In a move that surprised many in Kitsap County the Washington State Office of the Insurance Commissioner (OIC) announced in April that it had tentatively accepted an offer by Group Health Cooperative to purchase KPS Health Plans. Under the terms of the tentative sale agreement, Group Health would inject about $19 million into KPS and would immediately pay back half of the $6 million KPS owes to providers. The other half would potentially be paid out, based on KPS’s future performance, over the next three years, but that’s not guaranteed.

KPS has been in receivership under the OIC since 1999 when a Thurston County judge ordered the then-ailing company under the insurance’s commissioner’s control. At that time, KPS had a deficit of $8 million, was losing $500,000 a month, and was near bankruptcy. Receivership, clearing out old executives, and an agreement by area providers to hold surplus notes on moneys owed to them allowed the company to begin recovery.

Since that time, KPS has, under new management and the watchful eye of an interim advisory board, fought its way back towards solvency. Last year the company took a turn for the worse when several high-dollar claims caused it to lose $1.5 million — its first loss since recovery began. So far this year, however, the company has already built a $4 million surplus, according to Tim Arnold, chairman of the KPS interim advisory board.

“It’s a $12 million swing in a little over five years,” said Arnold, crediting the hard work and collaboration of providers, the OIC, and the community for making this financial upswing possible.

“The surplus note commitment was a key piece of it,” he said.

No one was more surprised by this sale announcement, it would seem, than the management and advisory board of KPS itself. Just a month prior to the OIC’s announcement of the tentative sale, Elizabeth Gilje, president of KPS, had declared that company expected to emerge from state control sometime next year.

As far as KPS and its advisory board knew, the company was well on its way to meeting the criteria for emerging from receivership that was laid out for them back in 1999: building up a $3 million minimum reserve.

Why then would the OIC pursue a sale of KPS now, when the company seemed poised to meet or even surpass this goal? According to insurance commissioner Mike Kreidler, the $3 million reserve was only one of the steps that KPS needed to complete to come out of receivership, and the chances of it meeting the other required steps – $11.6 million in risk-based capital, and an additional $19 million reserve, an 8:1 premium-to-surplus ratio based upon KPS’ $152 million reported premium revenues – in the foreseeable future were not very likely.

“The $3 million was just a minimum financial standard,” said Kreidler. “It was just the start. It was an achievable goal” when KPS started its role to recovery nearly six years ago.

Other reasons that Kreidler cited for pursuing a sale of KPS now was that last year’s loss due to the high-dollar claims showed that the company was still financially vulnerable. He also had growing concerns that other health insurance companies across the state would resent that KPS was being held up to a lesser standard than other companies, since it was being allowed to operate without meeting that 8:1 premium-to-surplus ratio.

“It’s not optional,” said Kreidler of the ratio. “Those are national numbers. Our office is accredited by meeting those standards.”

Kreidler noted that the Washington Office of the Insurance Commissioner was without accreditation when he took office in January 2001. And although the office has since been re-accredited, “we are still on the watch list,” he said.

Kreidler was not at the OIC when KPS went into receivership in 1999. But he does not doubt, however, that his predecessors left out the additional financial criteria from early discussions.

“I’m sure they didn’t [talk about it],” said Kreidler. “If I was back there I’m not sure I would have, either.” Kreidler’s position is that at the time, the additional financial requirements would have been so disheartening to all involved that recovery would never have been attempted.

The fact that these additional financial requirements were not mentioned to KPS management or its advisory board until a few weeks ago is just one of the aspects of this potential sale that troubles Arnold.

“Obviously I’m dismayed at a number of things,” said Arnold. Aside from the surprise of the additional criteria, the fact that the OIC did not keep KPS or its board fully informed of its efforts to sell the company was disheartening, he said.

The board was told at the end of last year that there were some interested parties that had sent due diligence requests to the state, although the names of the interested companies were not revealed.

“We were told we would be included before anything was finalized,” said Arnold. “That didn’t happen.”

The OIC did not involve the board in pending sales talks because of confidentiality issues, said Kreidler.

“The court named the insurance commissioner as the receiver,” he said. “Effectively that makes me an officer of the court. When getting into sensitive areas [such as prospective sales], you are tied to some level of confidentiality in such matters.”

Kreidler is quick to praise KPS’s management, its board, and the community for all that KPS has achieved so far.

“There’s a perception that by being acquired, it’s a failure,” he said. “But it’s really quite remarkable. Six years ago offers went out and there was nobody who wanted to buy.”

Group Health is currently performing its due diligence on KPS. It will then submit a final proposal to the OIC. Assuming the proposal satisfies the OIC, the Thurston County courts must give final approval for the sale. If all goes according to schedule, the final Group Health proposal will be delivered to the state in the next few weeks.

Under the criteria that the OIC laid out for potential buyers, KPS will remain a non-profit and will continue to operate under its existing business model. Group Health has also promised to keep KPS headquartered in Bremerton for at least four years. Group Health, in statements, has maintained that it has no intention of changing KPS’s business model or plan offerings, and that it is interested in acquiring the company in order to expand its own health insurance products in order to compete more effectively with Regence Blue Shield and Premera Blue Cross, the two largest health insurance providers in the state.

Efforts are underway to keep KPS independent and local. A committee of local leaders, headed by Bremerton Mayor Cary Bozeman, is working to put together an alternate proposal to purchase KPS.

“We do believe that it is in the community’s best interest if KPS remained an independent company,” said Mayor Bozeman.

Among the mayor’s concerns – which many in the community share – is that despite Group Health’s best intentions, KPS, which employs 175 people in Kitsap County, will eventually be melded into the larger company and that local jobs will be lost.

Also high on the list of concerns is the potential affect this sale would have on local health care providers and current KPS subscribers. The city of Bremerton and other large local employers, such as the Puget Sound Naval Shipyard, use KPS as their health insurance provider.

“I personally like the idea of local choice,” said Mayor Bozeman.

Insurance commissioner Kreidler has agreed to review the committee’s alternative proposal before making a decision and has given the committee until July 1 to submit its plan. Although the proposal is still in development, one area that it will differ greatly from Group Health’s expected proposal is that the reserve amount will be much less – somewhere between $10-12 million as opposed to $19 million.

“We do think he has discretion,” said Mayor Bozeman, referring to Kreidler and the 8:1 ratio.

“This isn’t an adversarial position,” he continued. “The insurance commissioner’s office is giving us a chance. They’ve been willing to listen and we appreciate that. If our alternative plan doesn’t work, then we’re interested in building a relationship with Group Health and making sure that KPS stays here and remains a PPO provider.”

Scott Bosch, CEO of Harrison Hospital, is also involved with the mayor’s committee.

“We believe that Group Health is a quality organization,” he said, “and we are not trying to do anything that would harm them. On the other hand, we believe that a locally owned and independent KPS is a positive thing.”

The Mayor rejected the notion of trying to block the sale to Group Health in court, should the alternative proposal fail.

“That’s not our strategy,” he said. “That wouldn’t be in anybody’s best interest.”.