Saturday, October 29, 2016

State sues failed Kentucky Health Cooperative's former chief executive board and contractors, alleging mismanagement

By Melissa Patrick and Al Cross
Kentucky Health News

The former president and directors of the Kentucky Health Cooperative, created under federal health reform, are facing a lawsuit from the state as liquidator of the failed, not-for-profit health insurer.

“Years of mismanagement by co-op administrators and contractors forced the co-op into liquidation, leaving Kentucky’s citizens and their health-care providers in medically and financially vulnerable positions,” Insurance Commissioner Brian Maynard, liquidator of the cooperative, said in a news release Friday, Oct. 28. “The complaint filed today serves as a step toward justice for the tens of thousands of Kentuckians who have been impacted by the co-op’s failure.”

The suit in Franklin Circuit Court at Frankfort, in the name of deputy liquidator Jeff Gaither, claims gross negligence and breach of contract and fiduciary duties by the co-op’s former contractors and management, including President Janie Miller, Board Chairman Joe Smith and other directors; Beam Partners LLC and its principal, Terry S. Shilling of Atlanta; and CGI Technologies and Solutions.

Janie Miller (Associated Press photo)
The lawsuit says Miller failed to set premiums high enough to keep the co-op solvent, seeks an unspecified amount of damages for her "reckless conduct," and notes that the co-op paid Miller a $50,000 bonus "even as KYHC was losing millions of dollars," and seeks "disgorgement of funds," a legal term for refunding money gained by illegal or unethical actions. Miller was then-Gov. Steve Beshear's first health and family services secretary.

The suit claims CGI failed to provide "adequately trained personnel," did not pay claims timely, overpaid claims and failed to properly process enrollments of policyholders, and should refund the millions of dollars in fees that it collected.

The suit alleges Beam recommended CGI as the co-op's third-party administrator though it lacked adequate experience; recruiting directors without proper backgrounds to oversee a health-insurance company, and failing to "adequately train and orient" them; and failing to "monitor or supervise the performance of the individuals and entities it selected or recommended." It says Shilling was a co-op board member while his company "negotiated a contract under which it was paid hundreds of thousands of dollars."

The suit claims former co-op board chair Joseph E. Smith of Frankfort and other unnamed directors kept premiums "woefully inadequate" though they knew that would make the co-op insolvent, and kept paying bonuses to co-op executives.

It seeks an unspecified amount of damages, including punitive damages, from the directors, Miller and the contractors for their "wanton and reckless conduct," as well as attorneys' fees. The suit was signed by attorney Paul Harnice of the Frankfort office of the Lexington-based firm of Stoll Keenon Ogden.

Kentucky's co-op was established under the Patient Protection and Affordable Care Act to compete with insurance companies and hold down premium costs. It was one of 23 created under the law, but only six remain, according to

Before it closed in October 2015, Kentucky's co-op sold 75 percent of the policies bought through the state health-insurance exchange and covered about 51,000 people through the end of 2015. The co-op said it had attracted business from the sickest population in the state and had to pay more claims than expected.

The co-op said it had turned things around and could have stayed afloat if Congress had provided sufficient "risk corridor" payments to insurers with disproportionately sick policyholders. Republicans inserted limits on those payments in the December 2014 budget deal, and the Obama administration was unable to make up the difference. The co-op, which had a deficit of $50 million in 2014, was expecting a risk-corridor payment of $77 million, but got only $9.7 million.

Click here for a copy of the complaint, with exhibits. Claims made in filing a lawsuit give only one side of a case.

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