How ACA’s ‘heavy-loss’ backstop was cut, undermining numerous small insurersNew research from S&P Global Market Intelligence. Read the entire report here.
Across the health insurance industry, some 60 insurers believe they are owed about $12.2 billion in total through the risk corridor program, which has been cut by Congress. The ACA’s risk corridor program was meant to act as a backstop to insurers in case they booked heavy losses on insurance products meant for high-risk patients. However, the removal of the program’s funding undermined the business models of dozens of insurers who opted to offer the products.
HealthyCT, and some small insurers like it, eventually turned to a cottage industry of hedge funds to finance lawsuits against the government over those promised payments.
According to documents reviewed by S&P Global Market Intelligence and conversations with more than a dozen people familiar with the industry, other firms are seeking to strike deals resembling HealthyCT’s agreement with Chicago-based firm, Juris Capital.
Excerpts from the S&P Global Market Intelligence analysis
Ken Lalime was out of options. Regulators were threatening the fledgling nonprofit health insurer he led with liquidation, and patients’ claims were going unpaid.
A critical subsidy promised to insurers like Lalime’s had been axed in Congress in late 2014, and the insurer had struggled to stay solvent. In 2016, Lalime decided to close the doors of his company, HealthyCT Inc.
As one of the state-level insurers founded after the Affordable Care Act was passed, HealthyCT had served as many as 41,000 patients over three years. It was also one of dozens of insurers relying on the federal subsidies called risk corridor payments the government had agreed to make to help cover high-cost patients.
But those payments had been cut in Congress, and the checks to insurers eventually stopped altogether. Lalime explained in an interview that his company went to the capital markets to raise money, tried to partner with other insurers and appealed directly to the federal health insurance regulator for relief. But the insurer’s revenue could not keep up with claims without the risk corridor payments.
“We tried everything that we felt we could to shore up our capital position and that, unfortunately didn’t happen,” Lalime said in an interview. “We had to take other arrangements.”
HealthyCT, and some small insurers like it, eventually turned to a cottage industry of hedge funds to finance lawsuits against the government over those promised payments. For the cash HealthyCT needed to repay its creditors, it traded its right to receive its risk corridor funds for only a fraction of what it could have recovered in court.
Across the industry, some 60 insurers believe they are owed about $12.2 billion in total through the risk corridor program. For a handful of insurers willing to take the government to court for their share, litigation financing has quietly become a key part of that fight.
High Risk, High Reward
The ACA’s risk corridor program was meant to act as a backstop to insurers in case they booked heavy losses on insurance products meant for high-risk patients. But the removal of the program’s funding undermined the business models of dozens of insurers who opted to offer the products.
That left many insurers scrambling to replace a source of funding they believed was guaranteed by law. At least 10 closed their doors within about a year of the payments’ absence.
For HealthyCT, the only way to recover the money critical for operations was to sue. But a lengthy legal fight against the government was beyond the tiny insurer’s means. HealthyCT spun its wheels for months before another option emerged in 2016.
In exchange for the nearly $45 million the insurer was owed, HealthyCT would receive $10.5 million from a hedge fund that would fight the government in court on its behalf. The firm, Chicago-based Juris Capital, stood to rake in a net gain of $34.5 million if courts ruled in the insurer’s favor.
Juris Capital agreed to purchase the rights to any money recovered in court to cover HealthyCT’s debt of about $10 million. The deal provided critical, immediate liquidity to the insurer and the prospect of a massive gain if the court sided with HealthyCT.
David Desser, managing director at Juris Capital, described the investment as high risk, high reward in an interview. Juris could book a windfall if it won, but the court could also decide the insurer is owed only a percentage of the loss it logged in its books, which could leave Juris with a disappointing return if not a loss.
Read the full report here.