Passport Health Plan’s fiscal troubles, which may push the nonprofit into insolvency as soon as this summer, began even before the state changed the distribution of its Medicaid dollars last summer.

In the last three years, Passport paid the publicly traded Evolent Health some $220 million in non-employee management fees, accounting for the vast majority of dollars it did not spend on its clients’ medical care and increasingly dwarfing its administrative overhead.

In turn, the entanglement threatens to undermine the health of Evolent, an Arlington, Va.-based health care consulting company, the shares of which have fallen about 40 percent since September, wiping out roughly $890 million in shareholder value.

The troubles of both Passport and Evolent also may be putting in jeopardy Passport’s planned new $87 million headquarters at 18th Street and West Broadway, though construction work is continuing. Evolent, which has lost $333 million in the last three years, is to be the project’s primary tenant.

Passport is one of five managed care organizations in Kentucky that administer Medicaid benefits, a federally funded health insurance for the poor. Passport, the only one of the five that operates as a nonprofit, is administering Medicaid for more than 313,000 Kentuckians, about two-thirds of whom live in Louisville. The state in total provides Medicaid to nearly 1.3 million residents, or about one in four Kentuckians.

Passport is battling Kentucky’s state government, which recently changed the way it distributes the federal Medicaid dollars. Since the changes, the for-profit providers have received more money, while Passport has received less, which, the nonprofit’s leaders have said, is threatening “its solvency and continued existence.”

Mark Carter

Passport CEO Mark Carter told a state legislative committee in Frankfort Wednesday that the nonprofit could face insolvency by the middle of the year unless the state reverses the changes it has made to the Medicaid reimbursement rates.

To some extent, Passport’s struggles are not surprising because of its unique circumstances. The state expects its managed care organizations to operate on a margin of 1 percent, meaning for every dollar the state sends to the organizations, it expects 90 cents to go toward medical care of Medicaid beneficiaries, 9 cents to cover administrative costs, and 1 cent for risk/profit.

A change to the way that dollars are distributed is hurting Passport in two unique ways. For one, the state’s new distribution formula has reduced the dollars that are sent to Louisville, the area where Passport has the most customers. For another, Passport is the only managed care organization in Kentucky that is nonprofit, regional and focused solely on Medicaid. Other providers, such as Humana, operate nationally and have other business lines.

That means, for example, that if Humana incurred a loss on its Medicaid business in Kentucky, it may get complaints from shareholders and/or abandon the business — but such a loss would not be catastrophic, because Humana could compensate for the Kentucky Medicaid loss by generating a profit on its Medicaid business elsewhere — or even unrelated lines of business.

Passport does not have that option because it provides only Medicaid services, and only in Kentucky.

However, the state says that it has to distribute its Medicaid dollars based on what’s best for Medicaid recipients — not on what’s best for the managed care organizations.

Kentucky Department for Medicaid Services Commissioner Carol Steckel said in an emailed statement that the rates the state uses to distribute Medicaid dollars are based on complex but actuarially sound calculations and “cannot make special accommodations to improve the competitiveness” of any one managed care organization.

“We have met with Passport on numerous occasions to hear their input, objections, ideas and feedback. In each of these meetings, Passport has failed to provide any data or evidence that the actuarial rates developed by the independent actuary are not sound or accurate,” Steckel said.

However, Passport Chief Financial Officer David Stanley told Insider that it sent the state two letters from actuaries “disproving the validity of the rate changes that the state has implemented.”

Passport’s appeal of the state’s action is pending.

According to data provided to Insider by the state, Humana and Passport, for both 2016 and 2017, spent a greater share of their dollars on care on Medicaid beneficiaries than the other three providers, Aetna, Anthem and Wellcare — though all exceeded the 90 percent threshold.

Expenses rising faster than revenue

But the declining reimbursement rates to Passport tell just part of the story. IRS records show that Passport’s money problems also are a result of overspending: In each year between 2014 and 2017, the nonprofit’s expenses rose at a faster pace than revenue — even though revenue increased by more than $600 million.

Passport revenues during that stretch increased an annual average 31 percent, while expenses increased at an annual rate of 35.5 percent. The big culprit that is pushing up expenses: non-employee management fees, which during the same period, rose 120.5 percent annually.

