Standing before the Senate Finance Committee last week, Chairman Chuck Grassley (R-Iowa) held up an array of pamphlets. One was a glossy brochure, others had come across a committee fax machine. All advertised affordable health insurance, some even for consumers with pre-existing medical conditions.
"To the average person, these look like fabulous opportunities to get lots of health coverage and other benefits at low prices," Grassley told the committee. "Unfortunately, these items are from phony insurance companies."
The demonstration underscored the release of a new General Accounting Office report on insurance scams-one that found an unprecedented influx of bogus health plans preying on uninsured individuals and small businesses.
These companies typically entice new members with rock-bottom rates, collect premiums and then disappear when claims come due, sticking policyholders and providers with heaps of unpaid medical bills.
According to the 54-page report, 144 fraudulent insurers sold policies to 15,000 employers and left 200,000 members with at least $252 million in unpaid claims from 2000 to 2002. The number of newly identified entities climbed each year, nearly doubling to 60 in 2002 from 31 in 2000. The report, ordered by Grassley and Sen. Olympia Snowe (R-Maine), confirmed findings outlined in an issue brief released by the Commonwealth Fund last year (Sept. 1, 2003, p. 14).
"Historically, these scams have come in waves, when premiums are high and large numbers of uninsured are desperate for affordable coverage," said Mila Kofman, assistant research professor at Georgetown University's Health Policy Institute and co-author of the Commonwealth Fund study. "But it's far worse this time around. No state has been immune."
Indeed, the study found at least five bogus insurers in every state, with Florida and Texas topping the list at 30 each. Experts say the problem is worst in the South, which has a large number of uninsured workers and immigrants, groups especially likely to fall for insurance scams.
Illinois and New Jersey also ranked high, with 29 and 28 sham insurers, respectively.
Of all the bogus health plans, some 27% were offered through small-employer associations, the report found. For example, Employers Mutual-which left 22,000 members with $24 million in unpaid medical bills before being shut down in early 2002-sold coverage through not only existing trade associations but also 16 new associations it had created itself.
The GAO report comes as tensions continue to run high around proposed federal legislation that would exempt association health plans, or AHPs, from state laws (Jan. 26, p. 8). President Bush has urged Congress to pass a controversial bill that permits small businesses to buy health insurance at lower rates by banding together through national AHPs, which would be supervised by the U.S. Labor Department. The bill-which passed the House in June 2003 but never made it out of the Senate-has been contested by insurers, which claim it would create a breeding ground for fraudulent health plans.
Grassley, who hasn't taken a formal position on the issue, stressed that the hearing was not about AHPs. "Legislation creating these types of plans is not before this committee, and we have no jurisdiction over their implementation," he testified. "Instead, this hearing is about predators-predators who are feeding on everyday citizens across the nation."
But at least one insurance group used the findings as further ammunition against AHPs. "The (current) problem would be much worse without the ongoing commitment of significant resources by the state for regulatory oversight," said Mary Nell Lehnhard, senior vice president of the Blue Cross and Blue Shield Association. "States can act quickly. ... They are alerted to questionable plans by state license agents, consumer complaints about nonpayment of claims and provider complaints about slow payments. ... AHPs that are not regulated by the state would be a recipe for disaster."
Representatives for Snowe, who introduced the AHP bill, interpreted the findings quite differently. By giving the uninsured a new coverage option, AHPs would essentially strip illegal insurers of the market on which they prey, said Snowe's spokesman, Craig Orfield. "It stands to reason that the more legitimate, trustworthy insurance alternatives you have, the less room there will be for folks trying to make a quick buck by defrauding desperate consumers," he said.
Grassley said he planned to ask the American Hospital Association and American Medical Association to help spread the word about bogus insurers, and request that the GAO assess the effectiveness of current state and federal oversight efforts.
Meanwhile, the AAHP-HIAA, the nation's largest health insurance trade group, announced plans to tackle the problem through its own three-part initiative, including the launch of a public information campaign and creation of a special task force. It also called for a national database that consumers and employers can access to check the legitimacy of an insurer.
Kofman recommended swifter and stricter punishment for offenders. "The biggest problem is that we're not seeing enough criminal prosecutions. Civil actions are just the price of doing businesses for most con artists," she said.
The Labor Department won 10 criminal indictments against fake insurers over the past three years and currently has 28 open criminal investigations, according to a letter included in the GAO report. Last year, Florida became the first state to increase the maximum penalty for selling bogus policies to a first-degree felony, which can result in a 30-year prison term.