Prominent NYC hospitals making millions through captive insurance companies

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.

Ultimately, it wasn't the reinsurance operation that got HIC and FOJP into trouble, it was the fact that they didn't disclose it. Hospitals band together all the time to form overseas captive insurance companies, especially in the Cayman Islands, where there are looser laws and more favorable tax codes, said Christian Puff, a Dallas-based attorney with Hall Render.

“They just operated as an insurance company with a whole lot of surplus just kind of passing it out among the owners, and they were not properly filed,” she said.

New York state operates a program that gives healthcare providers excess medical malpractice insurance on top of their primary policies. The settlement agreement shows HIC reinsured that policy through an AIG affiliate, National Union Fire Insurance Company of Pittsburgh, over a total of 10 transactions.

Each time, the risk and premiums paid taken over by the AIG affiliate were retroceded to another AIG affiliate, Richmond Insurance Co., and then retroceded again to Briarwoods, a Cayman Islands company formed in 1990, which was being used to hide the proceeds from the operation and, as part of the settlement, was dissolved, according to the settlement.

Ultimately, Briarwoods ended up with $168 million in excess malpractice premiums and $216 million in investment income.

“HIC designed a round-trip reinsurance chain to hide the magnitude of the surplus funds and ensure that its owners received dividend payments directly from Briarwoods,” DFS wrote in the settlement agreement. DFS representatives declined to provide additional comment.

In addition, FOJP performed claims adjustment services for 38 years without being licensed to do so, according to the DFS. Between 1977 and 2015, the company improperly adjusted more than 18,000 claims on behalf of HIC and others, and state regulators determined that was so that the scam wouldn't be uncovered.

“Prior management was concerned that licensing would have subjected FOJP to regulatory scrutiny and posed a potential threat to FOJP's tax-exempt status, required proof that it was in ongoing compliance with its licenses and could have resulted in the captives being treated as doing business in New York for tax and regulatory purposes.”

According to the agreement, the massive operation came to light after HIC and FOJP got a new general counsel; the general counsel recommended the companies conduct an internal investigation, which they reported to state regulators in spring 2014.

“HIC and FOJP are pleased to have resolved this matter with the DFS through a comprehensive and thoughtful remediation strategy put in place well over a year ago, including HIC's payment of a $3 million fine, replacement of executive leadership, revision of certain regulatory filings, and enactment of changes to operating structures and procedures to ensure future compliance with all NYS insurance regulations,” FOJP wrote in a statement.

The leadership team across both companies now includes CEO, Walter Harris; chief financial officer, Noeleen Doelger; chief medical officer, Dr. David Feldman; and general counsel, Robert Kauffman.

Other companies involved include FFH Insurance Corp., a Barbados-based company formed in 1986 that acted as the hospitals' excess professional liability insurance writer, according to the agreement. A Bermuda-based company formed in 1982 served as a holding company to the Barbados company but had no outstanding insurance policies or claims at the time of the settlement agreement, according to the DFS.

Another Bermuda company, Northeast Insurance Co. mostly dealt with the reinsurance assumed from the Barbados company. Bermuda-based Fulton Investment Trust was responsible for investing the assets of those companies, as well as FOJP's executive retirement plans.

At one point, HIC arranged to have 51% of the Briarwoods voting shares to be nominally owned by Blythedale Children's Hospital in Valhalla, N.Y. Under the DFS agreement, however, those shares would be acquired by the other hospitals and Briarwoods dissolved. The agreement says the hospitals will receive Briarwoods' assets and use them “for charitable purposes and not for executive compensation.”

Blythedale spokeswoman Connie Cornell said the hospital no longer has an interest in Briarwoods and was not a party to the DFS settlement. FOJP and HIC's websites list Blythedale as a client.

The DFS settlement required the hospitals to create a new entity to control their operating companies. They must operate under a transparent, simplified structure that's compliant with New York insurance laws and regulations. Both FOJP and HIC were permitted to continue operating—assuming FOJP got the required licenses—and providing services for the hospitals involved.

The case illustrates the increased importance of transparency in complicated insurance transactions, attorney Puff said. It should serve as a warning to hospitals to ensure their operations follow the laws of the states they're in. If they're in doubt, they should have an attorney review them, she said.

“We are at a time when transparency is paramount,” Puff said. “Consumers want transparency. The government wants transparency.”

Clarification: Hospitals Insurance Co. and FOJP Service Corp. no longer participate in reinsurance transactions.