The bulk of non-employee management fees, including $89.6 million in 2017, went to Evolent Health. Passport said it lost $70+ million in 2018. Source: IRS and SEC filings | Graphic by Boris Ladwig

Over 2014 and 2015, Passport’s total revenue rose 139 percent compared to 2013, or by nearly $1 billion, to just under $1.7 billion in 2015, from just under $600 million in 2013. Non-employee management fees and total expenses during that period more than doubled, too, but, combined, did not rise as quickly as revenue, which helped Passport turn a $3.5 million loss from 2013, into net income of $154 million in 2014 and 2015.

But in the two subsequent years, revenue grew much more slowly, by less than $300 million, or at an annual rate of 8.5 percent, while expenses grew faster, at just over $300 million, at an annual rate of 9.4 percent. Meanwhile, non-employee management fees spiked another 68 percent annually, or by a total of $95 million.

Passport lost a combined $40.1 million in 2016 and 2017.

While data for 2018 has not been released, Stanley told Insider Wednesday that losses last year are projected to exceed $70 million. And if the state makes no changes to the way it now distributes Medicaid dollars, Passport is projecting a net loss of $144 million for this year.

The nonprofit’s dispute with the state was first reported by the Louisville Courier-Journal on Jan. 15.

Passport-Evolent alliance

Stanley said that the non-employee management fees, which averaged $92.6 million per year between 2015 and 2017, include payments Passport makes for Medicaid patient services it is outsourcing, such as behavioral health and prescription drugs. But they also include payments the nonprofit is making to Evolent.

The parties in February of 2016 announced a strategic alliance to create The Medicaid Center of Excellence to streamline and improve care for Medicaid patients in Kentucky. If the venture proved successful, Evolent planned to expand the model into other states.

The parties at the time envisioned their alliance as a way to create jobs, generate more tax revenue and bolster Louisville’s reputation as a center for health care innovation.

The center was to provide administrative support for Passport Health users and implement a health performance management platform to target individuals who may be at risk for various health complications or patients who might benefit from health-related programs, such as a diabetes coaching program.

Frank Williams

Evolent Co-founder and CEO Frank Williams said at the time that the parties needed a better way to engage Medicaid patients and improve health outcomes.

“The idea behind launching the (center) is that we can take all that Passport has built and developed, a lot of what Evolent has developed in terms of technology, in terms of know-how, bring those two things together, and create a model that can vastly improve Medicaid care for others across the country,” Williams said.

In a joint news release, the parties said they “anticipated that the number of employees at The Medicaid Center of Excellence will increase substantially over the next five years as it grows to support Passport and other health plans across the country.”

Nearly three years later, the alliance is under intense fiscal pressures, and Passport, at least, has seen an employee decline — not growth.

IRS records show that Passport had 655 employees in 2015, 590 in 2016 and 202 in 2017. Stanley, Passport’s chief financial officer, said that the number of employees declined because many of Passport’s employees became Evolent employees.

Passport essentially outsourced to Evolent the work those employees were doing and paid the company a management fee. From 2015 to 2017, salaries Passport paid fell to about $17 million, down $22 million, while non-employee management fees rose to $129 million, up $86 million.

Stanley said that some of the cost increases are a result of Passport adding benefits for Medicaid recipients as well as receiving new services from Evolent that improve Passport’s operations. For example, he said that Evolent is providing much better information about how to assess a Medicaid patient’s risk for incurring health care costs. That’s a very involved process, he said, but allows Passport to persuade the state to provide revenue that’s closer to a patient’s expected costs based on the severity of his condition.

Evolent told Insider via email that the “majority of the fees Passport pays to Evolent are directly tied to local staff — at cost — as well as (insurance claims processing) and pharmacy benefit services at a lower per member cost than prior periods.”

The company said it has “hundreds of employees supporting Passport” and that “the number of employees has increased in line with the increases in scope of our partnership with Passport” and that “the number of our employees in Louisville exceeds our original projection.” However, the company did not provide details.

The state in 2016 approved $10 million in tax incentives for Evolent’s investments in Kentucky, contingent upon certain conditions, including the creation of 647 jobs by year four, according to the Lane Report. When Passport and Evolent announced the new HQ in 2017, they said it would be occupied by 200 employees from Passport and 350 from Evolent.

Passport’s arrangement with Evolent and reliance on outsourcing services is unusual. Insider looked at financial records of three other nonprofit managed care organizations — Family Health Network in Illinois, Geisinger Health Plan in Pennsylvania and MDwise in Indiana — and found that combined, in the last three years for which data are available, they had paid non-employee management fees of exactly zero dollars.

