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We thought about skipping Part 13 and going straight to Part 14, but that might confuse readers who don’t suffer from triskaidekaphobia.[1]  Let’s confront this irrational fear and see where the liquidation of Health Republic Insurance of New York, Inc. (Health Republic) now stands.

First, we will look at the processing of  Health Republic’s unpaid claims.  Then we will return to two principal themes of this series:  (1) how much of Health Republic’s assets has been spent by the Department of Financial Services (DFS) and the New York Liquidation Bureau (Bureau) since Health Republic stopped underwriting in September 2015; and (2) how much money remains to pay Health Republic’s policyholder/health provider claims.

As Part 13 was on its way to Law360, the Liquidator filed an order to show cause why the Court should not approve the Bureau’s “Report on the Status of the Liquidation of Health Republic (Status Report). . . .”  This order to show cause, which is now returnable at 10:00 A.M. on February 14, 2018, also seeks the Court’s authorization to distribute Health Republic’s assets to “allowed claimants.”  This sounds a lot better than it is, given the substantial impediments to any actual payment to policyholders (or health providers).  We will address these impediments, as well as the Liquidator’s Status Report, in Part 14.

The First of the EOBs

On August 8, 2017, Special Deputy Superintendent David Axinn wrote to Justice Carol Edmead, who oversees Health Republic’s liquidation proceeding, to “provide an update on the projected timeline of milestones in the Health Republic liquidation.”[2]   Perhaps “milestone” overstates it, but at least Health Republic’s policyholders and health providers are finally receiving, in lieu of proofs of claim, explanations of benefits (EOBs) for unpaid claims dating back to 2014.

Part 6 of this series described the claims adjustment procedures that the Court approved last October.[3]  Under these procedures, EOBs serve as both a “proof of claim” and a “Notice of Determination” with respect to Health Republic’s unpaid claims.[4]  These EOBs, a sample of which has not been posted, apparently contain codes that explain why a claim has been denied or questioned.  You can review a table of these codes on the Health Republic website (Website) by clicking on the link to “Reason Codes for EOB/Allowance” (Codes).

The Codes provide shorthand explanations as to why a claim has been disallowed or suggest steps to follow to pursue a claim.  For example, with respect to the former, the code “ri” means: “Received documentation incomplete. Claim closed.”  With respect to the latter, the code “d+” means: “Info submitted does not support services rendered.”  The Website advises that  EOB determinations may be appealed online by clicking on a link and filling out an Appeal Submission Form.  Note that the claimant must do so within 60 days of a date that appears on the EOB.

Mr. Axinn’s August 8th letter to the Court advised that the Health Republic EOBs were  being issued on a rolling basis.  The first group of EOBs went to policyholders with claims relating to Health Republic’s 2014 claims year.[5]  Mr. Axinn’s letter did not indicate how many EOBs had been mailed at that point or whether any health provider or policyholder had filed an appeal, but the Liquidator previously proposed — and the Court has appointed — two referees and a health care-qualified claims examiner to assist with any appeals.[6]

With respect to when any ultimately approved claim will be paid, the Website now contains, within a short description of the appeal procedures, the following notice printed in bright red letters:

Please be advised that no claim will be paid until all policy claims against Health Republic are adjudicated pursuant to the Claims adjudication [sic] Procedure.  Claims will be paid based on available general assets. The amount of payment will depend on the percentage of total assets to total claims in each particular claims class.[7]

I suppose this notice is better than nothing, but it’s misleading.

Not only will claims only be paid from “available general assets” and only after all policy claims are adjudicated, but claims will also only be paid after Health Republic’s Liquidator, DFS Superintendent Maria T. Vullo, has resolved all of her differences with the Federal government, including a lawsuit commenced by Superintendent Vullo against the Federal government on September 1, 2017.[8]

The red-letter notice quoted above also doesn’t point out that New York is one of the few states that never established a guaranty association or security fund for failed health insurers.  In other states, e.g., New Jersey and Connecticut, a guaranty association or security fund will pay or already has paid policyholders with approved claims.  In New York, on the other hand, Health Republic’s meager assets are the only source of funds to pay approved policyholder (or health provider) claims.

