SALT LAKE CITY — The billboards went up quickly. The customers came in droves.
Then, in October, Arches collapsed as suddenly as it went up.
Now eight months after it was announced that the state’s only nonprofit insurance co-op would be dissolved, Utah hospitals are still waiting on about $33 million in outstanding claims that the Utah Department of Insurance says it likely cannot pay until 2017.
Officials with the insurance department say they are doing the best they can to create a “soft landing” for Arches after the federal government reneged on what was supposed to be a $11 million payment this summer.
But former Arches executives say the insurance department was too hasty to shut down the scrappy startup and mismanaged the liquidation process.
"Unfortunately, Utah's doctors and hospitals are going to be shorted a lot of money," former Arches founder and CEO Shaun Greene said. "It didn't have to be that way."
No backup for rural hospitals
The shortfall will hit rural hospitals the hardest.
Utah Hospital Association Executive Vice President David Gessel estimates the association's hospitals are owed between $8 million and $10 million in unpaid claims for services already rendered.
Most providers will be able to absorb the shortfall. But for those in rural Utah, Gessel said, "there's really no backup."
"Medicine in rural areas is marginal at best," said Clayton Holt, CEO of the San Juan Health Service District, which includes San Juan Hospital, a 25-bed critical access hospital in Monticello.
As little as $50,000 in unpaid debt could mean the difference between buying a major piece of equipment for the hospital’s new telemedicine critical care unit and forgoing it, Holt said.
"I'm not suggesting that we're about to close our doors because of the claims that are outstanding with Arches, but it is significant to us," he said.
Jennifer Sadoff, CEO of Moab Regional Hospital, said the 17-bed critical access facility was left holding $350,000 in outstanding billings when Arches closed.
That was a “big hit” for both the hospital and the few independent family practice physicians in Grand County who are “practically going extinct," she said.
“Although a one-time loss of this size won’t close our doors this year, a few years ago it very well could have,” Sadoff said. “A lot of independent rural hospitals are living close to that edge.”
Arches was one of the only insurers that offered plans in rural Utah. When Arches shuttered, it left 20 of Utah’s 29 counties with only one insurer.
Sadoff and Holt said Arches executives seemed to understand local needs.
The co-op developed relationships with providers in Grand Junction, Colorado, so Moab residents didn’t have to drive 3 ½ hours to Salt Lake City to get comprehensive services, according to Sadoff.
And Arches struck deals with providers in Cortez, Colorado, so doctors in Monticello — just 20 miles from the border — didn't have to send lab work to Salt Lake City, 300 miles away, Holt said.
Now he's concerned about providers being paid back for services they already provided.
“The longer it drags on, I know the less money we’re going to get,” Holt said. “And so when I hear 2017, 2018, I’m very concerned.”
The state insurance department tapped a consulting firm, Stillman Consulting Services, to manage the liquidation. The firm's top consultant, Len Stillman, earns $198 per hour, according to Utah Department of Insurance Commissioner Todd Kiser. Another contractor is paid $158 per hour.
Including legal and administrative costs, the company has been paid approximately $480,000 since December, according to insurance department records — or about $80,000 a month.
Tricia Schumann, Arches' former chief marketing and communications officer, said the insurance department has not done enough to ensure the firm is conducting the liquidation as quickly as possible.
“(Stillman Consulting's) incentive is to drag this out and compensate themselves,” Schumann said. “There’s no recourse for that. There’s no accountability for them on that.”
Utah Department of Insurance spokesman Steve Gooch said the department keeps an eye on proceedings by meeting with the liquidation firm every two weeks. The firm is also required to file financial reports with the courts, according to Gooch, who said the first report is due July 14.
Len Stillman did not respond to an interview request, but Kiser defended him as an experienced liquidator who charges far less than receivers in other states.
Hospital administrators say they want to resolve the issue sooner rather than later.
"We understand this is a challenging process for everyone," Gessel said. "But hospitals and other providers are very concerned that there doesn't seem to be an expeditious plan to pay providers fairly and as quickly as possible."
A dispute over closure
Greene said he believes the insurance department should never have shuttered Arches.
In two years, the small co-op quickly became the second-largest health insurer in Utah due to its aggressive marketing, creative health plans and innovative business model that sought to pay doctors for quality of service instead of quantity.
"They were trying to be disruptive, they were trying to create some new ideas about how to deliver health insurance, and it looked like it was working," said Jason Stevenson with the Utah Health Policy Project.
Health care co-ops were created by President Barack Obama’s signature health care law to encourage competition.
But co-ops were dealt a blow when a largely unnoticed provision championed by Sen. Marco Rubio, R-Fla., slipped into a giant spending law in 2014. That provision required the so-called risk corridor program — a fund intended to help insurers make up shortfalls in the first few years of the Affordable Care Act — to be “revenue neutral.”
