Dan's Papers - March 7, 2008 - Locally Grown East End HMO Goes Bankrupt

It seemed like a good idea at the time. Because the insurance industry seems to aggravate doctors and patients alike, why don't doctors form their own insurance company, one that would understand the thinking process of doctors and be on the side of patients? That is exactly what a group of Long Island doctors did in 1995, forming MDNY based in Melville. But as the best laid plans of mice and men often go awry, the experiment was an utter failure - perennially late in paying doctors, MDNY is now going out of business following liquidation proceedings, leaving patients without continued coverage and doctors largely unpaid.

Although MDNY's website indicates that it remains active, without any mention of the company's troubles, the dénouement has been in the making for years. As early as 2000, the New York State Superintendent of Insurance found that MDNY was insolvent, but indicated that MDNY had a plan to rectify the situation. That same year and in the prior year, MDNY was fined for not paying doctors promptly. By 2002, the same fine was imposed but in an amount exceeding $120,000 (vastly greater than an earlier fine of $5,000).

Also in 2002, the Superintendent of Insurance reported that MDNY was misallocating claims by business segments, thereby distorting the results of those segments. Significantly, the Superintendent found that MDNY had vastly understated the results for its "Healthy New York" program and was generally showing an underwriting gain on its books when in fact it was facing a loss. Apparently never rectified, this situation finally reached a boiling point in 2007 when the roosters came home to roost.

In September, MDNY completely stopped making payments to at least some doctors and then in November informed participating doctors that it was going out of business. Because it appears that MDNY's assets are quite limited, debts to individual doctors in the tens of thousands will go largely unpaid. In a liquidation proceeding, a company's assets (from a lease to computers to filing cabinets) are sold, and its unsecured creditors are paid from the cash on a proportional basis, but only after secured creditors are paid.

The best that participating doctors can hope for in this situation is that MDNY's customer list can be sold to a competing insurance company for an amount high enough to allow for at least some repayment. In fact, a new insurance company to be formed shortly is likely to buy the list. However, because many patients have already found new insurance, the once 25,000-member list is less likely to command a price than it could have some time ago, perhaps had MDNY addressed the problems sooner and in a more orderly way.

Yet, some patients do remain enrolled - and for now, they remain in a peculiar limbo. Patients were informed in November that the company would go out of business in May. (Insurance companies must provide six month's notice before canceling insurance.) Those who have not arranged for new insurance now find themselves paying premiums to a company that has insufficient assets to pay participating doctors. Meanwhile, those doctors no longer want to accept MDNY insurance, and many are going through a process of getting out of their contractual obligation to accept the insurance. Thus, many patients with MDNY insurance now must pay their doctors out of pocket. To make matters worse, if they wait too long to acquire replacement insurance, they may not be eligible for automatic coverage of pre-existing conditions.

The unanswered question is how MDNY came to this. Was the business mismanaged, perhaps due to something as innocent as lack of sophistication in the complex insurance field? Was the business model flawed from the start? Or, more worrisome, did the business managers engage in some sort of fraud to keep the business running, bilking doctors along the way? Normally, business owners and managers cannot be held financially responsible to customers for a business's failure brought about by market conditions or even incompetence, but fraud is a different animal. Perhaps it will require a lawsuit to bring all of the facts into the open, so for now the story does not so much end as pause.

Due to problems at MDNY, as of January 3 LIMC will no longer accept MDNY as a participating insurance carrier. If your insurance is MDNY, you will only be seen on self-pay basis.