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CareOregon’s wealth in spotlight as merger nears key review

CareOregon has grown rapidly and of late has drawn scrutiny for high profits. Though its leadership says its financial success may not last, critics don’t want control of the nonprofit’s $1 billion portfolio of cash and investments to leave Oregon
CareOregon is among 16 coordinated care organizations in Oregon serving Medicaid members. | LYNNE TERRY/THE LUND REPORT
January 13, 2024

The hundreds of millions of dollars in profits that Portland-based CareOregon accumulated during the pandemic from its taxpayer-funded Oregon Health Plan work are proving a strength and a vulnerability for the organization as it seeks state approval to be absorbed by a California insurance group.

CareOregon’s wealth made it an appealing partner for California-based SCAN Group, which is on an expansion drive to create a multi-state health insurance powerhouse.

Yet critics of the proposed merger are increasingly pointing to CareOregon’s wealth – its $1 billion investment and cash portfolio – saying that money should remain dedicated to helping Oregon residents and not be shifted to the control of an out-of-state organization.

Oregon regulators evaluating whether to let CareOregon be acquired by a new insurance organization that would be headed by SCAN Group leaders have heard from a growing chorus of critics for whom CareOregon’s wealth is a sticking point.

Historically, CareOregon had been a low-profile nonprofit insurer, quietly receiving tax dollars to cover the health care needs of low-income residents in the Portland, Tillamook and Medford areas under the Oregon Health Plan. In years when per-member payments from the state exceeded expenditures to health care providers for services to members, CareOregon salted away profits into its investment portfolio.

But since applying a year ago for state approval to merge into nonprofit SCAN Group, CareOregon has found itself -- and its rich finances – in the spotlight.

In part, that’s because the pandemic provided a particularly big profit boost to CareOregon, the organization’s filings show, pushing it to more than $1 billion in assets by the end of 2022, the filings show.

“What will happen to the $1 billion reserve owned by CareOregon after the merger?” asked members of the Corvallis-based MidValley Health Care Advocates nonprofit community group in a letter last month to the Oregon Health Authority, which is evaluating the proposed CareOregon/SCAN deal. The MidValley group is lobbying for a universal health insurance system in Oregon.

“It appears from the available documents that SCAN is most interested in the flow of taxpayer money from Oregon to the corporate offices of SCAN” to expand, the group wrote.

However, proponents of the proposed deal argue it makes sense for CareOregon to become part of a multi-state system. That would strengthen CareOregon and thereby help Oregon residents, they say.

 If the merger went through, CareOregon as an entity would be controlled by a California-based board of governors dominated by SCAN Group appointees, the application shows. But the CareOregon board would remain in existence and, the merger proposal asserts, direct its operations in Oregon.

CareOregon acknowledges it has reaped big profits from its Oregon Health Plan work.

“I think we're probably a victim of our own success,” CareOregon president and CEO Eric Hunter said in a recent interview with The Lund Report regarding the concerns raised by opponents. “I mean, CareOregon is bigger and stronger than we've ever been. We have greater reserves than we've ever had. But that's temporary. All things are fleeting.”

CareOregon would report to California

Under the deal, CareOregon and SCAN would both become part of a new California-based nonprofit, HealthRight Group. CareOregon would continue its Oregon Health Plan work, SCAN would continue its Medicare insurance work in four states, and HealthRight would oversee the two arms and also spearhead new unspecified regional health insurance initiatives. CareOregon’s and SCAN’s stated goal is to keep a wide range of health insurance services in the hands of nonprofits rather than allow the markets to be dominated by national for-profit corporations.

“Bringing together these mission-driven organizations as HealthRight Group ensures the Oregon market continues to offer a high value, non-profit alternative to plans underwritten by for-profit competitors,” wrote Dr. Gregory Carroll to the Oregon Health Authority. Carroll is a California doctor who practiced for years in Oregon.

To be absorbed into HealthRight, CareOregon would have to pay $50 million of its reserves into the newly formed entity up front, plus a total of $70 million in subsequent years, according to the merger agreement. CareOregon’s big reserves give it the financial ability to make the upfront payment. Under the agreement, the $70 million would be paid out of CareOregon’s annual profits. Under the proposed formula, that could take about seven years.

Under the agreement, the new HealthRight organization would be overseen by a 17-member board. Twelve of those board members would be appointed by SCAN Group; one would be the current CEO of SCAN, Dr. Sachin Jain, who would become CEO of HealthRight; and four board members would be appointed by CareOregon.

​​Under the agreement, it appears HealthRight would have broad control over most of CareOregon’s $1 billion in investments and cash, although the document does say that CareOregon would keep some funds in reserve to backstop its Oregon Health Plan work.

CareOregon would commit to keeping all the reserves it is legally and contractually required by the state, under the agreement. The latest available CareOregon financial filing indicates a figure of as little as $26 million.

