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Proposed CareOregon merger was unlawful, state lawyers concluded

CareOregon leaders stood to win big, but a review said the public interest would suffer if the nonprofit merged with California-based SCAN Group. Proponents don't agree.
February 20, 2024
This article has been updated to incorporate additional reporting.

Portland-based CareOregon’s controversial proposal to merge into a California health insurance entity violated CareOregon’s own bylaws and would have financially benefited its CEO and four board members, according to a state review of the deal that suggested disapproval.

 “This transaction is not in the best interest of CareOregon members, communities, or the public,” stated a 67-page Oregon Health Authority report obtained by The Lund Report. The document has not previously been disclosed to the public.

On Feb. 13, Medicaid insurer CareOregon and its California suitor, a Medicare insurer known as SCAN Group, backed out of the proposal, citing lingering “questions.” A month before that, the state informed the two entities it was poised to recommend denial of the proposed merger, The Lund Report has learned. That's when the nonprofits asked to pause the recommendation for 60 days, saying in an email they hoped to address state “concerns.”

Asked about the report, a public relations consultant issued a statement to The Lund Report on behalf of the CareOregon board that defended the merger proposal's legality and benefits to Oregon, adding, “We are disappointed that (the state) and stakeholders did not see the value in our vision.” Also shared was a letter to the state dated Feb. 12 from the board chair, Damien Hall, saying the nonprofit was open to conditions to address concerns.

Some of the state report's notable findings:

  • The Oregon Department of Justice concluded that CareOregon CEO Eric Hunter – who is also a board member - and four other unnamed board members, failed to properly disclose a potential conflict of interest: They stood to receive big pay raises through the merger. Hunter, along with board chair Hall, had led negotiations on the deal.
  • The state also concluded that the resolution passed by CareOregon’s board approving the merger into SCAN was “invalid” and likely contrary to Oregon nonprofit law because too many board members had a personal financial interest in the merger taking place.
  •  By handing control to an expansion-oriented California-based entity focused on senior care, the CareOregon/SCAN proposal ran counter to CareOregon’s articles of incorporation, which limit CareOregon to providing and improving health care in Oregon, the state concluded.
  • Whereas CareOregon and SCAN had promised that CareOregon’s autonomy would be preserved — in part by giving it four seats on the new board of the merged entity called HealthRight Group — the state found otherwise. The report said that provision expired in four years, giving CareOregon no guaranteed representation on the merged board. The state noted that the deal included no guarantees that the financial reserves CareOregon had built up as a low-income insurer in Oregon would not fuel Medicare expansion in other states.

The CareOregon board statement disagreed, saying “CareOregon’s Board discussed and analyzed each part of this transaction for more than a year and followed our by-laws. This transaction sought to balance the need for strength and resilience in a rapidly changing industry, with the need to maintain the local control and autonomy that is so critical to CareOregon and the coordinated care model.”

A spokesperson for SCAN Group also defended the proposal in a statement. “SCAN Group is committed to improving and expanding access to care and services for seniors and vulnerable populations. We believe that the combination with CareOregon would have been an important step towards preserving and protecting not-for-profit community-based healthcare at a time when for-profit healthcare companies dominate the landscape. While we are disappointed that this combination will not be realized, our commitment to preserving not-for-profit healthcare and improving equitable access to quality care for vulnerable populations is unwavering.”

Report sheds light on new process

The state report, written early this year, is significant not just because it sheds light on why CareOregon and SCAN dropped the proposal. It also details the first in-depth “comprehensive review” of a proposed health care transaction by the state’s relatively new Health Care Market Oversight program, created by the Legislature to evaluate major deals.

For the last year, nonprofit CareOregon’s proposal to be absorbed by not-for–profit SCAN, a multi-state Medicare insurer, has been the topic of vigorous debate. Since its announcement, it’s drawn dozens of comments in opposition and sparked concerns and criticisms from high-profile former state officials as well as the state’s volunteer-dominated Medicaid Advisory Committee.

Proponents argued that the deal would cut costs and defend against for-profit competitors. Critics argued that CareOregon and SCAN failed to give specifics about how the move would help Oregonians, and that the transaction would give an out-of-state corporation control over most of CareOregon’s roughly $1-billion investment portfolio, which CareOregon had built up from years of profits it made on its Oregon Health Plan administration work.

The new state report echoes and elaborates on many of those criticisms.

 The state review concluded that the transaction “involves funds leaving Oregon without a clear commitment for investments in the state and will result in an out of state company gaining substantial influence over CareOregon,” the report said.  The deal is “unlikely to improve health outcomes for Oregon residents” and is “unlikely to improve access to care, slow the growth of health care costs or address health inequities,” it added.

