The private-equity backed health insurer Friday Health Plans collapsed under order by Colorado state regulators on July 18, stranding 30,000 policyholders without health insurance as of August 31 — forcing them to pursue new plans in the middle of the year and rendering the money they’ve already spent towards annual deductibles and out-of-pocket maximums moot.

The implosion of Friday Health Plans, which offered plans on seven state health insurance exchanges, comes as other private equity-backed insurers have faced similar issues. Bright Health, which was backed by private equity titan The Blackstone Group among others, had to end its insurance business on the exchanges last year, leaving hundreds of thousands of people to find new insurance policies for 2023.

In total, more than a million people have lost their health insurance thanks to the failures of the two private equity-backed insurers.

Their collapses illustrate the major risks of private equity moving into the already unstable health insurance market. Due to decades of failing anti-monopoly policy, the health care industry is designed for big players that are getting bigger. Lax regulations mean unscrupulous entrants can offer insurance to potentially millions of people with minimal oversight, while facing massive headwinds to profitability and long-term stability for patients.

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Private Equity Moving In

The failure of private equity-backed insurers — and their impact on customers desperate for affordable care — comes as private equity has massively expanded its footprint in the health care space.

Hospitals, medical practices, nursing homes, psychiatric care, disability care, and health care information technology have all been subject to extensive private equity speculation.

Private equity’s business model is centered on extracting profits, rather than providing high-quality, consistent, and affordable care. Studies show private equity involvement often spells worse patient outcomes.

Private equity-owned nursing homes have 10 percent higher resident deaths than in nursing facilities overall. Private equity-backed hospitals have cut staffing and services to meet the colossal dividend payments to the private equity firms that bought them. Private equity-backed emergency room staffing firms helped effectively create the “surprise billing” phenomenon, in which patients receive far higher medical bills for out-of-network care despite going to hospitals that are included in their insurance networks. And private equity roll-ups of dermatology practices have resulted in higher prices with poorer quality care.

Laura Katz Olson, a professor at Lehigh University who has studied private equity’s role in health care, said that private equity results in “instability for patients and far lower quality of care. They sell off their companies after several years, so patients don’t have any stability in terms of their providers.”

“They’re extracting value from the health care system, they load them up with debt and then they pay it back by lowering the quality of care,” said Katz Olson. “Health insurance is just another niche that private equity is destroying. They keep buying up these places, extract the value, and then spit them out.”

Friday had been operating plans in Colorado for six years, and for less than three years in the six other states where it operated. Bright Health was founded in 2016 by a coterie of former executives at UnitedHealth Group, the country’s largest insurer.

Friday, which is based in Denver, received backing from Vestar Capital Partners, a private equity firm with strong Colorado connections. Vestar Managing Director Jim Kelley is based in Denver and also heads the Colorado Impact Fund, where former Denver mayor and U.S. Transportation and Energy Secretary Federico Peña is a senior adviser.

From 2006 until 2018, Vestar owned The Mentor Network, a for-profit foster care company for children with intellectual and physical disabilities. A bipartisan report from the Senate Finance Committee found that 94 children died in the company’s care during that period.

Bright Health, which is based in Minneapolis, has recorded a 99 percent erosion in its share price since going public in June 2021. Modern Healthcare reported that when Bright Health exited the exchange market in October, the company would be able to reap $250 million from winding down its businesses. Instead, it owes $200 million to health care providers.

Blackstone backed Bright Health as part of a funding round in September 2020. Other backers include venture capital firm Bessemer Venture Partners, and the hedge fund Tiger Global Management.

While Bright Health, an insurer, would appear to have a vested interest in lowering the cost of providing care, Blackstone’s other investments in the health care space have substantially increased care costs.

Blackstone-backed TeamHealth, an emergency room physician staffing firm, helped pioneer the practice of surprise medical billing. According to a 2017 working paper from Yale researchers,  out-of-network billing costs increased by 33 percent when TeamHealth entered a given market.

TeamHealth is currently restructuring its debt and could face bankruptcy in the coming months.

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“A Good Governance Problem”

Ari Gottlieb, a health care analyst who has studied private equity-backed insurers, says of the Bright Health and Friday collapses, “There’s a good-governance problem and a systemic-solvency problem.”

For starters, said Gottlieb, regulators failed to ascertain whether these plans had sufficient capital, despite a long history of excessive risk-taking by private equity firms.

“Insurance companies are authorized by state regulators to operate for a full year,” he said. “But they don’t have to sign anything certifying that they actually have the capital to operate.”

Gottlieb pointed out that the Centers for Medicare and Medicaid Services (CMS) — which is tasked with regulating the state health insurance exchanges created under Democrats’ 2010 Affordable Care Act (ACA) — doesn’t guarantee or investigate insurer solvency, meaning that insurers can be approved to operate on the exchanges even if they don’t have sufficient capital.

“If you want to sell insurance products for a year, you should certify that you have money to operate for a year,” he remarked.

Another core issue is that the rapid consolidation of health care is driving up costs for insurers and making it harder for narrowly focused insurance startups to survive.

As hospitals are consolidated, only large insurers with diverse regional footprints will have the market power to negotiate lower prices from hospitals and medical practices — the latter of which have been getting scooped up by private equity firms as well as by giant health insurers.

If an insurer is only focusing on the ACA exchange market and the Medicare Advantage markets, as private equity-backed insurers have typically done, that doesn’t provide the company with enough market power to negotiate the same prices that much larger insurers like Blue Cross and UnitedHealth can demand.

“The individual market isn’t big,” said Gottlieb. “In any given market, you’re never going to be big enough to bargain with providers.”

Likely in part because of these issues, Friday collapsed midyear — a catastrophic development for many policyholders in Colorado, who will now face significant additional out-of-pocket expenses if they need care this year .

That’s because the vast majority of other insurers have refused regulators’ request that they voluntarily honor the payments these policyholders had already made to Friday towards their deductibles and out-of-pocket maximums.

“Friday is being shut down involuntarily, they’re going through the liquidation process in the middle of the year,” said Gottlieb. “As a result of failing midyear, individuals are having to pick new plans. Their deductibles don’t carry over. There’s no provision in the law protecting them.”

Health insurers are currently allowed to impose out-of-pocket maximums of up to $9,100 for individuals and $18,200 for families on ACA exchange plans. Friday’s “gold,” or most robust, insurance offering in Colorado, had out-of-pocket limits of $8,250 per individual and $16,500 per family.

For example, if a family already paid $16,500 or more for out-of-pocket costs this year on their Friday health plan, they could now face an extra $18,200 in out-of-pocket costs on their new health plan before the end of 2023, if anyone on their plan needs expensive care or services.

Despite their collapsing business, Bright Health’s executives have still enjoyed major rewards. (Bright Health is publicly traded, so this information is public. Friday Health is privately held, so there is no public information about executive compensation.)

As Bright Health was pulling back from providing insurance altogether, choosing to focus on a small group of primary care clinics it had purchased, its board of directors — which includes former General Electric CEO Jeff Immelt and Biden COVID-19 adviser Andy Slavitt — approved $4 million in bonuses for Bright Health executives. These payments came despite the company’s stock price falling precipitously.

Under the terms of Bright Health’s supervisory agreement with the state of Florida, where it offered coverage, the company could not pay bonuses to executives, Gottlieb pointed out. But because the parent company is separate from the legal entity that offered insurance in Florida, the bonuses were still legal.

“It’s just sort of staggering that they have negative capital, and are paying cash bonuses,” he concluded. “Where’s the accountability there?”