The hotly debated healthcare reform bill signed into law in March has killed a local insurance company.

At least that’s according to a brief letter Richmond-based nHealth sent to insurance agents explaining the reason behind the shuttering of the once promising local startup.

“I wanted to share with you the decision by nHealth’s board of directors to exit the health insurance market,” wrote James Slabaugh, executive vice president of the Richmond-based insurance company that employed about 50 people. (Many of those were at an office in Ohio).

The letter, obtained by BizSense, was sent June 2 to nHealth insurance agents. (You can read it here).

The letter explained that “considerable uncertainties” in the health insurance market caused by the recent federal healthcare legislation made the two year-old company’s business model unsustainable.

“Despite a product that was gaining increasing acceptance among companies throughout the Commonwealth, the uncertainties in the regulatory climate coupled with new demands imposed by national healthcare reforms have made it challenging to sustain the level of sales required to remain viable over the long run,” Slabaugh said in the letter.

According to nHealth CEO Paul Kitchen and Paul Nezi, one of the company’s original investors and former board members, regulatory changes the company believes are coming as a result of the legislation will require levels of capital beyond what nHealth’s business model can sustain.

Nezi said nHealth tried to raise additional capital but was unsuccessful.

“People got skittish about writing any more checks,” Nezi said. “Because of that uncertainty, would you invest a few more million dollars of your money in a startup if you don’t know what the rules are going to be?”

That left company with only one choice.

“The most prudent and sensible conclusion for us is to discontinue the sale of healthcare policies and withdraw from the healthcare business,” Slabaugh wrote in the letter.

Founded in 2008, nHealth was built around a high deductible insurance plan model that utilized health savings accounts and kept costs down making consumers more involved in their healthcare decisions.

Nezi and other investors helped fund the company out of the gate with a $12 million investment, he said.

“Initially we raised $12 million in no time from local investors and one large investor on the West Coast,” Nezi said.

The company also raised additional capital a few months ago he said.

And for a while, the investment seemed to be paying off.

nHealth was recognized in October 2008 by the Venture Forum a promising company to watch and Nezi said the model was gaining acceptance in the market.

“Our results over the last couple of years prove the product does work,” Nezi said. “I believed and still believe in the product design or I wouldn’t have invested in the company.”

Kitchen, former CEO of the Medical Society of Virginia, wouldn’t say what kind of revenue the company was generating, only to say it was “growing.”

The linchpin within the legislation for nHealth, Kitchen said, was related to pending requirements that would raise loss ratios for insurance companies, a ratio related to premiums versus claims.

Kitchen said the quick decision was based on a long-term outlook that showed healthcare reform would have a fatal effect on nHealth.

“You don’t make decision like this without good reason,” Kitchen said. “We didn’t do it just to prove any points.”

As for shutting the company down, Kitchen said an official closing date is difficult to determine. He said the company will send out letters to its customers but will likely let brokers spread the word first. The company is also working to help customers transition smoothly into coverage from other firms.

The letter to agent stated nHealth has “ample capital to pay claims” for business on the books through the end of the year. It also said the company will continue to pay commissions on business “as long as it remains on nHealth’s books.”

Kitchen said it’s unclear how much, if any, investors will get back.

Michael Schwartz is a BizSense reporter. Please send news tips to Michael@richmondbizsense.com.