The Vermont Department of Financial Regulation has rejected the licensing application of the Vermont Health CO-OP, finding "an extremely high risk of insolvency" and effectively barring the CO-OP from selling on the state insurance exchange this year.
In a somewhat scathing 36-page decision, Department of Financial Regulation (DFR) Commissioner Susan Donegan called the CO-OP's application "fatally flawed," with "estimated rates that are unaffordable, financial projections that show cumulative losses during the first three years of operations and reliance on unrealistically high enrollment assumptions."
The DFR's review, partly based on analysis by the actuarial firm Oliver Wyman, found that Vermont Health CO-OP would be selling silver tier plans at rates about 15 to 17 percent higher that the state's other two main insurers, MVP Health Care and Blue Cross Blue Shield of Vermont -- even as the target enrollment of 19,600 members was based on the assumption that its premiums would be four percent below the market average.
The fact that the CO-OP's premium – but not enrollment – estimates changed during the application process "undermines any credibility in the CO-OP's forecast," the DFR wrote in its decision.
Vermont Health CO-OP was awarded $6 million in start-up loans and $27 million in tentative solvency loans in 2012. Using the 19,600 enrollment estimate, it forecast losing $800,000 between 2014 and 2016, then becoming consistently profitable in 2017 and returning savings to members.
But with the CO-OP also projecting $6 million in spending from loans through 2016 and starting repayment in 2017, losses could total $9 million by 2017 if enrollment is only half of the optimistic 19,600, the DFR estimated.
Led by CEO Christine Oliver, the former deputy secretary of the state Agency of Human Services, Vermont Health CO-OP was formed by the Consumer Health Coalition of Vermont, and has branded itself as part of Vermont's "long and treasured history of cooperative economic activity."
The DFR's analysis, though, found some causes for concern and potential conflicts of interest in the CO-OP's corporate governance.
The board of directors is led by Mitchell Fleischer, president of the Fleischer Jacobs Group, an insurance brokerage and asset management firm, and other board members include an orthopedic clinic manager, the president of Lake Champlain Chocolates, a real estate developer and a South Burlington internist with the Good HEALTH practice.
For one thing, the DFR considered Fleischer's $120,00 annual salary as board president "surprisingly high," and argued that "the CO-OP's compensation practices exhibit a lack of oversight by the board of directors and an outsized influence by the president."
Fleischer, who has not responded to emails seeking comment on the decision, also may have overseen a significant conflict of interest with a contract awarded to his firm for brokerage services that aren't even allowed under Vermont's insurance exchange law, the DFR found.
Last December, Vermont Health CO-OP inked a $26,786 per month deal with the Fleischer Jacobs Group to be the exclusive agent soliciting applications for CO-OP health plans -- a type of brokerage service with commissions that will not be permitted for plans sold through Vermont Health Connect (which will be every individual and small group plan in the state).
[See also: Colorado CO-OP inks broker deal]
Vermont Health CO-OP defended the contract, which potentially would have been worth an annual $1 million, as a key part of the strategy, and as the DFR was reviewing the application, the CO-OP was starting a marketing and outreach campaign, which regulators ultimately halted.
The origins of the contract weren't clear to DFR regulators, who found that there wasn't a competitive bidding process and that there were "multiple conflicting accounts of the amount of oversight the board had at the time the contract was contemplated and signed."
Vermont Health CO-OPs attorney told DFR that the board did not have any "in depth conversations" about the potential conflict of interest in award the contract to Fleischer Jacobs Group, but did say that officials with the Centers for Medicare & Medicaid Services had questioned the relationship.
"These conflicting accounts are troubling and show a failure by the board to fulfill its fiduciary duties and a lack of competence by management in handling a contract with illegal terms," DFR officials wrote.
The CO-OP does have the option of appealing the decision. CEO Oliver said the CO-OP is considering that and other options, with a decision forthcoming. "The CO-OP will redouble its efforts to its mission of delivering better and more affordable healthcare to all Vermonters," Oliver said in a statement.
It's not exactly clear what will happen to the federal loans if the CO-OP never receives a license; according to DFR's reading of the CO-OP's agreement with CMS, the loans become due if it ceases to offer insurance.
In 2017, the Vermont government has the goal of transitioning the state to publicly-funded universal healthcare system -- which, DFR regulators pointed out, means there really wouldn't be a need for the CO-OP anyway.
"Any attempt by a start-up company to enter a highly competitive industry that will cease to exist as early as three years after entry may not serve the public interest," DFR officials wrote, noting that the CO-OP likely would not be able to pay its loans off on that timeline.
With the CO-OP likely not being able to sell plans this fall, if ever, Vermont's health insurance exchange, Vermont Health Connect, will have two health plans -- at least for the next few years.
As the single payer system is broadly envisioned, the "state would hold the risk for all of its residents, so there would not be a private insurance company that would be an insurer in the way that we understand insurance companies today," as Lindsey Tucker, deputy commissioner at the Department of Health Access, which manages Vermont Health Connect, said recently.