After launching the only health care cooperative in the country that made money, the top executives of Maine’s Community Health Options insurance company received hefty pay hikes that more than doubled their pay in the first two years of operation.
Now, a year later, the same managers are dealing with millions of dollars of losses and are expected to sharply increase premiums on its 84,000 customers to cover claims that poured in during 2015 when thousands of policy holders – many of them previously uninsured – accessed medical care on a scale no one anticipated. The executives are in the uncomfortable position of having big boosts in pay – the combined incomes of the top two executives, CEO Kevin Lewis and Chief Operating Officer Robert Hillman, grew from $311,642 in 2012 to $715,819 in 2014 – at a time when the organization’s finances are uncertain and under scrutiny from regulators.
CHO officials said they have cut administrative expenses by $11 million, including a 10 percent cut in Lewis’ pay, a reduction Lewis initiated last year. Other top managers volunteered to take pay cuts and bonuses were eliminated, co-op officials said, and CHO set aside $43 million in reserves to return the health co-op to financial sustainability. But co-op officials declined to reveal details about the other pay cuts and budget reductions, aside from saying much of it was in marketing and that there were no layoffs.
Pay and other budget information for 2015 will be revealed when the co-op files its annual Internal Revenue Service documents in July.
The top 10 earners after Lewis were paid an aggregate of $1,975,909 in 2014, according to CHO’s filing with the IRS.
Lewis said he worries that revealing details of his team’s pay cuts could lead other insurers to try to lure away CHO’s executives with offers of better pay.
“It’s important for us as an organization to preserve all of the staff force,” Lewis said. “We need this management team.”
CHO was formed in 2012 and began selling health insurance policies in 2014. Along with 23 other nonprofit co-ops nationwide, it received loans from the federal government to start up under the Affordable Care Act, with the aim of providing competition to other insurers to keep premiums down.
CHO was promised $130 million in capital from the federal government and, according to the state Bureau of Insurance, it has about $50 million left in borrowing capacity.
Nearly half of the nation’s co-ops failed in the first year of operation, but CHO stood out as the only one to make money in 2014, netting $7 million. But that turned around in the latter half of 2015, and CHO recorded a loss of $31 million and has set aside $43 million to cover an expected shortfall in premiums this year.
The 2015 budgeting shortfall has drawn the attention of the Maine Bureau of Insurance, which has placed the nonprofit on “enhanced oversight.” That means the co-op will have to file monthly reports to ensure it has enough money in reserves and for operations to cover the claims of its 84,000 enrollees.
Eric Cioppa, the state’s insurance commissioner, said his agency will post monthly updates on CHO on its website so that the cooperative’s business partners and members can keep track of its progress.
“I’m not trying to set off alarm bells,” he said, “but I am trying to be transparent.”
PAY AT NONPROFIT CO-OPS DRAWS CRITICISM
Although the cooperative executives’ pay seems large for Maine, where the 2014 median household income was less than $50,000, it’s not excessive in the world of nonprofits.
Charity Navigator, an independent watchdog organization that monitors nonprofits, reports that a nonprofit with expenses above $13 million – defined as large – paid CEOs a median $256,143 in 2012, the year the salary analysis was done. CHO had expenses of nearly $187 million at the end of 2014, so it would be compared with other large nonprofits.
Compensation varies widely among Maine health care nonprofits. For instance, the CEOs of large health care systems such as Maine Health, Central Maine Healthcare and Eastern Maine Healthcare make well over $1 million in annual compensation. Administrators of other health-related nonprofits also draw big paychecks: According to their 990s forms filed with the IRS, the CEO of HealthInfoNet, an organization that oversees the implementation and operation of an information technology network, earned $306,464 in 2014 and the CEO of Western Maine Health Care Corp., a regional group that ensures access to quality health care in three counties, earned $326,717.
The Maine Health Management Coalition Foundation, a provider-led partnership that works to improve the delivery of health care services in Maine, paid its CEO $234,960 in 2014 and the Maine Health Access Foundation, a group that promotes affordable and quality health care in the state, paid its CEO $207,192 that year.
But executive pay at the nonprofit co-ops has attracted criticism.
According to a report by the Daily Caller, a conservative news site, one cooperative paid its top executive $587,000 in 2013. The New York Times reported last August that a South Carolina co-op, the Consumers’ Choice Health Plan, paid its top two executives $458,196 and $351,710 in 2013, according to its IRS returns. The president of the co-op defended his salary in the Times article, saying it was competitive with similar health care enterprises.
Federal rules bar “excessive executive compensation,” but there’s no set procedure for determining what constitutes excessive pay.
