The company Modesto has relied upon for more than two years as its medical insurance carrier for hundreds of city employees is in trouble with the U.S. Department of Labor.
The department filed a Feb. 1 complaint in U.S. District Court in the Central District of California against Riverstone Capital LLC and four company officials as well as two associated companies, Nexgen Insurance Services and NGI Brokerage Services.
The complaint alleges Riverstone and the other defendants operated what is called a multiple employer welfare arrangement for about 112 employers with about 16,303 participants and engaged in such actions as setting low premiums that were not sustainable in an effort to attract customers as well as charging exorbitant fees.
The defendants “engaged in self-dealing by skimming 20% of the collected premiums for a ‘management fee’ that was not disclosed nor contractually agreed upon by the employers participating in the Plan until recently,” according to the complaint. “Coupled with additional fees paid to brokers and other entities, between 40-45% of all premiums ... are used to pay fees, leaving only 55-60% to pay employee medical claims.”
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The complaint said as of Dec. 27, the multiple employer welfare arrangement had about $24 million in unpaid claims, and very low reserves, while collecting $4 million to $6 million in premiums each month.
“Relying on misrepresentations by DEFENDANTS, over a hundred unsuspecting employers have joined the (multiple employer welfare arrangement) to provide affordable medical benefits for their employees, only to have their employees be saddled with thousands of dollars in unpaid medical claims — with some facing escalating collections actions and others threatened with not being able to obtain life-saving medical treatment,” according to the complaint.
Modesto officials have told similar stories about Riverstone, including unpaid medical claims and that the company said in January it would cancel its coverage unless the city agreed to an 87 percent increase in premiums. Last week, the City Council replaced Riverstone with the CSAC Excess Insurance Authority. The change is effective March 1.
About 700 of Modesto’s approximately 1,200 employees have medical insurance through Riverstone. The remaining have city insurance through Kaiser or have opted out of city coverage and have other coverage.
The Department of Labor also obtained a temporary restraining order in U.S. District Court against Riverstone and the other defendants that places the multiple employer welfare arrangement’s assets under the control of Receivership Management, which will operate as an independent fiduciary.
The temporary order also “protects participants and beneficiaries who are unable to pay covered medical expenses from collections actions until further ordered by the court,” according to a department news release.
It’s not clear what the complaint means for Modesto.
The complaint is based on alleged violations of the Employee Retirement Income Security Act, which regulates private sector health plans. Besides the roughly 112 ERISA plans, the complaint states Riverstone and the other defendants have authority over about seven non-ERISA plans.
Modesto’s medical plan is not one of the ERISA plans, according to Leo Kay, a spokesman in the Department of Labor’s San Francisco office. When asked what the complaint means for the non-ERISA plans, Kay said in an email: “We are unable to comment on this at this time.”
City officials learned Monday about the Department of Labor’s taking legal action against Riverstone. City spokesman Thomas Reeves said Tuesday the city is evaluating what it means, and its impact on the city, and will be closely watching the court action.
Modesto is determining the amount of its employees’ unpaid medical claims and putting together a plan to resolve them. City officials also have said they are looking at their legal options against Riverstone.
The judge who issued the temporary restraining order wrote that the Department of Labor portrayed Riverstone’s operation of the multiple employer welfare arrangement as a Ponzi scheme and also noted that the department described a $200,000 transfer to an account on the Cayman Islands.
Riverstone Chief Operating Officer Travis Bugli declined to address the complaint’s allegations but on Tuesday said, “I can only tell you one thing: Riverstone Capital management as it is stated in the complaint has voluntarily agreed to the temporary restraining order. We will have our day in court March 11 to see if we can get the order lifted ... But we all have the same goal, which is to protect the membership.”
The Department of Labor will seek a preliminary injunction against Riverstone and the other defendants March 11.
The complaint names Bugli and Riverstone officials James Kelly, Robert Clarke and Erik Manqueros as defendants.