Health Republic's Curious Liquidation: Part 12
Articles, 2017
Part 12 concerns a May 8, 2017 Court-ordered proceeding that explored the $7.6 million that Health Republic's Liquidator spent during the first ten months of the liquidation proceeding — all without Court approval.[1]
The proceeding revealed that:
even though a monthly claims expense summary posted on the Health Republic website showed that the Liquidator had paid consultants, vendors, and the New York Liquidation Bureau (Bureau) more than $7.6 million, the incurred figure was $8,263,660;[2]
Health Republic's assets shrank from $118 million as of December 31, 2015 to $99 million as of September 30, 2016 to only $43 million as of March 2017;[3]
the law firm of Weil, Gotshal & Manges (Weil), which had represented Health Republic before its liquidation and was later engaged to represent the Health Republic Liquidator, had stepped down and in-house counsel at the Bureau had been substituted for Weil;[4] and
the Liquidator had hired another outside law firm, Clarick, Gueron & Reisbaum, to represent her in any litigation to be commenced against the federal government to recover the $473 million in risk corridor and reinsurance moneys due to the estate.[5]
We'll look at these developments, but first a little context about how we wound up with the Bureau making a presentation in open court on moneys spent since May 2016.
The Liquidator's Expenses – Online!
Readers of previous installments in this series know that New York Supreme Court Justice Carol Edmead (Court) has opened up Health Republic's liquidation proceeding in ways no other New York Court has.[6] Early on, the Court directed that the Bureau post on the Health Republic website a monthly claims expense summary, as well as copies of vendor contracts, balance sheets, and transcripts of all Court proceedings. The Health Republic website – – http://www.healthrepublicny.org/ – – also contains a near-real-time docket for the Liquidation proceedings. Indeed, the docket on the Health Republic website is easier to access than the New York Supreme Court Electronic Filing System (NYSCEF).[7] As a result, Health Republic's 206,000 former policyholders, as well as its other creditors, are able to see just how expensive (and potentially wasteful) an insurance company receivership proceeding can be.
To appreciate the significance of having this information available, you need only open the Health Republic website and compare it with the Bureau's own website at http://www.nylb.org/. The Bureau's website is a bloodless and unfriendly place with very little information posted whereas the Health Republic website includes sections for members, providers, vendors, and brokers; answers to frequently asked questions; phone numbers to obtain additional information; and, thanks to the Court, a "Key Documents" section with financial information, timelines, and transcripts for all of the Court's proceedings, including the May 8, 2017 proceeding discussed below.
The claims expense summary shows, for every month from May 2016 through July 2017, how much money the Liquidator has paid to outside law firms, consultants, accountants, website administrators, IT support firms, accountants, and, of course, the Bureau itself.[8] But the Court never formally approved these expenditures or explored whether this money was well spent.
A "Conversation" and a "Presentation" on Expenses
In late 2016, the Court called for a hearing to review the Liquidator's expenditures. The Bureau's representatives urged that the Court wait until October 2017 when the Bureau would present a "formal report." But the Court insisted on an in-court review. As the Court put it: "…I may be able to see something on the website, but I can't have a conversation with the website, and I want to have a conversation about expenses."[9] Justice Edmead arranged for an in camera review of expenses on May 4th, which was followed by an in-court presentation on May 8th.
Two in-house attorneys for the Bureau, its Chief Financial Officer (CFO), and an Assistant Special Deputy Superintendent at the Bureau appeared at the May 8th hearing. They brought with them a presentation that you can find on the Health Republic website under Key Documents: "Administrative Expenses – May 8 Review of Administrative Expenses" (Review). The Review features graphs and charts designed to show that the estate's expenses are trending down, particularly for the estate's "Top Five Vendors." These vendors include Alvarez & Marsal (consultant – paid $2.2 million); Garden City Group (website administrator and "data manager" – paid $731,000); POMCO, Inc. (claims processor – paid $1.6 million);Weil (outside counsel – paid $1.3 million); and the Bureau itself (paid $1.2 million).
The Review shows that these vendors were paid to secure Health Republic's databases; "maintain (the) integrity of the claim files;" build a "claims adjudication procedure;" and "transition core functions to in-house . . . options," i.e., move these functions over to the Bureau.[10] The Review, however, does not address what action was taken and how much money was spent from October 2015, when Health Republic's Board stepped down and consented to liquidation, and May 11, 2016, when the Liquidation began.
Presumably some of the work to secure databases, maintain claim files, and transition claims adjudication procedures was undertaken during this six month gap, but the Review does not address that during these six months all of the estate's "major vendors," save for the Bureau itself, were hired and paid for by Health Republic's Chief Restructuring Officer (CRO) at Alvarez & Marsal. During these six months, Alvarez & Marsal's CRO operated under the supervision of the Department of Financial Services (DFS). I'm aware of no accounting of the moneys spent or any report on what actions were taken during these six months.
