Insurance Startup Wants Re-Evaluation, Not Redo

Aug 8, 2013

When Commissioner of Financial Regulation Susan Donegan in May denied the Vermont Health CO-OP’s bid to become the state’s third health insurance company, she laid out two paths for the embattled organization: Appeal her decision to the Vermont Supreme Court, or begin afresh with a new application.

It chose neither.

The would-be insurance startup is instead asking Donegan to reopen the docket and reconsider an earlier decision in which she panned not only the CO-OP’s business model but the integrity of the management team that developed it.

While the statute governing Donegan’s authority doesn’t stipulate this third option, lawyers for the startup say there’s more than enough legal precedent to justify their request.

And while Donegan isn’t commenting on the specifics of the organization’s motion, filed with her office July 3, she said Wednesday that she isn’t dismissing it out of hand.

“I interpret my obligation to see whether or not it is a viable option,” Donegan said. “I’m going to give them the benefit of the doubt.”

The future of the insurer hinges on Donegan’s willingness to grant its newest motion. Neither the appeal nor the submission of a new application, even if successful, would play out in time to win the Vermont Health CO-OP a license to sell policies on the new health insurance exchange next year — sales on which its existence depends.

Donegan will first have to answer the threshold question of whether her department can “reopen” a decided matter. If she determines that it may, then she’ll have to decide whether the reconstituted application remedies the numerous shortcomings identified in her first ruling.

During testimony Wednesday before the House Health Care Committee in Winooski, Donegan highlighted the concerns that compelled an earlier ruling in which she characterized the Vermont Health CO-OP as a “recipe for a corporate governance disaster.”

“We identified what I consider to be some flaws at the top of the house,” Donegan said. “It included some conflicts of interest and a lack of what I considered to be adequate participation by the board.”

In her ruling, Donegan paid special attention to a contract between the insurance startup and a brokerage firm at which the president of its board, Mitchell Fleischer, is president. The commission-based contract with Fleischer’s firm also ran afoul of federal law, which will prohibit the use of commissions in the sale of policies on the exchange.

She also said the nine-person oversight board, as well as the management staff running day-to-day operations, lacked the industry know-how to ensure a successful launch.

Donegan said her confidence in the application was further undermined by rate proposals that would have been 15 percent higher on average than identical plans being sold by the state’s other two insurers, Blue Cross Blue Shield of Vermont and MVP.

“If you have the exact same plan and you have one that’s significantly higher without a track record of consumer service, I think that can put you at a competitive disadvantage,” Donegan told lawmakers.

She said the Vermont Health CO-OP’s indebtedness to the federal government — it is underwritten entirely by a $32 million government loan — also led to a heightened risk for insolvency, as the payment schedule would require it to generate even more money than is typically needed to sustain adequate reserves.

“Solvency is our greatest consumer protection,” Donegan said. “And so it felt to me that I would not be doing a service to Vermont by allowing a company to be licensed that was not up to our gold standards here in Vermont.”

The 30-page motion, written by Ritchie Berger, an attorney with Dinse, Knapp & McAndrew, details ways in which the Vermont Health CO-OP plans to address each of Donegan’s critiques and, in one notable area, tries to explain why she’s wrong.

As to corporate governance, Fleischer has resigned from the board, and the contract with his brokerage firm has been rewritten to comply with prohibitions on commissions (the new contract, according to the motion, has resulted in an $850,000 savings). The organization’s board has also been expanded to 15 members, and its six additions, the motion says, include people with a depth of insurance industry experience. The management staff also includes a new chief administrative officer, Clifford Frank, who spent 12 years as CEO of Vermont Managed Care.

On the issue of rates, the motion says the ones used by Donegan to evaluate the organization’s market prospects were preliminary and had yet to be adjusted for key trend data. New rate estimates that reflect the latest data, according to the motion, are on par with its would-be competitors.

In what is an otherwise conciliatory document, the organization chides Donegan for allowing its debt load to figure so heavily in her estimation of its future solvency.

The CO-OP is the fruit of a provision in the federal Affordable Care Act that calls for a “consumer operated and oriented plan” in every state. The organization won a federal designation as the CO-OP for Vermont in June 2012, paving the way for the $32 million federal loan — $27 million of which is being held aside for reserves — that would fund its startup.

Debt load, the motion argues, is “coincident to the financial structure of all health insurers financed by the CO-OP program.” The whole reason the loan was issued, the motion argues, is that it is “instrumental in achieving Congress’ goal of facilitating new entrants to highly concentrated health insurance markets by supplying sufficient capital to overcome high capital barriers to entry.”

In viewing the $27 million reserve as a fiscal lead weight, instead of as the solvency guarantee Congress had intended it to be, the motion argues, Donegan has undercut a fundamental vision of the Affordable Care Act.

“Despite sharing similar financial characteristics with the Vermont CO-OP, twenty of the twenty-four federally approved CO-OPs have received licenses in other states,” the motion says. “Vermont is the only state to have denied the CO-OP a license.”

According to the motion, Donegan had previously assured both the CO-OP and federal regulators that the federal loan would be viewed “on a level playing field with other types of solvency capitalization.”

Had the Centers for Medicare and Medicaid Services known in advance that in fact the loan would “actually prejudice licensure,” it probably would not have awarded the money, “and the CO-OP organizers and their supporters in the Vermont community would not have then devoted their time, resources and careers to establishing the CO-OP.”

“The Department’s acceptance of the CO-OP’s solvency loan as adequate to satisfy the reserve requirements ... while simultaneously denying licensure, in part, based upon the CO-OP’s reliance on the loan, establishes a standard that is impossible for any CO-OP to meet,” the motion says.

Asked Wednesday about whether her office will issue a ruling on the motion in time to have products ready for the Oct. 1 launch of the exchange, Donegan said she couldn’t comment. She did say, however, she is aware that time is an issue.

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