Evergreen Health Cooperative sued the federal government Monday over a program that could force it to make a huge payment to larger insurance companies and compromise the 3-year-old company's future.
The lawsuit marks a critical departure for Evergreen CEO Peter Beilenson, a longtime advocate for the Affordable Care Act, President Barack Obama's insurance reform designed to extend health coverage to more Americans.
The federal law requires insurers with healthier members to make payments to those with sicker, costlier members.
In the lawsuit filed Monday in U.S. District Court, Evergreen says it expects to owe between $18 million and $22 million this year, or about a quarter of its $85 million premium revenue in 2015, under the so-called risk adjustment program.
Evergreen alleges in the suit that the method for determining how much companies pay or receive under the program favors older, more well-established companies and puts small firms, like Evergreen, at a disadvantage. The suit against the U.S. Department of Health and Human Services and U.S. Centers of Medicare and Medicaid Services seeks to phase in payments over several years or delay them temporarily.
While the charge won't put Evergreen out of business, it would be a big setback for one of the most successful and one of the few remaining health insurance co-ops established by the federal health reform law.
The higher-than-expected fee could wipe out nearly half of Evergreen's reserve cash, the suit said, putting the co-op's solvency at risk, and destroy plans to meet a major milestone in 2016 — profitability.
"We're quite confident we'll survive," Beilenson said. "But this is an outrageous sum of money being sent from one insurer to another that doesn't need it and doesn't deserve it."
Beilenson said he was told by federal regulators that CareFirst BlueCross BlueShield, the largest insurer in the state, would be the primary recipient of risk adjustment payments in Maryland.
A spokesperson for the Centers of Medicare and Medicaid declined to comment because litigation is continuing. CareFirst declined to comment.
The risk adjustment program was put in place under the federal health reform law to protect insurance companies that would be taking on sicker members, as the law prevented them from denying coverage to people because of a pre-existing illness.
Regulators give a health plan's members a risk rating based on their age, gender, medical history and other factors. Risk ratings are compared against the state average, and plans that have healthier-than-average members pay into the program, while those with sicker-than-average and riskier members receive money.
Evergreen argues in its lawsuit that, in practice, the program means small companies must pay out sizable portions of their revenue to some of the biggest insurers in the business.
Large insurers who have been in business for decades are better at estimating their members' health, while small companies lack the technical sophistication and the years of medical history to provide as accurate an estimate and, as a result, appear to have healthier members, the suit contends.
The payments are a significant burden for small companies with relatively small operating budgets and reserves, Beilenson said. The hardship the payments create for small companies contrast sharply to the benefit they offer the large recipients, Beilenson said. While $22 million represents about a quarter of Evergreen's 2015 revenue, CareFirst has a reserve of about $1.5 billion.
"It is a grossly unfair system," Beilenson said.
The program has become the most recent hurdle in a long series of obstacles that co-ops have needed to clear to stay in business.
Co-ops, or consumer-oriented and -operated plans, are insurance companies governed by a board of their members. The health reform law offered loans that helped create 23 co-ops nationwide. Lawmakers saw the program as a way to inject more competition into a market dominated by large corporations.
These newcomers had to build a membership base from scratch, establish a network of doctors and figure out the right price for plans, all while competing against larger insurers with deep-rooted reputations. Co-ops had been counting on new online insurance marketplaces, also created by the ACA, to boost early enrollment and many suffered when these new exchanges experienced technical problems.
Maryland's launch problems were among the nation's worst, and Evergreen shifted focus to the small-business market to survive initially.
Other rules created by the health law to spread the risk of covering more people, who previously were denied insurance and were expected to enroll in droves, also challenged co-ops. One such program was supposed to pay back insurance companies for exorbitant costs. Some co-ops closed when the federal government said it wouldn't deliver on that promise.
Only 11 co-ops remain operating.
"If you're looking for the fundamental flaw, it's not the risk adjustment program," said Sabrina Corlette, a senior research professor at the Center on Health Insurance Reforms at Georgetown University's Health Policy Institute. "It's that they were given very few resources to enter a market that has notoriously high barriers to entry and is expensive to enter."
The risk adjustment program alone won't close co-ops or other small insurers, but it could be the final challenge — on top of all the others — that drives them over the edge, Corlette said.
Evergreen initially anticipated a risk adjustment fee of between $4.5 million and $7 million this year, and Beilenson feared the much higher estimate would ruin the company. But after evaluating Evergreen's finances, he expects the company to be able to make the payment.
The charge will reduce Evergreen's reserves from $25.5 million to $13 million, just above the $11 million required by the state to cover the claims of its roughly 40,000 members.
The payment will leave Evergreen with a 266 percent risk-based capital ratio, a complex formula the Maryland Insurance Administration uses to determine a company's financial stability. The state is required to investigate if an insurer's risk-based capital ratio falls to 200 percent.
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"It's close," said Len Sherman, Evergreen's chief financial adviser.
On top of cutting into Evergreen's reserves, the payment blows the co-op's chance of turning a profit for the first time this year. The company had expected a profit of between $1 million and $2 million, but instead would lose $11 million, about the same as last year.
Maryland Insurance Commissoner Al Redmer Jr. said he is not worried about Evergreen and does not intend to take action. But he is concerned about the risk adjustment program.
Redmer and Evergreen worked together to try to persuade federal regulators to adjust the policy. The agency plans to make changes that will ease the problem in 2017, but Beilenson said the solution could come too late for some companies, which is why Evergreen pursued the lawsuit.
Though Evergreen is the only plaintiff named, Beilenson said he hopes the lawsuit will benefit other companies for whom a high risk adjustment charge may be detrimental.