Valuable Information

Employers Should Beware of Health Insurance Scams

Some 15,000 employers fell victim to health insurance scams between 2000 and 2002, according to a March 2004 report from the General Accounting Office (GAO).  Companies offering the policies collect premiums and may even pay some claims before simply disappearing, leaving employees who believe they have health insurance with uncovered medical bills and employers to deal with the wreckage in their employees’ lives.

“Tens of thousands of employers and hundreds of thousands of individuals have paid premiums for essentially nonexistent coverage,” said Kathryn G. Allen, Director of Health Insurance Studies at the GAO.  The GAO investigation found at least 144 companies that were marketing health coverage between 2000 and 2002 they were not authorized to sell.  Investigators found $252 million in unpaid claims on some 200,000 phony policies.  Employers and individuals in every state have been victims. 

With health insurance premiums continuing to climb nationwide, federal investigators have witnessed significant increases in these health insurance scams by unlicensed companies.  In many cases, policyholders discover that they have been defrauded only after they incur large medical bills, which their health plans will not pay. 

Many bogus insurers falsely claim that they are exempt from state regulation.  By the time unsuspecting customers realize the truth, the promoters of these bogus policies have often changed their names and moved to other states. 

Many of the bogus insurers directed their marketing to small businesses, self-employed people and uninsured workers in the construction, food service, and other industries, the GAO report said.  More than one-fourth of the phony health plans were offered through associations of employers or individuals.

The number of bogus insurance companies identified by federal and state officials nearly doubled, to 60 in 2002, from 31 in 2000.  The GAO found five or more bogus insurers in every state.  The number ranged from 5 in Delaware and Vermont to 31 in Texas.  Seven states had 25 or more bogus entities selling health benefits.  They were Texas with 31 companies; Florida, with 30 companies; Illinois and North Carolina, with 29 each; New Jersey, with 28; Alabama, with 27; and Georgia, with 25.

Insurance regulators in 30 states said they had issued 108 cease-and-desist orders to stop the marketing of health coverage by 41 of the 144 companies improperly marketing the insurance.  The Department of Labor obtained court orders against three companies that had left $39 million in unpaid claims, the report said.

The GAO said that prosecuting the phony companies was often difficult because they kept poor records, hid their assets, and refused to cooperate with investigators.  Some were nearing bankruptcy when they were detected.

Typically, the scam artists offer lower rates than legitimate companies with the goal of getting premiums from as many subscribers as fast as possible so they can walk away with millions in premium dollars.  They claim to offer comprehensive coverage at premiums much lower than those charged by state-licensed insurers.  One state insurance commissioner said the plans can “seem like a dream to many employers and individuals.  Unfortunately, the dream quickly becomes a nightmare.”

One victim who testified at a recent Congressional hearing said she had been left with $500,000 in medical bills after an unlicensed health plan refused to pay for a liver transplant her husband received.  A federal court has acted to shut down the sponsor of that plan, which was based in Nevada and sold coverage to more than 22,000 people.

To avoid becoming the victim of a bogus health insurer, be suspicious of any offer of health insurance that is significantly lower in price than policies offered by other legitimate insurers.  Be suspicious of any insurance that is marketed as being exempt from state regulation.  Call your state insurance commissioner to verify this claim. 

These scam artists prey on the desire of employers and individuals to find more affordable health insurance coverage.  If an offer sounds too good to be true, no matter how smooth and convincing the sales pitch, it probably is just that.