Nobody's Fool?

This story appears in the August 2004 issue of Entrepreneur. Subscribe »

Fraudulent health insurance plan promoters are preying on entrepreneurs, and the government is concerned. A General Accounting Office (GAO) survey in 2003 shows from 2000 to 2002, the U.S. Department of Labor (DOL) and the states found 144 unauthorized entities covering at least 15,000 employers and 200,000-plus policyholders, resulting in at least $252 million in unpaid medical claims. At the time of the survey, only about 21 percent of that amount had been recovered. The DOL told Congress it's trying to crack down on the schemes, but some say Washington lacks the authority to act quickly enough to end them.

Assistant Secretary Ann L. Combs told the Senate Finance Committee, "Small employers are targeted due to the challenges businesses face in finding affordable health coverage." Combs says, on average, employers end up paying 20 to 30 percent more for similar health coverage than large employers and unions.

Phony promoters claim to provide coverage at premiums well below what licensed insurers charge. They use strategies that make the plans seem legitimate, such as using marketing materials that resemble those from licensed insurance companies, contracting with existing provider networks, and using names of well-known companies. They might pay small claims so members keep paying the premiums, but when significant bills are submitted, they leave individuals high and dry. Once regulators get wind of the scam, the insurance plans dissolve and move to other locations.

These fraudulent plans elude state regulators by falsely claiming to be federally regulated plans under the Employee Retirement Income Security Act (ERISA). The law pre-empts states from regulating ERISA-covered employee benefit plans sponsored by private employers. But the DOL is responsible for overseeing ERISA plans. Experts say the DOL is slow to respond to fraudulent insurance activity and needs greater enforcement authority to pursue phony plans.

Georgetown University professor Mila Kofman told the Senate Finance Committee that the DOL must go to federal court and overcome a high evidentiary burden. Though the government is trying to gather enough evidence to issue restraining orders prior to trial, Kofman says, "it may take several years to have enough evidence to prove a case in court."

States, on the other hand, have regulatory authority that can result in quick enforcement of state rules covering health plans. "State insurance departments can issue cease and desist orders against these entities or charge them with illegally operating in the state without a license," says Kofman. In fact, the GAO found that state insurance departments issued cease and desist orders against 41 unauthorized entities.

The DOL says that in addition to aggressive civil and criminal enforcement, it's also pursuing prevention efforts through education for entrepreneurs, as well as a legislative solution that will give businesses coverage options through well-regulated and federally certified association health plans (AHPs). Under AHPs, businesses can pool their employees with other businesses that are part of a bona fide trade or business association. Supporters of AHPs say this would allow entrepreneurs to increase their purchasing power and negotiate lower health insurance rates.

Besides making coverage more affordable, the DOL says AHPs will provide strong protection against abuse, including a mandatory federal certification process, more oversight, and federal solvency standards for self-funded arrangements.

AHPs, however, are not a panacea. The National Small Business Association (NSBA), for example, sees higher costs for entrepreneurs if Congress passes the Small Business Health Fairness Act that would set up AHPs. Under the bill, national trade associations could offer health insurance to members across state lines without being subject to state rules and oversight.

Also, AHPs will not solve the fraud problem, says the NSBA. "If enacted, the measure might help reduce fraud in some cases, but it would create opportunity for health insurance fraud in others," says Jeremy Claeys, the NSBA's director of communications.

That hasn't stopped small-business groups from supporting an AHP bill, which has passed the House (H.R. 660), but not the Senate (S.545). In the meantime, avoid being stung by scam artists. First, when buying insurance, the DOL recommends comparing insurance coverage and costs. If one product appears to offer similar benefits at a dramatically lower cost, ask questions-it may be too good to be true. Request references of employers enrolled with the provider, and get information from employers about benefit payment history and claim turnaround time.

Finally, be sure the person offering the product is a licensed insurance agent with a proven record of reliability. For more on the DOL's activities and for ways to avoid being scammed, go to www.dol.gov/ebsa/hlthcarefraud.html.