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entitled 'Private Health Insurance: Unauthorized or Bogus Entities
Have Exploited Employers and Individuals Seeking Affordable Coverage'
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Testimony:
Before the Committee on Finance, U.S. Senate:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 9:30 a.m. EST:
Wednesday, March 3, 2004:
Private Health Insurance:
Unauthorized or Bogus Entities Have Exploited Employers and Individuals
Seeking Affordable Coverage:
Statement of:
Kathryn G. Allen, Director:
Health Care--Medicaid and Private Health Insurance Issues:
Robert J. Cramer, Managing Director:
Office of Special Investigations:
GAO-04-512T:
GAO Highlights:
Highlights of GAO-04-512T, a testimony before the Committee on
Finance, U.S. Senate
Why GAO Did This Study:
As health insurance premiums have risen at double-digit rates in
recent years, employers and individuals who have sought to purchase
more affordable coverage have fallen prey to certain entities that may
offer attractively priced premiums but do not fulfill the expectations
of those buying health insurance. These unauthorized entities—also
known as bogus entities or scams—may not meet the financial and
benefit requirements typically associated with health insurance
products or other arrangements that are authorized, licensed, and
regulated by the states.
This testimony is based on GAO’s recent report Private Health
Insurance: Employers and Individuals Are Vulnerable to Unauthorized or
Bogus Entities Selling Coverage, GAO-04-312 (Feb. 27, 2004). In this
testimony, GAO was asked to identify the number of entities that
operated from 2000 through 2002 and the number of employers and
policyholders affected, approaches and characteristics of these
entities’ operations, and the actions federal and state governments
took against these entities. GAO analyzed information obtained from
the Department of Labor (DOL) and from a survey of insurance
departments in the states; interviewed officials at DOL and at
insurance departments in Colorado, Florida, Georgia, and Texas; and
examined the operations of one of the largest entities—Employers
Mutual, LLC.
What GAO Found:
DOL and the states identified 144 unique entities not authorized to
sell health benefits coverage from 2000 through 2002. Although every
state was affected by at least 5 of these entities, these entities
were most often identified in southern states. These unauthorized
entities covered at least 15,000 employers and more than 200,000
policyholders. The entities also left at least $252 million in unpaid
medical claims, only about 21 percent of which had been recovered at
the time of GAO’s 2003 survey.
In most cases, the operators characterized their entities as one of
several types to give the appearance of being exempt from state
regulation, but states found that they actually were subject to state
regulation. Other characteristics that were common among at least some
of these entities included
* 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.
Both federal and state governments—individually and collaboratively—
took action against these entities and sought to increase public
awareness. For example, state insurance departments issued cease and
desist orders against 41 of the 144 entities, and DOL obtained court
orders against three large entities from 2000 through 2002. States
also took other actions against some entities’ operators and agents
that received commissions for marketing these entities. Further state
or federal actions remain possible as many investigations remain
ongoing. States and DOL 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.
www.gao.gov/cgi-bin/getrpt?GAO-04-512T.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Kathryn G. Allen at
(202) 512-7118 or Robert J. Cramer at (202) 512-7455.
[End of section]
Mr. Chairman and Members of the Committee:
We are pleased to be here today as you address how employers and
individuals have been exploited by unauthorized or bogus entities
selling health benefits. As private health insurance premiums have
risen at double-digit rates in recent years, employers and individuals
who have sought to purchase more affordable coverage have fallen prey
to certain entities that may offer attractively priced premiums but do
not fulfill the expectations of those buying health insurance coverage.
These unauthorized entities--also sometimes referred to as bogus
entities or scams--may price their products below market rates to
attract purchasers but may not meet the financial and benefit
requirements typically associated with health insurance products or
other arrangements that are authorized, licensed, and regulated by the
states. When these entities do not pay legitimate claims for the costs
of care that policyholders incur, the harm can affect several parties:
individuals may be held responsible for their own medical bills, which
can mean owing thousands of dollars; employers may find that they have
paid premiums for nonexistent coverage for their employees; and health
care providers may be at increased risk of not being paid for services
already rendered. In addition, federal and state governments may need
to invest significant public resources to investigate and shut down
these unauthorized entities.
