New Vt health insurer is denied license to sell
By Peter Hirschfeld
Vermont Press Bureau | May 23,2013
MONTPELIER — Evidence of questionable fiscal management and conflicts of interest have dealt a severe blow to a health insurance startup that saw its bid to sell policies in Vermont quashed by state regulators Wednesday.
The decision by the Department of Financial Regulation casts into doubt not only the fate of the much-ballyhooed Vermont Health CO-OP but also the repayment of nearly $6 million in government loans that funded its creation.
Commissioner of Financial Regulation Susan Donegan said structural flaws in the relationship between the nonprofit’s board of directors and executive staff constituted a “recipe for a corporate governance disaster.” The awarding of a $500,000 contract to a brokerage company of which a board member is president, Donegan said, indicated those flaws had already begun to spawn dubious business practices.
Corporate governance, regulators determined, wasn’t the Vermont Health CO-OP’s only hurdle to solvency.
Donegan said the organization’s proposal would have resulted in premiums 15 percent higher on average than the policies against which it would have been competing. She said the cost projections undermined confidence in the insurer’s claim that it would enroll nearly 20,000 members by the end of 2014.
Donegan said the department’s concerns were exacerbated by the lack of insurance industry experience among board members and management.
“And running an insurance company is not like running any other kind of company,” Donegan said Wednesday. “Our greatest consumer protection we can offer is solvency, and if you don’t have board members and management that are keeping checks on each other, then it exacerbates the solvency risk.”
Christine Oliver, chief executive officer of the Vermont Health CO-OP, said the department’s 32-page ruling contains inaccuracies that “we’ll want to address, because they’re very serious.”
Recent data obtained by her organization, Oliver said, has allowed it to change some of the variables that resulted in the above-market cost projections for the insurance products it wants to sell.
“We spent all day Monday with our actuary, and we’re really coming to the point where we think we’ll be right in line with other carriers,” Oliver said.
The announcement Wednesday marks a sudden fall from grace for an organization that as recently as October was winning praise from top government officials. Funded by a $32.8 million loan from the U.S. Department of Health and Human Services — of which about $27 million is being held back for reserves — the organization is the fruit of a provision in the federal Affordable Care Act that called for a nonprofit, member-owned health insurance company in every state.
Vermont’s “consumer operated and oriented plan” — the term of art coined by the health care law that some call Obamacare — began when a group of health care industry veterans got together to discuss forming one in 2011. The organization won a federal designation as the CO-OP for Vermont in June 2012.
At a grand opening for its bricks-and-mortar headquarters in South Burlington on Oct. 23, Gov. Peter Shumlin said it’s “innovators like this CO-OP that are going to give Vermont the ability to contain costs in the health care system.”
“What a cooperative like this would do is spend our health care dollars on health care, not on out-of-state insurance company profits, recycling those dollars in the system, so when businesses and individuals … buy health insurance, every dollar stays in Vermont and helps us design a delivery system that costs less for better outcomes,” Shumlin said.
Donegan, however, said its board has yet to prove its ability to provide adequate financial oversight.
The Vermont Health CO-OP was to have competed in the new online “exchange,” the federally mandated insurance marketplace set to go online in January 2014. In an effort to win away market share from its prospective competitors — Blue Cross Blue Shield and MVP — management last year awarded a contract to the Fleischer Jacobs Group. The contract stipulated payments of up to $500,000 for marketing, promotion and sales of insurance products that would be offered in the exchange.
But the contract raised several red flags, according to Donegan. The president of the firm, Mitchell Fleischer, is also president of the nonprofit insurer’s board, a conflict of interest that should have been investigated by the five-person board before it authorized the deal. But not only did the board not vet the proposal, Donegan said Wednesday, other board members appear not to have known of the contract’s existence.
“We believe the board did not have sufficient knowledge of this contract and did not know about it, and obviously that’s a failure for adequate reporting by management to the board,” Donegan said.
Had the board been aware of the contract, Donegan said, members likely “would have put it through the (request for proposals) process, which did not happen.” Donegan said her department’s findings were based in part on interviews with board members, as well as a review of minutes from meetings.
“They should have known about the contract … isolated the contract or done something to acknowledge the potential problem, and put the kibosh on the contract or acknowledged they understood its terms and had been informed about it,” Donegan said.
Oliver said she can’t remember the particulars of the meeting at which the contract was discussed, but she said it did come up and that it was vetted by the organization’s lawyer.
“We were comfortable we were avoiding the conflict potential,” Oliver said.
As to some board members’ claim that they knew nothing about the contract, Oliver said, “I guess they’ll have to speak for themselves.”
“My understanding was they knew,” she said.
That Fleischer hadn’t disclosed the potential conflict to the rest of the board, according to Donegan, was of particular concern, as was his annual salary as board president: $126,000. That’s significantly higher than the $28,900 earned by the board president at Blue Cross Blue Shield of Vermont, and the $48,750 paid to the president of the board at MVP — both of which oversee far larger operations.
Oliver said the high salary owes to Fleischer’s extensive involvement in the day-to-day operations of an organization he founded.
Donegan said the marketing and sales contract also provided for commissions to brokers at the Fleischer Jacobs Group that sold the insurer’s products to clients, in violation of state and federal law.
“You can’t pay commissions under Vermont law and under the (Affordable Care Act),” Donegan said.
On that count, Oliver said, she agreed with Donegan.
“And we will amend that contract,” she said.
The organization can appeal Donegan’s decision, and Oliver said it is considering its options. The nonprofit could also file a new application.
“But whatever entity was applying for a license would have to look very different from the one we just denied,” Donegan said. “And certainly there is no time left in the process for them to qualify to be (in the) exchange by January of 2014.”
That would delay for at least a year sales of its policies — the lone source of revenue for an organization that has yet to generate any income. Asked about prospects for repayment of the federal loan, Oliver said they hinge on the entity’s ability to secure a license to sell insurance.
“Where we are right now, there’s no money in,” Oliver said.