The board of directors of New Mexico Health Connections resigned last year in an attempt to get the state to take control of what board members said was an insolvent organization, according to a document obtained by the Journal.
“It is our understanding that, with our resignations, as superintendent you will take immediate control of (Health Connections) and act in the best interest of policyholders,” the board wrote in a July 31 letter to Superintendent of Insurance John G. Franchini.
Under New Mexico law, insurers that pass a certain threshold of financial distress are taken over by the state in a process called “mandatory control.” But the state did not assume mandatory control of Health Connections after the resignation of its board last year, Franchini confirmed Tuesday.
In December, his office approved a $10 million sale of Health Connections’ commercial business to one of its vendors, the Arlington, Va.-based Evolent Health. The deal gave rise to a new for-profit insurer, True Health New Mexico. The 18,000 members insured under the Affordable Care Act remained with Health Connections, albeit with a new board and management team.
The seven board directors listed on the resignation letter were Diane Denish, New Mexico lieutenant governor under Gov. Bill Richardson; Ken Carson, former president of what is now MyBank in Belen; John Ulrich, president of Ulrich Consulting Group; Anthony Zancanella, executive director of Opera Southwest; Jane Hajovsky, owner of the consulting company Perfect Solution; Simon Goldfine, general manager of Sierra Peaks Corp.; and James Delgado, a family medicine physician.
“We all wanted the company to succeed, but we were effectively insolvent in June,” Denish said in an interview Tuesday. “Our understanding was that resigning would begin the process of putting the company into receivership. We thought that was the best thing for consumers under the circumstances.”
The other directors either did not respond to a request for comment or declined to speak on the record. After its resignation, a new board was appointed by Martin Hickey, who was then the CEO of Health Connections until this year; he is now the head of True Health.
Franchini said he had not seized any accounts or property owned by Health Connections, though his spokeswoman also noted that such proceedings are confidential. He said Health Connections, one of the last health insurance cooperatives in the country, was under such close supervision by his office it was essentially “the same thing” as mandatory control.
“There was no need (for mandatory control),” Franchini said in an interview. “There was complete corporate cooperation as soon as the new board was implemented. The new board did everything I asked them to do.”
The new board members listed on the Sept. 30 filing are Dennis Michael Litos, former CEO of Michigan Community Health Network; James R Tryon, a family medicine doctor in Albuquerque; and Margaret Gunter, director of medical outcomes research at the not-for-profit Lovelace Respiratory Research Center.
A spokeswoman for the superintendent’s office said Health Connections has been under financial supervision since 2015, primarily because the nontraditional structure of the organization – parts of it are by operated by policyholders – required additional oversight, she said. The company entered a period of more active regulatory oversight in June.
“The superintendent has broad powers of oversight, and he has the experience to determine the right course of action,” Hickey said. “We were very appreciative of his help.”
Hickey and Franchini said they did not know whether Health Connections had passed the threshold for mandatory control when the board resigned in July. State law indicates mandatory control is triggered when an insurer’s risk-based capital – a calculation of the minimum amount of money an insurer needs to operate – is less than 70 percent. In testimony submitted during consideration of the Evolent deal, Presbyterian, one of Health Connections’ competitors, claimed that Health Connections’ September filings indicated the organization was below the 70 percent threshold and insolvent.
Health Connections reported a 2017 loss of $10 million as of Sept. 30, according to the filings. The company had losses totaling more $40 million over the previous two years.
Hickey said the company’s risk-based capital is calculated and disclosed only in an annual filing; the 2017 filing will be available in March. He said the company’s risk-based capital calculation was substantially over 300 percent by the end of December as a result of the Evolent deal.
The financial statements for Sept. 30 showed about $3.5 million in capital – including the $10 million paid by Evolent.
‘Zone of insolvency’
In its letter of resignation, the company’s previous board cited a lack of guidance from the superintendent on the payment of executive bonuses and other issues surrounding Health Connections’ “factual insolvency.” They said they were concerned that paying the bonuses “while in the zone of insolvency may violate our fiduciary duty to the policyholders.”
“For this reason, the board requested a clear instruction from you to either pay the executive bonuses or continue to postpone paying them so as not to compromise policyholders or duties to others considering our factual insolvency,” the board wrote. “As superintendent, you declined to give us such a directive.”
The board also described a lack of agreement between the board, Hickey and the superintendent’s office on “accurate financial disclosures, appropriate investment structure, or the need to conserve cash in the interest of policyholders.”
Franchini said he had asked board members to make their own decision about the executive bonuses and other issues.
The new board decided to pay out the bonuses after the Evolent deal was finalized, according to Franchini and Hickey, though the Journal could not determine how much the bonuses were nor to whom they were paid.
Hickey dismissed the board’s description of the disagreement and pointed out that the members resigned despite having a term sheet from Evolent, which Hickey said was indication that a deal was imminent.
The letter contradicts previous explanations by Health Connections about the turnover of its board. In December, a spokeswoman attributed the turnover to the normal election cycle of the seats. Asked now about the letter, the spokeswoman said it was a “confidential board communication” of which she was unaware.
The Evolent deal was approved over the concerns of Presbyterian, the University of New Mexico and Blue Cross Blue Shield about the continued financial condition of Health Connections and whether it could make good on about $30 million of what they say are unpaid bills – with Presbyterian raising the possibility that people insured by Health Connections could be liable for charges they incurred for medical services.
Health Connections has since described the testimony submitted by its competitors as bearing “little resemblance to reality.” The company has pinned much of its financial problems on the federal budget sequestration that began in 2013, which, among other things, ended millions of dollars of payments allotted to it under the Affordable Care Act.
Of the 23 not-for-profit health insurance cooperatives funded by federal loans through the Affordable Care Act, only four are still in existence, including Health Connections which initially received about $77 million in federal loans. The company’s financial statements describe them as “surplus notes” and don’t include a repayment schedule.
Asked about the future of Health Connections, Marlene Baca, the new CEO, said the Evolent deal had put the organization in “a very positive financial situation, and we are confident we can stand on our own.”