Fairview has options to become majority owner of PreferredOne

Fairview Health Services has obtained options to become the majority owner of PreferredOne, the Golden Valley-based health insurer that made a big splash during the first year of the MNsure health exchange.

Fairview received the options as part of a loan it provided last year to PreferredOne, but officials with the Minneapolis-based network of hospitals and clinics weren't commenting this week about their plans.

"Currently, there are no plans for if/when we might exercise the option," Fairview spokeswoman Cindy Fruitrail said in a statement.

PreferredOne grew quickly in 2014 and garnered national attention for offering some of the lowest health insurance premiums in the country.

But the company dropped out of MNsure for 2015 and hiked premiums after sustaining big losses in the market for individuals who buy non-group coverage. The growth and losses prompted Fairview, as a 50 percent owner of PreferredOne, to lend the health insurer $18.75 ­million in October.

At the time of the loan, Fairview entered into share purchase option agreements with North Memorial Health Care and PreferredOne Physician Associates, each of which has a 25 percent ownership stake in PreferredOne. In a financial statement this month, Fairview said the agreements let the health system "purchase additional shares in PreferredOne … from those parties. These options are effective on or after Jan. 1, 2015, through Dec. 31, 2018."

A North Memorial spokeswoman did not respond to ­questions. PreferredOne Physician Associates could not be reached.

"The two best explanations are that North Memorial is looking to reduce its investment, and possibly redirect its capital in other places — or that Fairview is anticipating a strategy in which ownership of an insurance company would be a significant advantage," Baumgarten said.

There's been a long history of hospitals trying to get into the health insurance business, and ultimately backing out, Baumgarten said. At the same time, some hospitals across the country are giving the strategy another try with the move toward "accountable care organizations," in which the government and private insurers are asking health care providers to take financial risk for high costs.

With about 22,000 employees, Fairview is one of the state's largest health systems with six hospitals, including the University of Minnesota Medical Center in Minneapolis, plus a network of clinics with roughly 600 physicians.

PreferredOne lost $35.7 million on operations in the fully insured market last year. During the same period, the four other major health ­insurers selling coverage in Minnesota all posted operating income from fully insured customers.

The figures don't include investment income, or the companies' business as third party administrators to self-insured employer groups.

The loan to PreferredOne is called a "surplus note," which means state insurance regulators must give approval before PreferredOne can repay principal and interest.

For 2014, Fairview posted operating income of $147.3 million on $3.56 billion in ­revenue during 2014. The health system derived about 4 cents of income per dollar of revenue last year — a margin that was comparable to 2013, when Fairview saw operating income of $134.5 million on $3.31 billion in revenue.

Fairview's "other operating revenue" for 2014 was up by about 4 percent over the previous year, but featured "lower income on the PreferredOne joint venture, driven by increased health claims activity, particularly within new products available on MNsure," according to a recent financial statement.

PreferredOne has about 340 employees.

Christopher Snowbeck • 612-673-4744