In the Clutches of a Con
By: Source: AARP Bulletin Today Date Posted: 2004-02-27 13:39:00-05:00
At first it seemed tiresomely familiar: a new health insurance plan to replace the one that had been canceled, interminable delays in receiving paperwork, a merry-go-round telephone system that never offered up a real live employee.
But over the summer of 2001, Judy Coburn's annoyance gradually turned to alarm. She needed surgery to correct a rapidly developing cataract, but she couldn't get Employers Mutual, her new insurer, to authorize it. Her efforts to get answers from the company—and from the brokerage that sold the policy—grew increasingly frantic.
"One day I was on hold for four and a half hours," recalls Coburn, 60, a freelance writer who lives an hour north of San Francisco. "Then I would call at two in the morning. I set my alarm."
It took months to ferret out the awful truth about Employers Mutual. The company was unlicensed, already the target of cease-and-desist orders in several states. In short, it was a fraud. Meanwhile, Coburn says today, "I was going blind."
Thousands of miles away, in Montverde, Fla., Terri Orr was watching her own world come undone. Her 45-year-old husband, Pete, who'd been diagnosed with advanced lymphoma on Labor Day of 2001, needed chemotherapy and might need surgery. Before the year was out, the Orrs also learned that the health plan they'd recently joined was a sham and was being shut down by the state. Pete was gravely ill, and he was uninsured.
AN EPIDEMIC OF FRAUD?
Nationwide, health insurance scams—like the ones in which Coburn and Orr became entangled—have been sprouting faster than authorities can shut them down. The basic con: Sign up as many people as possible, keep them paying premiums for as long as possible and, when claims get substantial or regulators catch on, close up and move out of town.
In the past these schemes have been mostly local or regional. But in recent years, crooked insurers with grander schemes have managed, in a matter of months, to enroll—and bilk—hundreds of thousands of victims from all over the country.
"We are at the beginning of a real crisis: an unprecedented influx in unauthorized insurers selling phony health insurance," says Mila Kofman, a researcher at the Georgetown University Health Policy Institute and the chief author of a recent study on the subject. According to the study, just four of the biggest unauthorized insurers have left at least 100,000 victims with $85 million in unpaid medical bills. Cases in point:
- Texas-based American Benefit Plans, now being liquidated under court order, bilked 40,000 victims nationwide out of $43.3 million in outstanding medical claims.
- Nevada-based Employers Mutual LLC left 30,000 victims nationwide and an estimated $27 million in outstanding claims.
- Indiana-based TRG Marketing claimed 12,000 victims in 44 states. A lawsuit by the U.S. Department of Labor alleges that the company's top officers diverted funds for, among other things, family vacations to Europe.
Experts say that health insurance scams tend to proliferate when the price of legitimate insurance spikes. "It's kind of like selling water in a drought," says Ben Gillard, chief investigator for Nevada's Division of Insurance. And after three years of job losses nationwide and double-digit increases in health insurance premiums, the drought is on. Droves of small employers are out shopping for a better deal. The self-employed and new retirees without access to a group plan face premiums the size of mortgage payments—if they're healthy enough to qualify.
Victims of insurance scams, unfortunately, are on the hook for their unpaid medical bills; they don't have access to state guaranty funds that pay claims when legitimate insurers go belly up. Some are hounded by collection agencies. Others lose access to health care. Pete Orr's doctors recommended that he be evaluated for a bone marrow transplant, but there was no way the family could come up with $300,000 to pay for it. He died in 2002 knowing the unpaid bills were piling up.
Shop for other insurance? That's what Coburn did, but she was told her cataract would be excluded as a pre-existing condition. The surgery went on a credit card; still, it came too late to save her from permanent visual impairment.
Members of the fraudulent plans aren't the only losers. Unwitting employers who've purchased the plans for employees find themselves liable for the unpaid medical bills. Some doctors never get paid for extensive treatments. Real companies that do business with the frauds—from provider networks to claims processors—may be ruined by the financial and legal fallout.
Meanwhile, the scammers march on, offering too-good-to-be-true terms: premiums that underprice the market by 15 percent or more and easy access without regard to health. "They're just in the business of collecting premiums," Kofman says. "They don't care who pays it—whether it's someone in the hospital waiting for a lung transplant, or a healthy person."
GILT BY ASSOCIATION
Many health insurance schemes land whole blocks of customers by recruiting insurance agents with an established base of clients and by persuading established associations to sign up their members. The plan cooked up by TRG Marketing, for example, was sold through a large well-known insurance agency. A Miami area police union was duped into offering unlicensed insurance to its retirees, says Tom Gallagher, Florida's chief financial officer.
