GAO Study Finds Unauthorized Health Insurers Piled Up $252M in Unpaid Claims

A study conducted by the U.S. General Accounting Office (GAO), released at the end of February, found that unauthorized health insurers are costing workers significant amounts in unpaid benefits. The entities surveyed, who did business between 2000 through 2002, ranged from small operations to one company that collected over $16 million in premiums. “The entities also left at least $252 million in unpaid medical claims, only about 21 percent [around $52 million] of which had been recovered at the time of the GAO’s 2003 survey,” said a bulletin that accompanied the study.

The GAO considered figures from both the U.S. Department of Labor (DOL) and a number of states, who reported that “the 144 unauthorized entities covered at least 15,000 employers and more than 200,000 policyholders from 2000 through 2002. The states reported that more than half of the entities they identified frequently targeted their health benefits to small employers.”

It identified 10 of the 144 entities as covering “about 64 percent of the affected employers and about 56 percent of the policyholders, who accounted for 46 percent of the unpaid claims.” The largest culprit was Employers Mutual, a Nevada company established in July 2000, which began operations in January 2001. According to the GAO it apparently traded on the similarity in names with the Iowa-based national carrier, Employers Mutual Casualty Company, which has no affiliation with its Nevada sound alike.

“In most cases, the operators characterized the entities as one of several types to give the appearance of being exempt from state regulation,” read the GAO’s bulletin, however, “states found that they actually were subject to state regulation.” It also cited the following “characteristics that were common among at least some of these entities:
• adopting names that were familiar to consumers or similar to legitimate firms;
• marketing their products through licensed agents and with other health care or administrative service companies;
• setting premiums below market rates;
• marketing to employers or individuals that were particularly likely to be seeking affordable insurance alternatives; and
• paying initial claims while collecting additional premiums before ceasing claims payments.

“Employers Mutual adopted many of these characteristics as it collected approximately $16 million in premiums from over 22,000 people in 2001, leaving more than $24 million in medical claims unpaid.” During its brief life the company “enrolled over 22,000 policyholders; covered about 1,100 employers; and amassed over $24 million in unpaid claims.” So far, despite numerous investigations and legal actions, none of the unpaid benefits have been recovered.

Agents play an important role in preventing this type of abuse, first by being aware of it themselves, and then by communicating that awareness to their clients. The four states the GAO interviewed for the report indicated that they have “alerted insurance agents about unauthorized entities. Using bulletins, newsletters and other methods, these states warned agents about these entities, the implications associated with selling their products and the need to verify the legitimacy of all entities.”

Agents should well note their potential liabilities. The GAO cited the Georgia Insurance Department’s actions as an example. It “sent a warning to insurance agents in May 2002, which highlighted the characteristics of these entities, reminded agents that they could lose their licenses and be held liable for paying claims when the entities do not pay, and noted that the state insurance department Web site contained a list of all licensed entities.”

Agents can also contact the NAIC, which has “developed a model agent alert to help agents identify these entities.” The warning has been widely distributed; thus agents are “on notice” of their responsibilities. There have already been enforcement actions against some. The GAO cited Texas as an example, indicating that the insurance department’s Web site “provided the disciplinary actions that the state took as of August 2003 against individuals who acted as agents for unauthorized insurers. These agents were fined,” among other penalties.

The report indicated that “to identify these entities, state insurance departments and DOL often relied on consumer complaints.” The investigation revealed that the highest number of non-authorized entities operated in Texas, Florida, Illinois, New Jersey, South Carolina, Alabama and Georgia. These states each reported between 25 to 31 such operations.

The primary action the states have taken “to stop the entities’ activities was to issue cease and desist orders,” the report read. “State insurance departments issued these orders against 41 of the 144 unique entities identified from 2000 through 2002. Such an order, however, only applies to the activity in the issuing state.”

The DOL relied on the states to issue cease and desist orders while it “conducted investigations to obtain evidence that it could use to stop these entities in multiple states through the federal courts.” It was successful in obtaining court orders against three entities from 2000 through 2002. “Each of these three entities affected consumers in more than 40 states,” the report noted; “combined, the three entities affected an estimated 25,000 policyholders and accounted for about $39 million in unpaid claims.” The DOL still has a number of active case files and ongoing investigations that it is working on.

As a result of these revelations, state insurance regulators and the DOL have “primarily focused their prevention efforts on improving public awareness, including the need for consumers, employers and insurance agents to verify an entity’s legitimacy with insurance departments.” In addition to the DOL, the GAO’s report was reviewed by the National Association of Insurance Commissioners and GAO interviewed officials in the insurance departments in Colorado, Georgia, Florida and Texas. Authorities in those two states indicated that “the report illustrated the extent to which unauthorized entities have harmed individuals and small employers.”

The GAO stressed the use, or rather misuse, of associations to sell health benefit plans as being a widespread problem of particular concern. “27 percent of the entities identified by the states and DOL characterized themselves as associations in which employers or individuals bought health benefits through existing associations, or through newly created associations established by the unauthorized entities.” Employers Mutual not only sold coverage through an existing association, but also “created 16 associations as vehicles for selling its products.”

The complete copy of the report may be obtained on the Department’s Web site at: www.gao.gov/, or by ordering it directly from the GAO by mail: U.S. General Accounting Office; 441 G Street NW, Room LM; Washington, D.C. 20548. Orders may also be made by phone: (202) 512-6000.