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With healthcare reform looming, nHealth was losing millions

Michael Schwartz June 11, 2010 14

The financial records of nHealth, the Richmond-based startup health insurer that said last week it was shutting down as a result of federal healthcare reform, show it was losing millions in its first year and a half of existence.

According to filings by nHealth with the National Association of Insurance Commissioners and the Virginia State Corporation Commission, the company has lost $10.6 million since it opened for business in 2008, adding to the complexity of the political debate being waged on the internet over whether healthcare reform is to blame for the young company’s demise.

Since an internal nHealth document obtained by Richmond BizSense uncovered last week that the company claims it must shut down as a result of proposed regulations within the recently passed healthcare reform bill, the story has found its way into the wild world of political blogs, even going as far as Politico and Fox News.

The left versus right battle that has erupted since the nHealth story was first reported by BizSense, calls into question whether the company was indeed the first victim of what right wing calls “ObamaCare,” or whether nHealth’s business model, which revolved around offering high deductible plans and the use of health savings accounts, was simply inadequate to survive the tumultuous times in the insurance world.

nHealth’s losses were nothing unexpected, according to its CEO Paul Kitchen.

Kitchen told BizSense in a previous story that his company was “growing,” but gave no other detail into its financial state.

nHealth, may have been slowly working its way out of the red, having lost $5.6 million in 2008 and $4 million in 2009, according to the company’s financial statements. Its loss for the first quarter 2010 was $966,472.

Kitchen said losses early on were factored into the company’s initial business plan. It is after all, a startup company trying to survive one of the worst economic downturns in history.

“Not many businesses start up and make a profit from day one,” Kitchen said.

Asked if its initial business plan forecasted a timeline for nHealth to reach profitability, Kitchen said, “We had numerous forecasts.”

Those forecasts, he said, “They were always moving targets.”

A document nHealth filed with the NAIC showed enrollment in its plans grew from 101 in 2008 to 1,488 in 2009.

“It was moving in the right direction,” Kitchen said.

Making the call to shut down nHealth because of proposed politically-charged changes that have yet to go into effect was a business decision, Kitchen said.

“The healthcare law changed the rules,” he said. “We assessed the rules and made a business decision.”

“The politics — I’ll let people make their own judgments about it.”

The changes in question would require a tighter medical loss ratio for insurers, forcing them to spend a defined percentage of the premiums they collect specifically on medical claims, rather than unrelated expenses.

That proposed ratio would require more capital than nHealth has or was able to raise. The company raised $12 million at its inception. And according to documents filed with the Securities and Exchange Commission filed by nHealth Holding Corp., the parent company for nHealth Inc. and subsidiary health insurers ACMG of Kentucky and ACMG SC, it raised $75,000 in May 2009 and $2.5 million earlier this year.

A section of nHealth’s 2009 annual report dated March 31, 2010, shows the company was keeping an eye on the healthcare bill that had been signed into law that same month, though it didn’t express concern at the time that the bill’s provisions would force it out of business just a few months later.

“Recent passage of healthcare reform at the federal level is being evaluated at this time,” the company said in the narrative filed with the NAIC.

“While some provisions affecting health plans will take effect in a matter of months, the significant provisions of the legislation will not take effect until 2014,” it said further. “Many of those provisions will be addressed by regulation so any specific impact cannot be determined at this time.”

That statement was from March 31. The company informed its agents in a letter on June 2 that “The most prudent and sensible conclusion for us is to discontinue the sale of healthcare policies and withdraw from the healthcare business.”

Further reading:

A Richmond startup tries to cut health care costs

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  1. Alan Slabaugh June 11, 2010 at 9:35 am - Reply

    Incredibly irrelevant article. Why don’t you do a story about how Martins lost millions in the first week of ownership in Ukrops, because i am sure they did.

    In starting a Health Insurance company the Chicken must come before the egg.

  2. Mariane June 11, 2010 at 9:57 am - Reply

    How about some background information? What the heck was their business model? What exactly did they do? Health insurance, sure, but how were they different from Anthem? Or was it just an Anthem-like startup? Where did they get their customers from? Employers? Private enrollments? Maybe it was a bad idea for a business. The reporter needs to always assume this is the first encounter with this story for the reader and provide a background. How did their coverage compare to similar businesses?

