Health plan "too good"? It may be illegal
The old adage, "If it sounds too good to be true, it probably is," applies
now more than ever when it comes to health insurance. That's because more people
-- some unscrupulous, others just incompetent -- are selling something they call
health insurance that really isn't.
The unscrupulous ones simply want to take your
money. The incompetent may be well-intentioned, but lack the business sense
and financial resources to cover the claims when they start rolling in.
While firm numbers are hard to come by, industry watchdogs have
seen a startling increase in the number of illegal health care plans, says Janie
Miller, chair of the health insurance and managed care committee of the National
Association of Insurance Commissioners. In a just-released study, Georgetown
University's Health Policy Institute found that health insurance scams have
been rising over the past two years as insurance premiums have increased at
Among the findings: Since 2001, four unauthorized plans have left
nearly 100,000 people with approximately $85 million in unpaid medical debts
and without health coverage. The study was commissioned by the Commonwealth
Fund, a private foundation supporting independent research on health and social
Typically, scam health plans proliferate when insurance premiums
are rising, prompting people to look for less expensive alternatives. "These
people can sell their plans, because the market is seeking cheaper forms of
coverage," says Miller.
Those sellers often target individuals and small business owners
who don't appreciate the possibility of fraud and don't have the resources to
thoroughly investigate potential insurers. Others may be deceived by crooks
who say they're affiliated with a trade group and claim to offer coverage for
individuals working in a particular industry.
The plans can sound quite legitimate. Their names often include
such words as "assurance" or "mutual." The company or trade
association names sound similar to the names of well-known, legitimate businesses
or professional organizations. They're usually promoted through flyers, radio
and Internet ads; some make themselves look more credible by recruiting licensed
What's more, those operating the plans may actually pay the first
few claims and then stop, leaving policyholders wondering what is going on.
"They're like Ponzi schemes," says Jerry Goldsholle, chief executive
officer with freeadvice.com,
a consumer legal information site based in Mill Valley, Calif. "The operators
get a lot of people to purchase the so-called insurance and pay premiums. Then,
they'll shut down and leave town without paying claims."
Here are some warning signs that a supposed health care plan won't be around
to actually cover you when you need it:
- Low, low premiums: If the plan
offers premiums much lower than what other firms are charging -- say, less
than half the going rate -- watch out, says Dave Evans, vice president of
the Independent Insurance Agents and Brokers of America in Alexandria, Va.
"Ask if their benefits are less generous, or what's going on," says
- Easy, easy applications: Your
antenna should shoot up if the application for coverage contains only a few
questions. "A legitimate individual plan is going to ask sometimes extensive
medical questions in order to properly price the product based on a person's
medical condition," says the NAIC's Miller.
- Union or no union: Be skeptical
of an agent trying to sell you a union plan and you're not in the union.
- Unlicensed agents: Watch
out if an agent tells you he doesn't need a license because the insurance
is exempt from regulation.
Checking up on a plan
The best way to determine if a health insurance plan is on the up-and-up is
to contact your state's
insurance regulators. To conduct business in your state, legitimate health
insurers file documents with the appropriate regulatory agency. The regulators
review these documents, as well as the insurers' financial statements, to make
sure they will be able to pay the claims that are likely to come due.
One ploy that some unscrupulous peddlers of scam health plans
use is to claim that their plans are either "ERISA" or "union"
plans and thus are exempt from regulation by the states. They're usually twisting
"ERISA" -- which refers to the federal
Employee Retirement Income Security Act -- plans are regulated by the U.S. Department
of Labor rather than state insurance departments. However, ERISA plans are sponsored
by employers for their employees. They are not sold by insurance agents and
Miller says, "I'm not aware of any way that an ERISA plan could be sold
to an individual."
Similarly, some plans legitimately can be called "union"
health insurance plans. They also are regulated by the Department of Labor and
each year must file what's known as a Form 5500 with the government. But there
has to be a true union behind it. They are sold to union members through the
union, not insurance agents. To check whether a union plan is on the up-and-up,
ask how long the association has been around and what its mission is, says Evans.
"It should be a legitimate trade association," he adds.
After the fact
If you've purchased insurance from an illegal plan, you'll want to find new
coverage ASAP. You can work with your state insurance commissioner to find companies
that cover individuals or small businesses.
If you do have to file claims and the insurance company doesn't
pay, you'll be responsible for the charges. No governmental safety net exists,
as it does for those covered under licensed plans. If a legitimate plan goes
bankrupt, all states have "guaranty funds" that will pay individuals'
claims, up to varying limits. These funds aren't available if you've purchased
insurance from an unlicensed provider.
More trouble ahead
Even if you never need to make a claim under a scam policy, you still may run
into trouble down the road. Here's why: During the period you thought you were
covered by the phony policy, you actually had no insurance at all. Once you
obtain new, legitimate coverage, any medical condition you have will be excluded
as a "pre-existing condition" for some period of time. Regulations
on this vary by state and depend on whether you're purchasing individual or
When an insurance commissioner learns of an illegal plan operating
within the state, he or she typically will try to obtain a restraining order
and shut it down as quickly as possible. The goal is stop the plan from operating,
so that others aren't deceived into purchasing phony coverage.
Unfortunately, bringing the peddlers of illegal health care plans
to justice -- and forcing them to pay up, face jail time or both -- is difficult.
Many plan operators move from state to state and use a variety of names. They
may file bankruptcy to avoid paying claims or fines. Insurance regulators often
operate with small staffs, making it difficult for them to allocate resources
to take illegitimate operators to court.
Your health care coverage is too important not to spend a few
minutes checking it out. Doing so can help ensure that if you need medical attention,
you can concentrate on getting well, rather than worrying about whether your
bills will be paid.
For more information, read the Consumer
Alert on the Web site of the National Association of Insurance Commissioners.
Karen Kroll is a freelance
writer based in Minnesota.
-- Posted: Sept. 23, 2003