Which bring us to our next topic: What Health Republic assets remain  to pay approved claims?

Another Health Republic Financial Statement/Balance Sheet

In Part 12, we discussed the Health Republic estate’s “incredible shrinking assets.”[9]  We pointed out that during Health Republic’s liquidation proceedings, Liquidator Vullo, acting through the Bureau, has produced several balance sheets and at least two financial statements.  These balance sheets/financial statements were prepared using different accounting bases – cash, modified cash, and statutory – that make them difficult to compare.

For example, as discussed in previous Parts, the Health Republic estate has generated:

  • a September 30, 2016 balance sheet, prepared at the Court’s direction;[10]
  • an as of December 31, 2015 statutory financial statement, prepared by Eisner & Amper (E & A), an accounting firm hired by the Liquidator;
  • an as of December 31, 2016 statutory financial statement, prepared by E&A, but only for the last seven months of 2016; and
  • another balance sheet — of sorts —  included with Health Republic’s “Estate Profile” in the Bureau’s 2016 Annual Report ( Annual Report) to the DFS.  See NYIL § 7405(g)(1).  (The Bureau’s Annual Report to the DFS comes out in May each year and includes for each failed insurance entity overseen by the Bureau a single page of text and a balance sheet.[11])

Mr. Axinn’s August 8th letter to the Court states that the Liquidator “has completed the 2016 financial audit of Health Republic.”[12]  This is an oblique reference to yet another financial statement, a statement due every August 1st pursuant to NYIL § 7405(g)(2) (Financial Statement).

The Bureau’s 2016 Financial Statement purportedly shows the results of an “audit” of the Bureau itself, as well as of every estate that the Bureau manages.  For a thorough discussion of the Bureau’s Annual Report vs. its purportedly “audited”  Financial Statement, see Peter Bickford’s The Liquidation Process in New York, Parts 1-7.[13]

I recognize that these different financial reports and statements are confusing, but for our purposes note that the Bureau’s 2016 Annual Report identifies Health Republic as a “new estate” and includes a one-page Statement of Assets and Liabilities.  At the end of the 2016 Financial Statement, you will find a copy of a separate “audited” financial statement prepared by E & A for Health Republic.  With this as background, let’s look at the most recently produced Health Republic financial statement, as well as the Bureau’s 2016 Financial Statement, to see what they reveal about Health Republic’s “available general assets.”

First, however, we need a little context.  Let’s walk back to the beginning and then come forward.

Declining Assets

In June 2015, the DFS received an audit prepared by BDO USA showing errors in Health Republic’s 2014 annual statement.[14]  After a review of corrected filings and other “investigative action[s],” the DFS and Federal authorities concluded that Health Report could not “profitably manage its business” without more capital.[15]

When Health Republic filed its last Quarterly Statement as of June 30, 2015 (2015 Second Quarter Statement), Health Republic had an executive staff, a CEO, and a seventeen-person board of directors/trustees.  The 2015 Second Quarter Statement reported total assets of $530,183,771 and total liabilities of $443,995,702.  The 2015 Second Quarter Statement also revealed a $136,926,600 Risk Adjustment Liability.[16]  The 2015 Second Quarter Statement, which was prepared on a statutory accounting basis and filed on or about August 17, 2015, showed current year to date net premium income of $479,819,107 and a net operating loss of $53,095,722.[17]

On September 25, 2015, the DFS directed that Health Republic stop issuing new policies and commence an “orderly wind down.”  On the same date, the Centers for Medicare and Medicaid Services (CMS), which operates within the Department of Health and Human Services (HHS), terminated all its loan agreements with Health Republic, a harbinger.[18]  By October 2015, the DFS had determined that as of December 31, 2015, Health Republic’s total admitted assets would be less than its liabilities and required surplus.

On October 1, 2015, HHS announced that the Federal government would pay only 12.6% (or $18.8 million) of the $149.3 million owed Health Republic under the CO-OP program.[19]  On October 27, 2015, Health Republic’s board of directors unanimously consented to the entry of an Order of Rehabilitation or Liquidation pursuant to NYIL Article 74.[20]  On October 31, 2015, the DFS notified all of Health Republic’s approximately 215,000 enrollees/members that their plans would terminate as of November 30, 2015.[21]  On November 9, 2015, the DFS issued an order pursuant to NYIL § 1311 directing that Health Republic immediately stop paying claims to Health Republic’s policyholders/members.

On April 22, 2016, the Superintendent petitioned to liquidate Health Republic pursuant to NYIL Article 74.[22]  The Court entered an Order of Liquidation on May 11, 2016.[23]  I am not aware of any financial reports released to the public covering the period from June 30, 2015, the date of Health Republic’s 2015 Second Quarter Statement, to May 11, 2016, the date on which the Court entered its Order of Liquidation (Gap Period).[24]

During a hearing before Justice Edmead on October 11, 2016, the Court directed that the Liquidator produce, and post on its website, a balance sheet.[25]  You can still find that balance sheet, prepared as of September 30, 2016, on Health Republic’s website (Balance Sheet).  The Balance Sheet shows total assets of $99,149,675 and total liabilities of $465,980,848.  The Balance Sheet also describes itself as an “unaudited [statutory basis] balance sheet and related footnotes” that are “preliminary and subject to adjustments” to the extent that an “audit of the Company’s December 31, 2015, financial statement is in progress . . . .”[26]

In January 2017, E & A released its audited 2015 statutory financial statement for Health Republic, a report you can review on the Health Republic website (December 31, 2015 Statement).[27]  In the December 31, 2015 Statement, E & A notes that “management [i.e., the Bureau] was responsible for the preparation and fair presentation” of the statement.[28]  The December 31, 2015 Statement, prepared on a statutory accounting basis, showed admitted assets of $118,710,840 and total liabilities of $482,884,608.

In July 2017, E & A released another financial statement for Health Republic, this time for the period from May 11, 2016 (Date of Liquidation) through December 31, 2016 (2016 Partial Statement).[29]  The 2016 Partial Statement was prepared on a “modified cash basis” and shows “cash receipts and disbursements,” including “changes in Cash, Cash Equivalents and Invested Assets,” for the period from May 11, 2016 through December 31, 2016.”[30]  In other words, the 2016 E & A financial statement for Health Republic does not cover the period between January 1, 2016 and May 10, 2016.

The 2016 Partial Statement for Health Republic includes at the end of the Statement “Supplementary Information” in the form of a “Statutory Basis Statement of Admitted Assets, Liabilities, and Deficit” that shows Health Republic with total admitted assets of $43,003,676.  The E & A notes for the Partial Statement make clear that the Supplementary Information “has not been subjected to the auditing procedures applied in the [E&A] audit” and “E & A does not express an opinion or provide any assurance on it.”[31]  Nor does E & A express any opinion on whether using a “modified cash basis of accounting is an acceptable basis for the preparation of financial statements in the circumstances.”[32]

That said, the 2016 Partial Statement shows Health Republic’s estate has total assets of $43,003,676 and total liabilities of $702,700,047.[33]  With respect to Assets, the 2016 Partial Statement backs out two of Health Republic’s largest potential assets – $51,736,709 in “Amounts Recoverable from Federal Insurance” and $445,134,282 in “Risk Corridors” payments owed by the Federal government.[34]  Both the “Federal Insurance,” i.e., reinsurance, and the “Risk Corridors” payments have been set off with “non-collectability reserves.”[35]

The Health Republic estate’s obligations with respect to classes of creditors are laid out in its 2016 Partial Statement according to the creditor classes in NYIL § 7434.[36]  Section 7434 assigns all claims against an insolvent New York insurer’s estate to nine classes.  Class one claims, for example, consist of the “actual and necessary costs and expenses of administration” for the estate, which, in Health Republic’s case, includes moneys paid to outside consultants, vendors, web-site administrators, outside counsel, and the Bureau itself.

Class two claims include “all claims under policies.”  Class three claims include “claims of the federal government.”  Class six claims include “claims of general creditors.”  Class nine claims include “claims of shareholders,” of which there are none, unless you count all of the Federal taxpayers who paid for Health Republic’s solvency and start-up loans.

Here is a critical point:  NYIL §7434 requires that “[e]very claim in each class shall be paid in full . . . before the members of the next class receive any payment.”  NYIL § 7434 (a).  With that caveat in mind, what are Health Republic’s obligations to each of these creditor classes?

The 2016 Partial Statement shows Class one claims at $4,097,461, presumably the administrative expenses paid through December 31, 2016.  For Class two claims, $200,716,597 has been allocated for all allowed and non-allowed policyholder and health provider claims.  Class three claims are listed as $197,571,060, which presumably refers to the Affordable Care Act’s risk transfer program pursuant to which Health Republic owes money to compensate health insurers that enrolled insureds with higher than average costs.[37]  Health Republic’s start up and solvency loans, totaling $264,966,400, have been assigned to Class eight.[38]

The 2016 Partial Statement concludes with Note 13 that describes a series of letters to the Liquidator from the CMS offsetting amounts due to Health Republic against amounts that Health Republic purportedly owes the Federal government.  For example, the Federal government has offset $46,258,274 it owes to Health Republic under a Federal reinsurance program against the $191,338,780 that Health Republic purportedly owes  under the risk adjustment program.[39]  While Notes 13 and 14 indicate positions taken by the Federal government, the notes do not reveal the Liquidator’s response or whether the Liquidator agrees or disagrees with any of the offsets or administrative holds described in the notes.

Recall that under NYIL §7405(g) the Bureau must provide its own “annual financial statement.”  The Bureau’s 2016 Financial Statement contains one reference to Health Republic: “During 2016, the NYLB made claim payments for Health Republic from the CDA” or Central Disbursement Account.[40]  This is interesting because, to my knowledge, no Health Republic claims have yet been presented to the Court for approval, much less approved for payment.

Perhaps this sentence refers to claims that were approved for payment before Health Republic’s May 11, 2016 Liquidation Order was entered.  In other words, were claims paid during the period from June 30, 2015 to May 11, 2016 (Gap Period), i.e., before Health Republic was liquidated, but without Court approval?  Or were these claims that were paid before the Superintendent issued the November 9, 2015 Order directing that Health Republic stop paying claims?

Other questions have surfaced recently with respect to funds that were spent immediately before Health Republic was placed in liquidation or with respect to at least one entity that was hired, and may have been paid, during the Gap Period.

Empire Center Report

As described on its website, the Empire Center for Public Policy, Inc. (Empire Center), is “an independent, non-partisan, non-profit think tank based in Albany, New York.”[41]  Empire Center focuses on government transparency, particularly with respect to how New York State government spends taxpayer dollars.[42]

Recently, Empire Center looked at New York State’s Indigent Care Pool, which is funded with a tax created as part of New York State’s Health Care Reform Act of 1996.[43]  The Pool reimburses hospitals that provide free care to the poor and uninsured.  The Empire Center’s analysis of 2016 Pool distributions showed that the Pool’s distributions shortchanged some hospitals, such as St. Joseph’s Hospital in Yonkers, while overcompensating other hospitals, such as Memorial Sloan Kettering Cancer Center in Manhattan.  The money to reimburse these hospitals comes from two sources: (1) a federal matching program; and (2) surcharges on health insurance, i.e., taxes paid by health insurers such as Health Republic.