  3. Tom Roberts June 11, 2010 at 10:08 am - Reply

    As you note, it sounds like they were making progress towards lowering the burn. The substantial change to the regulatory outlook was likely a pretty critical factor to the company’s investors and their expectations of earning a return on their current and future capital invested reflective of the risk created by the changed regulatory landscape. Sad to see a promising company derailed by government regulatory intervention, as well intentioned as it may be. Another example of unintended consequences of “regulatory reform”.

  4. Steve Gillispie June 11, 2010 at 10:41 am - Reply

    If this report is as misleading and poorly conceived as we believe, this article is an incredible disservice to small business in Virginia.

    Our company of 35 employees provides full Health Insurance coverage to all our associates. Over the past 5 years we had experienced extraordinary increases (30% to 40%) from Anthem. Anthem asked for an increase from app $96,000 to $140,000 with less insurance but agreed to hold at the $90 range if we went to a high deductible plan and assumed the risk on the first $30K. We did that and the next year they said they wanted a 40% increase to app. $140 but we still had to keep the high deductible. They also said that the 40% increase would be for one year only and they intended a 20% minimum increase the following year for a minimum increase of 48% in a two year span — obviously not based on any experience with our company since the increases were being announced before the insured year.

    nHealth provided a high deductible plan better than Anthem’s or Southern Health or a 3rd insurer (VA businesses only choices in this near-monopoly market) for 45% ($75,000) less which also included Health Savings accounts, the effect of which was to lower our Associates out-of-pocket costs. This was combined with a management plan for paying expenses, handling the Health Savings plans, etc superior to any of the big companies. We had more and better insurance at about half the cost. Of course with lower premiums we would assume that nHealth’s ratio of admin cost to premium would be higher.

    In summary, if economically viable as a business, nHealth is revolutionary to this industry and exactly what we are all seeking and Congress seems to have missed totally. The solution to Health Care costs for businesses is an alternative model. We know that small businesses throughout Virginia were signing up for nHealth at a prodigious rate, almost faster than they could be processed. We are under the impression that virtually all their customers, like us, were delighted with this alternative as almost a lifeline to being able to continue to provide coverage for our associates and would so testify if contacted by any serious reporter. (To our knowledge Mr. Schwarts did not contact a single nHealth user) We have no doubt that had this trend continued, Anthem and it’s “competitors” in this market would have discovered that they could provide much lower cost plans for those of us without large groups.

    The Health Care bills claim that costs and premiums are controlled by a ratio of claims to admin costs or controlled at all mystifies us. Clearly, the formulas favor the large companies since the more insured they have, the more $$ they get from their spread. At some point the bill may make anything less than a mega insurance company non-viable. It also seems to encourage the insurers to seek higher medical expenses since the ratio effectively creates a government-sanctioned markup. I realize that there will be theorists who will point to other elements which are supposed to counter that, but basically when you have one or two providers we all have to use, the customer is going to lose.

    So, Mr Schwartz you missed an opportunity to point out to your readers that the loss of nHealth deprives Virginia’s small businesses of the only viable alternative we have found to offering our associates great insurance and complete personal choice of how and where they want to spend their health dollars. The real story would be if there were flaws in their business model how could these be corrected and this alternative to the current monopoly be fixed or supported by our legislators.

    Or if their demise was at least in part constructed in the back rooms between the traditional insurance industry, the White House, and Congress (as many believe) you have a heck of a story about the underlying dishonesty of the new Health Care legislation which appears to this small business as less directed toward providing “affordable insurance” to the “average, hardworking American” as providing free insurance to 30 million who for various reasons were not insured at whatever it costs the rest of us and is satisfactory to the big insurers.

  5. Irony June 12, 2010 at 5:50 pm - Reply

    The ramifications will be felt for long time and while some may be positive, the negative aspects will weigh them down. I’m sure this article is the first of many.


