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Co-op Insurer Denied Spot on Vt. Exchange

Montpelier — A state regulatory agency has denied a license to the Vermont Health Co-op to sell health care insurance in Vermont.

The Vermont Health Co-op sought a certificate of public good to sell health insurance in the new state exchange under the federal Affordable Care Act. The nonprofit, mutual member-owned health insurance company failed to show the Department of Financial Regulation that it would be financially solvent in the first few years of operation.

In addition, Susan Donegan, the commissioner of the department, cited concerns about higher than market premium rates and a financial conflict of interest between the president of the co-op board and the company. The department spent about 18 months reviewing the license application.

“My job is to be the solvency regulator when it comes to insurance companies and that’s a consumer issue,” Donegan said in an interview. “It’s disappointing for a lot of people. But when you have clear concern that what you would be doing is creating an insurer with a high risk of insolvency within the first three years of operation that’s not a company we want to move into the Vermont market.”

Donegan said Vermont Health Co-op overestimated the number of customers who would buy policies, especially since the nonprofit’s premium rates would be significantly higher than that of its competitors.

“We felt it wasn’t justified given what we know about the market,” Donegan said.

Christine Oliver, CEO of Vermont Health Co-op, said she was disappointed with the decision. The nonprofit could file amended rates, another application or appeal the decision to the Vermont Supreme Court, she said.

“We’ll move forward and find a way to bring Vermonters what they need to bring another option that is consumer-focused,” Oliver said in an interview.

“If I thought there would be harm to consumers, I would be the first to stop this in its tracks,” she said. “Because of the federal loans, consumers would be made whole. The state is not at risk should the co-op not work out. The feds are taking a risk but the state and Vermonters are not.”

In its 37-page decision, the Department of Financial Regulation determined that Vermont Health Co-op would have cumulative losses of about $9 million in the first three years of operation, from 2014 to 2016, if it achieved 50 percent of its target enrollment. In addition, the newly formed health insurance company would be liable for $6 million in loans from the federal government.

The Centers for Medicare and Medicaid Services awarded Vermont Health Co-op $6 million in startup loans and $27.4 million in solvency loans last year (the latter are to be made available when certain benchmarks are reached).

The state requires that health insurers maintain a solvency fund or surplus of $2 million to $3 million for claims payments.

“The co-op is already saddled with debt and high loans from the federal government, so they would have to be profitable to pay back the loan by 2017,” Donegan said.

In her determination, she wrote: “Analysis by DFR demonstrates that the CO-OP’s significant liabilities and high proposed rates will make it extremely difficult for the CO-OP to remain solvent.”

Oliver countered that the federal government had already rigorously reviewed the nonprofit’s financial prospects and was satisfied enough to grant the company $33 million in loans.

By contrast, MVP and Blue Cross Blue Shield of Vermont each have more than $100 million in “positive unassigned surplus” money to pay claims. Health insurance companies must operate within the framework of the exchange in order to do business in Vermont. MVP and Blue Cross Blue Shield Vermont are the other two insurers now in the exchange.

In its original application with DFR, Vermont Health Co-op told regulators that it would offer 4 percent lower premium rates to more than 19,645 Vermonters in the exchange compared with its competitors, MVP and BCBS.

The department, however, found Vermont Health Co-op would charge 15 percent higher rates for standard plans and 17 percent higher rates for silver plans on the exchange than either of the other two insurers.

“Co-op plans would consistently offer consumers fewer benefits than competitors for a similar price,” Donegan wrote.

State regulators also found that Vermont Health Co-op allowed the president of its board, Mitchell Fleischer, who also founded the nonprofit company, to receive a “surprisingly high salary” of $120,000 a year. The chair of the Blue Cross Blue Shield of Vermont board is paid $28,900 per year; while the chair of MVP’s board receives $48,750 in annual compensation.

Fleischer also secured a contract with the co-op with the potential of generating $250,000 to $1 million per year in marketing and distribution services with his Burlington-based insurance firm, Fleischer Jacobs Group, Donegan said. There was no competitive bidding process for the contract. Under the arrangement, Fleischer Jacobs would also pay a commission to brokers for insurance sales.

“Directly or indirectly paying commissions to sign consumers up to plans through Vermont Health Connect is illegal,” Donegan wrote in her decision.

“We saw the board was not sufficiently engaged in key decisions that had to do with management of contracts and salary setting,” the commissioner said.

The Vermont Health Co-op board failed to “fulfill its fiduciary duties” and didn’t provide adequate oversight of Mitchell Fleischer and his company’s relationship to the co-op, according to the department.

Oliver said the federal Centers for Medicare and Medicaid Services reviewed the arrangement, but she declined to comment further. Fleischer could not be reached for comment. CMS officials did not return a request for information .

According to the decision from DFR, the general counsel for the co-op was not aware of any conversations about the relationship between Fleischer Jacobs and the board. Key officers of the co-op lack the “insurance experience and business qualifications commensurate” with a health insurance company.

Donegan said the co-op’s certificate of public good application was “fatally flawed” from the start. The nonprofit filed the application after it had registered with the state Secretary of State and had received a grant from CMS.

The department hired Oliver Wyman, a risk management firm, to review the Vermont Health Co-op application. Donegan said the firm provides rate review analysis for the Green Mountain Care Board and understands the Vermont market.