The Bureau's representatives then took turns describing the services provided by the "Five Major Vendors."[11] At one point, the Bureau's representatives tried to compare the estate's monthly expenses during the liquidation to Health Republic's monthly administrative expenses while the insurer was in operation.[12] This seems a bit of a stretch – comparing a fully operating insurer with over 600,000 open claims and 200,000 policyholders with a liquidated insurance company operating under an order that essentially stays all its functions (and all actions against it).
In any event, the Bureau's general discussion of services rendered and moneys spent left open two critical questions: how much money is available to pay Health Republic's approved claims and when will they be paid?
Health Republic's Incredible Shrinking Assets
Neither the Bureau's Review nor its presentation addressed where the money would come from to pay any approved claims, but the Court did. "[W]hat is your pot?…how are you paying [your expenses] from what pot?…What is [the] March 2017 asset number?"[13] The answer turned out to be "approximately $43 million."[14] That prompted the Court to ask: "[A]t what point will we start making sure claimants get paid while I have that $43 million . . . while it is being chipped away even incrementally, with $250,000 a month [in administrative expenses] which adds up."[15]
The Court also asked for an estimate of the value of all potential claims against the estate. The Bureau's CFO advised that the value of all potential claims "including loss adjustment expenses [is] approximately $212 million."[16] The Bureau's CFO later agreed with the Court's thumbnail estimate of Health Republic's liabilities and assets: "$43 million in assets, $2.5 million annually in expenses; $210 million potential claims. Right?"[17]
If these figures are ballpark accurate, this means that absent significant collections from the federal government or other third-parties (and without taking into account health providers who may also try to recover from the estate as policyholder assignees), approved policyholders' claims would be worth about 20 cents on the dollar today. This rough estimate, however, will be constantly reduced as the estate's assets are, in the Court's words, "being chipped away"[18] by the estate's on-going expenses.
Battling Balance Sheets
How could Health Republic's policyholders be expected to figure this out? At this point, policyholders had available at least three different Health Republic balance sheets. On the Health Republic website, policyholders can find an audited statutory statement prepared as of December 31, 2015 that shows assets of $118 million and liabilities of $482 million. On the same website, however, policyholders can also find an unaudited balance sheet as of September 30, 2016, prepared at the Court's direction, that shows assets of $99 million and liabilities of $466 million.
But if a policyholder were to review the Bureau's recently published Annual Report, which appears on the Bureau's website, but not on the Health Republic website, a policyholder would find on p. 47 a statement of "Assets and Liabilities" showing Health Republic with "Total Assets" of $43,003,676 and "Total Liabilities" of $702,700,047![19]
After the Bureau's CFO told the Court that the estate's assets were about $43 million, I asked why Health Republic's assets had dipped from $99 million to $43 million.
Mr. Veach: My question is how did we go from $99 million in September of 2016 to $43 million today?
[Bureau CFO]: The biggest chunk of that decrease is related to the three audits, included in the assets were the federal reinsurance and risk corridor [payments due from the federal government]. Every so often we get communications from CMS [and] they adjust that number…mostly downward, unfortunately…"[20]
The Bureau CFO then went on to explain that the Liquidator had set up a reserve against approximately $50 million due under a federal reinsurance program because the Liquidator concluded that the government would apply this amount as an offset against any recoveries the Liquidator might seek under the Affordable Care Act's risk corridor program.[21] Health Republic has a claim for at least $432 million in risk corridor moneys owed by the federal government, as well at $51 million due under a federal reinsurance program.[22]
As discussed in Part 6, the receivers for other failed Affordable Care Act Co-Ops have sued the federal government to recover moneys that were due these companies under the risk corridor program. These cases are being actively litigated and are working their way up to the Federal Circuit and, possibly, the United States Supreme Court.[23] But DFS Superintendent Vullo told a legislative budget committee in Albany in February 2017 that, while she had directed that a complaint against the federal government be drafted, she was "sitting on it."[24]
More importantly for Health Republic's policyholders and other creditors, Superintendent Vullo also told the budget committee that "payments to claimants cannot be made until the dueling claims with the federal government are resolved."[25] By "dueling claims" the Superintendent meant the estate's claims for $483 million in risk corridor and reinsurance moneys that never reached Health Republic and the federal government's offsetting claims to recover the federal government's start-up and solvency loans, i.e., about $264 million.[26]
To be clear: no claimants, be they policyholders or health providers, will see any money until all of these disputed claims against and from the federal government have been completely sorted out. Nevertheless, the Health Republic estate will continue to pay for a very expensive claims adjudication program. For example, the Bureau's Review projects that the estate's expenses will soon be trending up to more than $400,000 a month as policyholders begin receiving explanations of benefits (EOBs) that will serve as their claims against the estate.[27] Indeed, the Bureau anticipates spending $3.6 million in expenses from April 2017 through December 2017.[28] Most of these charges will relate to the claims adjudication process.
Stay the Claims Adjudication Process (and Update Policyholders)
At the conclusion of the May 8th hearing, I asked the Court to consider imposing a moratorium on the claims adjudication process until it is determined how much money will be available to pay policyholders. In other words, let's stop the bleeding and not put policyholders through a claims process until they have some idea how much their claims are worth.
The Court declined to stay the claims adjudication process on the ground that the Liquidator has not given the Court any "directive" to stop processing claims.[29] During a subsequent court appearance on the Liquidator's application to appoint a panel of referees and a medical review firm to assist with the claims process, I again requested a moratorium on the processing of claims. The Court again declined to stay the process, but suggested that I write to the Superintendent and urge her, in her role as Health Republic's Liquidator, to pause the claims review until policyholders have some idea about the value of their claims (and whether it's worth their time and effort to pursue their claims and any appeals from denied claims).[30]
I wrote to the Superintendent and a copy of my letter appears on the Health Republic Docket, Item 110. In my letter, I urged that the Superintendent not only pause the claims processing until all disputes involving the federal government are sorted out, but also asked that the Superintendent:
clarify on the Health Republic and Bureau websites the large differences in assets and liabilities that appear on the Health Republic's balance sheets; update the unaudited September 30, 2016 balance sheet that still appears on the Health Republic website; and continue to update that balance sheet on at least a quarterly basis; and
post a "plain English" notice for all policyholders and creditors advising them that their claims will not be paid until the Liquidator's differences with the federal government are completely resolved.
Policyholders and other creditors should not be told to 'hurry up and wait' through a claims adjudication process — and have the estate spend another $3.6 million dollars in expenses — only to find that, barring some significant recoveries from the federal government, very few dollars may remain to pay even a small portion of their approved claims. And that notice should also be provided to the Court rather than forcing the Court to drag this information out of the Bureau's representatives during proceedings and hearings.[31]
[1] A May 8, 2017 transcript of the proceeding is available on the Health Republic website, which also contains a copy of a Review of Administrative Expense (Review) submitted during the presentation.
[2] May 8, 2017 Trans., p. 20. These expenses were paid or incurred between May 11, 2016 and March 31, 2017.
[3] May 8, 2017 Trans., pp. 14-16 (March 2017 balance). You can review on the Health Republic website an as of September 30, 2016 balance sheet prepared at the Court's direction (showing assets of $99,149,675) and an audited statutory financial basis statement for Health Republic as of December 31, 2015 (showing assets of $118,710,840).
[4] May 8, 2017 Trans., pp.28, 58; Letter from Special Deputy Superintendent David Axinn to Hon. Carol Edmead, dated May 26, 2017 (Axinn May 26th Letter). Since May 11, 2016, Weil billed the Health Republic estate $1,298,501. May 8, 2017 Trans., p. 28.
[5] May 8, 2017 Trans., p. 29. Axinn May 26th Letter, p. 1.
[6] Curious Liquidation: Parts 5 and 8.
[7] The docket on the Health Republic website also includes copies of correspondence with the Court, including my letters to the Court.
[8] You will see on the site that the Liquidator paid more than $7.6 million, but at the May 2017 proceeding we learned that "for May 11, 2016 through March 31, 2017, the cumulative expenses of the estate are $8,263,660." May 8, 2017 Trans., p. 20.
[9] February 17, 2017 Trans., p. 23.
[10] Review, pp. 5, 6; May 8, 2017 Trans., p. 9.
[11] May 8, 2017 Trans., pp. 24- 29, 39-57.
[12] May 8, 2017 Trans., pp. 4-7.
[13] May 8, 2017 Trans., p. 14.
[16] May 8, 2017 Trans., p.16.
[19] New York Insurance Law Section 7405(g) requires that the Bureau publish annually a report for all of the estates that it oversees.
[21] Part 10 discussed the federal risk corridor program and the estate's potential $483 million claim against the federal government.
[22] Maria T. Vullo, Superintendent of the New York State Department of Financial Services Testimony Delivered to Legislative Fiscal Committees on the State Budget – Health, February 16, 2017, p.14 (Written Budget Testimony).
[23] W. Roberts, et al., Confusion Over Risk Corridors Program Payments Continues, Law360 May 4, 2017, https://www.law360.com/articles/920276/; Insolvent Insurer Says U.S. Government Owes $157M In Affordable Care Act Funds, https://www.lexislegalnews.com/articles/17836/.
[24]Oral testimony given before the Legislative Fiscal Committee on the State Budget – Health on February 16, 2017.
[25] Curious Liquidation: Part 9; Written Budget Testimony, p.15.
[26] See unaudited balance sheet prepared as of September 30, 2016 posted on the Health Republic website.
[27] Review, p. 19. The Bureau told the Court that Health Republic's 690,000 open claims will be compressed into about 18 – 19,000 EOBs. May 8 Trans., pp. 41-42.
[28] Review, p. 19.
[29] May 8 Trans. pp. 66-67.
[30] "And if you think that the superintendent needs to address [your stay request], you need to contact the superintendent and say: 'I want you to formally state that the Liquidation should stop' – and you could do that –…and then [the superintendent] could respond directly and I will know what to do." May 18, 2017 trans., p. 8. A copy of that transcript is on the Health Republic website.
[31] See, e.g., Jan. 11, 2017 Trans., pp. 41-42.