Wash. Commissioner Backs Sale of KPS

July 19, 2005

Washington Insurance Commissioner Mike Kreidler has asked for court permission to sell KPS Health Plans of Bremerton, a move that would allow the non-profit insurer to emerge from receivership after six years of operation under the protection of his office.

Kreidler has approved the proposed $19 million sale of KPS to non-profit Group Health Cooperative, under provisions that will allow the insurer to continue serving its 55,000 subscribers and to maintain a separate corporate identity and presence in the community.

“I appreciate the strong community allegiance and I understand the concerns raised about selling KPS. But I cannot continue to protect the company under receivership indefinitely,” Kreidler said. “I’m convinced that this proposal serves the best interests of policyholders, creditors, providers and the public, and I’m confident the court will agree.”

The Office of the Insurance Commissioner (OIC) has filed a scheduling order in Thurston County Superior Court to place the hearing on the Aug. 19 court calendar. This is the first step in asking the court to lift the receivership order it imposed in 1999 and approve the sale. Kreidler expects to file the necessary petition early next week which is required 30 days before the court date.

The insurer was placed under the OIC’s control in 1999 as it teetered on the brink of insolvency with an $8 million operating deficit. The subsequent plan to rehabilitate the company included a restructuring of its debt, installation of new management and an eventual corporate reorganization.

Although the company has a solid base of community support, and has made significant progress building enrollments and paying claims on time, it nevertheless operates far below minimum capital requirements that would enable it to emerge from receivership.

Additionally, the company’s financial struggles reportedly leave it vulnerable to multiple high-cost claims experience and other adverse economic developments.

“We’ve had six years of experience running this company, and while we’ve made good progress, we are still years away from KPS coming out of receivership,” Kreidler said. “Further, it is unlikely that we could meet the minimum statutory financial requirements without an infusion of new and substantial capital.”

Under terms of the proposed sale, Group Health would infuse $19 million into KPS to meet the required minimum standards for capital reserves. In addition to meeting the minimum financial requirements, Kreidler established four other criteria for any successful bidder:

* Keep KPS as a non-profit company;
* Maintain KPS as a separate corporate entity for at least four years with the intent to continue indefinitely;
* Continue operations in Bremerton for at least four years with the intent to continue indefinitely;
* Immediately pay 50 percent of the $6 million that has been owed to surplus note holders since 1999. The remaining 50 percent will be paid over the next three years, based on the company’s specific financial performance.

Kreidler said the Bremerton-area community, including subscribers, medical providers and health facilities, played a critical role in the successful rehabilitation of the company.

“Without that support,” he said, “we probably would be dealing with a liquidation scenario and the accompanying duress for everyone affected. Instead, we have ensured the company’s continued operations, removing the question mark from its future and ensuring its continued viability.”

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