Modesto reaches $5.9M settlement over implosion of one of its health insurers
Modesto has settled a lawsuit that city officials say lets it recover all of its costs from the financial meltdown of one of its health insurance providers that had left the city responsible for $8.7 million in unpaid medical claims for its employees.
The city in May 2019 sued Peter C. Foy & Associates, its former insurance broker, accusing it of negligence, breach of contract and fraud related to its recommendation that the city use Riverstone Capital for health insurance coverage.
City Attorney Jose Sanchez announced at the Feb. 2 City Council meeting that Modesto had settled the lawsuit, with Foy & Associates paying the city $5.86 million.
City officials said in a Monday interview that the settlement covers all of the city’s costs. That includes its legal costs and reaching settlements with the medical providers over the unpaid claims.
While the medical claims totaled $8.7 million, the city negotiated settlements with health care providers to pay nearly all of them for about $3.8 million and anticipates it will need an additional $150,000 to resolve the remaining claims as well as associated and unexpected costs.
“... We ended up in a much better place than we could have anticipated two years ago,” Deputy City Manager Caluha Barnes said in the Monday interview, which included city spokesman Thomas Reeves and Human Resources Director Christina Alger.
‘Incredible win’ for Modesto
Reeves in an earlier statement said the settlement “is an incredible win” for the city, including for its employees, who endured “months of agonizing financial hardships and uncertainties due to this situation.”
He said Modesto resolved more than 10,000 claims with more than 600 providers. He said when providers agreed to discounts to settle the claims they also agreed to discount what the employees had to pay in deductibles and copays.
The settlement states Los Angeles-based Peter C. Foy & Associates denies the city’s allegations against it and any wrongdoing. A Foy & Associates official did not return a voicemail Monday seeking comment.
Based on Foy & Associates’ recommendation, Modesto officials say the city decided to replace one of its health insurance providers with Riverstone in January 2017. The city was facing steep premium increases with the previous provider, and Riverstone offered rates 25% lower than what employees were paying before the premium increases.
‘Functioning like a Ponzi scheme’
About 700 of the city’s roughly 1,200 employees were covered through Riverstone. The city’s other employees had coverage through other providers.
But Riverstone eventually stopped paying claims. The U.S. Department of Labor filed a civil complaint in federal court against Southern California-based Riverstone in February 2019, alleging it charged low premiums that were not sustainable in an effort to attract customers while charging exorbitant fees.
The judge in the civil complaint wrote that the Labor Department described Riverstone’s administration of its insurance plans “as functioning like a Ponzi scheme,” though the judge made no finding regarding criminal intent.
Modesto was one of 119 employers that had relied upon Riverstone for health insurance.
Modesto officials said the Labor Department and federal court placed Riverstone in liquidation. As part of the settlement, Modesto assigned its rights to any potential payments from Riverstone to Foy & Associates, though city officials say Riverstone has very little in assets.
Besides the roughly $3.95 million to settle claims, the $5.86 million settlement covers the city’s $416,711 in legal costs, $197,000 for city staff time and the $1.08 million the city spent helping employees absorb the cost of higher health insurance premiums. That leaves Modesto with about $200,000 left over from the settlement for any unexpected costs.
City employees now paying more
Modesto replaced Riverstone with another insurance provider that charged higher premiums. The city paid the difference in the premiums on behalf of its employees from March through June of 2019. City officials said the employees now are paying premiums 43% to 61% percent higher than what Riverstone had charged, but the premiums are in line with the marketplace.
Modesto used Meyers Nave — the firm the city retained in 2014 as its city attorney — to represent it in resolving the issues around the unpaid medical claims and in the litigation against Foy & Associates. The city’s legal costs were $416,711 as of December. Reeves, the city’s spokesman, said Meyers Nave does not expect its final costs to be much higher.
Modesto sued Foy & Associates in Stanislaus County Superior Court, but the lawsuit was moved to Superior Court in Los Angeles County, where Foy is based.
The City Council approved the settlement in September. Barnes, the deputy city manager, said Modesto did not announce the settlement until last week because this matter has a lot of components, and the city wanted to resolve them first.
