PART 2: CREDIBILITY (What does a “credible” HCSO look like?)
In recent months we have seen the first bankruptcy of a HCSO in a 40-year history. There have been rumors and accusation of financial malfeasance at others. How can you know that your HCSO and its programs are credible and warrant your trust.
As Americans seek better options for financing their medical needs, it's only natural that they turn from the high cost of health insurance to the affordability of Health Care Sharing. But should you trust it? How will you know which questions to ask and what to be looking for to truly assess if a specific Healthcare Sharing Organization (HCSO) merits your trust?
In this post we will explain how to assess the credibility of a HCSO in terms of its governance and operational design. Consumers will be equipped with information and questions for evaluating the strength and independence of a HCSO’s governance model, as well as potential for fraud, self-dealing, and other inappropriate “not for profit” business practices.
The rapid proliferation of HCSOs since the passage of the Affordable Care Act not only requires careful consideration of how a specific healthcare sharing program works but requires consideration as to who is behind the organization and how it is structured. Afterall, consumers join HCSOs to not only help fund the needs of others, but also to gain comfort knowing that their needs will be shared as well. Thus, the credibility of the organization itself is important since HCSOs tend to be less regulated than health insurance companies. As industry insiders who have worked hard to further the credibility of Healthcare Sharing, we believe that HCSOs owe it to applicants and members to better educate them on the design, governance, and management of their organization and programs.
Before we provide our insights as to what makes a HCSO and its Programs credible, know that you can find some related questions to consider in our DECISION GUIDE: Choosing a Healthcare Sharing Program. An Insider’s Perspective. While the answers can often be obscure and difficult to ascertain, let’s discuss a few key areas that warrant your attention.
How is it designed?
The first thing you should be concerned about when evaluating a HCSO is the design of its Sharing Program(s). Is it designed, and does it operate, in a manner that clearly differentiates it from the practice of insurance? Is it designed to ensure that member funds will be properly used to share and pay eligible medical bills? Is it designed in a way that protects members from the mischief of “bad actors” and financial malfeasance?
If a HCS Program isn’t designed and operated in a manner that clearly separates it from health insurance, then it is at risk of being destabilized and/or possibly shutdown by an aggressive state insurance regulator. The role of a State’s Department of Insurance (DOI) is to regulate the practice of insurance and to protect their residents from insurance scams. So, regulators are appropriately annoyed if a HCSO doesn’t properly separate the operation of its HCS Programs from the practice of insurance. While there might be a debate as to ALL the ways a HCSO can separate its operations from the practice of insurance, experience has taught us that it is best to:
- Clearly state on all marketing material that Healthcare Sharing is NOT INSURANCE and that it provides “no guarantee,” “no promise to pay,” and “no transfer of risk;
- Never take receipt of member funds to avoid the practice of “pooling;”
- Facilitate sharing by moving funds directly from one member’s account to another member’s account, also known as peer-to-peer (P2P) sharing.
Placing the appropriate disclosures and disclaimers on all marketing materials mitigates the potential that a consumer thinks they are buying insurance when they are joining a Healthcare Sharing Program. If an HCSO is not willing to go to great lengths to make certain that you understand the difference, then they do not warrant your trust. If a HCSO takes receipt of funds and “pools” those funds into a centralized account, which is an insurance practice, then it is too willing to operate and look like an insurance company. It also places the membership at a greater risk of fraud and financial malfeasance as the HCSO has too much control and access to member funds. If a HCSO doesn’t facilitate sharing from member-to-member, then it risks running afoul of many states “Safe Harbor Statutes” that protect Healthcare Sharing.
How is it governed?
Few of us have ever had reason or need to understand the importance of Corporate Governance or the role of a Board of Directors. However, in the case of not-for-profit organizations such as HCSOs, Governance is critically important considering the hundreds of millions of dollars that move through some HCSOs annually. Governance of a for-profit insurance company is primarily focused on the interest and protection of its owners (shareholders). In contrast, the governance of a HCSO should be primarily focused on the organization’s exempt purpose as approved by the IRS and the best interests and protection of its members. The actual duties of the Board of Directors will vary from HCSO to HCSO, but generally they establish the mission and purpose of the organization, they hire and manage the CEO, and provide oversight to the management of the organization.
In the case of a HCSO, the Board has a responsibility to provide financial oversight that ensures the fiscal soundness of the HCSO’s programs and ensures that member funds are used appropriately. To ensure the fiscal soundness of a HCS Program and to protect the use of member funds, the Board should be transparent in their commitment to the following disciplines:
- the Board should be verifiably independent;
- the Board should avoid transactions that could be construed as “self-dealing;”
- the Board should make certain that the majority of member funds directly benefit the members
The most credible HCSOs are governed by an independent Board of Directors. For the purposes of evaluating a HCSO, a good definition of an Independent Director is one who is not tied to any executive or vendor of the organization. Thus, an “Independent Board” is a board that is comprised of a majority of Independent Directors. While Part I (Lines 2 & 3) and Part VI (Line 2) of a HCSO’s most recent Form 990 filing can offer some insight into a Board’s independence it is incomplete and typically outdated. The only way to fully assess the Board’s independence is to request a recently updated letter that details any commercial and/or relational ties between the HCSO and its directors or executives. This type of letter can be easily produced by an HCSO and made available to inquirers.
