The photo shows a steel frame of a partially completed building.
The idle construction site of Passport Health Plan’s proposed new headquarters at 18th Street and West Broadway. It’s unclear how Evolent’s bailout of Passport will affect the site’s future.| Photo by Boris Ladwig

For Passport Health Plan, Evolent’s $70 million bailout and its assurance of additional “interim balance sheet support” were a matter of survival, a Medicaid expert said.

Without Evolent’s bailout, Passport likely would lack the capital required to even qualify to apply for the new five-year Kentucky Medicaid contract, said Alex Shekhdar, founder of Washington, D.C.-based consulting firm Sycamore Creek Healthcare Advisors.

While the new Kentucky Medicaid contract, which runs through 2025, won’t take effect until next summer, bids are due on July 5. That helps explain the urgency with which Passport’s owners, which include the University of Louisville, sought a partner to acquire Passport, which was close to insolvency this spring.

A portrait of Alex Shekhdar
Alex Shekhdar

“The infusion of capital from Evolent preserves Passport’s ability to stay in the market,” Shekhdar told Insider this week.

Passport handles Medicaid benefits for about 307,000 Kentuckians, of whom two-thirds live in the Louisville area, including nearly 129,000 in Jefferson County, according to state data.

Medicaid is a mostly federally funded health insurance program primarily for the poor, pregnant women and people with disabilities. The state funnels the federal dollars to managed care providers, including Humana and Passport. WellCare is the largest provider in Kentucky, with about 438,000 beneficiaries.

Passport has lost $164 million in the last three years, including $123 million last year, blaming recent struggles on the state lowering its disbursement of Medicaid dollars.

Passport has sued the state to claw back some of the money that it asserts the state should have paid in the last year. The state said that it made changes to the Medicaid program because of budget constraints and because Kentucky’s managed care organizations were generating much higher profit than their peers in other states.

The state recently raised its disbursement rate of Medicaid dollars for Region A, a 16-county area that includes Jefferson County, by 4.3%, which prompted Passport CEO Mark Carter to say that he was “cautiously optimistic” that the nonprofit could avert insolvency.

However, Carter also told Insider at the time that the state’s low disbursement rates in the last year had “substantially depleted” Passport’s cash reserves.

Passport generates nearly all of its revenue from its Medicaid contract with the state. That contract runs out in summer 2020. 

Cash needed to apply

A drawing of an umbrella that protects money from falling rain.
Courtesy of Pixabay

To be able to bid on the new contract, an applicant has to prove that it has a certain amount of cash, a quasi rainy day fund, “to support its overall business operations in consideration of its size and risk profile” and to provide “a cushion … against insolvency,” according to the National Association of Insurance Commissioners.

The state monitors this reserve, called risk-based capital, to determine an insurer’s ability to continue to provide services to Medicaid beneficiaries. Shekhdar said that if an insurer’s reserves fall below 200% of the threshold, the state usually warns the managed care organization to get its finances in order.

When an insurer falls below the threshold, it signals the managed care organization’s inability to pay its debt and/or its beneficiaries’ medical bills and typically results in state intervention and eventual liquidation.

Many insurers make sure to stay far above the minimum that would increase regulatory scrutiny. For example, insurer Centene said in 2014 in filings with the Securities and Exchange Commission that its reserve exceeded 350% of the threshold.

The thresholds also differ from state to state, and even from insurer to insurer within the same state. WellCare has said in SEC filings that when it began operations in Ohio, the state imposed an RBC requirement of 300%, which was higher than the requirement for WellCare’s competitors that had been operating in Ohio for a while.

Passport wouldn’t tell Insider what its current RBC level is, and the Kentucky Department of Insurance could not be reached, but public filings indicate that Passport’s cash reserves — without Evolent’s help — are nowhere near where they need to be to avoid regulatory scrutiny or even intervention.

Passport said in its annual statement to state regulators that as of Dec. 31, its total assets in the prior year had shrunk by $67 million, or nearly 15%, while its liabilities had jumped by $55 million, or 23%. As a result, its net assets dwindled from $214 million at the end of 2017 to $92 million at the end of last year.

Passport had projected that it would lose another $22 million in January and February. It then made drastic cuts in early March — but was still losing $1.25 million per week, at least until the state’s new disbursement rates took effect on April 1.

Even in its February lawsuit against the state, Passport had warned that before March 1, its continuing losses would result in its risk-based capital being “significantly less than the statutory threshold.”