At the time, nobody understood its significance, Stevenson said. Media outlets largely ignored it. Even as late as July 2015, federal officials with the Centers for Medicare and Medicaid Services assured Arches that co-ops would receive “all risk corridor payments.”
Then, sometime between July and October, “they looked in the piggy bank and realized there wasn’t any money there,” Stevenson said. Insurers would receive just 13 percent of what they were expecting.
Arches, which was expecting $11 million in risk corridor payments, received just $1.9 million.
Greene scrambled to save the company by negotiating discounts with Arches’ hospital partners and presenting the insurance department with an analysis from an actuarial firm that showed the co-op could end 2016 with a small profit.
Kiser said it was too little, too late. He said his analysis, done with insurance department actuaries, concluded that Arches couldn’t absorb such a big hit.
On Oct. 27, the insurance department put Arches into receivership.
Greene said he respected Kiser’s decision until he saw how the insurance department was handling the liquidation.
He says the department lost millions of dollars in cash flow that could have gone toward paying hospitals by “spooking” policyholders, including three large school districts that represented about 15,000 employer group members.
Greene said he was not allowed to show the school districts the business plans that proved Arches could cover them until the end of their contracts in mid-2016.
By February, all three school districts — Nebo, Washington County and Box Elder — had dropped out.
Terry Jackson, assistant superintendent of personnel for Box Elder School District, said district officials didn't get the assurances they wanted from Arches. According to Jackson, the school district switched to another insurer that promised to match Arches’ rates.
"You hate to turn that down for an unknown," Jackson said.
Kiser defended his decision, saying it was too risky to encourage the districts to stay on Arches.
“If I’m placing your business with a company, do you want it in an A-rated company, an A+ company, an A++ company or a B-minus company?” Kiser said. “As an insurance agent, I did not want to put any of my clients in a B-minus company.”
Tough choices remain
The insurance department still has to decide how to pay $33 million in outstanding claims with Arches' $17.8 million in remaining assets, leaving a shortfall of about $15.2 million.
The original plan, according to Kiser, was to wait for more federal payments expected to come this summer and pay providers back at 75 cents on the dollar.
But the insurance department recently learned that those funds are not coming, Kiser said — something Greene said the department should have known months ago.
The plan is now to use a provision in the law that allows the insurance department to assess Utah’s seven other HMOs — among them SelectHealth, Molina and Aetna — to pay for Arches’ shortfall.
It is an unpopular solution to an unprecedented problem. But “it’s the reasonable — and I believe responsible — thing to do to help our doctors and hospitals,” Kiser said.
He hopes to be able to pay back outstanding claims by the first half of 2017.
Insurance agents will likely not recoup their commissions, Kiser said, for which he is “so sorry."
“I came from their ranks,” Kiser said, his voice trembling. “I want them to be made whole. But I think my hands are going to be tied.
"I'm not perfect," he added. "But I think we've been responsible."
Schumann and Greene say they're still committed to disrupting the health care industry.
Schumann, who is now CEO of a health care innovation company called BachHealth, said the Arches situation is an example of the “dysfunction and waste” of the health care industry as a whole.
“For me, it’s such a motivator,” she said. “There’s so many people who have done things the way they want, and it’s not accountable. There’s a huge financial drain, and you know who pays for it? The people that can least afford to pay for it."
Greene now leads business operations at health insurance technology company HealthPocket. The self-described conservative said he is moving on from what he once saw as a glimmer of hope in the Affordable Care Act for a market-based solution to the U.S.'s bloated health care industry.
“Sometimes I think maybe we should have taken it to the courts, tried to force (the federal government’s) hand,” Greene said, as Oregon’s co-op is doing. “But the feds could have done anything they wanted, and I suspect they would have.”
Others have seized upon Arches’ downfall as an object lesson in the Affordable Care Act’s failures.
Of the 23 health insurance co-ops created through the health care law, 12 have failed. All told, the co-ops received about $1.17 billion in federal loans. (Arches received $89.7 million.)
At a December meeting of the Health Reform Task Force Committee, Rep. Francis Gibson, R-Mapleton, said he considered Arches' closure an example of the perils of relying on the federal government.
"I’m not trying to be Mr. Anti-Federal Government, but to say we're going to rely on them to do their portion — we've had this debate for three years on Medicaid expansion,” Gibson said. “Once again, huge shortfall."
Kiser, in response, said he had a hard time directing the blame toward any one person or organization.
"It's just one Congress saying something that another Congress said, 'We're not going to do,'" Kiser told the committee. "To me, it's a legislative decision. And it impacted people downstream very poorly.
"That," he added, "is the tragedy of all of this."
Email: [email protected], Twitter: DaphneChen_