How To Recognize and Avoid Health Insurance Fraud
January 2006
As health insurance premiums continue an upward
spiral and employer-based health insurance declines in use, more Americans are
susceptible to becoming victims of health insurance scams perpetrated by unauthorized
insurers.
by Tim Ryles,
Ph.D.
Tim Ryles Consulting
In insurance regulatory language, an "unauthorized insurer" is an insurance
company (or some entity performing insurance type functions) that does not possess
a certificate of authority from the top insurance regulatory official to operate
in a state. This certificate is not the same document as and should never be
construed as a substitute for articles of incorporation or a certificate of
registration issued by another state official, usually the Secretary of State.
According to a report issued by the U.S. Government Accountability Office
(GAO) in 2004, Private Health Insurance: Employers
and Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage,
between 2000 and 2002, the U.S. Department of Labor and state insurance regulators
identified 144 unauthorized entities selling health insurance unlawfully. These
entities defrauded 15,000 employers and more than 200,000 policyholders out
of $252 million. Indeed, despite repeated efforts by state and federal authorities,
containing fraudulent health insurance schemes is somewhat like playing a game
of whack a mole. Whack a nearby mole that rears its head and another pops up
from another hole in another location.
Victims of fraudulent health insurance are not just poorly informed, desperate
consumers. On the contrary, they are well-educated and experienced professionals,
and employers, especially small employers, succumb to the deals available from
adventurous rogues. Accordingly, one might ask what warning signs one should
look for to avoid these scams. While the suggestions below are not exhaustive,
my experiences over the past 20 years suggest that careful attention to certain
representations about and characteristics of phony health insurance plans can
be instructive.
Don't Get Fooled by Fancy Paperwork
Separating legitimate plans from the illegitimate ones cannot be done by
examining the marketing materials. Con artists know that appearances cannot
only be deceiving, but can also go a long way toward conferring the aura of
integrity on a phony plan. Hence, fraudulent operators often have slick, professionally
prepared literature, and the language is similar to that found in regulated
plans.
Licensed Insurance Personnel Involvement Is No Guarantee
Bogus health insurance is often sold by licensed insurance agents and administered
by third-party administrators licensed by Departments of Insurance. The use
of licensed agents to sell bogus plans can bestow a false aura of legitimacy
over the scheme, especially if buyers have a prior relationship with the soliciting
agent. White collar criminals, like animals in the wild, need a good cover for
camouflage. Use of licensed insurance agents and third-party administrators
are two commonly used covers used by fraudulent health insurance schemes to
disguise their true identities.
Thus, assertions that "I am a licensed agent" should not be taken as an indication
of authenticity. To guard against being taken, it is important to inquire as
to whether the agent has confirmed the regulatory status of the company, the
plan, and the third-party administrator of the plan. Are the company and the
third-party administrator licensed to do business in the state? Is the policy
approved for sale? If the agent cannot answer these questions affirmatively,
don't buy.
It's Not Insurance
It is common for sellers of fraudulent insurance to claim that they are not
really selling insurance. Instead, they may describe their product as a discount
plan or a benefit of joining an association the buyer has never heard of. How
can one determine if the product is or is not insurance? One way is to call
the state insurance department and ask for advice, but another is to realize
that genuine insurance products have certain defining characteristics. Insurance,
for example, involves a transfer of risk; consequently, if the buyer pays money (usually called a premium, but
it may be mislabeled as a fee, membership cost, or some other name) in return
for a promise to be honored in the future
by another party, and the value of the promise exceeds the premium,
chances are that it is insurance irrespective of what label is attached.
It's ERISA, So States Don't Regulate Us
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal
law that allows employers to set up employee benefit plans for employees and
their dependents. ERISA plans are not subject to state regulation although they
do the same things as insurance products. ERISA is so common that many employees
and their dependents erroneously believe that they have insurance when in fact
they have an employee benefit plan provided by their employer.
