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Moda Negotiating A Major Infusion of Capital

Confidential sources tell The Lund Report that a deal is in the works that could eventually lead to another insurance company holding a majority of seats on Moda's board.
The Moda Tower in downtown Portland. | LYNNE TERRY/THE LUND REPORT
August 13, 2018

Speculation has swirled for years that Moda Health, Inc. would fail or be taken over.

Now it looks as if it will be the latter. 

Moda is currently working on a deal that would give it a big infusion of capital. That money would put Moda Health, which has skittered on the financial edge for years, on firm footing.

The investor is another insurance company, according to inside sources who requested anonymity because of their relation to the company. They said that under a deal in the works, the outside company would eventually gain a majority share on Moda's board. It's not clear whether the investor is based in Oregon. 

If a deal goes through, it could further consolidate the health insurance industry in the state. Health policy experts have speculated for years that mergers and acquisitions would leave a handful of health insurers in Oregon compared with 10 now that cover at least 10,000 people on the commercial market.

The sources said the negotiations follow pressure from Oregon’s insurance commissioner, demanding that the company shore up its financial situation. Under Oregon law, the commissioner has the authority to intervene to protect consumers from losing coverage.

Brad Hilliard, a spokesman for the state Department of Consumer and Business Services, declined to release any relevant emails between the commissioner and Moda’s chief executive, Robert Gootee, citing protection under Oregon statute. Moda also declined to discuss details. But Jonathan Nicholas, the company’s spokesman, confirmed that negotiations are in the works.

“Moda has for some time been contemplating a strategic partnership that would bring significant additional resources to our company,” Nicholas told The Lund Report in an email. “While we currently are in discussions with a potential partner that would significantly strengthen Moda and enhance its future growth, we have not finalized an agreement.”

He said a deal is not imminent.

The sources said an agreement hinges on a crucial vote on Sept. 8 by the House of Delegates of the Oregon Dental Association, which founded Moda in 1955 as a dental insurance company, ODS. The association elects directors to the board of Moda, Inc., which, in turn, appoints the members of the board of Moda Health. The delegates have to approve a change in Moda’s bylaws, allowing non-association members on the board, the sources said. They said the plan is to change the bylaws, eventually allowing the investor to take seats on the board. Then when Gootee, the CEO, retires, the investing company would take his place, gaining a dominant position. 

A Major Turning Point

The move would mark a major turning point in Moda's evolution. Starting as ODS and offering dental plans, it added coverage of medical, vision and pharmaceuticals. It also serves residents in Washington and Alaska.

In 2013, ODS switched its name to Moda. The company has more than 1 million members with dental insurance, another million with drug coverage and more than 365,000 members with medical plans in Oregon, Washington and Alaska, Nicholas said. 

Though the parent company has expanded, and now has several affiliates, Moda Health has been on rocky financial footing for years, stemming from losses under the Affordable Care Act, former President Barack Obama’s signature achievement.

The ACA was intended to ensure that more Americans were covered by health insurance -- and it did -- partly by banning insurers from denying plans to those with preexisting conditions. To compensate, the ACA promised to reimburse insurers that lost money through the so-called risk-corridor program. The program was created to stabilize the insurance marketplaces through a redistribution of funds from profitable companies to those with losses above a certain amount.

But Republicans in Congress essentially scaled back the payments. Since 2014, Moda has only received $15 million in payments, Nicholas said. The government owes it $250 million for 2014, 2015 and 2016. he said. 

Other health insurers have suffered as well. In fact, two Oregon insurance co-ops, Health Republic and Oregon Health Co-op, folded.

Moda has struggled through losses, reporting negative net incomes in 2014, 2015 and 2016. Its losses peaked in 2015 with nearly $50 million in negative net income. Towards the end of that year, Oregon Health & Science University swooped in, giving Moda a $50 million loan with the possibility of converting that into a 25 percent equity share. OHSU eventually decided against taking a share. 

In 2016, the state, worried about Moda’s finances, moved to take over the company but backed down when Moda raised new capital. 

Moda also went to court against the federal government, saying it was owed millions in risk corridor payments. It prevailed in a 2017 decision by the U.S. Court of Claims, which ordered the government to pay Moda $214 million.

The federal government appealed. This past June a three-judge panel for the U.S. Court of Appeals for the Federal Circuit in Washington D.C. overturned that decision. Moda has appealed, asking the full federal appeals court to reconsider.

In the meantime, Moda’s finances were in the black last year, with a net income of nearly $45 million, according to its financial statement. But in the first quarter this year, it reported a net loss of more than $15 million. The financial statement still shows Moda in the clear, with a capitalization of nearly $76 million. 

The Road Ahead

In the past, Moda avoided going through a bankruptcy process by drumming up fresh capital. Its parent company, Moda, Inc., also sold assets and secured loans.

This time it appears to be in an entirely different situation. A deal could shake up the insurance industry and potentially affect consumers.

The next few weeks are crucial.

The House of Delegates needs to approve a change of Moda's bylaws at its September meeting. The company also has to apply to the Department of Consumer and Business Services for authorization to receive an infusion of capital. That request would then go through a public review process, that typically takes about four months.

Moda has yet to make a formal request, said Brad Hilliard, a spokesman for the department.

Researcher Kathryn Thomsen contributed to this report. You can reach Lynne Terry at [email protected].