A First Circuit Court judge abruptly shut down Family Health Hawaii, the startup medical insurer run by a former state insurance commissioner over the past 2-1/2 years.
The insurer, which has struggled to maintain the required $2.3 million in statutory reserves since opening in October 2013, fell below that threshold and did not maintain the minimum net worth to ensure it could meet its obligations in 2015.
The company, which posted a $1.2 million loss last year, couldn’t withstand the substantial changes in the health insurance market resulting from the federal Affordable Care Act, also known as Obamacare, said J.P. Schmidt, chief executive officer of Family Health Hawaii, who stepped down as Hawaii’s insurance commissioner in 2010.
“All of the health insurers have had a difficult time adjusting to the ACA,” he said. “We’ve seen it with all health insurers this past year suffering underwriting losses. We have several parties interested in providing the capital that would meet the Insurance Division’s requirement, but it takes time to finalize them and we simply ran out of time. We had hoped to persuade the Insurance Division to put Family Health in rehabilitation to give us the time to finalize them, but they decided not to do that. This is pretty much the last nail in the coffin.”
The order, signed by First Circuit Court Judge Karen Nakasone, authorizes Insurance Commissioner Gordon Ito, who previously was deputy insurance commissioner under Schmidt, to take control of the company’s assets and assume the powers of its directors and officers to protect policyholders, creditors and the public. The company had been working with the state’s examination team but missed several key deadlines.
“This is a regrettable situation,” Ito said in a news release Thursday. “However, once we determined the degree of the existing financial hazard, the decision was made to protect the policyholders and creditors. Falling below statutory solvency requirements compelled this liquidation action. Further delay would only increase the risk of loss and jeopardize FHH’s policyholders’ access to health care and providers under their plans.”
Family Health Hawaii insures roughly 420 employer groups and about 7,000 members. It had three employees and a number of contractors to keep overhead low, according to Schmidt.
The company did not offer individual plans and was the fifth commercial health insurer in the market, competing with Hawaii Medical Service Association, Kaiser Permanente Hawaii, Hawaii Medical Assurance Association and UHA (University Health Alliance).
One of the biggest problems for the startup company was that under the ACA, insurers could no longer medically underwrite policies or deny coverage based on pre-existing medical conditions, Schmidt said.
“That’s fundamental to the insurance business. They then can determine how much they need to charge in premiums in order to cover the claims for the next year,” he said. “That makes it very difficult to do an actuarial prediction.”
The other major blow was a so-called risk-adjustment program under Obamacare, which requires insurers with healthier members to reimburse competitors with higher-risk populations to mitigate the effects of companies having to cover the chronically ill and uninsured.
“Family Health Hawaii with its 7,000 members was required to pay over half a million dollars to our competitor HMSA, the dominant health insurer in the market,” Schmidt said. “I believe it’s crazy. I believe it’s unconstitutional and it will have exactly the opposite of the intended effect. It’ll end up destroying the small-business health insurance market in Hawaii.”
Under the program, Kaiser was forced to pay HMSA more than $14 million, while HMAA and UHA paid hundreds of thousands of dollars, he said.
“We knew from the start that it would be risky and difficult, but we were able to overcome and were able to provide good coverage to a number of employers, (who) were very happy to see us come into the market,” he said. “We believe we had a very beneficial effect on the market during the time we were here.”
