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.