The agreement also states that for two years after closing, CareOregon would keep on hand an additional amount of reserves. The formula spelled out in the agreement suggests that amount would be about $150 million.

But beyond these restrictions, the funds ultimately would be controlled by HealthRight.

Pandemic profits at the center of debate

Like other Oregon so-called coordinated care organizations that administer the Oregon Health Plan regionally for low-income state residents, CareOregon reaped outsized profits during the pandemic. That’s because the tax dollars these organizations received from the state far outstripped members’ actual use of health care services. That was in part because health care providers cut back on work such as elective surgeries. Also, the state’s payments to the care organizations soared as enrollment in the Oregon Health Plan rose during the pandemic. The Oregon Health Authority, the governor’s office and the coordinated care organizations have been engaged in months of behind-the-scenes talks about how the coordinated care organizations should use those windfall profits.

The care organizations “did receive windfall additions to their reserves during the pandemic, and the (organizations) and the state are in negotiations to determine … what other purposes the money can be spent on,” argued Corvallis resident Warren George in a letter to the health authority opposing the merger. “So, the subject of the use of (those) reserves is currently tied up in policy discussion which might result in legislation or other action which could affect how (those) funds can be used,” he argued.

But advocates of the merger have argued CareOregon owns its reserves and should be free to use them how it sees fit.

In a statement issued by CareOregon’s Hunter through a spokesperson, the CEO defended the nonprofit’s success since he began leading it, noting that other Oregon Health Plan contractors left the plan during a “volatile” period. He noted that part of the growth stemmed from absorbing coverage of 80,000 people when FamilyCare left. He said that the group’s success has come with spending of $230 million to “help Oregon’s health care system work better for everyone,” including building capacity for behavioral health care.

“We expect strong headwinds ahead as the COVID-19 public health emergency unwinds and the influence of for-profit market players grows. That’s why we are taking action now by combining with (SCAN) to form HealthRight Group, so we continue to invest in the priorities that we know are most critical for Oregonians – behavioral health services, affordable housing and health care workforce expansion.”

Low margins turned into waves of profit

CareOregon was formed in 1993 by a partnership between Multnomah County Health Department, federally funded safety-net clinics and Oregon Health & Science University — which was then part of the state’s bureaucracy.

As a managed-care organization serving the newly formed Oregon Health Plan, CareOregon received tax dollars to pay providers for low-income members’ health care. Its work included negotiating contracts with health care providers who serve those members, and processing and paying claims from those providers.

Operating in 14 counties, for a time the entity limped along, financially pinched. In 2002, for instance, it was effectively broke. It received $234 million in revenue from the state but spent more than that paying for health care for its Medicaid members and covering administration expenses. At the end of 2002, it had no assets left and was $13 million in debt, its financial filings show.

In later years it grew, covering an expanding roster of Medicaid members while slowly accumulating profits and reserves.

In 2012, it joined with Portland-area hospital systems to form Health Share of Oregon. The collaborative won approval from the state to be part of a statewide network of regional Oregon Health Plan managed-care entities known as coordinated care organizations.

By 2012, CareOregon had accumulated net assets – all assets minus all liabilities -- of $180 million, consisting mainly of cash and investments. That year, it eked out a small profit of less than 1%: $5 million on revenues of $703 million.

Then came 2014, when provisions of the federal Affordable Care Act increased Medicaid funding and expanded eligibility, triggering a flood of new funding to states that, like Oregon, chose to expand their programs.

Even as the care organizations were swamped with newly eligible members, per-member reimbursement rates approved by Oregon officials for the care organizations vastly overestimated the medical needs of people in the program. That meant massive profits over the next few years of as high as 27 percent for the organizations formed to serve the Oregon Health Plan. That was more than ten times the normal margin for Medicaid. Among the organizations benefiting was CareOregon, where profits tripled in 2014.

By 2019, the year before the outbreak of COVID-19, continued profits and returns on its swelling investment portfolio boosted CareOregon’s net assets to $379 million. That year, the organization recorded a profit of $90 million on operating revenues of $1.4 billion, a margin of 6.4%.

Then came the pandemic and a continued windfall.

Over three years, the organization reaped $333 million in profits, including a record $179 million profit on operating revenue of $2.1 billion in 2021.

 That year CareOregon netted from its Portland-area Health Share operations an 11% profit margin compared to 3% among similarly situated entities statewide, according to the state. In 2022, state officials announced that in response to that situation CareOregon would spend an additional $80 million primarily on behavioral health investments in the Portland areas over an unspecified period of time, with Health Share chipping in an additional $20 million.

CareOregon has not yet filed its annual financial report for 2023, and it is unclear how much it has spent on those initiatives.

In a July 17, 2023 letter to Gov. Kotek sent in response to her queries about pandemic profits, CareOregon touted activities that included taking over behavioral health for the entire Health Share of Oregon group and said it had boosted its spending on community health, making “unprecedented progress.” 

You can reach Christian Wihtol at [email protected].