The Empire Center report contains a table that shows that Health Republic’s owner,  Freelancers, paid $40,370,228 in insurance surcharges, i.e., HCRA taxes.[44]  According to the report’s author, these insurer payments[45] include payments by Health Republic during the first seven months of 2015, not the 2016 calendar year.  The October payments would have been due on or about September 23, 2015, or just two days before the Superintendent announced Health Republic’s shutdown, which raises the following questions:

  • Given Health Republic’s fragile fiscal condition in September 2015, who at Health Republic approved payment of the HCRA tax?
  • Were persons at the DFS who were familiar with Health Republic’s condition also aware of the HCRA payment?
  • Has anyone suggested or proposed that the HCRA payment be returned to the estate as a preferential payment?

Had the HCRA  payment not been made, or if the HCRA payment were returned, the assets available to pay Health Republic’s policyholders (and health providers) would double.

Finsbury

If you go to Health Republic’s website and look under “Key Documents: Administrative Expenses,” you will find a reference to “Finsbury” under the subheading:  “Legal.”  You will note that the two law firms that have represented Health Republic during its receivership — Weil Gotshal, & Manges and Clarick, Gueron, Reisbaum, LLP — also appear under this subheading.  According to the expense summary on the Website, in May and July 2016 the Liquidator paid “Finsbury” a total of $11,145.

Crain’s New York Business recently reported that Kushner Cos. had hired London and New York-based Finsbury Communications to represent it in the face of several ongoing investigations.[46]  Referred to in the article as a “fixer firm,” Finsbury Communications numbers among its clients Citigroup, Toyota, Barclays, Volkswagen, and Sherri Redstone, as she fought for control of Viacom.  Crains described Finsbury Communications as a “significant player in the world of corporate image-making and crisis management.”  In other words, if “Finsbury” is Finsbury Communications, it’s not a law firm, but it may advise “legal counsel.”

In an email to counsel for the New York Liquidation Bureau, I asked whether the Finsbury that appears on the list of Health Republic’s vendors is the same public relations firm that now represents Kushner Cos.  If so, I asked what advice Finsbury provided to the Bureau and why its retainer agreement had not been posted.

I received no response from the Bureau, but I did learn of a Finsbury Law Solicitors in London with offices on Seven Sisters Lane.  I called and a baffled solicitor confirmed that his firm has never acted for the Bureau or a failed health insurer in New York.

The Finsbury listed as a Bureau vendor on the Website prompts the following questions: (1) who hired Finsbury?; (2) what possible advice did Finsbury provide to Health Republic?; and (3) how much was Finsbury paid for services rendered during the Gap Period?

Where to Now?

I’m writing to Justice Edmead requesting that on the return date for the Liquidator’s order to show cause the Court address a number of questions raised by the Liquidator’s Status Report, as well as the Liquidator’s suit against the United States, an action filed on September 1, 2017. Vullo v. United States, No. 17-1185C (U.S. Court of Federal Claims).  In that action,  Liquidator Vullo seeks “to recover more than $575 million owed to [Health Republic] by the United States government . . . .”[47]

We are now a year and a half into Health Republic’s liquidation.  A few outside law firms, a major accounting firm, a large consulting firm, a website administrator, other vendors, and the Bureau itself have been paid a total of more than $10 million, but no Health Republic policyholder (or health provider) has received a cent on a single approved claim. We will see what the February 14, 2018 return date/status conference reveals and trust that at least a few of Health Republic’s more than 200,000 former policyholders will appear and participate.

 

[1] See, generally, http://www.triskaidekaphobia.info/.

[2] Letter from Special Deputy Superintendent David Axinn to Hon. Carol R. Edmead, dated August 8, 2017;  http://healthrepublicny.org/ (Health Republic Website and Court Docket, Item 118 (Axinn Letter).