  6. Tom Bowden June 14, 2010 at 8:35 am - Reply

    Steve Gillespie – Excellent Post! The lack of government enthusiasm for the high deductible/catastrophic model is really simple. If you start (as they do) form the proposition that government control (i.e. regulation) is good, then more is better. By carving off the vast majority of health care transactions – prescriptions, check-ups, etc. and leaving them completely up to the consumers, the insurers and the regulators (some would say that is redundant) would pass up huge opportunities for control, by regulating prices, adjusting “cost-sharing” (that’s reform-speak for co-pay – as if the consumer doesn’t ultimately pay the whole cost anyway – through premiums), and treatment policies and protocols. It’s just too juicy for them not to try to exert their boundless powers. It’s like the doctrine of “manifest destiny” that led to the westward expansion of our country. Or like Sir Edmund Hillary ( I think) who, when asked “Why do you climb the mountain” responded “Because it’s there.” Or more apropos – When they asked Willy Sutton why he robbed banks, he replied “Because that’s where they keep the money.” Expecting Congress to overlook such a lucrative opportunity is like expecting an addict to turn down a free fix. Don’t bet on it. And when you couple that temptation with the mindset of Nancy Pelosi and many others who really do believe that there is no limit to what Congress can do under Commerce Clause, it’s really a foregone conclusion that anything remotely resembling true choice or innovation has about as much chance as the mice they feed the snakes in pet shop..

  7. Jeff D. Smith, III June 14, 2010 at 10:54 am - Reply

    As an nHealth subscriber, having left Anthem after 30 years of paying higher prices each year for stock holders, nHealth saved our company $11,000 the first year.

    HSA’s with high deductibles is nothing more than health care back in the 50’s and 60’s. (A hospital plan.) In this case you can set aside tax free money in a savings account and you pay for routine visits.

    Like people did back then.

    By paying cash for these visits out of our savings account, physicians have discounted as much as 50% of the cost of visit’s to us. DID YOU GET THAT—50% —— We all know it is a paper game with traditional health care providers and physicians. At least nHealth was trying to work outside the box and did have a great program that would have worked over time as their client base grew.

    Please give me example where the Government or traditional Health Care providers have reduced the cost to an individual by 50%.

  8. Casey Quinlan June 14, 2010 at 11:42 am - Reply

    This is a perfect example of the law of unintended consequences – in an attempt to spur health care reform, the Feds missed the boat completely and are killing off the best avenue to reform: consumer-driven health plans like nHealth.

    There are two big issues in health insurance that are desperate for viable answers:
    1. Why is health insurance still strapped on to “job” employment when the market is in deep need of affordable individual/family policies? This only raises the burden on business owners, without delivering any kind of real value to consumers.
    2. Until those consumers are put in direct touch with the cost of their health care, they have no incentive to become actual consumers. The current health insurance marketplace, with its focus on selling to large groups, turns individual consumers into meat-puppets with no control over how their health care $s are spent.

    Big insurers are savvy about how to run the game on a state-by-state basis – state insurance commissions decide both who gets to play in their state, and often set cost guidelines as well. Small innovators like nHealth start out with a handicap, particularly in states like VA where the market has essentially been handed to only a couple of companies.

    Consumers need to take control and demand change. Unfortunately, mis-information is more prevalent than anything else, and the big insurers aren’t interested in messing with their revenue model – selling insurance to groups, the bigger the better. Those groups get hammered by big increases every year, and companies are afraid to introduce consumer-driven plans because the big insurers have convinced them that their employees will revolt against that approach.

    Individual consumers and small businesses don’t have a prayer.

  9. Donald Judy June 15, 2010 at 12:05 pm - Reply

    I agree that Steve Gillespie’s post was very interesting. But an awful lot seems to depend on the assumption that nHealth was “economically viable as a business” (from 4th paragraph). The point of this article seems to be that that assumption is more questionable than originally thought.

