Mar 1, 2016 5:27 PM

By Alyssa Melillo

At the request of U.S. Representative Lee Zeldin, the Federal Bureau of Investigation may launch a criminal investigation into last fall’s shutdown of Health Republic Insurance of New York, a nonprofit health insurance provider established through the federal Affordable Care Act.

Mr. Zeldin noted that about 200,000 people throughout the state were left without health insurance after the company folded, including 11,000 Suffolk County residents, and thousands on the South Fork alone.

Southampton Hospital and Peconic Bay Medical Center in Riverhead both suffered serious financial blows and collectively lost between $3 million and $4 million for services they provided to Health Republic members that were not reimbursed. One result is a temporary hiring freeze at Southampton Hospital.

Only days after Health Republic ceased operations on November 30, Mr. Zeldin called for the investigation in a letter to U.S. Attorney General Loretta Lynch, stating that the company may have filed false financial reports “to mask [its] financial woes.” He also suggested that Health Republic denied policy-holder benefits and sent out checks to health care providers even though its coffers were empty.

“If Health Republic officials knowingly sent out checks to health care providers without having the sufficient funds to cover those checks, swift and immediate action must be taken to hold these individuals accountable and to ensure this does not happen again,” Mr. Zeldin wrote in his December letter to Ms. Lynch. “In addition to investigating whether or not any criminal action took place, an investigation must also include ways in which the government can recover the funds lost during the undertaking.”

Ms. Lynch sent the congressman a written response dated February 17, which stated that the U.S. Department of Justice had forwarded his request to the FBI and that the bureau “will determine whether an investigation is warranted.”

The shutdown of Health Republic affected thousands of individuals on the South Fork. According to Southampton Hospital spokesperson Marsha Kenny, about 6,500 patients there utilized the company in 2015, and the hospital was not reimbursed for $1.7 million in services between the main facility and its various Meeting House Lane Medical Practice offices.

Southampton Hospital President and CEO Robert S. Chaloner estimates, however, that the loss will end up climbing to a little more than $2 million, although he does not anticipate that it will create an overall budget deficit for the most recent fiscal year. But because revenues at the hospital are not as high in the winter as in the summer, the reimbursement loss has forced officials to implement a hiring freeze for the time being.

“Those are dollars that we could’ve used to invest in new programs. It’s forced us this winter to slow down payment of our bills,” Mr. Chaloner said. “It was a surprise. The plan was percolating along well, it seemed to be getting people to sign up.”

Peconic Bay Medical Center, according to Mr. Zeldin, is out about $1.5 million, although a spokesperson for the hospital did not respond to a request for comment.

In an interview with The Press this week, Mr. Zeldin said that even when Health Republic first began enrolling clients in January 2014, it “was operating off of a business model that had a 100-percent chance of failure.”

Health Republic was a nonprofit consumer-operated and -oriented plan program, or CO-OP, sponsored by Freelancers Union, another nonprofit organization that supports independent workers statewide. Health Republic of New York’s umbrella company, Health Republic Insurance, was created under the Affordable Care Act, which Mr. Zeldin voted in favor of repealing last month.

The company operated three CO-OPs in New York, New Jersey and Oregon, but the New York State Department of Financial Services forced the New York CO-OP to shut down at the end of November after realizing how severe its financial problems were.

Attempts to reach out to Health Republic Insurance for comment were not successful.

Debra Friedman, CEO of Health Republic Insurance of New York, had vaguely explained in an undated letter to policyholders on the company’s website that the decision to shut down came “after coordinating with state and federal regulators.”

“While we are deeply disappointed with this outcome, we believe it is in the best interests of our members. Starting a new insurance company is a daunting task in any environment, but the systemic challenges placed on us by the structure of the CO-OP program were simply too difficult to overcome,” Ms. Friedman wrote.

In October, the CEO of Health Republic of Oregon, Dawn Bonder, had announced that Oregon’s CO-OP would fold in 2016 as well.

Mr. Zeldin said he believes the New York CO-OP ultimately failed because of how it operated: It rented plans from MagnaCare, a regional health care network that partners with insurance providers in New York and New Jersey, and offered premiums at rates that were, on average, about one-third lower than its competitors’.

“If you were to go into business and decide that you want to open up a grocery store across the street from Stop & Shop, and you’re trying to decide where to buy your products from, and you choose to buy the products from the Stop & Shop [and sell them at a lower price] … you’ll be able to sell your product, but you’re operating at a loss that creates a 100-percent chance of failure for your model,” Mr. Zeldin said.

Anthony Cardona, president of Cardona & Company, a Water Mill-based life and health insurance brokerage, agreed, adding that because Health Republic was a nonprofit, it is especially unusual that it failed for any reason other than underpriced premiums. Medical loss ratio, a financial measurement of the Affordable Care Act, allows insurance companies to keep as much as 15 percent of their users’ premiums—something Health Republic, as a nonprofit, didn’t need to rely on.

“Whatever they were taking in obviously wasn’t enough,” Mr. Cardona said. “A company can’t just come in and go, ‘You know what, we’re going to be 50 percent cheaper than the rest of the market.’ In theory, that extra 15 percent wasn’t as important to them, because they weren’t trying to make a profit,” he added. “At the end of the day, it just seems like they didn’t take in enough premiums.”

Cardona & Company also lost out on two months’ worth of commissions it was supposed to receive for enrolling clients in Health Republic, Mr. Cardona said. “They didn’t even say anything or anything like that—they just stopped paying,” he said. “It’s been kind of weird. They went out and then kind of vanished. I’ve been at this for a long time, and I never experienced anything like that.”

For individuals, the shutdown created more of an inconvenience than anything, as policy holders had to scramble to find new carriers.

Springs resident Heather Dunn-Kostura and her husband, Richard, had signed up for Health Republic in June 2015 and were paying a monthly premium of just $515 for the both of them. Aside from paying for their prescriptions, they were planning to use the coverage for Mr. Kostura’s shoulder surgery, which was scheduled for just after Thanksgiving, but they had to put the operation on hold until they found a new carrier.

“It complicated things. It was going to be complicated no matter what, but his arm will be out of commission for three months, so [doing the surgery in the] winter would have been best,” Ms. Dunn-Kostura said.

Although they are now signed up for Empire Blue Cross Blue Shield and pay a monthly premium of about $560, the costs of their co-pays and prescriptions have also increased, and they have to find a cardiologist for Mr. Kostura to see before he can schedule another surgery date.

“After a while, it does all add up,” Ms. Dunn-Kostura said. “Everything’s a little bit more expensive. It is what it is.

“When [Health Republic] fell apart, I was more sad than anything else. I wasn’t really surprised—there are a lot of people who don’t want the Affordable Care Act to survive,” she said. “I think the Affordable Care Act is a good thing. I didn’t have health insurance for 10 years. I own a small business. It’s hard.”