[3] Health Republic’s Curious Liquidation, Part 6, pp. 1-3.

[4] Id., p. 1.

[5] Axinn Letter, p. 1.

[6] See order entered on May 18, 2017 appointing two referees to resolve objections to the EOBs and authorizing the Liquidator to hire Independent Medical Expert Consulting Services, Inc. to provide independent medical review services on an as needed basis in support of the referees’ review.  Health Republic Website, Docket Item 112.

[7] Health Republic Website: Appeal Procedure.

[8] Health Republic’s Curious Liquidation, Part 10, text accompanying nn. 15-17.

[9]  Health Republic’s Curious Liquidation, Part 12, pp. 3-4.

[10] Health Republic Website: Key Documents/Balance Sheets.

[11]  New York Liquidation Bureau: 2016 Annual Report http://www.nylb.org/Documents/AnnualReport_2016%20Final%205.2.17.pdf. The financial snap shots of each estate are prepared on a modified cash basis.

[12] Axinn Letter, p. 2.

[13] http://www.pbnylaw.com/category/nylb/.

[14]  Verified Petition, p. 5, n. 11.

[15] Id.

[16] 2015 Second Quarter Statement, pp. Q2, Q3.

[17] 2015 Second Quarter Statement, p. Q4.

[18]  Health Republic Website: Legal Documents, Verified Petition, ¶ 12, p. 5.

[19] Health Republic Website: Legal Documents, Verified Petition, ¶ 13, pp. 5-6.

[20] Health Republic Website: Legal Documents, Verified Petition, ¶ 16, p. 6.

[21] Health Republic Website: Legal Documents, Verified Petition, ¶¶ 14, 15, p. 6.

[22] Health Republic Website: Legal Documents, Verified Petition, p. 1.

[23] Health Republic Website: Key Documents, Liquidation Order.

[24] Id.

[25] Health Republic’s Curious Liquidation, Part 6.

[26] Health Republic Website: Key Document, Balance Sheet.

[27] Health Republic Website: Key Documents, Audited 2015 Financial Statements.

[28] Health Republic Website: Key Documents, Audited 2015 Financial Statements, January 17, 2017 cover letter, p. 1.

[29] Health Republic Website: Key Documents, Audited 2016 Financial Statements.

[30] Health Republic Website: Key Documents, Audited 2016 Financial Statements, initial note, p. i.

[31] 2016 Partial Statement, p. 2.

[32] 2016 Partial Statement, p. 1 of introductory cover note.

[33] 2016 Partial Statement, pp. 4-5.

[34] 2016 Partial Statement, p. 4.

[35] 2016 Partial Statement, n. 6, p. 15.

[36] 2016 Partial Statement, p. 4.

[37]  2016 Partial Statement, p. 16-17, n. 6.

[38] 2016 Partial Statement, pp. 4, 14-15, n. 5.

[39] 2016 Partial Statement, p. 19, nn. 13 and 14.

[40] 2016 Financial Statement, p. 10. The Bureau titles the “annual financial statement” required by NYIL 7405(g)(2) as an “Annual Audit Report,” but does not cite to NYIL 7405(g)(2) in its report, which only attributes to the confusion.

[41] https://www.empirecenter.org/.

[42]  See Empire Center’s transparency website called SeeThroughNY.net that allows New Yorkers to search the public employee payrolls of New York State, New York City and 19 public authorities.  This site also allows you to search databases of legislative member items and office expenditures.

[43] Empire Center, Indigent Carelessness, http://www.empirecenter.org/publicationsinvincible-indigence.

[44] Indigent Carelessness,  p. 9.

[45] Id.

[46] Kushner Cos., feeling heat, hires new public relations firm.  www.crainsnewyork.com/article/20170824/POLITICS/170829934/with-kushner.

[47] A copy of the complaint has not been posted on the Health Republic Website or included with the Liquidator’s Order to Show Cause, but can be retrieved via PACER.