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OSI allowed financial reporting change for insurer

Copyright © 2018 Albuquerque Journal

The state’s Office of the Superintendent of Insurance let New Mexico Health Connections report a $10 million payment it had not yet received as an asset last year, according to recently released financial filings. Doing so kept the organization from triggering a law in which the state assumes control of a financially troubled entity.

According to Health Connections’ Sept. 30 filing, which was posted on the agency’s website last week, “the company, with the explicit permission of … (OSI), recorded a receivable for the sale of a specific line of business. If the receivable of $10,000,000 had not been permitted as an admitted asset as of September 30, 2017, the company would have a (deficit) of $6,499,473 and the company’s risk-based capital would have triggered a mandatory control level by the OSI.”

“Mandatory control level” is a financial threshold established by the National Association of Insurance Commissioners. Once an organization passes the threshold, state law dictates the superintendent “shall … take such actions as are necessary” to place the organization under state control. That involves either liquidating the organization or “rehabilitating” it with the state conducting business on its behalf.

The $10 million was a payment from Arlington, Va.-based Evolent Health, which purchased the company’s commercial business and formed a new entity, True Health New Mexico. That deal was not approved by the state until December.

Lea Geckler, financial examiner supervisor for the superintendent’s office, said the state would have assumed control of Health Connections had it not approved the Evolent deal.

Superintendent John G. Franchini said the state had, 15 years ago, allowed another insurer – though not a health insurer – to treat a receivable from its parent company as an asset. His office was not able to provide information about how often it had done so for health insurers in recent years.

Dr. Martin Hickey, CEO of Health Connections at the time of the Sept. 30 filings and current CEO of True Health, said the “Evolent Health investment allowed for the creation of True Health New Mexico,” which he said had “very healthy margins” at the end of the first quarter of this year.

Ken Wood, CEO of Evolent’s True Health Inc., said in a statement that the company could not comment on confidential provisions of the deal with Health Connections, but said Evolent has invested $30.25 million in New Mexico since the fall.

A 90-day delay

Health Connections, a not-for-profit co-op created with $77 million in federal loans under the Affordable Care Act, has been under financial supervision since 2015, according to the superintendent’s office, and remains under supervision today.

Franchini warned Health Connections’ board about the possibility of state control in a confidential June 23 letter obtained by the Journal. In it, he stated Health Connections would trigger mandatory control once it received an $8.9 million bill from the Affordable Care Act’s risk adjustment program, which redistributes money from insurers with healthier customers to those with sicker customers.

(A federal judge recently ruled in favor of Health Connections in a lawsuit alleging the government’s formula for determining those payments was “arbitrary and capricious.” The financial implications of that ruling are still unclear.)

“As we discussed, when the federal government assesses the ACA Risk Adjuster, NMHC’s risk-based capital will fall below seventy percent … such a financial position creates a mandatory control level event,” Franchini wrote.

Franchini also noted that state law allowed him to invoke a 90-day delay if there is a “reasonable expectation” the organization could improve its finances to the extent that the “mandatory control level event is eliminated.” He wrote that he believed such an improvement was possible.

The $8.9 million sum was assessed on June 30, according to the Centers for Medicare and Medicaid Services. Due to other federal payments that were netted against the charges, that amount was eventually reduced to $3.7 million.

On July 31, the entire Health Connections board resigned, citing the organization’s “factual insolvency,” documents show. The insurer continued under the leadership of a board appointed by then-CEO Hickey, after a change in Health Connections’ bylaws approved by Franchini and the federal government.

Franchini previously told the Journal he did not know whether Health Connections had reached the threshold for mandatory control when its board resigned in July. Asked about the discrepancy between that statement and the timeline he outlined in the June 23 letter, he said in an interview Thursday that he was indeed aware that the risk adjustment bill had put Health Connections at the threshold of state control at that time.

Substantial and confidential

The sale of Health Connections’ commercial business, which encompassed about half of its 40,000 members, required approval from the state insurance office and a final sign-off from Franchini.

Franchini and Geckler said in an interview that Evolent had paid $10 million to True Health in September, money that was scheduled to be transferred to Health Connections once the state approved the deal and the transaction closed. Franchini said the fact that the $10 million had already been transferred, albeit to True Health instead of Health Connections, was one reason he allowed Health Connections to report the money as an asset.

On Sept. 27, the day before the end of the 90-day delay, Evolent announced it would purchase Health Connections’ commercial business for $10.25 million “subject to customary closing conditions, which includes certain regulatory approvals, including approval by the New Mexico Office of Superintendent of Insurance.”

The superintendent approved the deal on Dec. 20. On Jan. 2 of this year, Evolent announced that the transaction had closed.

Today, Health Connections is one of only four remaining health co-ops created under the Affordable Care Act. As of 2014, there were 23 such organizations.

Marlene Baca, the current Health Connections CEO, said in a statement that the company was on track to have “a banner year” with financial resources that place it far from the mandatory control level.