The nation's HMOs found themselves back under the public microscope last week as New York Attorney General Eliot Spitzer's efforts to root out alleged fraud and kickbacks in the insurance industry expanded to include health plans and threatened to take on a national scope as officials in at least two other states joined the probe.
Health insurance giants Aetna and Cigna Corp. last week confirmed that they had received subpoenas for additional information pertaining to their compensation arrangements with brokers. They join a growing list of life and property-casualty insurers that have received inquiries since Spitzer launched his investigation in April.
At the center of the broadening probe are "contingent commissions" paid by insurers to brokers based on the number and profitability of clients steered their way. Spitzer has called these commissions "payoffs" and says they have led to phony bidding for insurance contracts and inflated clients' costs by choking off market competition.
Spitzer's spokesman Brad Maioni declined to comment on the investigation other than to reiterate that it is wide-ranging. "We're looking into the entire spectrum of the insurance industry," he said.
If nothing else, the investigation casts a further pall over the nation's health insurers, which already face scrutiny for their double-digit premium increases and, with the exceptions of Aetna and Cigna, remain embroiled in a massive class-action lawsuit filed by physicians who claim they were shortchanged for their services. In the worst-case scenario-if evidence of wrongdoing is ultimately uncovered-the industry could face a new wave of costly lawsuits by angry consumers and employers. And though it's premature to speculate what this could mean for hospitals and doctors, analysts say, financial pressure on insurers has often translated into cost- cutting and tougher negotiations with providers.
"The risk to health insurers is much more real than (observers) previously thought," said Sheryl Skolnick, an analyst with Fulcrum Global Partners and a former antitrust expert for the U.S. Justice Department.
In California, Insurance Commissioner John Garamendi said he was preparing to file lawsuits against brokers and insurers believed to have cheated consumers through secret commission arrangements. He did not name the companies in question but said they spanned all areas of insurance. Garamendi last week also proposed new regulations that would require brokers to disclose all fees and financial incentives they receive.
"When consumers place their trust in the hands of agents and brokers to find them the best policy at the best price, they should know if a backroom deal has already been struck," Garamendi said in a news release. "My ongoing investigation will expose these under-the-table kickbacks that are not in the best interest of consumers."
Meanwhile, the Connecticut attorney general's office said it issued at least 20 subpoenas last week to brokers and insurers, including some that offer employee health benefits. The targeted companies were not named.
The crackdowns came one week after Spitzer filed a lawsuit against Marsh & McLennan Cos., charging that the nation's largest broker rigged bids for insurance contracts and steered unsuspecting clients to insurers with whom it had lucrative contingent-fee agreements. Property-casualty insurance giants American International Group, Hartford Financial, Ace Ltd. and a division of Germany's Munich Re were among those implicated in the scheme.
Analysts said large health insurers don't typically use contingent-fee arrangements because most work with employee-benefits firms, which get paid directly by employers. One reason Cigna and Aetna may have received subpoenas is that they also sell some lines of group life, accident and disability insurance.
"We fear that (health insurers') size could make them of the most interest to Spitzer nonetheless," Sanford Bernstein analyst Ellen Wilson wrote in a research note. "Broker commission payments can be tied to volume, which tells us there is a gray area that could leave the sector open to at least a look by Spitzer."
Skolnick pointed out that Marsh's Mercer Human Resource Consulting unit is a leading consultant for employee benefits, including healthcare. "Connect the dots: If Spitzer's team has already investigated at least two other (Marsh) units, the next logical place for them to look for possible misdeeds is Mercer," she said. "And sometimes when they look, they'll find. Sometimes they won't find, but we know they're going to look."
Aetna and Cigna disclosed receiving a first set of subpoenas from Spitzer in June. The insurers said the latest subpoenas request additional information relating to their broker payments, though neither would elaborate. Both companies said they are they are cooperating with the attorney general's office.
It's possible that other health insurers have also received subpoenas but have opted to keep it under wraps until November, when their quarterly filings with the Securities and Exchange Commission are due, Skolnick said.
Industry leader UnitedHealth Group could be vulnerable to the probe, Skolnick said, citing a March 2003 report in which the state alleged the insurer's New York division had not filed its plan on broker commissions as required by state law. The company later filed and New York accepted a corrective plan of action.
In a statement, UnitedHealth spokesman Mark Lindsay declined to comment. "We do not comment or speculate on potential legal matters or regulatory reviews unless they are deemed to have a material impact on our business."