photo_mvullo-1261374Confirmation hearings for Maria Vullo, Governor Cuomo’s nominee for superintendent of the Department of Financial Services, hit a sour note on Thursday when the questioning turned to last year’s collapse of Health Republic Insurance.

Although the fiasco unfolded before Vullo’s time at the department, her comments gave a misleading account of events and downplayed DFS’s own responsibility for what went wrong—raising doubt as to whether she has learned from her predecessors’ mistakes.

Health Republic was a non-profit “co-op” (consumer-operated and oriented plan) founded under the Affordable Care Act in 2013. By offering top-drawer benefits at rock-bottom prices, the company both attracted customers and ran up deficits from the beginning. DFS not only failed to stop Health Republic’s money-losing practices, but denied its full rate-hike requests in 2014 and 2015.

The company then learned that some $200 million in federal subsidies it had been banking on would not materialize, leaving it effectively insolvent. DFS shut the plan down in November 2015, disrupting coverage for 215,000 customers and sticking medical providers with hundreds of millions in unpaid bills.

Asked by senators how she would have handled things differently, Vullo asserted that the department was misled about Health Republic’s deficits.

“What I can tell you is that the company had provided financial statements to DFS of solvency, a very high level of solvency, throughout the time period,” she said. “And it was only until June 2015, when an outside auditor provided an audited financial statement that caused a deep-down review, where we saw that the estimates of liabilities were higher than perhaps they should have been.”

In fact, the department had plenty of earlier warnings about trouble at Health Republic—from the company’s filings, from its competitors, and even from the company’s top executive.

According to a revealing post mortem by Crain’s New York Business, newly appointed CEO Debra Friedman concluded in the summer of 2013—before Health Republic had sold a single policy—that its premiums were too low to be sustainable.

By August, one month into her new job and two months before New Yorkers could begin enrolling in Obamacare plans, Friedman realized the insurer had set itself up for disaster, former staffers said. She asked DFS to let Health Republic refile its rates. The regulator refused. Troy Oechsner, the agency’s deputy superintendent for health, said changing approved rates would be akin to having a closed bid and then letting one bidder change its offer after all the bids were made public.

As for why the company looked solvent on paper, this was because it expected tens of millions of dollars in “risk corridor” subsidies from Washington, and plainly reported that mushrooming amount on its balance sheet as an asset receivable. That was a questionable practice to say the least, since the subsidy was meant to partially compensate insurers for excessive operating losses in the early years of the ACA—meaning the more money Health Republic lost, the bigger this “asset” grew. Plus, in December 2014, a newly passed law barred the Obama administration from using tax dollars to make up a shortfall in the risk corridor program, putting both Health Republic and DFS on notice that the company was unlikely to collect its full amount. In the end, insurers owned money from risk corridors received only 12.6 cents on the dollar.

As Senate Health Chairman Kemp Hannon said to Vullo: “It became pretty obvious in retrospect—and hindsight always gives you great wisdom … that there were warning signs all along the way, that we should have known, we could have known. It wasn’t just the June or July outside auditor.”

Also discouraging, if unsurprising, was Vullo’s expression of support for New York’s “prior approval” law, which empowers DFS to directly regulate health insurance premiums. The industry charges that the department, under political pressure to keep prices low for consumers, tends to cut too deep—a complaint bolstered by the department’s decision to lower some of Health Republic’s rates a few weeks before declaring it insolvent. Also, there’s no evidence, in New York’s competitive insurance industry, that regulation works better than competition to keep premiums in line.

Yet Vullo’s comment on prior approval was: “From the regulator’s perspective, I think that serves New Yorkers well.”

She also resisted the idea, as suggested by Insurance Committee members, that the department should present actuarial evidence to back up its rate decisions.

To her credit, Vullo emphasized that she considers assuring the financial health of insurers—which was the original purpose of insurance regulation—to be her top priority.

“My main goal is the fiscal soundness of the institutions,” she said. “That is the primary part of my job, and I take that incredibly seriously.”

Prior approval, she said, means “balancing the financial solvency issues, which is my primary concern, and the tremendous cash burden on people, on your constituents, in terms of health insurance rates. And that’s not an easy task.”

It’s a balancing act she should not have to perform.

About the Author

Bill Hammond

As the Empire Center’s senior fellow for health policy, Bill Hammond tracks fast-moving developments in New York’s massive health care industry, with a focus on how decisions made in Albany and Washington affect the well-being of patients, providers, taxpayers and the state’s economy.

Read more by Bill Hammond

You may also like

Even With Federal Cuts, New York’s Health Funding Would Remain High

New York's health-care industry stands to lose billions of dollars in federal funding under the major budget bill being debated in Washington – a rare and jarring turn of events for a sector accustomed to steadily increas Read More

As Albany’s Session Ends, Watch for Rising Health Costs

Every session of the state Legislature brings a fresh crop of proposals that would drive up health-care costs, and 2025 is no exception. Here is a sampling of pending bills that, if Read More

House Budget Would Burst New York’s Essential Plan Bubble

The extraordinary cash bonanza associated with New York's Essential Plan – which has generated billions more than state officials were able to spend – would come to a crashing end under the budget bill advancing in Cong Read More

The House GOP’s Shrinking Budget Plan Could Still Cost New York Billions

The likely impact of federal health-care cutbacks has diminished in recent days as House Republican leaders backed away from some of their bigger-ticket proposals, reducing the estimated savings to $625 billion from previous figures of $715 billion and $8 Read More

How Medicaid ‘Expansion’ Changes Could Affect New York

As House Republicans consider cutbacks to federal Medicaid funding, their focus has turned to the so-called expansion population. Although the details of remain undetermined, the s Read More

New York’s Home Health Workforce Jumps by Another 10 Percent

New York's home health employment is continuing to soar, growing by 57,000 jobs or 10 percent from 2023 to 2024, according to newly released data from the U.S. Bureau of Labor Statistics. Read More

Immigrant Enrollment in ‘Emergency Medicaid’ Surges to 480,000

One of the biggest drivers of New York's Medicaid enrollment growth over the past decade has been "emergency Medicaid" for undocumented immigrants, newly released state records show. Read More

Upstate Insurance Customers Pay the Price for Medicare’s Hospital Rate Hike

A billion-dollar Medicare windfall for upstate hospitals has turned into a crisis for upstate health insurers that's threatening to disrupt coverage for millions of New Yorkers. The Read More