynch calling for “a thorough criminal investigation” to “determine what, if any, illegal actions” led to the company’s failure. DFS has declined to comment on its investigation, and the Justice Department has not commented on Zeldin’s request.

According to experts, Health Republic’s failure can be attributed to fundamental miscalculations by the company in setting prices too low and attracting many more customers than it could easily handle, changes in what the federal government would pay and, as one report concludes, “an apparent breakdown in state oversight of the health insurance industry.”

“Health Republic’s growing financial troubles should have been no surprise to insurance regulators,” said the Dec. 22 report written by Bill Hammond for the Empire Center for Public Policy, an Albany-based nonpartisan think tank. “The company’s filings to DFS showed steep operating losses, mounting debt, unanticipated costs and heavy reliance on a federal risk-management subsidy that failed to materialize.”

Participants at the Senate roundtable agreed with that assessment, in particular faulting the department for the prior approval process in which DFS sets the rates insurers can charge for premiums. Historically, that has meant the agency, whose job it is to oversee the solvency and prudent practices of insurance companies, has lowered rates requested by insurers — even in the case of Health Republic, which was losing money. Paul Macielak, president of the New York Health Plan Association, which represents health insurers statewide, called this a “failed state policy.”

But Troy Oechsner, special assistant to the superintendent for DFS, pushed back, citing the agency’s quick response once it realized the depth of the insurer’s dire financial straits. And he — like the company and others at the time of its closing — attributed much of Health Republic’s financial problems to federal money that it banked on and did not receive.

Health Republic was one of 23 nonprofit Consumer Operated and Oriented Plans, or CO-OPs, nationwide created under the Affordable Care Act to increase competition and offer low-cost health care. Twelve of these CO-OPs have gone out of business since their debut on federal or state exchanges in January 2014.

From the beginning, the program ran into headwinds. The Affordable Care Act provided $6 billion in initial funding but Congress, in a series of cuts, reduced that to $2.4 billion.

That decrease limited the number of nonprofits in the program and also the ability of the government to support CO-OPs through early cash flow challenges, according to a report released Dec. 10 by the Commonwealth Fund, a health research nonprofit based in New York.

The federal Centers for Medicare & Medicaid Services gave the CO-OPs startup loans and solvency loans, which were provided to make sure they had enough money to cover insurance payouts. (Under New York law, not-for-profit insurers are required to maintain reserves that equal 12.5 percent of premiums.)

Health Republic, founded by the Freelancer’s Union, a group of independent workers that offered health insurance to its members, received the largest of these: a startup loan of about $24 million, according to the company’s March 2015 financial statements, plus solvency loans of $241 million. The loans were to be repaid.

Faced with relatively short deadlines to file their rates and plans with the states, many CO-OPs outsourced their networks of doctors and hospitals and claims processing, according to the Commonwealth Fund report. Health Republic leased its network of doctors and hospitals from MagnaCare, which provided broad network coverage but little savings to the company. And when the company debuted, it offered very low premiums for 2014 coverage. Health Republic’s benchmark silver plan was the lowest in seven of eight regions statewide. Fidelis Care was the only company offering lower premiums on Long Island.

From the outset, industry insiders said they were concerned that premiums were too low and could push others out of the market.

UnitedHealth Group chief executive Stephen Hemsley said in a earnings call with analysts in April 2014 that the new entrants in the New York market were “pricing well below cost and [at] what we would view as unsustainable pricing levels.”

With its broad network and low prices, Health Republic became in many ways a victim of its own success.

A July 2015 report by the Office of Inspector General in the U.S. Department of Health and Human Services found that while more than half of the CO-OPs did not reach their enrollment projections, Health Republic had a 504 percent higher enrollment than what it had projected, with more than 155,000 enrollees in its first year of operation — more than 2.5 times more than the CO-OP with the next highest enrollment.

Not only did that initially overwhelm the company, which scrambled to ramp up its customer service, but it also had to put more capital reserves aside, meaning it had less cash on hand. The Commonwealth Fund report called this the “Goldilocks problem” for the CO-OPs, which, as new entrants, had no actuarial experience in their markets: Price too high and you risk not attracting members. Price too low and you risk significant losses if revenues from premiums can’t cover your costs.

The company’s initial financial statements for 2014 show that it generated close to $529 million in income from premiums with an additional $68 million in other revenues and adjustments.

But claims expenses were more than $556 million and administrative costs were $76.7 million. Initially the company reported it was $35 million in the hole but that was ultimately amended to more than $77.5 million in losses for 2014. That was significantly higher than the $5 million loss the company had initially projected, according to the inspector general’s report. By June 2015, the company was reporting another $52.6 million in losses for the year, according to state regulatory filings.

Anticipating that insurers might have problems initially setting prices for premiums on the exchange, the ACA set up risk protection programs known as the “three R’s”: reinsurance, risk adjustment and risk corridors. But two of the three, risk adjustment and risk corridors, proved to be of little help to Health Republic. In fact, the risk corridors program signaled its death knell.

Under risk adjustment, those insurers that enrolled healthy customers had to transfer some funds to those with a larger share of high-risk enrollees. With a healthier customer base, Health Republic had to pay $80 million into this program in 2014, according to CMS.

The risk corridor program, a mechanism through which CMS shifts money from profitable plans to struggling ones, proved to be the most problematic for Health Republic — as for other CO-OPs. When it became evident that more CO-OPs were running deficits than surpluses, Congress, led by Republican presidential candidate Sen. Marco Rubio of Florida, in December 2014, barred the agency from using other intragency funds to backfill the program. That meant it had to be “budget neutral,” or could not use federal dollars.

Because there were more losses than surpluses, CO-OPs only got 12.6 percent of risk corridor payments they had anticipated for 2014. That meant Health Republic received only $18.8 million of the $149 million that it sought from the risk corridor program, according to a November 2015 CMS report.

“This pretty much sunk Health Republic,” said John Sardelis, associate chair of Health Administration at Saint Joseph’s College in Patchogue. “Health Republic’s premiums may have been too low for the people who signed up, thereby encountering an underwriting loss, and since it was still less than the overall average, it required a substantial contribution to the risk adjustment fund. The risk corridor designed to mitigate losses was cut drastically and was the final fiscal blow that sunk Health Republic.”

Yet despite Health Republic’s ongoing and escalating financial woes, the state cut Health Republic’s requested premium increases for both 2015 and 2016. For 2015, the company asked for a 15.4 percent hike and was granted a 13 percent increase in the individual and family market. For 2016 — which ended abruptly in September — the company had requested a 14.4 percent hike and received 14 percent.

Hammond said in an interview that while the state agency’s actions were not the primary cause of Health Republic’s demise, DFS bears some responsibility.

“I am not blaming DFS for Health Republic’s failure,” he said. “I am blaming them for not recognizing how serious the situation was for Health Republic earlier in the process.”

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