Three prominent New York City hospitals continue to make money—about $64 million this year—from an insurance company that New York regulators last year found engaged in a hidden scheme to funnel hundreds of millions of dollars back to the hospitals.
New York's state Department of Financial Services, or DFS, found that the professional liability insurer Hospitals Insurance Co. illegally kept secret the fact that its offshore captive insurance company soaked up more than $160 million in premium payments that yielded more than $200 million in investment income over a two-decade period, all while avoiding domestic regulation.
Despite the violations, which came to light in a 2017 settlement between the state, Hospitals Insurance Co. and HIC's third-party administrator, FOJP Service Corp., the latest financial filings from Montefiore Medical Center, Mount Sinai Hospital and Maimonides Medical Center indicate the hospitals continue to retain HIC's services.
The $64 million the hospitals made during the first six months of this year was driven by activity unrelated to the reinsurance transactions that occurred in the 1990s. HIC and FOJP do not currently engage in reinsurance transactions, according to a FOJP representative.
The hospitals involved, which are among New York City's largest employers, obtain supplemental medical malpractice insurance through the state of New York. But they effectively devised a way to convert that coverage into cash through a series of reinsurance transactions that funneled the money to their Cayman Islands-based captive insurance company at the heart of the scheme. They used the money to obtain cheaper insurance and pay dividends, according to the settlement agreement.
Even after the settlement, not-for-profit Montefiore Health System, which includes the medical center, posted a 72% jump in net income during the first half of 2018, despite mixed utilization results, due in large part to more than $43 million from FOJP, according to Modern Healthcare's health system financial database.
Mount Sinai collected $17.8 million from HIC in the first six months of 2018, which the health system attributed to a gain on its equity investment and related costs of the program.
A Montefiore spokeswoman said no executives were available for an interview. A Mount Sinai spokeswoman did not respond to a request for information about the proceeds.
During the same time period, Maimonides reported a $3.8 million equity gain from its captive insurance program.
A spokeswoman for Maimonides shared the following joint comment from the hospitals: “When the compliance issues at HIC/FOJP were first discovered, the boards of directors, which include representatives from each partner hospital, immediately authorized an independent internal investigation and reported their concerns to DFS. As a result, appropriate steps were taken to correct the problems identified and strengthen compliance policies and procedures.”
FOJP and HIC's websites list Montefiore, Maimonides and Mount Sinai hospitals, including Mount Sinai Beth Israel, as current clients. The settlement agreement includes Beth Israel Medical Center, which has been part of Mount Sinai since 2013, as a participant in the scheme.
According to the settlement agreement, HIC broke state insurance laws by hiding the existence of its captive insurance companies from state regulators, failing to get state approval to perform retrocession transactions among the insurers and working with an unlicensed adjuster—FOJP—for nearly 40 years. The company was fined $3 million.