Lawmakers mull remedies for insurers after collapse of Health Republic

Health Republic, the nonprofit health insurance company set up in New York to offer low-cost coverage under the Affordable Care Act, suffered a premature death last fall.

Now, while regulators conduct an autopsy of the company, state lawmakers are exploring how to prevent other health insurers from suffering the same fate – or at least to ease the financial pain that comes with such a collapse.

One major proposal the state Legislature is considering is a new fund that would cover customers and medical providers for any unreimbursed costs if another health insurance company goes under. A number of lawmakers in both houses, most of them Democrats, have signed onto legislation that would create a so-called guaranty fund, which would be paid for with a one-time tax assessed on other health insurers in the market.

The other key change that lawmakers are considering is an overhaul of the way health insurance rates are set. Since 2010 New York has had in place a prior approval process in which state regulators review and sign off on rates charged to customers. Some lawmakers have called for more transparency in how rates are set. Other lawmakers have gone further, calling for doing away with the prior approval process entirely.

The proposals, which were introduced earlier this year, are likely to be further debated before the end of this year’s legislative session in mid-June. However, they still have serious obstacles to overcome before becoming law.

Prior approval has long been a source of concern in the industry. A year before the process was established in New York, the Business Council of New York State warned in a memo that “reintroducing price controls could financially weaken some insurers to the point of impairment or insolvency.”

Supporters counter that a review process is essential to protect customers from exorbitant rate hikes, citing double-digit increases before prior approval was implemented. But industry insiders argue that the process has become politicized – and they say that the case of Health Republic proves it.

Under current law the state Department of Financial Services, which oversees New York’s health insurance industry, reviews proposed rate hikes each year, which it can adjust before granting final approval.

After Health Republic set surprisingly low initial rates in 2013, it tried to raise them the following year. But DFS rejected Health Republic’s request for a 15 percent hike, allowing a 13 percent increase instead. Although the state regulator has the power to raise or lower rates, it reduced every single request that year.  

"We closely scrutinized the proposed rate increases insurers requested and reduced them significantly where appropriate,” Ben Lawsky, then the superintendent of DFS, said at the time.

But Paul Macielak, the president and CEO of the New York Health Plan Association, a trade group for insurers, issued a statement the same day calling all of the approved rates “inadequate.”

“The bottom line is inadequate rates will result in reducing product choice or otherwise destabilizing the market, which is ultimately harmful to the health care system as a whole and to the consumers who rely on it,” Macielak said.

So when it became clear late last year that Health Republic was struggling to balance its books, and when it was eventually shut down, critics blamed DFS for its failure to identify and adequately address the brewing financial problems.

DFS has focused instead on the business problems within Health Republic. In November, the regulator announced that it was investigating “representations to the state about the company’s financial condition” after finding that its “finances were substantially worse than the company previously reported to the state.” Last month DFS began the official process of liquidating Health Republic.

State Sen. James Seward, the chairman of the Senate Insurance Committee, told City & State that he already had concerns about the prior approval process before Health Republic was forced to shut down. He sponsored legislation to make the prior approval process more transparent, and it passed unanimously in the Senate last session but did not advance out of committee in the Assembly.

“The collapse of Health Republic begged the question of whether we needed to consider a total repeal of the prior approval system,” Seward told City & State via email this month.

The other proposal, a guaranty fund, has also garnered mixed reviews. Supporters point to the fate of Health Republic as evidence of the need for such a fund. The insurance company, which first began providing coverage in 2014, attracted more than 200,000 customers, far more than anticipated, but its low rates contributed to the financial problems that ultimately shut it down.

Now, over a quarter of a billion dollars has been asserted as being owed to doctors, practices and hospitals, Assemblyman Kevin Cahill, chairman of the Assembly Insurance Committee, told City & State.

“Over and above that, a small army of other claimants have come forward seeking recompense for their losses in dealing with Health Republic,” Cahill said in an email. “To add insult to injury, the federal government appears poised to assert a right to reimbursement of the fractional portion of the funds they provided when the promise of a federal ‘backstop’ was reversed by Congress in one of their many attempts to ‘kill Obamacare.’”

Supporters have noted that New York is the only U.S. state that does not have such a fund. But opponents remain unconvinced. Some worry about the burden on other health insurance companies. Seward said insurers in New York are already subject to the state’s Health Care Reform Act, which governs hospital reimbursements and assesses fees.

“While New York is the only state without a health insurance guaranty fund, New York is also the only state with HCRA assessments and surcharges,” Seward said. “These taxes already total upwards of $5 billion. A guaranty fund would serve as another tax on health insurers and would ultimately be passed on to consumers through higher premiums and increased health care costs.”

While lawmakers haven’t come to an agreement on how to address the potential for the collapse of a health insurance company in the future, they have tried to address the immediate crisis. In this year’s state budget, they approved a fund to bail out hospitals and medical staff for their losses.

However, even that initial step is incomplete. The state Senate called for using funds from the state's financial services bank settlements to pay off Health Republic’s debt, but Cahill told City & State that the Legislature has yet to actually allocate any money for the fund.

“It is important to note, however, that no appropriation was made, nor was any provision for making one to pay even a penny of those claims,” Cahill said. “Indeed, the wording of the budget language requires further direct legislative action before the fund can be activated.”