The Centers for Medicare and Medicaid Services, the federal agency that oversees the Affordable Care Act, said it monitors how co-op boards determine executive pay, including adopting a policy on compensation and surveying similar organizations on executive pay. If a board were unable to show that it followed the rules, a CMS spokesman said, it could lose its federal loan and be forced out of business.
W. Douglas Smith, chairman of the CHO board, said those rules were followed at the Maine co-op. The 16 people who oversee the cooperative relied on reports that outlined the pay of comparable executives at similar organizations when calculating how much to pay Lewis and other executives.
“This is a hugely talented management team and we don’t want to lose them,” Smith said, adding that he respected the management team’s offer to cut pay after the losses of 2015.
Smith also said he thinks the cooperative’s managers did a good job staying on top of CHO’s finances last year, even as the projected losses grew steadily from an estimate of $3 million in August.
“We just didn’t see that snowball coming,” said Smith, a veteran of more than 30 years in the health care and insurance industries. “It’s not unusual in the insurance business. It’s like a roller-coaster ride.”
AT 2015’S END, A $31 MILLION LOSS
CHO started gearing up in 2012 when it and about two dozen other nonprofit cooperatives were formed under the Affordable Care Act to create competition – and ideally keep premiums lower – in the new era of health care coverage exchanges and requirements for individuals to get insurance or face fines.
At the time, Lewis made $141,585. His management team – just two other executives – earned $226,262.
The co-op started selling policies in 2014, signing up 40,000 enrollees and building a workforce of more than 180 as of last fall. It expanded into New Hampshire last year and more than doubled its policyholders.
But then the bottom fell out, as more people filed claims for medical care than CHO’s managers expected.
Cioppa said CHO told his bureau in October that it had lost $17.2 million during the July-September quarter, but it expected to break even through the rest of the year. But when the end of the year came, the loss was $31 million for 2015. Also, the co-op needed to set up a $43 million reserve to cover the difference between projected premium payments and health care costs in 2016.
In December, Cioppa ordered CHO to stop enrolling customers for individual insurance coverage, since that line of business was causing the biggest losses. The cooperative was allowed to continue to sell group insurance policies.
That made one of the 2016 budget cuts easy for CHO managers. Aside from salary reductions, most of the rest of the $11 million in cuts came from reduced spending on marketing, Smith said, a logical step in the wake of the bureau’s orders to stop selling individual policies. Smith said the cooperative was also able to sublet some of the space it had rented in Lewiston.
Cioppa said CHO and other cooperatives are hamstrung by the way the ACA was established.
The cooperatives were intended to provide competition with for-profit insurers and larger nonprofits to keep insurance rates low. But critics said they were underfunded by loans from the federal government, a critical factor in the failure of more than half the original 24 co-ops.
Cioppa said there’s also a long lead time between when the cooperatives file their rate plans and when they go into effect. For instance, CHO files its premium requests in May, they are generally approved by state regulators in the summer, and go into effect at the beginning of the next year.
Because CHO had such a good year in 2014, it sought a premium increase of just 0.25 percent for 2016. As the losses piled up in the last half of 2015, CHO’s only option for 2016 was to set up the reserve fund and seek a premium increase that will take effect on Jan. 1, 2017.
CO-OPS ‘FACE A PRETTY STEEP HILL’
Lewis declined to say how much of an increase CHO will seek when it files its request in May, but it will likely be significant because the co-op has to cover its 2015 losses.
Cioppa said CHO has about $50 million in capital after last year’s loss and the premium reserve. He said that appears to be adequate to give the cooperative time to adjust its premiums to reach a better balance sheet.
He said his bureau also tracks a complex formula called risk-based capital, which tracks how much capital an insurer is likely to need to support its operations. CHO’s risk-based capital is 343 percent, which Cioppa said is “healthy,” noting that his bureau would likely need to act only if that figure fell below 100 percent.
Charles Gaba, who follows the implementation of the ACA on his blog, ACAsignups.net, said he expects the problem of the newly insured heavily using their coverage – and causing big losses for insurers – will ease as fewer people will look to immediately see a doctor to treat a long-standing condition.
“Hopefully, that wave has subsided,” he said, but the question remains whether any of the nonprofit cooperatives can survive to provide the competition they were designed to offer.
“They face a pretty steep hill with very little margin for error,” he said.
For his part, Lewis said the troubles that CHO and other cooperatives have encountered reflect the complexity of the insurance market in a time of change and the difficulties of starting a new company.
He said he and the CHO management team have learned lessons that will help in the months and years to come.
“I don’t think there’s a single carrier that had a profitable year in 2015, at least in the individual marketplace,” Lewis said. “Our team has gotten a lot better and has more tools in place. Our dashboard is a lot more accurate and sensitive.”
Edward D. Murphy can be contacted at 791-6465 or at: