Scores of bogus health plans collect premiums, ignore claims

Victimized patients often can't afford to pay their medical expenses.

By Joel B. Finkelstein — Posted March 22, 2004

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Washington -- Sham health insurers are racking up hundreds of millions of dollars in unpaid medical bills -- leaving patients across the country with the tab and doctors with little chance of getting paid, according to a new government report.

Health insurance fraud comes in waves, and the recession has caused the latest upsurge.

"The proliferation of the Internet, the increasing number of uninsured and the ever-increasing cost of health care make the perfect breeding ground for these scams," said Sen. Chuck Grassley (R, Iowa) at a recent hearing of the Senate Finance Committee, which he chairs.

At that hearing, the U.S. General Accounting Office introduced a report that analyzed federal and state data on 144 unauthorized sellers of health insurance between 2000 and 2002. During those years, the firms sold more than 200,000 policies to employees at more than 15,000 businesses. The unpaid medical bills totaled $252 million.

"Companies running insurance scams for the sole purpose of defrauding patients are an outrage," said Yank D. Coble Jr., MD, AMA immediate past president. "It is particularly troublesome that some of the nation's most vulnerable populations ... are direct targets of these charlatans."

The plans generally target small businesses by claiming to provide comprehensive coverage at premiums set well below what state-licensed insurers charge. Using local agents and PPO networks, these companies can lend themselves an air of legitimacy.

The reasonable rates "seem like a dream to many employers and individuals struggling to afford or even obtain coverage," said Fred Nepple, general counsel for the Wisconsin Office of the Commissioner of Insurance. "Unfortunately, the dream quickly becomes a nightmare."

Not passing the buck

These fraudulent health plans sometimes pay off small claims to trick members into continuing to pay premiums. But inevitably they leave patients high and dry for significant medical expenses.

"Unauthorized health plans have had a destructive ripple effect, impacting every aspect of the health care system," said Nepple.

Families and employers are left with thousands, sometimes hundreds of thousands, of dollars in medical bills they cannot pay. In turn, physicians and hospitals are left with millions of dollars in claims they have little hope of ever collecting.

"My staff receives phone calls and inquiries asking us the same question: 'Who is going to pay the claims left behind by these phony, defunct health plans?' " said José Montemayor, commissioner of the Texas Dept. of Insurance. "Unfortunately, we usually don't have an answer."

When patients have been promised health benefits by their employers and they have been paying their premiums, they are simply not in the frame of mind to pay for services that were supposed to be covered, said Norman H. Chenven, MD, executive vice president of the Austin Regional Clinic in Texas.

When the physician finds out weeks or months later that the insurance company has no intention of paying the bill, he or she is left with the unpleasant choice of pursuing the patient through legal means or not getting paid, Dr. Chenven said.

These bogus plans can elude state regulators for months to years by falsely claiming to be federally regulated plans under the Employee Retirement Income Security Act, Montemayor said. That time allows the scam artists who run the companies to continue selling their products and collecting premiums from unsuspecting individuals and business. The crooks divert much of the revenues into accounts held by front companies they also own. Once regulators catch on, the plans dissolve, only to pop up in another state.

"These people know that they are going to leave unpaid claims, and the more successful they are at marketing the plan on the front end, the more unpaid claims there will be," Montemayor said.

The low rates charged by fraudulent plans are designed to entice as many small businesses as possible to enroll as quickly as possible. Because they set premiums far below market rates, the companies don't even collect enough money to cover patients' claims.

The Dept. of Labor, which is responsible for overseeing ERISA plans, is slow to respond, often taking years to shut down scam insurers.

"States are a lot better, a lot quicker," said Mila Kofman, an assistant research professor at Georgetown University's Health Policy Institute in Washington, D.C.

However, to some extent states' hands are tied by federal law. A company even purporting to run an ERISA plan is required only to file paperwork with the federal government some time in the first year of operation. At that point, the Labor Dept. is responsible for overseeing the plan and tracking annual reports.

"The DOL must generally prove a breach of fiduciary duty or fraud in order to take civil or criminal action against an ERISA plan or its operator," said Montemayor. "That is a far cry from the resources the states have in regulating the rest of the insurance industry." He suggested that the Dept. of Labor be given greater enforcement authority to pursue these plans.

However, an analysis of ERISA paperwork filed with the federal government revealed that about 100 out of 700 forms had flaws that should have instigated follow-up from the department but didn't, said Georgetown's Kofman, who conducted the study.

She and others suggest that the Dept. of Labor does not have the resources to oversee these plans and that the states are better equipped to handle the problem.

Despite that assessment, Assistant Secretary of Labor Ann L. Combs testified at the hearing that more health plans should be preempted from state regulation.

"Association health plans can offer small employers more affordable coverage and reduce their exposure to health insurance fraud," said Combs.

Many experts disagree with that opinion, which they believe to be based more on politics than evidence. Reports from within and without the government suggest AHPs are more likely to foster a rich environment for illegal health plans than to produce affordable premiums.

AHP legislation would create a new preemption under ERISA law behind which illegal plans could hide, said Kofman. Criminals will take advantage of that ambiguity.

Crooks are already using ERISA as a shield, even though current law gives no real grounds to do so, said Alissa Fox, executive director of policy for the BlueCross BlueShield Assn. Deregulating AHPs would only make the situation much worse.

AHPs are not a new idea, said Kofman. "States have been experimenting with this, and it just isn't working." The association plans, even when regulated by states, have proven very unstable, she said.

Four AHPs have become insolvent in the past year, leaving 66,000 individuals without coverage and $48 million in unpaid claims.

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Scope of scam plans

Every state had at least five companies selling sham health insurance under the guise of the Employee Retirement Income Security Act, according to an analysis of federal and state data from 2000 to 2002.

5 to 14: Alaska, Arizona, Connecticut, Delaware, Hawaii, Idaho, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Ohio, Oregon, Rhode Island, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming

15 to 24: Arkansas, California, Colorado, Indiana, Louisiana, Maine, Massachusetts, Mississippi, Missouri, New York, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah

25 to 31: Alabama, Florida, Georgia, Illinois, New Jersey, North Carolina, Texas

Source: U.S. General Accounting Office

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Warning signs

Physicians who are small-business owners also risk getting burned on their own staff insurance. Here are some red flags:

If it's too good to be true, it probably is

Illegal health insurers often price their products significantly below competing plans in the market.

If they say it's an ERISA plan, don't believe it

Plans regulated under the Employee Retirement Income Security Act can only be run by companies that have the financial reserves to self-insure. These plans cannot be resold to small businesses. All health plans that can legally sell comprehensive coverage to individuals and small employers are regulated by the states. Check with your state's insurance commissioner to see if a plan you are offered is properly licensed.

Know your agent

Health insurance agents also have been duped by phony plans. A reputable agent should be licensed by the state and should do the appropriate checking to ensure a health plan he or she carries is operating within the proper regulatory framework.

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External links

General Accounting Office report, "Private Health Insurance: Employers and Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage," in pdf (link)

Commonwealth Fund issue brief, "Health Insurance Scams: How Government Is Responding and What Further Steps Are Needed," in pdf (link)

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