Some 4,600 employees of small businesses around South Carolina will be responsible for their own medical bills now that the state Department of Insurance has taken over their insurer, saying it didn't have the funds to pay claims.
"This is a serious situation," DOI Director Ray Farmer told The Greenville News. "We have seized the company and its bank accounts."
The insurer, the South Carolina Health Cooperative, Inc., is a multiple employer welfare arrangement (MEWA) headquartered in Seneca that offers benefits to about 530 small businesses from landscaping firms to convenience stores with fewer than 50 employees each, Farmer said.
In a MEWA, a group of employers pool contributions in a self-funded health plan for employees and bear the claims liabilities, according to the department. The SCHC is the only MEWA licensed in the state.
The co-op was the brainchild of Cooper Littlejohn, a young Georgia Tech business student, and enabled by legislation passed in 2008.
The idea was that businesses with two to 50 employees could act as one entity to purchase coverage at lower rates than they could get individually. By increasing the size of the pool, the risk can be spread among many employees, thereby reducing costs.
SCHC representatives couldn't be reached for comment.
Farmer said the DOI had been monitoring SCHC's finances since its licensure in June 2012, but stepped up surveillance after concluding a financial examination on Oct. 31 which revealed SCHC was in a "financially impaired state" and unable to pay all their claims.
DOI was in the process of helping SCHC execute a plan to ensure it was fully insured by finding another company to underwrite the members when it learned of an investigation in Alabama involving the company as a potential victim of fraud, he said.
Subsequently, Farmer said, it was determined that the two letters of credit SCHC held totaling $8 million - which were to be to be used in the event of insolvency to pay claims - were fraudulent.
"They were not able to pay all their claims and the fraudulent letters of credit compounded an already disastrous situation," he said.
Authorities are investigating, he said.
In the meantime, Farmer said, DOI is focused on the employees who were left without coverage and holding the medical bills and is working with insurers to provide coverage for the SCHC's small businesses with an effective date of Dec. 1
"We are encouraging those members to as soon as possible secure a new policy with another company," he said, "and we've gotten good responses from some companies."
Additional information on other possible options available to the businesses will be provided in the coming days.
DOI also is looking to marshal as many assets as possible to reduce the liabilities of the members and minimize the impact on small businesses that paid their premiums, he said.
"Contractually, the employers are responsible, but they do not have enough money to pay the claims," Farmer said. "We have filed a petition in Richland County Court of Common Pleas for a rehabilitation and we will be back in court some time soon with a plan that will find every dollar we can find, from whatever they have in bank or liability coverage."
DOI also has contacted some unrelated insurance companies to contribute to help pay off a portion of the claims, and some have committed to help, he said.
"We're asking them to be good citizens," he said. "If this had been a traditional company, they would be covered by ... a guaranty fund. This is not covered by a guaranty fund."
The department also is reaching out to health care providers, Farmer said, asking as them to stand down on collecting any outstanding bills.
DOI formally assumed control of SCHC's operations on Nov. 10 and the rehabilitation will take effect upon signature of the order by the court.