Passport CEO: Despite deep cost cuts, nonprofit ‘facing extinction’

Mark Carter at Passport’s office on Commerce Drive. | Photo by Boris Ladwig

The drastic cuts Passport Health Plan implemented a week ago have reduced its shortfall by about 42 percent, but it is still hemorrhaging about $1.25 million a week.

CEO Mark Carter said that while slashing expenditures delayed the insolvency of Passport, it cannot survive without help from the state.

“We’re facing extinction,” Carter told Insider Thursday afternoon at Passport’s offices, 5100 Commerce Crossings Drive.

Passport’s future could be decided in a matter of days, as it soon expects to learn whether the state will change the distribution of Medicaid dollars on April 1. If the state declines to do that, Passport’s fate is all but sealed, barring a favorable — and quick — resolution in court.

And state officials do not appear inclined to make more Medicaid dollars available. Just this week, Kentucky Cabinet for Health and Family Services Secretary Adam Meier wrote Carter a letter to formally reject an appeal Passport had filed earlier this year.

Meier wrote that Passport’s appeal contained “multiple unfounded allegations and claims for which there is no evidence. … Accordingly, I must reject all of the claims and requests … .”

Meier said the letter was his “final decision,” though Carter said Passport Monday will file an appeal with the Secretary of the Finance and Administration Cabinet by Monday.

In an email Friday, Meier told Insider that “the Medicaid budget is extremely tight” and that “we are not in a position to pay the high end of the rates.”

Passport is one of five organizations in Kentucky that manage Medicaid benefits. Medicaid is a mostly federally funded health insurance program primarily for the poor, pregnant women and people with disabilities.

The state last summer changed the way that it distributes the Medicaid dollars. The Louisville region, where Passport has the most of its roughly 312,000 customers, has been receiving less money, while the rest of the state, where Passport’s competitors have more customers, has been receiving more money. Passport, which lost $122 million last year, has sued the state to restore the previous disbursement rates.

Passport’s fiscal problems had prompted the nonprofit on Feb. 22 to halt work on its $87 million planned headquarters at 18th Street and West Broadway. The move dismayed community leaders, who had said that they hoped the project would stimulate the economy and inhibit further social degradation in an underserved part of the city.

The project was to be financed by a $63 million traditional construction loan from Old National Bank and $24 million in new market tax credit financing, which provides investors with a tax credit toward their federal income tax if they invest in low-income communities. PNC bought the tax credits.

Carter said Thursday that Passport already had spent $24 million on the project and has had to liquidate some of its assets to pay back portions of the money it has spent.

For now, Carter said, Passport is wrapping the steel structure on the site to protect it from the elements.

“My hope is we restart that project,” he said.

Passport at odds with state projections

Adam Meier

Meier told Insider this week that the process by which the state’s Department of Medicaid sets the distribution rates is based on data provided by Passport and the other managed care organizations, and that the state cannot arbitrarily change the rates to the benefit or detriment of any MCO.

And Scott Brinkman, secretary of Gov. Matt Bevin’s executive cabinet, told Insider that the state’s actuarial analyses, which rely on claims data provided by the managed care organizations, produce a narrow range in which the state is allowed to distribute Medicaid dollars.

With permission from state and federal agencies, the state could push its overall Medicaid spending to the high end of that range, but that would require the use of additional taxpayer dollars and would not help Passport become solvent, he said.

However, Carter told Insider that the state’s underlying assumptions that served as the basis for the new distribution are unrealistic, even if they are actuarially sound. For example, the state is projecting prescription drug prices to increase in the mid-single digits, while Passport and the managed care organizations have seen price increases in the double digits.

The state is applying some judgment when it puts together the rates, Carter said, and on essentially every metric, from drug prices to the cost of hospitalizations, the state is low-balling the estimated increase.

The state’s new distribution scheme calls for the Louisville region to receive 4.1 percent less than the prior year, but Carter said health care costs aren’t declining in Louisville, they’re rising.

And if the state altered some of the underlying assumptions, it would arrive at a higher distribution rate, which still would be actuarially sound, would be approved by the Centers for Medicare and Medicaid Services and would provide more dollars to managed care organizations including Passport.


Carter said that he had breakfast with the Department of Insurance commissioner last summer on the day that the new rates would be announced and was told they would increase 0.8 percent across the state. Carter said he was disappointed, as he had expected a higher increase, but thought that Passport could deal with a slight increase.

However, when he returned to Passport’s offices, CFO David Stanley was waiting for him with the bad news: Rates in the Louisville area would decline by 4.1 percent, but increase in the rest of the state.

“I was stunned by that,” Carter said. “That was devastating.”

The idle construction site of Passport Health Plan’s proposed new headquarters at 18th Street and West Broadway. | Photo by Boris Ladwig

And, he said, unless the state changes its mind, it won’t just mean the end of Passport. It’ll mean disruption for beneficiaries and providers, as covered services will be unclear and payments for services will be delayed.

It could mean the end of the Kentucky operations of health care consulting company Evolent Health, which the state supported in 2016 with $10 million in tax incentives. And it would mean the end of an $87 million construction project that was meant to improve health outcomes and help revitalize an underserved part of the state.

“This whole thing has been pretty perplexing to me,” Carter said.

Meier told Insider via email that if the state distributed Medicaid dollars at the top of the current range, Passport would receive another $35.5 million per year, not enough to address Passport’s losses.

In addition, he said, at the top of the range, the state’s Medicaid expenditures would increase by about $144.5 million, of which the state would have to pay nearly $29 million, with the federal government picking up the rest.

“… the state is not in a financial position to pay the top end of the rate range,” Meier said.

He said that the state previously disbursed dollars in the middle of the rate range.

“We started using the lower end of the rate range around the time we realized Kentucky had the most profitable MCOs in the country. … We have since used the lower end of the range, which has brought MCO profitability in line with national averages,” he said.

“In addition,” Meier said, “the Medicaid budget is extremely tight, as it was included in the 6.25% across the board budget cuts (historically, Medicaid has been exempt from such cuts), so we are not in a position to pay the high end of the rates.”

In the letter that Meier sent to Carter this week to reject Passport’s formal appeal of the Medicaid disbursement rates, he wrote that the state is “not responsible for ensuring that Passport has made sound business decisions” and noted, for example, that the nonprofit is paying some medical providers “rates that are in excess of what is market driven.”

Meier also said that the Department of Medicaid Services “has a concern regarding Passport’s administrative costs including executive compensation and marketing expenses.”

According to a recent report Passport filed with the state, the nonprofit’s administrative overhead was near 10 percent as a share of total revenue in 2018, up from 6.5 percent three years earlier. Carter said the increase was partially driven by additional services the nonprofit is providing.

Meier wrote that he was unconvinced by Passport’s appeal.

“Passport’s dispute contains multiple unfounded allegations and claims for which there is no evidence,” he wrote. “Passport has produced not one iota of evidence to support any claim that the (state’s) rates are in error.”