Since ERISA became law, however, it serves as a substantial boost to fraud
perpetrators who insist that they are selling ERISA plans so state insurance
commissioners cannot regulate them. ERISA plans, however, are not sold; instead,
they are established by employers, unions, or groups of employers acting on
their own. It is possible to sell to an
ERISA plan, but I have never known of any legitimate means of directly selling
ERISA plans.
This Plan Is for Those without Health Insurance
Of course, fraudulent plans are for those without insurance (and probably
for all others who will part with their money). This is a common representation
about fraudulent health insurance. So think about it. Why are some people uninsured?
Health conditions perhaps? If other health insurers refuse to insure a given
population, then what is it about this insurance company that makes it willing
to assume risks that no other insurer is willing to bear? Or maybe cost is the
reason for a given population's uninsured status. If so, a prudent person might
want to know why the plan for people who don't have insurance is affordable,
while policies offered by all other insurers are unaffordable.
The bottom line is that fraudulent insurers target people who don't have
insurance and charge them a comparatively low price because they don't expect
to pay policyholder claims. This brings up another feature of fraudulent plans.
Not only are they for people who lack insurance, but they are also significantly
cheaper, easier to qualify for, and more forgiving of preexisting conditions
than products available from authorized insurers.
"This Plan Is Reinsured."
One main selling point for a recent health insurance scam was the claim that
the plan was reinsured. "It's reinsured" is another red flag, signaling that
a prospective buyer should call time out and notify state insurance regulators. Reinsurance is something insurance companies
buy to protect themselves against their own risks. It is insurance for insurance
companies. Licensed insurers rarely have their agents mention any of their reinsurance
arrangements during a sales presentation. And, of course, if one has been told
that the policy under consideration is not really insurance in the first place,
how can a plan that is not insurance be reinsured? The simple answer is it can't.
You Have To Join an Association To Qualify
Professional and trade associations are frequent targets of insurance marketers.
In fact, the GAO study found that association schemes ranked at the top of the
marketing methods followed by bogus health insurers. Readers will recognize
that selling insurance and other products through associations is a common practice:
the American Bar Association, American Association of Retired Persons, state
and national associations of teachers, and others often strike deals with insurers
to permit sales of insurance to their members. Such arrangements may take many
forms, but well-established associations have an existence independent of the
insurance offering; they were formed for purposes other than purchasing insurance;
they have a constitution and bylaws, a set of officers, regular membership meetings;
and members have a role in governing the organization.
Phony insurance arrangements rarely conform to this model of association
governance. Thus, a major characteristic separating phony from authentic associations
is the degree of control that rank and file members exercise over the officers,
directors, and policies of the organization. In fraudulent insurance plans I
have witnessed dozens of so-called association groups in which members had no
say whatsoever in how the organization is governed.
If there is no member participation and control in the association, prudence
dictates that one should look elsewhere for insurance. Further, if the association
exists primarily as a marketing mechanism for insurance, it is unlikely that
the leadership maintains an arm's length relationship with the insurance company.
Indeed, it is common practice for perpetrators of fraudulent insurance plans
to also form the very associations through which insurance is marketed. Conflict
of interest, then, is inherent in the marketing design.
Well-Known Provider Networks Don't Prove Legitimacy
The ability to access provider networks of hospitals, doctors, and other
healthcare entities is a big selling point for health insurance. Consumers want
convenient access to as many providers as possible, so marketers of both legitimate
and fraudulent plans have an interest in satisfying this concern. Provider networks,
however, are not regulated by insurance commissioners and do not necessarily
perform adequate due diligence in reviewing the authenticity of insurance plans
that want to use their networks. Consequently, both employers and individuals
need to be aware that the presence of a great provider network is no better
than the insurer that is supposed to pay the bill. Moreover, if the insurer
fails to pay, the fact that the provider network chose to allow the fraudulent
insurer the use of its network is no bar to a provider's insistence that the
patient is liable for paying the bill when the bogus insurer disappears with
the money.
Being alert to these factors will be helpful in avoiding victimization at
the hands of con artists operating through unauthorized insurers. A future commentary
will discuss how authorized insurers use some of the same methods as unauthorized
competitors to short change health insurance consumers.
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