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Dissecting Problems in Association Health Insurance Policies

Tim Ryles | June 1, 2006

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Marketing products and services, including insurance, through associations is a common method of expanding a company's customer base. Associations represent segmented markets enabling sellers to fine-tune their messages, reduce costs of reaching customers, and achieve other economies of scale. But all is not rosy in the popular association marketing of health insurance.

A 2004 Government Accountability Office (GAO) report, Private Health Insurance: Employers and Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage, GAO-04-312, found that of 114 entities selling bogus health plans and examined by GAO researchers in 2000-2002, the association model was the second most likely form of organizational structure.

It is not my contention that all association plans are either bogus or a bad deal. Some associations perform worthy services for their members by rigorously performing a watchdog function on behalf of members; others, however, are less diligent. Some are just scams.

The problem list attributable to association plans includes unpaid claims, re-underwriting individuals at policy renewal based on claims experience, replacement of one's insurer with another insurer offering less coverage, insurer insolvency, death spiral pricing, and outright fraud. This article highlights a few of the more egregious infractions that may assist potential victims in avoiding future victimization and disassociating themselves from risky association plans.

Observable Indicators of Problems: Or, You Might Be a Victim If ...

While there is no foolproof litmus test distinguishing fraudulent from legitimate association-based insurance, the following indicators, most of which are observable to the buyer, should trigger a consumer caution light.

You might be a victim if you are solicited by an insurance agent who insists that you join an association if you want to buy "group insurance for individuals and families." An important red flag here is that joining the association and buying insurance are part of the same transaction. Further, aside from the possibility that you have seen the association's name on a telephone pole somewhere offering major medical insurance at cut-rate prices, you never heard of the organization you are asked to join, and it is probably located in a state far from your home.

The application for insurance usually contains an application for association membership, and a membership fee is charged. Usually, answering a few common questions about age, gender, family size, and health history, completing the member application, and writing a check are steps sufficient to complete the sale. The agent, of course, is being compensated for recruiting new members for the association and for making the sale. (These are among the facts that will not be disclosed.)

Regulators call the transaction "a policy issued to an out-of-state group or association." Odds are that regulators will contend that the sale is exempt from regulation in the buyer's home state. In my opinion, phony association plans (and some not so phony ones) violate so many insurance statutes that even Sergeant Schultz of the old television comedy series "Hogan's Heroes" (remember, "I see nothing."?) would see the problems.

You might be a victim if you shopped around and couldn't find coverage like this deal anywhere for the price. Curb your enthusiasm: these are called "teaser rates." They're cheap because the company behind the insurance plan either does not intend to pay claims or you're in for a big surprise later when premiums take off at warp speed to recoup the money they should have charged in the first place.

You might be a victim if upon reading the paperwork you discover that members have absolutely no say in how the association is governed, have no voting privileges even in selecting the leadership, and agree in advance to abide by decisions made by a phantom set of leaders and organizations.

You might be a victim if instead of receiving an insurance policy you receive a Certificate of Coverage. The Certificate informs you that the actual insurance policy (The "Master Policy") is on file in a bank vault somewhere far away in possession of a "trustee of the trust" presumably established by the association. This Notice may strike you as rather odd because the Master Policy may be examined only at its distant location during regular business hours.

You might be a victim if after filing small claims the initial claims are paid in a timely manner, but as time passes, claim payments get slower and slower. At some point they may just disappear.

You might be a victim if, after signing up for health insurance, claim records show that you are afflicted with a costly disease or injury that will require substantial future claims expenditures. Once the insurer recognizes this potential liability, your premiums may accelerate to the point of unaffordability. This will alert you to an important fact about some association health insurance plans: by engaging in "tier rating" (setting renewal premiums on individual claims experience) they try to force costs of catastrophic care back to either their insureds or to taxpayers. In a startling example of how this practice affects premium costs, one company's tier rating renewal premium I am aware of was $75,000 a year. At these prices, the insurer is functioning more as banker than insurer because the insured is essentially paying premiums sufficient to offset his or her actual claims experience.

You might be a victim if, upon protesting increasing premiums, the insurer blames it all on high medical costs. If you sue the company because you are under the impression that "group insurance" does not operate the way your policy is functioning, don't be surprised if the insurer's attorneys argue that you and your family, not the total association membership, are the group. In other words, the costs of insurance are spread among you and other family members of your primary group, not the association. (Sociologically, of course, families are primary groups while associations are secondary groups—the type of group for which group insurance is intended.)

Association plans have the temerity to offer such arguments about the meaning of "group" partly because state insurance code language (which may have a common understanding among regulators), is not readily comprehensible to judges and it may be manipulated by crafty attorneys to subvert the true intent of laws governing group insurance.

You might be a victim if you find that your premium increases by length of time you are insured. This practice is called "durational rating" in insurance argot. The practice is unlawful by specific statute in Georgia and other states take the position that this rating method is unfairly discriminatory; that is, it is an unfair trade practice. Association officials and marketers, however, are not necessarily deterred by what regulators think of durational rating.

Taking Offensive Action Against Association Plans

Aside from reviewing the indicators listed above, persons solicited to enroll in an association plan should vigorously assert themselves and pursue the following inquiries. If the information demanded in the questions below is unavailable or the sales person does not know, hold on to your money and tell the agent to return when he or she has the answers.

What insurance expertise does the association leadership have to analyze and evaluate insurance products and insurer performance?

Is there a contract separate from the insurance policy between the insurer and association? A separate contract should stipulate what controls the association exercises over the insurer; it should set performance standards for the insurer with regard to premiums, claims, and policy administration. It should also require association-approved member information brochures about the policy or policies, availability of insurance company employees to service the business, and association-approved underwriting criteria for use in establishing eligibility. In short, a true association should govern the relationship and take its business elsewhere when insurer performance falls short of expectations and objectives.

What penalties are imposed on the insurer if it fails to meet predetermined objectives and standards?

Is there an excess profits provision in the arrangement under which the insurer agrees to reduce premiums if profits exceed an agreed upon level?

Is there any financial relationship between the association and the insurer? If so, what is its nature? Does the financial arrangement benefit all members? Why can't any financial incentives available to the association pay for an ombudsman type oversight of the insurer's performance or, alternatively, for reduction of premiums?

What is the financial rating of the insurer? How long has it been in existence? How many state licenses does it hold? If the insurer is not rated A or better by a standard rating organization (such as Best's) and is a new entry into the market, proceed with extreme caution is the rule.

Do any association members serve on the board of the insurer? Is there any link between association members and any servicing entities for the insurer? (Servicing entities include claims administrators, investment advisers, selling agents, or agencies and other vendors.)

Does anyone associated with the insurer or its vendors serve on any governing board of the association?

What other services or products can members expect from the association other than insurance? (Carefully evaluate these benefits. Many may already be available to you through your credit cards or other sources. Also, the services available when members join may be only temporary.)

Does the association make regular reports to its membership about the insurance program? Get copies as an example.

Finally, the GAO report emphasized the fact that all states are vulnerable to health insurance fraud through associations or other means. Some states, however, demonstrate a greater susceptibility than others: these states are Texas, Alabama, Georgia, Illinois, Florida, North Carolina, and New Jersey. Residents of these states may need an additional layer of protection from insurance scam artists.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.