Evolent does have a relationship with MDwise, as the organization’s claims vendor. MDwise in 2017 accounted for 11.8 percent of Evolent’s revenue, or $51.3 million, but the nonprofit’s IRS report for that year was not yet available. MDwise could not be reached to say whether it paid Evolent any non-employee management fee for that year.

Evolent told Insider that for MDwise it performs primarily claims processing services, while for Passport and many other clients it provides “a broader array of clinical and pharmacy services alongside … claims processing support. For example, at Passport we have dedicated employees and clinical resources in Louisville, whereas for MDwise, we support via claims staff only.”

The amount of money that Passport and MDwise spend on administrative overhead — excluding the non-employee management fees — is similar: Both in 2016, the last year for which data for both is available, spent less than 1 percent of their expenses on salaries/wages, and Passport actually spent slightly less, as a percentage of revenue, than MDwise. Carter, Passport’s CEO, made about $880,000, which was about $326,000 more than the CEO of MDwise. As a percentage of total expenses, Carter’s salary was 19 percent higher than his counterpart’s at MDwise, though for 2017, Carter took a pay cut of nearly $240,000, or 27 percent.

Despite Passport’s struggles, construction work at the site of the new headquarters is continuing. Workers were on site even in freezing temperatures on Friday. While two job fairs related to the new HQ have been delayed, a spokeswoman for Passport said the delays were unrelated to the nonprofit’s fiscal challenges.

Stanley said that Passport’s financing plan of the $87 million structure involves $24 million in new market tax credit financing, which provides investors with a tax credit toward their federal income tax if they invest in low-income communities, and $63 million through a traditional construction loan from Old National Bank.

If the project fell apart, it would serve as another blow to an area of Louisville desperately in need of revitalization. Community leaders in 2017 had said that they hoped the project would stimulate the economy, inhibit further social degradation and “activate hope.”

Passport’s importance to Evolent

Meanwhile, the non-employee management fees Passport is paying Evolent are of critical importance to the health care consulting company, accounting for nearly 19 percent of revenue through the first three quarters of 2018.

In the last three years, excluding the fourth quarter of last year, for which data are not yet available, Passport has paid Evolent more than $220 million in management fees, including nearly $50 million in 2016, nearly $90 million in 2017 and $82 million through three quarters of last year.

Evolent, in filings with the Securities and Exchange Commission, makes clear how important Passport is to the company’s finances: Its 2017 annual report mentions “Passport” 42 times, or, on average, on about every third page.

Among risk factors that can affect the company’s performance, the company writes that it derives “a significant portion of our revenues from our largest partners. … The sudden loss of any of our partners, including our strategic alliance partner, Passport or the renegotiation of any of our partner contracts, could adversely affect our operating results.”

An Evolent spokeswoman told Insider via email that the company was in a quiet period until its next earnings statement and therefore could not comment on how Passport’s fiscal challenges might affect Evolent’s business and its plans to occupy a large portion of Passport’s new planned headquarters.

“Based on our historical experience and Passport’s 20 years serving Kentuckians, we remain optimistic that together, with reasonable rates, we can deliver demonstrable improvements in health outcomes throughout Kentucky,” she said.

Evolent’s shares fell Wednesday afternoon after Passport’s CEO addressed the nonprofit’s potential insolvency. Since September, Evolent’s shares had fallen 38 percent through Thursday, decreasing shareholder value by about $889 million. Passport, which holds nearly 1.1 million Evolent shares, saw the value of its holdings fall to about $19 million, down $11.5 million since September.

Darla Carter contributed reporting.

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Boris Ladwig
Boris Ladwig is a reporter with more than 20 years of experience and has won awards from multiple journalism organizations in Indiana and Kentucky for feature series, news, First Amendment/community affairs, nondeadline news, criminal justice, business and investigative reporting. As part of The (Columbus, Indiana) Republic’s staff, he also won the Kent Cooper award, the top honor given by the Associated Press Managing Editors for the best overall news writing in the state. A graduate of Indiana State University, he is a soccer aficionado (Borussia Dortmund and 1. FC Köln), singer and travel enthusiast who has visited countries on five continents. He speaks fluent German, rudimentary French and bits of Spanish, Italian, Khmer and Mandarin.