    I also agree somewhat with Casey Quinlan’s 2 points. Giving people a personal incentive to control costs seems like a powerful response to the current problem in which patients (and doctors) choose treatments regardless of the cost. However, there are important differences between a pure consumer-in-the-marketplace model and the context of health care. If I fail to save enough money to buy a Lexus, I just don’t get to drive a Lexus. I drive a Chevy, or I ride a bike, or walk. Maybe I have to live in town rather than commuting from the countryside.

    But if I have a serious life-threatening illness and I’ve squandered my money and can’t afford the necessary treatment – I die. I think we have so far refused to build that broad option into our health care system, for moral reasons. And I think that’s a good thing.

    As for the strange marriage of employment and payment for health care, I agree that it ought to end. In countries with single-payer public health insurance, employers are freed from the burden of providing health insurance to their employees. Obviously we’ve chosen, for now, not to go that route. I would argue that that choice was at least as much ideologically driven as it was based on economics. But regardless, the road not taken is something to keep in mind as we pass through the growth pains of implementing the new system we have chosen.

  10. Alan Slabaugh June 16, 2010 at 6:42 am - Reply


    With a “High Deductible” plan like nHealth, we are talking about a $1,500 deductible, with 100% coverage thereafter for inpatient, outpatient, and prescriptions. Considerably less exposure than you have offered by other HMO’s and PPO’s. The difference is that you have no coverage except for in network discounts before your deductible.

    If you like analogies pertaining to cars try this one.

    Would you pay twice as much for your car insurance if it covered your oil changes and regular maintenance for a $30 copay? Probably not, I know I would not.

    Do some research on the plans we are talking about before drawing the same old conclusions that the people who don’t understand HDHP’s do. 99 times out of 100 you are better off paying less Monet to

  11. Alan Slabaugh June 16, 2010 at 6:52 am - Reply

    Should not have been typing that on my droid.

    99 times out of 100 you are better off paying less money to the insurance company and putting the savings in a savings account like an HSA.

  12. John Sams June 21, 2010 at 1:45 pm - Reply

    Mr. Gillispe, it is easy to save someone on premiums if you have not priced your product correctly. I wonder how much nHealth lost on your business. Could it be that in the rush to add members, they did not correctly set the rate for the pools of employees they were insuring?

    Mr. Slabaugh I have done some research, this type plan is being offered across the country. The places it and the insurance company do well are where the groups are young healthy professional workers who make enough money that they want to gamble that they will not become ill and will be able to roll up the HSA into retirement. It is not for groups that use a lot of healthcare, have older workers or have expensive health problems

  13. Steve Gillispie June 22, 2010 at 12:38 am - Reply

    I find it dismaying how difficult it seems to be for people to accept that there are alternatives to the traditional big company model far superior to government rules, that nHealth was a poster-child for at least one alternative, and that what went wrong was not nHealth’s model but the introduction of very flawed legislation combined with an industry which is going to fight vigorously to preserve what amounts to predatory practices in supporting an incredibly bloated, inefficient, and unaccountable Hospital industry. It seems we should be able to seek a way for non-governmental entities to solve our problems without treading on anyone’s ideological toes.

    As I write, across the country, according to a recent Kaiser Family Foundation survey, premiums are going up an average of 20% for individual insurance holders. And an alarming number of hospitals across the country are increasing prices by 40% – 50% (“We’re seeing price increases of 40 percent to 50 percent from some hospitals across the country,” says AHIP spokesman Robert Zirkelbach.)

    For the record, Mr. Sams, the vast majority of our workforce is under 40 and use very little medical care. nHealth lost no money on our business as we have not come close to hitting the deductibles on the insurance where they took risk; nor would we have. I cannot question the validity of your research for the companies you examined; but your comments suggest that you did not fully understand the actual insurance provided by nHealth or where their costs and risks are.

    Michael Schwartz, please find a way to keep this story alive and whatever real fact you can contribute to the dialog. Virginia business is heading toward a storm is just isn’t seeing on its radar screens.

  14. Alan Slabaugh June 28, 2010 at 7:11 am - Reply

    John, You are incorrect in your assumptions about HDHP’s and, if you are a business owner, I will gladly come visit and get you up to speed. The last thing we need is for more misinformation spreading around about the best option available in our insurance market.

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