That means its cash reserves were expected to fall below 100% of the state’s requirement — and states usually begin to worry if an insurer’s level falls below 200%.

Put another way, Passport was projecting that it would need significantly more than $130 million to escape regulatory scrutiny. It also meant that Passport lacked the financial resources to be able to apply by July 5 for the next Medicaid contract, which is vital to its future beyond the summer of 2020.

“When you bid, you have to have that amount of money,” Shekhdar said.

Passport remains confident

Passport's logoPassport would not tell Insider this week what its current risk-based capital level is.

“This information is not public at this time, so we’re unable to share these details,” the nonprofit told Insider in an emailed statement.

Nonetheless, Passport said it was “confident (it would) meet the relevant regulatory thresholds for risk-based capital requirements.”

Shekhdar said that’s likely because Passport’s “white knight,” Evolent, has ridden in to save the day.

When Evolent announced May 29 that it planned to acquire a 70% stake in Passport for $70 million, the company, an Arlington, Va.-based health care consultant, also said that it would “provide interim balance sheet support if necessary to meet near-term regulatory capital requirements.”

Passport is Evolent’s most important revenue stream: Passport’s payments to Evolent approach $100 million annually and account for about 12% of the consulting company’s revenue.

Investors did not react well to Evolent’s bailout. The company’s shares plunged as much as 30% on the day of the Passport acquisition announcement. They have not recovered much in the week since.

Piper Jaffray analyst Sean Wieland said in a research note that Passport’s problems placed Evolent in a dilemma: Do nothing and, in all likelihood, see Passport go under, which would have seen Evolent lose its biggest customer — or, bail out Passport, which may be costly and require Evolent to drain precious resources from its core business while taking on the responsibility of competing in the Kentucky Medicaid market with wealthy rivals such as WellCare and Humana.

Evolent was “damned if they did, damned if they don’t,” Wieland wrote.

Shekhdar warned that even with the help from Evolent, Passport may not be successful in securing the next state Medicaid contract. The state’s request for proposal indicates that it is looking for five providers, the same number that currently serve the state.

Shekhdar expects that at least seven health plans will bid on the Kentucky Medicaid contracts this year. States generally favor current providers over newcomers, he said, because they want to avoid market disruption. If Passport disappeared, the nonprofit’s Medicaid beneficiaries would have to be assigned to or choose a new insurer, and health care providers, including doctors and hospitals would have to negotiate new contracts with the new market entrant. 

However, Shekhdar said, prior experience usually accounts for no more than 20% of a state’s decision, or about as much as pricing. Financial difficulties could sway state regulators to move away from an insurer with which it is currently doing business — in favor of a more financially stable rival.

Shekhdar also is a lecturer at George Washington University and previously was in charge of federal and state policy at Medicaid Health Plans of America, a trade association of managed care organizations that cover 25 million Medicaid beneficiaries in 39 states. The MHPA board includes executives from health insurance giants such as WellCare, UnitedHealthcare and Aetna.

Evolent declined to make executives available for an interview, but sent Insider an emailed statement that read that Passport and Evolent have worked together to improve health care delivery and outcomes for 300,000 Kentuckians and that they “are already hard at work furthering our relationship with local providers, state agencies, and community-based organizations as we integrate more seamlessly.”

The Evolent deal has been approved by Passport’s owners, but still has to be approved by state and federal regulatory agencies.

Evolent’s bailout good for Medicaid patients, health care providers

A portrait of Dr. Sandeep Wadhwa
Dr. Sandeep Wadhwa

Another Medicaid expert told Insider that Evolent’s bailout of Passport should be considered good news by Medicaid beneficiaries and local health care providers.

Among other potential acquirers of Passport, Evolent “strikes me as maybe being the least disruptive for the provider community,” said Dr. Sandeep Wadhwa, chief health officer of Solera and former Medicaid director and chief medical officer of the Colorado Department of Health Care Policy and Financing.

When a health plan suddenly exits the market, beneficiaries and providers invariably see an interruption of care or payments, which means any action to assure Passport’s survival should benefit Louisville area Medicaid patients and their doctors and hospitals, he said.

And given Evolent’s existing relationships with Passport, the University of Louisville and other local players, an acquisition of Passport by Evolent — as opposed to one by WellCare, Aetna or another managed care organization — is likely to result in the least disruption for patients and providers, Wadhwa said.

“I think that it’s good news,” he said.

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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.