March 10, 2004

Unauthorized, Bogus Entities: GAO Report Highlights Critical Role States Play in Preventing, Identifying, and Shutting Down Fraudulent Insurers

Background: A recent report by the U.S. General Accounting Office (GAO) - entitled Private Health Insurance: Employers and Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage - uncovered a wave of health insurance fraud and abuse that left over 200,000 individuals uninsured and saddled with over $252 million in unpaid medical claims. Health insurance scams are on the rise despite the significant progress states have made in halting the proliferation of unauthorized (and therefore illegal) insurers. Specifically, the report found that:

• States aggressively issue cease and desist orders against unauthorized entities to protect consumers. Cease and desist orders allow state officials to halt the marketing and selling of unauthorized coverage in the state, as well as force unscrupulous operators to pay some of their policyholders unpaid bills. Since 2000, states have issued 108 cease and desist orders that "affected 41 of the 144 unique entities nationwide."
  
  
  
• DOL relies on states to initially identify and take action against fraudulent entities. "DOL officials said that they rely on states to obtain cease and desist orders to stop these entities' activities in individual states while conducting the federal investigations." In the case of Employers Mutual, LLC, seven state insurance departments issued cease and desist orders before the DOL was able to obtain a temporary restraining order against Employers Mutual and four of its principals.
  
  
  
• Associations are the most common arrangement used to sell phony health coverage. "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." One of the largest insurance scams - Employers Mutual, LLC (which left 22,000 people with $24 million in unpaid medical bills) actually sold coverage through an existing association (as well as associations created by the fraudulent entity).
  
  
  
• States have aggressively taken action against agents who sold unauthorized policies . In 48 separate instances, states have taken action against agents who sold unauthorized policies, including "fining them, revoking their licenses, or ordering them to pay outstanding claims."
  
  
  
• State insurance departments and the NAIC are working together to protect consumers. Public information campaigns - developed by the NAIC and states - have helped "alert the public about these entities in general and to publicize the enforcement actions they took against specific entities." The NAIC also developed a model consumer alert which was distributed to all states. A number of states, including Florida, have run public service announcements warning consumers about insurance scams.