Our experience has also shown that the most successful and credible HCSOs go to great lengths to avoid commercial arrangements that could be construed as “self-dealing”. In short, “self-dealing” can be defined as entering a vendor relationship for the purpose of financially benefiting a Board Director or Executive of the HCSO and/or benefiting their family members. As we will discuss in our final section below (How is it Managed?), there can be good reasons for a HCSO to enter a vendor relationship that benefits a Director, Executive, or one of their family members. Unfortunately, as we have learned, this also increases the potential for fraud and abuse. Again, Form 990 can provide some insight into the number of vendor relationships that might be benefiting a specific director or executive, or a family member. But know that a HCSO’s proclivity to enter these types of business relations is a cause for great caution.
Well-governed HCSOs are also committed to using member funds in a way that directly benefits its members. Experience has taught us that approximately 75% of funds contributed by the members should be used to
- Share/pay members’ medical bills
- Pay for program services that benefit the members directly, including fees to discount medical bills or access fees for prescription or diagnostic lab services
- Help members build a surplus in their member-owned accounts so medical bills can be shared promptly.
The remaining 25% can be used to pay administrative expenses such as marketing, member development, legal, accounting and management compensation. It is reasonable and understandable that new or small HCSOs will expend a higher percentage of member funds on administrative expenses. As they grow, and if they are well-governed, those percentages and ratios should become more aligned with the established, larger HCSOs.
Well-run HCSOs publish a breakdown of the “use of funds” in each Monthly Share Notice and/or dashboard in their Member Portal. If a HCSO that you are considering does not know this information, publish this information or is unwilling to share this information, then you should ask why not. Some states require this information to be disclosed by the HCSO for members in their state.
How is it managed?
To be truly credible, a Sharing Organization needs to be managed for the benefit of its members, as opposed for the benefit of others. Like businesses, HCSOs can choose to manage their operations by developing skills, expertise, and technology in-house or they can outsource a portion (or all) of their operations to gain access to those skills, expertise, and technology. Both are reasonable strategies for managing the operations of a Sharing Organization.
Unfortunately, the rapid growth of Healthcare Sharing has attracted a few entrants who have levered the outsourcing model as a means to attain profit and benefits for themselves, while skating around IRS statutes that prohibit “inurement.” Beware of HCSOs who have outsourced portions of their operations to 3rd party vendors that are owned by one (or more) of the HCSO’s Executives, Board Directors and/or their family members. If the 3rd party vendor was established at (or near) the same time as the HCSO, then it is reasonable to suspect a tie that is less than “arm’s length.” Another situation to look for is when the HCSO has outsourced portions of its operations to multiple vendors that are owned by an Executive, Board Member and/or their family members. These situations warrant further investigation on your part.
However, there are times when it is both appropriate and preferable that a HCSO outsource a portion of their operations to a 3rd party vendor that is also owned by an Executive, Board Member and/or one of their family members. In most ALL cases it is a circumstance where the vendor has a unique service, expertise, or technology that can NOT be developed in-house and isn’t available elsewhere. This is a situation where the board abides by its conflict-of-interest policy and procedures to demonstrate that it acknowledged and addressed the conflict.
To further assist in the evaluation of a specific HCSO and their programs, you may want to link to our DECISION GUIDE: Choosing a Healthcare Sharing Program. An Insider’s Perspective. You’ll find that we have provided several questions and prompts that you may want to consider when assessing the credibility of a HCSO, in terms of its design, governance, and management.
As consumers continue to seek more affordable options for their healthcare needs, we should expect that Healthcare Sharing will continue to grow. But know that not all HCSOs are created equal. Consumers should cautiously consider HCSOs that are not properly designed, governed, and managed.
In Part 3 of our series “Choosing a Healthcare Sharing Program: An Insider’s Perspective”. we will define the key business practices and sharing protocols that are necessary for building and sustaining a high-performing Sharing Program that doesn’t operate like an insurance company in either form or function. Consumers will be better equipped to look for sharing practices and protocols that strengthen the fiscal soundness and reliability of a HCSO, as well as ensuring the prompt publishing, sharing and payment of their medical bills.
DISCLOSURE: Sharable, LLC is a technology and services company that serves the Healthcare Sharing Industry. The Sharable team has more than 100 years’ experience in building and managing high-performing Healthcare Sharing Programs. Our mission is to advance the adoption of Healthcare Sharing as an affordable option to health insurance. Sharable does not endorse specific Healthcare Sharing Organizations or their Programs.