Our testimony will summarize findings of a report that we are releasing
today that examines the prevalence of these entities and their impact
on employers, especially small employers, and policyholders.[Footnote
1] At your request, Mr. Chairman, together with Senator Snowe, Chair of
the Senate Committee on Small Business and Entrepreneurship, and
Senator Bond, we examined (1) the number of unauthorized entities
selling health benefits that federal and state governments identified
from 2000 through 2002, the number of employers and policyholders
affected, and the amount of unpaid claims involved, (2) approaches and
characteristics of these entities' operations, and (3) the methods
federal and state governments have employed to identify such entities
and to stop or prevent them from continuing to operate. We surveyed
each state's insurance department in 2003, including that of the
District of Columbia,[Footnote 2] and also obtained data from the
Department of Labor's (DOL) Employee Benefits Security Administration
(EBSA), which conducts civil and criminal investigations of employer-
based health plans.[Footnote 3] We consolidated information from DOL
and the states to determine the unduplicated number of entities
identified from 2000 through 2002 and the numbers of affected employers
and policyholders.[Footnote 4] We also asked states to provide
information on a related type of problematic arrangement--discount
arrangements that may be misrepresented as insurance. We interviewed
officials with EBSA, including those in three of its regional offices
(Atlanta, Dallas, and San Francisco); the National Association of
Insurance Commissioners (NAIC); insurance departments in four states
that were identified as being affected by a relatively large number of
these entities (Colorado, Florida, Georgia, and Texas); and other
experts and associations, including those representing insurance agents
and administrators of employers' health benefits. Because many of the
federal and state investigations regarding these entities were ongoing
at the time we did our work, we generally do not name specific entities
except in situations in which publicly disclosed actions have been
taken against an entity. We also examined in detail the operations of
one of the largest entities identified during this period, Employers
Mutual, LLC, and the actions federal and state governments took to stop
it from operating.
In summary, DOL and the states identified 144 unique entities not
authorized to sell health benefits coverage from 2000 through 2002.
Although every state was affected, with at least five entities marketed
in each state, these entities were most often identified in southern
states. Specifically, of the seven states with at least 25 entities,
five were located in the South. These 144 unauthorized entities covered
at least 15,000 employers and more than 200,000 policyholders from 2000
through 2002. At the time of our 2003 survey, DOL and the states
reported that the identified entities did not pay at least $252 million
in medical claims and only about $52 million--about 21 percent of the
total unpaid claims--had been recovered on behalf of policyholders and
those covered by the policies.
Most unauthorized entities characterized themselves as one of several
types of arrangements and some had other approaches in common. For
example, the operators of these entities often characterized the
entities in one of several ways that gave an appearance of being exempt
from state insurance regulation when they should have been subject to
regulation. Some entities selected names that resembled legitimate
insurers or employee benefit firms and recruited insurance agents,
administrative services companies, and health care provider networks to
enhance their appearance of legitimacy to consumers and employers. The
entities typically set their prices below market rates to be attractive
especially to employers or individuals seeking more affordable health
insurance alternatives. One of the largest entities, Employers Mutual,
used a name similar to the long-established, Iowa-based Employers
Mutual Casualty Company; established associations to sell its products;
marketed its products through licensed insurance agents and contracted
with other companies for administrative services; and, according to
court documents, set premiums by underpricing the average of sample
rates posted on the Internet. According to court documents and DOL,
during a 10-month period in 2001, Employers Mutual collected
approximately $16 million in premiums from over 22,000 people and did
not pay more than $24 million in medical claims for which they were
liable.
Both federal and state governments--individually and collaboratively--
took action against these entities and sought to increase public
awareness. For example, state insurance departments issued cease and
desist 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. States reported also taking other actions, such
as filing cases against the entities' operators in civil or criminal
courts or fining agents or revoking their licenses for selling
unauthorized coverage. DOL obtained court orders against three large
entities from 2000 through 2002 that prevented their operations
nationwide. Further actions remain possible as many investigations
remain ongoing. States and DOL 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.
Background:
States regulate the insurance products that many employers and
individuals purchase. Each state's insurance department enforces the
state's insurance statutes and rules. Among the functions state
insurance departments typically perform are licensing insurance
companies, managed care plans, and the agents who sell their products;
regulating insurers' financial operations to ensure that funds are
adequate to pay policyholders' claims; reviewing premium rates;
reviewing and approving policies and marketing materials to ensure that
they are not vague and misleading; and implementing various consumer
protections, such as assisting people who do not receive health
benefits that are covered through insurance products or by providing an
appeals process for denied claims.[Footnote 5]
The federal government regulates most private employer-sponsored
pension and welfare benefit plans (including health benefit plans) as
required by the Employee Retirement Income Security Act of 1974
(ERISA).[Footnote 6] These plans include those provided by an employer,
an employee organization (such as a union), or multiple employers
through a multiple employer welfare arrangement (MEWA).[Footnote 7] DOL
is primarily responsible for administering Title I of ERISA. Among
other requirements, ERISA establishes plan reporting and disclosure
requirements and sets fiduciary standards for the persons who manage
and administer the plans.[Footnote 8] These requirements generally
apply to all ERISA-covered employer sponsored health plans, but certain
requirements vary depending on the size of the employer or whether the
coverage provided is through an insurance policy or a self-funded plan
where the employer assumes the risk associated with paying directly for
at least some of their employees' health care costs. In addition, ERISA
generally preempts states from directly regulating employer-sponsored
health plans (although maintaining states' authority to regulate
insurers and insurance policies). Therefore, under ERISA, self-funded
employer group health plans generally are not subject to the state
oversight that applies to insurance companies and health insurance
policies. The federal and state governments coordinate their regulation
of MEWAs, with states having the primary responsibility to regulate the
fiscal soundness of MEWAs and to license their operators, and DOL
enforcing ERISA's requirements.
DOL and States Identified 144 Unique Unauthorized Entities Operating
from 2000 through 2002 That Left More Than $250 Million in Unpaid
Claims:
DOL and the states identified 144 unauthorized entities from 2000
through 2002. This likely represents the minimum number of unauthorized
entities operating during this period because some states did not
report on entities that they were still investigating. The number of
unauthorized entities newly identified by DOL and the states each year
almost doubled from 2000, when 31 were newly identified, through 2002,
when 60 were newly identified.
DOL and the states found that every state had at least 5 entities
operating in it. Specifically, the number of entities per state ranged
from 5 in Delaware and Vermont to 31 in Texas. (See fig. 1.) Many
entities marketed their products in more than one state, and some
operated under more than one name or with more than one affiliated
entity. These entities were concentrated in certain states and regions.
Seven states had 25 or more entities that operated during this period;
5 of these states were located in the South. In addition to the 31
entities in Texas, 30 were in Florida, 29 each in Illinois and North
Carolina, 28 in New Jersey, 27 in Alabama, and 25 in Georgia.
Figure 1: Number of Unauthorized Entities That Operated in Each State,
2000-2002:
[See PDF for image]
Note: Some of the unauthorized entities operated in more than one state
so the total number of entities identified by DOL and the states
exceeds the total of 144 unique entities.
[End of figure]
At least 15,000 employers purchased coverage from unauthorized
entities, affecting more than 200,000 policyholders from 2000 through
2002. The number of individuals covered by unauthorized entities was
even greater than the more than 200,000 policyholders covered because
the policyholder could be an employer that purchased coverage on behalf
of its employees or the policyholder could be an individual with
dependents. Therefore, any one policyholder could represent more than
one individual. The states reported that more than half of the entities
they identified frequently targeted their health benefits to small
employers.
At the time of our 2003 survey, DOL and states reported that the 144
entities had not paid at least $252 million in medical claims. This
represents the minimum amount of unpaid claims associated with these
entities identified from 2000 through 2002 because in some cases DOL
and the states did not have complete information on unpaid claims for
the entities they reported to us. Federal and state governments
reported that about 21 percent of unpaid claims had been recovered from
entities identified from 2000 through 2002--$52 million of $252
million. These recoveries could include assets seized from unauthorized
entities that have been shut down or frozen from other uses. Licensed
insurance agents who have marketed products offered by these entities
have also reimbursed unpaid claims either voluntarily or through state
or court action.[Footnote 9] Additional assets may be recovered from
the entities identified from 2000 through 2002 because investigations
and federal and state actions remain ongoing.[Footnote 10] However, it
is likely that many of the assets will remain unrecovered because
federal and state investigators report that the entities often are
nearing bankruptcy when detected or otherwise have few remaining assets
with which to pay claims.
A few entities were responsible for a large share of the affected
employers and policyholders and the resulting unpaid claims. Of the 144
unique entities, 10 alone covered about 64 percent of the employers and
about 56 percent of the policyholders. They also accounted for 46
percent of the unpaid claims.
In addition to the unauthorized entities selling health benefits, 14
states reported that discount plans were inappropriately marketed as
health insurance products in some manner. Unlike legitimate insurance,
discount plans do not assume any financial risk nor do they pay any
health care claims. Instead, for a fee they provide a list of health
care providers that have agreed to provide their services at a
discounted rate to participants. In response to our survey, 40 states
reported that they were aware that discount plans were marketed in
their state. While discount plans are not problematic as long as
purchasers clearly understand them, 14 of these states reported that
some discount plans were misrepresented as health insurance. For
example, some discount plans were marketed with terms or phrases such
as "medical plan," "health benefits," or "pre-existing conditions
immediately accepted." However, state insurance departments do not
regulate discount plans because they are not considered to be health
insurance. Thus, while state insurance departments might be aware that
discount plans operated within their borders, they would not
necessarily be able to quantify the extent to which they exist.
Most Unauthorized Entities Characterized Themselves as One of Several
Types of Arrangements and Some Had Other Approaches in Common:
The 144 entities that federal and state governments identified from
2000 through 2002 varied in size and specific characteristics, but most
were variations of one of four types of arrangements and some had other
approaches in common that enhanced their appearance of legitimacy and
attractiveness to prospective purchasers. For example, about 80 percent
of the entities characterized themselves as one of four arrangements--
associations, professional employer organizations, unions, or single-
employer ERISA plans--or some combination of these arrangements.
According to DOL and the states, specifically:
* 27 percent of the entities characterized themselves as association
arrangements through which employers or individuals bought health
benefits through existing legitimate associations or through newly
created associations established by the unauthorized entities. Although
some of these entities claimed that this structure would shield them
from oversight by federal or state governments, these associations
would be subject to federal and state oversight if they were determined
to be MEWAs.
* 26 percent of the entities were identified as professional employer
organizations, also known as employee leasing firms, which contracted
with employers to administer employee benefits and perform other
administrative services for contract employees. However, professional
employee organizations could be subject to federal and state
requirements if, in addition to providing administrative services, they
managed assets or controlled benefits for multiple employers.
* 9 percent of the entities identified claimed to be union arrangements
that would be exempt from state regulation. However, they lacked
legitimate collective bargaining agreements and were therefore subject
to state oversight.
* 8 percent of the entities identified characterized themselves as
single-employer ERISA plans and claimed to be administering a self-
funded plan for a single employer. Such plans, when administered with
funds from one employer for the benefit of one employer's workers, are
exempt from state insurance regulation under ERISA. However, assets for
several employers were commingled in these entities, making them MEWAs
subject to state regulation.
* 10 percent of the entities were reported as a combination of one of
these or other types of arrangements.
The operators of these entities often characterized the entities as one
of these common types to give the appearance of being exempt from state
regulation, but often states found that they actually were subject to
state regulation as insurance arrangements or MEWAs.
These entities sometimes took other steps to enhance their appearance
of legitimacy and make their products attractive to prospective
purchasers. For example, some entities:
* adopted names that were familiar to consumers or similar to those of
legitimate firms;
* marketed their products through licensed agents;
* established relationships with networks of health care providers and
with companies that provide administrative services for employers
offering health benefits;
* set premiums below market rates;
* marketed to employers or individuals that were particularly likely to
be seeking affordable insurance alternatives, such as small employers,
workers in industries such as construction or transportation who are
disproportionately more likely to be uninsured, and self-employed
individuals; and:
* paid initial claims while collecting additional premiums before
ceasing claims payments.
One of the most widespread entities during the period we examined that
illustrates some of these approaches was Employers Mutual, incorporated
in Nevada in July 2000. According to court documents and DOL, four
individuals ("the principals") operated Employers Mutual and, during a
10-month period from January through October 2001, collected a total of
approximately $16 million in premiums in every state from over 22,000
people. Today, more than $24 million in medical claims against
Employers Mutual remain unpaid.
The name Employers Mutual is similar to the name of a long-established
Iowa-based insurance company marketed throughout the United States,
Employers Mutual Casualty Company, which had no affiliation with
Employers Mutual. Notably, both in 1998 and in 2000, one of the
Employers Mutual principals was found to have engaged in the health
care insurance business in California without a license and was barred
from engaging in any insurance business in that state.
Two of the principals formed 16 associations having names relating to
workers in a wide array of industries and professions, such as farmers,
construction workers, mechanics, and food service employees. Principals
were named as the "managing members" of all 16 associations and created
an employee health benefit plan for each association. The principals
contracted with legitimate firms to process claims and to market the
plans to employers nationwide. Employers Mutual claimed that it was
exempt from DOL regulation.
One of the principals, who was not a licensed actuary and had no formal
training, set the premiums for the 16 plans after he calculated the
average of sample rates posted by insurance companies on the Internet
and reduced them to ensure that Employers Mutual offered low prices.
The principals also formed two companies, Columbia Health Network and
Western Health Network, that purported to provide networks of health
care providers for people insured by Employers Mutual. Additionally,
the principals formed two other companies, Graf Investments and WRK
Investments, which purported to provide investment services. However,
these companies were found to be vehicles for the illegal diversion of
over $1.3 million of plan assets.[Footnote 11]
When Nevada insurance regulators became aware of Employers Mutual, they
found that it was transacting insurance business without a certificate
of authority as required by Nevada law[Footnote 12] and issued a cease
and desist order against Employers Mutual in June 2001.[Footnote 13]
Subsequently, other states also issued cease and desist orders against
Employers Mutual. In December 2001, based on a petition from DOL, the
U.S. District Court for the District of Nevada granted a temporary
restraining order against Employers Mutual and its four
principals.[Footnote 14] The restraining order temporarily froze the
assets of all the principals and prohibited them from conducting
further activities related to the business. It also appointed an
independent fiduciary to administer Employers Mutual and associated
entities and, if necessary, implement their orderly termination. On
September 10, 2003, the district court issued a default judgment
granting a permanent injunction against the principals and ordered them
to pay $7.3 million in losses suffered as a result of their breach of
fiduciary obligations to beneficiaries.[Footnote 15] The fiduciary has
also sued and sought settlements from insurance agents who marketed or
sold Employers Mutual's plan for damages and relief from unpaid or
unreimbursed claims. Employers Mutual is also under investigation by
law enforcement authorities. Appendix I includes a chronology of events
from Employers Mutual's establishment to state and federal actions to
shut it down.
States and DOL Share Responsibility for Identifying, Stopping, and
Preventing the Establishment of Unauthorized Entities:
Both federal and state governments have responsibility for identifying
unauthorized entities and stopping and preventing them from exploiting
businesses and individuals. DOL's EBSA conducts civil and criminal
investigations of employer-based health benefits plans that are alleged
to violate federal law as part of its responsibilities for enforcing
ERISA. For example, EBSA may identify entities whose operators have
breached their ERISA fiduciary responsibilities, which generally
require managing benefit plans and assets in the interest of
participants. State insurance departments investigate entities and
individuals that violate state insurance or MEWA requirements, such as
selling insurance without a license. Because some entities may violate
both federal ERISA requirements and state insurance requirements, both
EBSA and states may investigate the same entities or coordinate
investigations. Of the 144 unique entities DOL and states identified,
the states identified 77 entities that DOL did not, DOL identified 40
that the states did not, and both the states and DOL identified another
27.
States and DOL often relied on the same method to learn of the
entities' operations--through consumer complaints. States also
received complaints about these entities from several other sources,
such as agents, employers, and providers. In addition, NAIC played an
important role in the identification process by helping to coordinate
and distribute state and federal information on these entities, and
states and DOL also reported that they coordinated directly. For
example, DOL submitted quarterly reports to NAIC that identified all
open civil investigations, the individuals being investigated, and the
EBSA office conducting the investigations. NAIC shared this and other
information from EBSA regional offices with state investigators
throughout the country.
After identifying the unauthorized entities, the primary mechanism
states used to stop them from continuing to operate was the issuance of
a cease and desist order. Generally, a state cease and desist order
tells the operator of the entity, and affiliated parties, to stop
marketing and selling health insurance in that state and in some cases
explicitly establishes their continuing responsibility for the payment
of claims and other obligations previously incurred. Such an order,
however, only applies to the activity in the issuing state. Thirty
states reported that they issued a total of 108 cease and desist orders
that affected 41 of the 144 unique entities.[Footnote 16] About 58
percent of policyholders and nearly half of the total unpaid claims
were associated with these 41 entities. States also took other actions
against some entities, sometimes in conjunction with issuing cease and
desist orders. For example, in 48 instances, states responding to our
survey reported that they took actions against or sought relief from
the agents who sold the entities' products, including fining them,
revoking their licenses, or ordering them to pay outstanding claims.
States also reported that they took actions against the entity
operators in 25 instances and filed cases in court in 14 instances to
pursue civil or criminal penalties.
DOL often relied on states to stop unauthorized entities through cease
and desist orders while it conducted investigations, usually in
multiple states, to obtain the evidence needed to stop these entities'
activities nationwide through the federal courts--that is, by seeking
injunctive relief and, in some cases, pursuing civil and criminal
penalties.[Footnote 17] DOL's enforcement actions apply to all states.
To obtain a temporary restraining order or injunction, DOL must offer
sufficient evidence to support its claim that an ERISA violation has
occurred and that the government will likely prevail on the merits of
the case. As of December 2003, DOL had obtained temporary restraining
orders against three entities for which investigations were opened from
2000 through 2002. In two of these cases, DOL also obtained preliminary
injunctions and in one case ultimately issued a permanent injunction.
Each of these actions affected people in at least 41 states. (See table
1.) These three entities combined affected an estimated 25,000
policyholders and accounted for about $39 million in unpaid claims.
Documenting that a fiduciary breach took place can be difficult, time-
consuming, and labor-intensive because DOL investigators often must
work with poor or nonexistent records, uncooperative parties, and
multiple trusts and third-party administrators. As of August 2003, EBSA
was continuing to investigate 51 of the 69 entities it had investigated
from 2000 through 2002. As a result, further federal actions remain
possible.[Footnote 18]
Table 1: Temporary Restraining Orders and Injunctions for Three
Unauthorized Entities, as of December 2003:
Unauthorized entity: Employers Mutual;
Number of states affected: 51;
Temporary restraining order issued[A]: December 2001;
Preliminary injunction obtained: February 2002[B];
Permanent injunction obtained: September 2003;
Other results: In September 2003, a federal court ordered the
principals to pay about $7.3 million.
Unauthorized entity: OTR Truckers Health and Welfare Fund;
Number of states affected: 44;
Temporary restraining order issued[A]: June 2002;
Preliminary injunction obtained: None;
Permanent injunction obtained: None;
Other results: In September 2002, one defendant agreed to pay an
amount that was less than 1 percent of the unpaid claims.
Unauthorized entity: Service and Business Workers of America Local 125
Benefit Fund;
Number of states affected: 41;
Temporary restraining order issued[A]: October 2002;
Preliminary injunction obtained: October 2002[C];
Permanent injunction obtained: None;
Other results: None.
Source: EBSA.
[A] Generally, these temporary restraining orders froze the
unauthorized entity's assets; removed the operators; prevented the
operators from managing the entity; and appointed an independent
fiduciary to manage the entity, account for assets, and pay claims.
[B] Preliminary injunction extended appointment of fiduciary and
prevented health care providers from taking action against participants
to collect unpaid bills.
[C] Preliminary injunction ordered termination of the entity and
prevented health care providers from taking action against participants
to collect unpaid bills or other actions.
[End of table]
To help prevent unauthorized entities from continuing to operate, the
four states we reviewed--Colorado, Florida, Georgia, and Texas--and DOL
alerted the public and used other methods. These states, which were
among the states with a moderate or high number of entities, and DOL
emphasized the need for consumers and employers to check the legitimacy
of health insurers before purchasing coverage, thus helping to prevent
unauthorized entities from continuing to operate. To help states
increase public awareness, NAIC developed a model consumer alert in the
fall of 2001, which it distributed to all the states and has available
on its Web site. Insurance departments in the four states took various
actions to prevent unauthorized entities from continuing to operate.
Each of these states issued news releases to alert the public about
these entities in general and to publicize the enforcement actions they
took against specific entities. The four states' insurance departments
also maintained Web sites that allow the public to search for those
companies authorized to conduct insurance business within their
borders, and some states also released public service announcements via
radio, television, or billboards. In addition to increasing public
awareness, the four state insurance departments warned insurance agents
through bulletins, newsletters, and other methods about these entities,
the implications associated with selling their products, and the need
to verify the legitimacy of all entities. DOL primarily targeted its
prevention efforts to employer groups and small employers. For example,
to help increase public awareness about these entities, on August 6,
2002, the Secretary of Labor notified over 70 business leaders and
associations, including the U.S. Chamber of Commerce and the National
Federation of Independent Business, about insurance tips that the
department had developed and asked them to distribute the tips to small
employers. Also, the EBSA regional offices initiated various activities
within the states in their regions. For example, EBSA's Atlanta
regional office sponsored conferences that representatives from 10
states and NAIC attended.
Concluding Observations:
Recent double-digit premium increases for health coverage have
encouraged employers, particularly small employers, and individuals to
search for affordable coverage. At the same time, however, these
premium increases have created an environment that makes them
vulnerable to being exploited by unauthorized or bogus entities. This
has been reflected by the increasing number of these entities
identified by federal and state governments in recent years. As a
result, tens of thousands of employers and hundreds of thousands of
individuals have paid premiums for essentially nonexistent coverage. As
many employers and individuals continue to seek affordable health
coverage alternatives in this environment of rising premiums, it is
especially important that federal and state governments remain vigilant
in identifying, stopping, and preventing the establishment of these
entities and continue to caution individuals, employers, and their
agents to verify the legitimacy of entities offering coverage.
Mr. Chairman, this completes our prepared statement. We would be happy
to respond to any questions you or other Members of the Committee may
have at this time.
Contacts and Acknowledgments:
For future contacts regarding this testimony, please call Kathryn G.
Allen at (202) 512-7118 or Robert J. Cramer at (202) 512-7455. Other
individuals who made key contributions include John Dicken, Joseph
Petko, Matthew Puglisi, Andrew O'Connell, and Paul Desaulniers.
[End of section]
Appendix I: Chronology of Key Events Regarding Employers Mutual, LLC:
Figure 2 summarizes key events regarding Employers Mutual, one of the
most widespread unauthorized entities operating in recent years.
Employers Mutual collected approximately $16 million in premiums from
over 22,000 people in 2001, and left more than $24 million in unpaid
medical claims.
Figure 2: Key Events of Employers Mutual, LLC from Establishment to
Closure:
[See PDF for image]
Note: Includes information from the preliminary injunction, the
permanent injunction, and cease and desist orders from Alabama,
Colorado, Florida, Nevada, Oklahoma, Texas, and Washington.
[A] All references to the U.S. District Court in this figure refer to
the U.S. District Court for the District of Nevada.
[End of figure]
FOOTNOTES
[1] U.S. General Accounting Office, Private Health Insurance: Employers
and Individuals Are Vulnerable to Unauthorized or Bogus Entities
Selling Coverage, GAO-04-312 (Washington, D.C.: Feb. 27, 2004). We
conducted our work for the report from January 2003 through February
2004 in accordance with generally accepted government auditing
standards.
[2] Throughout this testimony, we include the District of Columbia in
our discussion of states; we refer to each state's insurance
department, division, or office as an insurance department.
[3] In conducting our state survey, we asked states to use the
following definition: "an unauthorized health benefits plan is defined
as an entity that sold health benefits, collected premiums, and did
not pay or was likely not to pay some or all covered claims. These
entities are also known as insurance scams." We asked EBSA to provide
information using a similar definition.
[4] States provided data on the number of policyholders and DOL
provided data on the number of participants; we refer to the combined
data as policyholders in this testimony.
[5] State insurance regulators established NAIC to help promote
effective insurance regulation, to encourage uniformity in approaches
to regulation, and to help coordinate states' activities. Among other
things, NAIC develops model laws and regulations to assist states in
formulating their policies to regulate insurance.
[6] Pub. L. No. 93-406, 88 Stat. 829.
[7] MEWAs are plans or other arrangements that provide health and
welfare benefits to the employees of two or more employers. Under
ERISA, MEWAs do not include certain plans that the Secretary of Labor
finds are collective bargaining agreements, or plans established or
maintained by a rural electric cooperative or a rural telephone
cooperative association.
[8] Under ERISA, a fiduciary generally is any person who exercises
discretionary authority or control respecting the management or
administration of an employee benefit plan or the management or
disposition of the plan's assets.
[9] The four states whose officials we interviewed had laws imposing
penalties on agents and others who represented such products.
[10] Most states and DOL reported to us from March through June 2003.
[11] Chao v. Graf, No. 01-0698, (D. Nev. Sep. 10, 2003) (order
granting permanent injunction).
[12] Nev. Rev. Stat. §§ 685B.030, 685B.035 (2003).
[13] Cease and Desist Order: Employers Mutual, L.L.C., Nevada
Department of Business and Industry Division of Insurance case no.
01.658 (June 14, 2001).
[14] Chao v. Graf, No. 01-0698, (D. Nev. Dec. 13, 2001) (order
granting temporary restraining order).
[15] Chao v. Graf, No. 01-0698, (D. Nev. Sept. 10, 2003) (order
granting permanent injunction).
[16] Twelve states that identified unauthorized entities did not
report issuing cease and desist orders regarding the entities they
identified, and nine states did not report identifying unauthorized
entities.
[17] An injunction is an order of a court requiring one to do or
refrain from doing specified acts. Injunctive relief sought by DOL
against unauthorized entities includes temporary restraining orders,
which may be issued without notice to the affected party and are
effective for up to 10 days; preliminary injunctions, which may be
issued only with notice to the affected party and the opportunity for
a hearing; and permanent injunctions, which are granted after a final
determination of the facts.
[18] For example, in addition to the three investigations that had
yielded temporary restraining orders or injunctions, EBSA had referred
four other case investigations to the DOL Solicitor's Office for
potential enforcement action and obtained subpoenas in five cases.