The review does not include an explicit recommendation on the deal. But it indicates the proposal failed to meet criteria for state approval, including that it was not lawfully approved by CareOregon’s board and was not likely to improve Oregonians’ health care.

Potential ‘conflicts of interest’

The state said the deal could financially benefit CareOregon’s Hunter because he would become SCAN’s top Medicaid executive and could get a substantial pay raise. That’s because top salaries at SCAN are far higher than at CareOregon. 

As CEO at CareOregon, Hunter was paid just under $800,000 according to its 2022 financial filing. In contrast, SCAN that year reported more than $5 million in compensation to its CEO, the state report said, and other top executives at SCAN were paid $1 million-$2 million or more apiece. (After the initial version of this article was published, a SCAN spokesperson emailed additional detail, saying $2 million of the $5 million listed in its 2022 financial report as compensation to CEO Sachin Jain was actually not paid until 2023.)

Also, while CareOregon board members are not paid, SCAN pays its board members annual salaries that in 2022 ranged from $94,000 to $157,000, the report said. So, the four unnamed, unpaid CareOregon board members who would join the board of SCAN — to be renamed HealthRight Group — would financially benefit by receiving salaries, the state said.

CareOregon’s bylaws require board members to disclose potential conflicts of interest in writing, but none of the five board members made any such written disclosures to the board, the state found.

Responding to an inquiry from the state regarding the issue, CareOregon said that “there were no such disclosures and no members of the CareOregon board had a conflict of interest” in the deal, according to the report.

The report said that “The (CareOregon) board’s review of the transaction may have fallen short of the process and duties expected of a major nonprofit organization in a transaction of this nature.”

CareOregon has a 14-member board, including the CEO, the report said. Under CareOregon’s own bylaws and articles of incorporation, the votes in favor of the CareOregon/SCAN deal by the five board members with potential financial conflicts of interest could not be counted, the report said. That left nine other board members voting in favor of the deal, the state said. But under CareOregon’s bylaws, at least 10 votes were needed to approve the deal, the state said.

The board vote allowing CareOregon to merge into SCAN “was not valid,” the report said.

No clear benefit

The state’s review also questioned the claim by CareOregon and SCAN that the merger would help Oregonians. In their application to the state, the two non-profits made generalized statements that the merger would be beneficial. “But neither SCAN nor CareOregon have demonstrated how (the merger) will result in improved care delivery or product offerings for CareOregon (Medicaid) members or Oregonians,” the report said. The report said the lack of detail was particularly troubling given that the two entities had been in merger discussions for more than two years.

In its application for state approval, CareOregon had also said it needed to merge with SCAN in order to ward off competition from large national for-profit health insurance companies that handled Medicaid. But the state review said CareOregon had provided no substantiation for that claim. CareOregon’s primary business is administering the Oregon Health Plan – Oregon’s version of Medicaid -- for about 500,000 Oregonians in the Portland metro area, and the Tillamook County and Jackson County areas. The Oregon Health Plan market is overseen by the Oregon Health Authority and administered through contracts with insurers around the state, mostly local and non-profit.

The state report also stressed that with the deal, SCAN would effectively control CareOregon and its financial assets, which include a $1-billion portfolio of cash and investments. SCAN would be controlled by a 17-member board, of whom only four members would be appointed by CareOregon — a provision that would expire in four years, the report noted. 

Under the deal, CareOregon would have been required to transfer $120 million to SCAN for use for projects that were to be determined by SCAN’s board. SCAN would also have “on-going access to CareOregon funds,” the state report noted, adding, “The transaction would also create the potential for funds in addition to the $120 million to flow out of state in the future. There is no evidence that SCAN has made concrete commitments to invest in CareOregon, CareOregon members, or communities in Oregon.”

John Santa, a retired physician and prominent Oregon health care advocate, had opposed the CareOregon/SCAN deal, citing among other things its lack of clarity, and the control SCAN would gain over an important Oregon health care nonprofit.

“I am pleased how thorough and robust the (state) report is,” Santa told The Lund Report, adding he was glad of the involvement of the Department of Justice, which oversees Oregon’s nonprofit laws.

The merger vote by the CareOregon board “was filled with conflict of interest,” Santa said, “and it is great to see conflict of interest be taken seriously” in the report.

Santa said he was also pleased to see the Health Care Market Oversight program judging the deal based on whether it would improve access to care, as well as health care quality, cost and equity.

According to Oregon Health Authority Communications Director Robb Cowie, the state shared the report with CareOregon and SCAN last week before sharing it with The Lund Report.

You can reach Christian Wihtol at [email protected].