These bona fide groups also help create what Kofman calls "a facade of legitimacy"—a sort of camouflage—for the frauds. Well-meaning agents may sell the phony policies even as others are in on the scam and accepting outsized commissions.
Employers Mutual swindled the legitimate National Writers Union into buying its insurance, for example, but it also peddled plans through 16 made-to-order front groups—among them the "Association of Retail Sellers," the "American Coalition of Consumers" and the "Association of Health Care Workers"—all incorporated in Nevada on a single day.
"Enrollees might be writing checks into the association," Gillard says, "but all those associations are owned by Employers Mutual."
Scam artists also choose names that approximate the names of real insurers (there's an Employers Mutual Casualty Co. in Iowa). Often they churn out slick, realistic marketing materials.
In most schemes, the companies pay modest claims for several months—another must for avoiding early detection. When payments stop, operators offer excuses or shift the blame, buying more time to collect premiums.
"The insured doesn't get fed up until about nine months down the road," says Jan Nemmert, who investigates fraudulent insurers for the state of California. "It's a stall game."
VERIFY BEFORE YOU BUY
Buyers of health insurance should always check with their state insurance departments to make sure that the company offering the plan is properly licensed. Verify before you buy, as Florida's consumer education campaign puts it. State licensing is critical, with solvency and reporting requirements that bar the door to outright frauds as well as to companies that simply lack the financial wherewithal to meet obligations.
A typical ploy by unlicensed operators is to claim they don't need a license because they're exempt from state law under the 1974 Employee Retirement Income Security Act (ERISA), which established a federal regulatory framework for employer-sponsored health plans. This lack of state oversight may even be part of their sales pitch, with operators claiming that freedom from the burdens of compliance allows them to offer better prices.
But there's an obvious gap in logic here. ERISA plans aren't pitched at all. You get membership in the plan through your job or union membership, not through an agent.
The phony insurers are lean operations, yet they engage in a complex financial crime—a challenging combination for law enforcement. "They don't have a large glossy office building, or a lot of staff or computer equipment," says James Quiggle of the Coalition Against Insurance Fraud, which is made up of insurance companies, consumer organizations and government regulators. "So it's very easy for them to just shut down, disappear into the night. They take their marketing literature, their policyholder list, and open up in a new strip shopping center or small office."
Meanwhile, authorities say, premium money disappears into bogus administrative fees, fancy homes and luxury cars.
To detect and shut down the frauds often requires intensive coordination across jurisdictions; states can act quickly, but only the feds can rein in a scam nationwide. After cease-and-desist orders against Employers Mutual arose in several states, the U.S. Department of Labor led the charge in federal court, ultimately winning a $7.3 million default judgment against the company's principals when they failed to mount a defense to the government's complaint.
According to Kofman, health insurance scammers often treat civil penalties as a cost of doing business. "Unless these people see the inside of a jail," she says, "you can't stop them."
James Lee Graf, for example, had already run unlicensed health insurance operations shut down by California authorities in 1998 and 2000 when he and a few partners established Employers Mutual in Nevada.
ACTING THEIR RAGE
Regulators and prosecutors say they are determined to throw the book at scam artists. Last April the state of Florida charged two executives of TRG Marketing—the company that left Terri Orr's husband uncovered—with racketeering and selling insurance without a license, charges carrying a maximum sentence of 60 years.
Three months later the state legislature passed the Pete Orr Insurance Anti-Fraud Act, which provides tougher criminal penalties for unlicensed insurance operators and the agents who sell their products. Meanwhile, various federal and state agencies are working together in what U.S. postal inspector D.A. Rikli calls an "intensive" criminal investigation targeting Employers Mutual.
But even the most aggressive enforcement efforts can't undo the Orr family's suffering, or restore Judy Coburn's sight. Most victims of health insurance scams never imagined there was someone out there willing to rob them in their hour of need.
"You're in denial about it," Coburn says. "You just can't believe this is a complete fraud."
She and other victims of the Employers Mutual plans spent months talking to one another on the phone, doing research and organizing as an antidote to the rage and despair they felt over what had happened to them.
California fraud investigator Jan Nemmert often feels the rage, too. "I wake up in the middle of the night and want to call these guys and say, 'How can you sleep knowing you're doing this to people?' " Nemmert says. But as she knows from decades of experience, the crooks are more likely to occupy themselves dreaming up new and even better cons.
Katharine Greider is a freelance writer in New York.
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