Health Insurance Innovations Inc. is trying to pay for expanding its short-term medical insurance distribution business by selling stock to the public.

This is a great time to be selling short-term medical insurance business, because the Patient Protection and Affordable Care Act (PPACA) could greatly expand the market for individual medical insurance, and many major PPACA provisions exempt short-term medical insurance, Health Insurance Innovations says in a registration statement filed with the U.S. Securities and Exchange Commission (SEC).

Short-term medical policies likely will be free from the PPACA underwriting restrictions and medical loss ratio rules that will apply to major medical policies, “allowing us to offer attractive distributor commission rates while providing affordable products for individuals,” the company says.

Health Insurance Innovations has said it intends to sell two types of shares: Class A shares, which would go to members of the public, and Class B shares, which would be controlled by Kosloske. The Class B shares would have effective control over all matters requiring shareholder approval, the company says.

Shares would trade on the Nasdaq Global Market under the symbol HIIQ.

The top managers of the planned $86 million initial public offering (IPO) are Credit Suisse Securities (USA), Citigroup Global Markets and Merrill Lynch, Pierce, Fenner & Smith.

Raymond James Financial Inc. will be the co-manager.

Michael Kosloske, the president of the Health Insurance Innovations, has been with that company since March 2007. Before that, he was the founder and owner of Health Plan Administrators Inc., a TPA he founded in 1987.

Kosloske has a bachelor’s degree in risk management and insurance from Florida State University.

In the registration statement, the company notes that it accepts no underwriting risk.

The company acts solely as a distributor for insurers such as Starr Indemnity & Liability Company, Companion Life, U.S. Fire, ING, Markel and CIGNA.

Starr accounted for 49 percent of the company’s premium equivalents for the first 9 months of the year, and U.S. Fire accounted for 26 percent, the company says.

Health Insurance Innovations works with an independent distribution network that includes 32 agent call centers and 248 wholesalers, the company says.

Health Insurance Innovations is reporting $2.6 million in net income for the first three quarters of 2012 on $30 million in revenue, up from $1.8 million in net income on $22 million in revenue for the comparable period in 2011.

The company ended the quarter with 24,416 short-term medical plans in force, up from 16,838 a year earlier. The average monthly retention rate was 80 percent, the company says.

The company says it could face regulatory challenges.

If Congress repeals PPACA, that could cause one set of problems, and, if regulators decide that consumers cannot use short-term medical coverage to meet the PPACA coverage mandates, or regulators decide to apply the PPACA MLR rules or other rules to short-term medical insurance, that could cause another set of problems, the company says.

In the past, other sellers of short-term medical insurance and other health insurance products other than traditional major medical insurance have noted that ensuring that brokers explain the limits of the non-traditional products accurately and completely, and understanding that consumers understand the limits, can be challenging.

In the registration statement, Health Insurance Innovations says simply ensuring that agents and brokers in each state maintain the proper licenses can be difficult.

Health Insurance Innovations is not involved in any material legal or regulatory proceedings, the company says.

If there were an adverse regulatory action in one jurisdiction, the action “could result in penalties and adversely affect our license status or reputation in other jurisdictions due to the requirement that adverse regulatory actions in one jurisdiction be reported to other jurisdictions,” the company says in a general discussion of the risks facing the company.

“Even if the allegations in any regulatory or other action against us are proven false, any surrounding negative publicity could harm member, distributor or health insurance carrier confidence in us, which could significantly damage our reputation,” the company says.

In 1998, for example, Health Plan Administrators of Illinois, a TPA, ended up being fined by Wisconsin after an association management company ran afoul of Wisconsin insurance market rules, even though the TPA spent $23,000 of its own funds to help consumers affected by the association management company’s problems.

Also in the registration statement, Health Insurance Innovations:

- Estimates its distributors are spending $2 to $20 per lead to generate leads.

- Says it took out a $4.25 million bank loan in September 2011 and now has $3.5 million of the loan outstanding. The loan has a fixed interest rate of 5.25 percent. The company also set up a $2 million revolving credit facility in December 2012. The rate on the credit facility is LIBOR plus 3.5 percentage points. Collateral for the facility includes the assignment of a $4.5 million life insurance policy on Kosloske.

- Says it ended the third quarter with 51 employees, about 7,858 square feet of office space in Tampa, and about 4,000 square feet of office space in Boca Raton, Fla. 

See also: