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95–473—PDF 2004

S. HRG. 108–598

HEALTH INSURANCE CHALLENGES:

BUYER BEWARE

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MARCH 3, 2004

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)
(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Rockefeller, Hon. John D., IV, a U.S. Senator from West Virginia ..................... 3

Daschle, Hon. Tom, a U.S. Senator from South Dakota ...................................... 11

AGENCY WITNESSES

Allen, Kathryn G., Director, Healthcare - Medicaid and Private Health Insurance Issues, U.S. General Accounting Office, Washington, DC ....................... 12

Cramer, Robert J., Managing Director, Office of Special Investigations, U.S.

General Accounting Office, Washington, DC ..................................................... 14

Combs, Ann L., Assistant Secretary, Department of Labor, Washington, DC ... 16

PUBLIC WITNESSES

Almond, Marie, victim of unauthorized health insurance plan ........................... 4

Piantadosi, Joan, wife of Albert Piantadosi, victim of unauthorized health

insurance plan ...................................................................................................... 6

Nepple, Fred, chair of ERISA Working Group, National Association of Insurance, general counsel, Wisconsin Office of the Commissioner of Insurance ... 23

Montemayor, Jose, Commissioner of Insurance, Texas Department of Insurance, Austin, TX ................................................................................................... 25

Kofman, Mila, assistant research professor, Health Policy Institute, Georgetown University, Washington, DC ...................................................................... 27

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Allen, Kathryn G.:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 33

Responses to questions from Senators Grassley and Kerry .......................... 109

Almond, Marie:

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 111

Combs, Ann L.:

Testimony .......................................................................................................... 16

Prepared statement .......................................................................................... 113

Responses to questions from Senator Grassley .............................................. 132

Cramer, Robert J.:

Testimony .......................................................................................................... 14

Daschle, Hon. Tom:

Opening statement ........................................................................................... 11

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Prepared statement w/attachment .................................................................. 144

‘‘Senator Grassley’s Seven Tips To Avoid Being a Victim of a Health

Insurance Scam’’ ........................................................................................... 153

Kerry, Hon. John:

Prepared statement .......................................................................................... 154

Kofman, Mila:

Testimony .......................................................................................................... 27

Prepared statement .......................................................................................... 156

Responses to questions from Senators Grassley, Baucus, and Kerry .......... 181
Page

IV

Montemayor, Jose:

Testimony .......................................................................................................... 25

Prepared statement .......................................................................................... 189

Responses to questions from Senators Grassley and Kerry .......................... 198

Nepple, Fred:

Testimony .......................................................................................................... 23

Prepared statement .......................................................................................... 200

Responses to questions from Senators Grassley and Kerry .......................... 207

Piantadosi, Joan:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 211

Rockefeller, Hon. John D., IV:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 213

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 218

COMMUNICATIONS

Coalition Against Insurance Fraud ........................................................................ 221

National Federation of Independent Business (NFIB) ......................................... 225
(1)

HEALTH INSURANCE CHALLENGES:

BUYER BEWARE

WEDNESDAY, MARCH 3, 2004

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 9:37 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Kyl, Thomas, Rockefeller, and Daschle.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Good morning, everybody. I thank all of you for

coming and the great interest there is in this problem that faces

us.

I want to suggest that our hearing has at least three purposes:

to expose the significant and growing problems of unauthorized and

bogus health plans and their damaging effect; educating people, including employers, about unauthorized and bogus health plans, basically what they look like; and empower people with information

how not to fall prey to one, and if you have already been scammed,

what you should do next.

There is much to be done at the State level, at the Federal level,

and by insurance companies, among others. Good-faith efforts have

been made, and I commend the efforts made by the Department of

Labor, the National Association of Insurance Commissioners, and

the States, generally.

But at the very same time, we can, and we must, do much more

to protect everyday people who are becoming victims. In other

words, we need to stop bogus health insurance scams.

The problem is growing. The General Accounting Office reports

that from 2000 to 2002, more than 200,000 policyholders were

taken by bogus health insurance scams. Unauthorized health insurance and a bogus health insurance plan are entities that sell

health insurance to individuals, unions, associations, and others

with the intent not to pay claims, or at least not to pay all the

claims that they ought to pay, but in most instances pay very few

percentage.

This is not a new phenomenon, but a continuously growing one.

Here is what I am talking about. I would like to show you a pamphlet, this pamphlet that was distributed by one of these phony

health insurance plans. It is shiny, looks very official, and paints

a very pretty picture.
2

Recently, the staff in my office received a piece of literature advertising health insurance at a very extremely low cost. This plan

is even advertising that will accept people with all preexisting conditions.This came across the committee fax machine just last week.

To the average person, these two examples, and a lot of others,

look like fabulous opportunities to get lots of health coverage and

other benefits at very low prices. Unfortunately, these items are

from phony insurance companies.

The proliferation of the Internet, the increasing number of uninsured, and the ever-increasing costs of health care make the perfect

breeding ground for these scams to be born and to grow.

So, we have this hearing as a wake-up call to America and as

a reminder that there are unscrupulous individuals who intentionally inflict emotional and financial harm upon businesses and

individuals. We must focus on awareness, on education, and, most

importantly, aggressive oversight to prevent bogus plans from taking people’s hard-earned money.

Today, 43 million Americans are desperate for affordable health

insurance coverage. In addition, the number of people covered by

government health insurance plans is on the rise.

With more and more people being taken by these bogus health

plans, the system is being pressured. More and more people will

become uninsured and end up on Federal assistance programs.

Let us not forget that there are also tax and health policy implications. The predators are defrauding the taxpayers. The IRS is not

able to catch. The victims are taking deductions, in other words.

When all is said and done, some victims may even end up in the

ranks of Medicaid.

We also need to target the scam artists who do a disservice to

all the good insurance companies that are out there. On a personal

note, I want to point out that no insurance company is safe from

bogus health plans.

Employers Mutual, LLC, a scoundrel that scammed thousands of

people, took its name from a reputable Iowa insurer, Employers

Mutual Casualty Company, that has been in business in my State

for 90 years. The real Employers Mutual has received more than

75 complaints from people confusing it with Employers Mutual, the

scam.

By using the same of a reputable company, bogus plans aim to

confuse consumers, take their money, and run. Any person taken

by a bogus plan is one victim too many. It is easy to forget that

there are human lives and untold stories behind statistics.

That is why we will hear this morning from a panel of everyday

Americans dealing with the horrible consequences of bogus health

plans. They will tell us very troubling, and all too common stories.

Each has come before this committee to remind us that no one is

safe from the wrath of an unauthorized health plan and the trouble

that it leaves behind.

At my request, along with the request of Senators Bond and

Snowe, the General Accounting Office has issued a fact report assessing the effects of unauthorized health plans.

I welcome Ms. Kathryn Allen, who will testify about the latest

GAO report. The GAO report is a fact report. It is a first step in

looking at this complex problem. Also, the GAO’s Office of Special
3

Investigation will discuss the investigation of this one scam that I

have already referred to.

The Department of Labor’s Assistant Secretary Ann Combs is

with us, too. The Department’s responsibility is enforcing the Federal requirements for insurance and group plans. It found, in

ERISA and implementing initiatives, ways to combat the growing

problem and they see this as one of paramount importance.

We welcome testimony from the National Association of Insurance Commissioners, also from the Texas Department of Insurance,

to discuss efforts to educate consumers and pursue these bogus

plans. Finally, we will hear testimony from Mila Kofman about her

work in this important area.

Now, I would like to say that this hearing is not about what

some people might think it is. This hearing is not about association

health plans, as some have asked me and members of my staff.

Legislating creation of these types of plans is not before this committee. That is before another committee that has jurisdiction. Instead, this hearing is about predators, predators who are feeding

on everyday citizens across our country.

I want to close by saying that it is extremely important and valuable to maintain a dialogue among the insurance industry, regulatory agencies, Congress, and consumers and their advocates

about the problems that persist.

I hope this hearing will help continue and expand that dialogue

and provide a road map for what still needs to be done. We need

to stop the bleeding and do it now.

Senator Rockefeller?

OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, A

U.S. SENATOR FROM WEST VIRGINIA

Senator ROCKEFELLER. Thank you, Mr. Chairman. It was just occurring to me as you talked, and reviewing your history, when you

get onto something, whether it is in the Defense Department or

some kind of activity which does not please you, I think I would

rather be on your side than on the other side.

The CHAIRMAN. Thank you. I would welcome that.

Senator ROCKEFELLER. The word is called relentless. Absolutely

relentless.

I will put my statement in the record. I will simply say that we

have a company in West Virginia which I think talks about what

you are talking about, Corbin Limited of West Virginia.

Actually, they are a very prestigious company. They went bankrupt in 2004 and 444 employees were left with $2 million in medical bills. It was solely regulated by the Department of Labor. We

do things in a very, very different way in our State. So, this is a

hearing of interest and importance, and I thank the Chairman for

having it.

The CHAIRMAN. Well, thank you.

[The prepared statement of Senator Rockefeller appears in the

appendix.]

The CHAIRMAN. Senator Thomas?

Senator THOMAS. Thank you, Mr. Chairman. I really do not have

a statement. I listened very closely to yours. I have to tell you that

my reaction, not knowing much about it, is that we have people
4

that have oversight over this thing. We have the Department of

Labor, we have State insurance organizations. I really do not understand.

I think the question is, why have they not done their job? That

is why you have regulatory people there. I will be very interested

in knowing why they have not stepped in and done something here.

It seems to me that is really the issue.

The CHAIRMAN. All right.

We have an opportunity now to hear from two people who have

gone out of their way and were willing to come and tell us about

the personal problems that these scam artists have caused for them

and their families. We thank you for coming to tell your story.

Marie Almond and Joan Piantadosi. If I pronounced your name

wrong, would you please correct the record? But I am going to term

these people victims. They may want to term themselves some

other way.

But they do have a very real story that you need to hear so you

know what we are dealing with. The world needs to hear it because

there are a lot of other people out there that these two people can

be speaking for.

Would you start, Marie? Then I will go to Joan. We will let both

of you testify, and then if colleagues have questions we will go to

questions at that point.

STATEMENT OF MARIE ALMOND, VICTIM OF UNAUTHORIZED

HEALTH INSURANCE PLAN

Ms. ALMOND. My name is Marie Almond, and I appreciate the

opportunity to take part in the hearing to share my experience as

a victim of a health insurance scam created and operated by Employers Mutual.

In 2001, I owned a small medical consulting firm with two other

individuals. In March of that year, our company purchased a small

business health insurance plan from Employers Mutual and began

paying premiums.

My life quickly turned upside down in the next 4 months when

I found that I had breast cancer in July. I was devastated and suffered tremendous emotional stress. Unfortunately, my stress would

only compound itself when I realized Employers Mutual was not

paying my claims.

To date, there are outstanding medical bills of $71,000 that I incurred on procedures related to my breast cancer, my treatment,

and other medical emergencies during the time that Employers

Mutual should have been paying the claims.

Soon after discovering that I had breast cancer in July of 2001,

I underwent surgery, chemotherapy, and radiation treatment. As

expected, these procedures are very costly, totaling $65,000.

As soon as I received my medical bills, I sent them to Employers

Mutual for payment. Acting under the facade of a legitimate health

insurer, Employers Mutual promptly responded by sending me a

notice that the claims were being processed.

Since Employers Mutual was purporting to be a legitimate company and there was no indication at that time it was operating a

health insurance scam, I believed that in the future these claims

would be paid.
5

Unfortunately, I would soon learn that Employers Mutual’s

claims of processing my bills were nothing more than a front to buy

time for the company to receive premiums.

I distinctly felt that something was wrong, and I learned that the

medical bills had not been paid during the next 3 months. Clearly,

it did not take that long to process claims.

I desperately needed answers, so I contacted the Tennessee Insurance Commissioner’s office to find out about Employers Mutual.

To my horror, I learned that Employers Mutual was a Nevada company and not licensed to sell insurance in Tennessee. My heart

sank.

Still needing answers to my questions about Employers Mutual,

I decided to contact the Nevada Insurance Commission’s office to

learn more. I learned that the State of Nevada had ordered Employers Mutual to stop operating its scam business.

Unfortunately, I soon learned that I had another problem with

Employers Mutual which would escalate when my doctor said I

needed to have another procedure immediately.

My doctor strongly recommended that I receive the treatment in

the hospital in Germantown, Tennessee. I feared that I would ultimately be responsible for paying for this procedure.

The hospital subsequently refused to admit me because of outstanding medical claims related to my breast cancer. With no other

option, and as a last resort, I reluctantly agreed to have a procedure performed in the physician’s office. I simply had no other

choice.

My frustrations with Employers Mutual mounted because the cost of the procedure was $6,000, and I was at my wit’s end. All

during this time, Employers Mutual continued to purport that it

was a legal health insurance provider, claiming that my outstanding claims, now of $71,000, were being processed.

Employers Mutual carried on this charade to January of 2002.

However, the curtain fell on January 21, 2002 when the company

finally admitted that a temporary restraining order had been

issued against it and told me that I would not receive any benefits

until the lawsuit against them had been resolved.

At my age, the prospect of not being insured is daunting. As a

small business owner, I knew the cost of coverage for my business

would be exorbitant, yet I needed insurance and I needed it quickly. With no other recourse, I had to leave the company that I started and go to one of my company’s competitors just to get insurance.

I cannot begin to explain the emotional turmoil that I suffered

when I left the company that I started, forging meaningful relationships, just to obtain health insurance. To me, I was paying the

ultimate price for Employers Mutual’s scam operation.

Between January 2002 and October 2002, I was uninsured. Fortunately, there were no medical emergencies at this time. If there

had been, I would have been financially responsible for them. As

of October, 2002, Blue Cross/Blue Shield of Georgia became my insurer.

After experiencing Employers Mutual, I was happy to be insured

by a reputable company. However, for almost a year I feared that

I would be financially responsible, until my preexisting coverage

with Blue Cross/Blue Shield. These fears subsided in November of
6

2003 when Blue Cross/Blue Shield began paying the claims associated with my preexisting condition.

I would like to thank you for the opportunity to share my experience, and I would be happy to answer any questions.

The CHAIRMAN. Do you realize that you are one of the few witnesses that finish right at the bell? [Laughter.]

Ms. ALMOND. That is a good sign.

The CHAIRMAN. Yes.

Now, Joan, would you proceed, please?

STATEMENT OF JOAN PIANTADOSI, WIFE OF ALBERT

PIANTADOSI, VICTIM OF UNAUTHORIZED HEALTH INSURANCE PLAN

Mrs. PIANTADOSI. Mr. Chairman and members of the committee,

my name is Joan Piantadosi. As a victim of the health insurance

scam created and operated by Employers Mutual, I appreciate the

opportunity to take part in this hearing.

In 2001, I was paying insurance premiums on behalf of my family and employees to Employers Mutual, believing it was a legitimate health insurer. During that time, my husband experienced a

medical trauma resulting in the need of a liver transplant.

During this time, the medical trauma was exacerbated by emotional turmoil when we discovered that Employers Mutual was not

a legitimate insurer. Due to the company’s failure to pay our medical claims, there are more than $500,000 in unpaid bills for my

husband’s medical care.

Our story began in July, 2001 when insurance agents contacted

me regarding a health insurance plan being offered by Employers

Mutual. According to one of the agenda, I could save 30 percent on

my health insurance. The agent told me that the insurance was offered through several associations composed of thousands of individuals whose group associations entitled them to very low rates.

Upon learning of an impending rate increase by Humana, and

that Employers Mutual premiums would be significantly lower, I

decided to switch coverage from Humana to Employers Mutual on

behalf of my family and two employees and our family business.

On August 1, 2001, I began paying premiums. In November of

2001, my husband began experiencing severe neck and shoulder

pain. Our doctor referred us to an orthopedic surgeon, who administered an epidural in an attempt to provide some relief.

Employers Mutual pre-approved the epidural, as well as the office visits to our doctor and the orthopedic surgeon. When the epidural failed to alleviate my husband’s neck and shoulder pain, he

began taking over the counter pain relievers.

Unbeknownst to us, the painkillers aggravated his preexisting

liver condition. We would learn afterwards that, over the course of

a few weeks, my husband’s already poorly-functioning liver would

shut down completely.

Before the liver problems became apparent, the orthopedic surgeon thought that my husband would benefit from another epidural

for his neck and shoulder pain. For several weeks, I tried in vain

to reach someone at Employers Mutual to obtain pre-approval for

the procedure.
7

When I finally spoke with an Employers Mutual representative

on December 19, 2001, I was referred to a court-appointed fiduciary. To my alarm, I was advised the company was shutting down

and would not pay any claims submitted after December 31, 2001.

Armed with a letter from the court-appointed fiduciary, we were

able to get the second epidural on December 21, 2001. On Christmas Eve, my husband slipped into a coma due to complications

from the failing liver. On Christmas Day, he underwent a 12-hour

surgery at a Ft. Lauderdale hospital. On New Year’s Eve, after 6

days being comatose, my husband regained consciousness.

The doctors informed us that he needed to be evaluated to determine whether a liver transplant would be possible. The evaluation

had to be conducted in Miami at Jackson Memorial Hospital. However, the hospital would not admit him until Employers Mutual

pre-approved payment for the medical bills.

Again, I had to find a way to hold Employers Mutual accountable. First, I personally attempted to obtain pre-approval for the

transplant evaluation from the court-appointed fiduciary. When

those efforts were unsuccessful, I had my attorney telephone the fiduciary on behalf of my husband and myself. Understandably, we

were desperate.

On January 11, 2002, the court-appointed fiduciary sent a preapproval for the transplant evaluation. However, the pre-approval

did not guarantee payment. My husband was admitted to the hospital on January 12, 2002. He stayed there for 2 weeks while an

evaluation was conducted.

After being told he would be placed on the transplant recipient

list, he was sent home. In early February of 2002, we were informed that since the lack of insurance coverage, we would have

to pay a deposit of $150,000 before my husband could enter the

hospital liver transplant inpatient program. We simply did not

have $150,000 to cover the deposit. Consequently, my husband was

removed from the recipient list.

Like the preceding months, the next 2 weeks were an emotionally tumultuous time for us. We feared, among other things, that

my husband might die while we were attempting to deal with the

predicament of being uninsured, despite having paid premiums to

what appeared to be a legitimate health insurer.

Fortunately, our story ends on a positive note. First, Eileen

Lieberman, a Broward County commissioner, intervened on behalf

of my husband and he was placed back on the transplant recipient

list. Second, we were able to obtain new insurance in February of

2002 which took effect shortly after on March 1, 2002. Third, and

most importantly, my husband underwent a successful liver transplant on April 10, 2002. Thankfully, the new insurance company

covered the surgery.

Again, thank you for giving us the opportunity to share our experience with you concerning the health insurance fraud. I would be

happy to answer any questions you might have. Our medical bills

during this time period exceeded $800,000.

Bills of about $500,000 were incurred during the time that Employers Mutual should have provided coverage, and remain unpaid.

Although our new insurance company covered $300,000 of medical

bills, we were saddled with personal debt that totaled $33,000 for
8

medical expenses incurred while we were without any type of insurance from January, 2002 to March, 2002.

Thank you for the opportunity to be here.

The CHAIRMAN. Thank you, Joan and Marie.

We will take 5-minute turns for questions.

I only have two questions. I think they would come into the category of not necessarily getting new information from you, but

highlighting some things that you have said. I would like to have

both of you to answer both of the questions.

Once you found out that your health insurance was a scam, did

you know who to call in your State or the Federal Government?

Did you have any idea of what to do? And if you did not, where

did you get the information to pursue what you have told us about?

Ms. ALMOND. Well, I have been in the health care industry for

30 years, so I just instinctively knew to call the commissioner in

Tennessee.

The CHAIRMAN. All right.

Ms. ALMOND. I am not sure that I would have known that if I

had not been in health care.

The CHAIRMAN. All right.

And you, Joan?

Mrs. PIANTADOSI. No, I did not know who to call. What I did, was

I sent a telegram to my President and I cc’d it to my Governor of

Florida. Through that, I was fed information on who to call in Tallahassee, the Insurance Commission, and in Ft. Lauderdale. But

through that telegram, I was led in the right direction.

The CHAIRMAN. Now I would like to have each of you take a moment, because of your experiences with this problem and how it

highlights the problem that is before this committee and the Congress, and even before our States, and even for something for legitimate insurance companies to help us stay on top of, and tell us,

what advice would you give people across the country if they, like

you, are victimized by bogus health plans, based upon your experience?

Ms. ALMOND. I would go to the State insurance commissioner.

The thing that always has bothered me, or bothered me, is I got

an agent. An agent actually came to our office and sold us this

plan. Well, you go to an agent because they are supposed to know

what they are doing.

The CHAIRMAN. Is there anything about your initial purchase

from the scam company you bought insurance from that you see

now as something that alerted you to the fact that it was a scam

as opposed to the real thing that you can tell us that people might

look out for?

Ms. ALMOND. Well, the low cost. We paid, for three people, $800

a month.

The CHAIRMAN. One of the rules is, if it is too good to be true——

Ms. ALMOND. It probably is.

The CHAIRMAN. Yes.

Joan?

Mrs. PIANTADOSI. Well, my advice to the consumer would be to

call their insurance commission. If they are dealing through an

agent, get the agent’s name and all of their information, the insurance policy, and call and just make sure it is legitimate, because
9

the packages that are sent out, the faxes that are sent over, look

real, sound real, and there is a human being on the other end of

the phone telling you it is real. So, I would check it out with the

insurance commissioner of your State.

The CHAIRMAN. All right.

Senator Rockefeller, then Senator Thomas.

Senator ROCKEFELLER. Thank you, Mr. Chairman.

An observation, and one question to you, Ms. Piantadosi.

Mr. Chairman, it just amazes me that we talk up here about people having health insurance problems, and so much of it is generic

or in the abstract because we do not have people specifically before

us.

We have our constituents that come to see us, but often they do

not bring their health problems to us or they do not want to come

to Washington to do that. They cannot afford to come to Washington to do that.

It just strikes me how many folks there are out there, not the

44 million uninsured that we always talk about, but how many

folks that are out there who are trying to make things work, run

up against a catastrophe. Eight hundred thousand dollars? I mean,

good grief. That is why a hearing like this is very, very, very important to us.

The question I wanted to ask you, is I was very interested by

your response because in your second answer to the Chairman’s

question you said, well, I contacted the insurance commissioner of

the State, which would be a very good thing to do.

Your first response was that you telegrammed, I think, your Governor and the President. That, to me, was very interesting. That

is what a lot of people do. I was a Governor for 8 years and people

get in touch with your office.

In a small State like the one I come from, they think that, well,

that means the next day they will get something back in the mail,

if not a personal phone call. But life does not usually work like

that.

So the question I have for you is, how long did it take you to

hear from your Governor and from the Office of the President? I

do not care who sent the response, but that gave you the information which you said was helpful. How long?

Mrs. PIANTADOSI. I would say about 10 days, I got the first phone

call.

Senator ROCKEFELLER. Well, that is fast. I am surprised by that.

Mrs. PIANTADOSI. It could have been sooner, but I will say, in

about 10 days I got a call.

Senator ROCKEFELLER. Where do you come from?

Mrs. PIANTADOSI. I come from Massachusetts, but I have resided

in Florida for 21 years.

Senator ROCKEFELLER. Well, those are two rather large States.

Mrs. PIANTADOSI. So, it is a mix.

Senator ROCKEFELLER. All right. Well, they are well-run, I guess.

All right. Thank you very much.

The CHAIRMAN. Senator Thomas?

Senator THOMAS. Well, thank you both. Certainly those are very,

very difficult situations that you found yourself in.
10

Do you believe, if there is an insurance company/policy operating

in your State, they should be legitimized, that they should be registered, that they should be authorized to be there?

Ms. ALMOND. Yes.

Senator THOMAS. And whose responsibility do you believe that

would be?

Ms. ALMOND. The State.

Senator THOMAS. The insurance commissioner, would you not

imagine? Is that not what it is for?

Ms. ALMOND. The insurance commissioner of the State.

Senator THOMAS. And what about you? Do you think that there

should be some entity that says, if you are going to operate in our

State—you indicated your insurance companies were not legitimate. You indicated they were a scam. So, would you not think

they ought to have been reviewed before they could operate there?

Mrs. PIANTADOSI. That was one of my questions when I found

out, why was I not told, or why does the consumer not know that

these people were not licensed.

Senator THOMAS. Why are they even there?

Mrs. PIANTADOSI. I was told they were licensed in Florida and

there was a cease and desist. But that was not sent out to the consumer.

Senator THOMAS. Cease and desist to what, do you know?

Mrs. PIANTADOSI. Yes. Cease and desist for them to sell the insurance in the State of Florida.

Senator THOMAS. But they were still selling it?

Mrs. PIANTADOSI. Yes.

Senator THOMAS. Thank you. No more questions.

The CHAIRMAN. All right.

Our Democratic Leader just came. I want to give him a chance,

before you leave the table, if he wants to ask you some questions.

You have gotten a chance to get settled. Just get your breath.

Senator DASCHLE. Thank you, Mr. Chairman. I will. I appreciate

your kindness, but I will allow the testimony to go forward. I do

not have any questions at this particular time.

The CHAIRMAN. What I would do then, is thank you. But I am

going to put in the record, and also I hope it is in our packet that

we put out at the tables, I have got seven tips. I do not know

whether there is any magic number about seven tips. It could be

10. Maybe you folks that are victims could add another 20 to it.

But I have seven tips here to avoid being a victim of a health

insurance scam. I will put them in the record. I am not going to

take time to read them now. So, at least minimally, people will

have something to check against if they have any questions about

this.

[The information appears in the appendix.]

The CHAIRMAN. So, I thank you.

I am going to call the next panel. While the next panel is coming,

again, we usually give the courtesy of a statement to the Leaders

if they have to come and say something and run. We understand.

If you want to go ahead now, I would be glad to have you go ahead

now.
11

OPENING STATEMENT OF HON. TOM DASCHLE, A U.S.

SENATOR FROM SOUTH DAKOTA

Senator DASCHLE. Mr. Chairman, thank you very much. I know

that this is a busy day for you, too, because you have a bill on the

Senate floor. But I want to commend you for calling this hearing.

I think it is really one of the most important short-term issues

that this committee and the Congress has to address. I look forward to having more time to examine the GAO’s findings and conclusions and to hearing more from the other witnesses that we

have before us today.

I especially want to thank the victims of these scams for coming

forward, as they have this morning. There is no doubt that we face

some extraordinary challenges with regard to health care.

I cannot go home and not hear from people who have lost family

members because of extraordinary medical problems that could not

be addressed because they did not have the resources, double-digit

increases in the cost of health insurance, businesses having to

make difficult choices between literally dropping employees or paying for higher costs for benefits. So, there is no doubt that we have

some very serious problems.

But, based on the GAO prepared testimony, it is clear that the

Department of Labor, the States, and the NAIC have some very

major challenges to address as we look to the scams that are now

in existence as a result of efforts being made to thwart the enforcement of sound regulatory policy.

The important roles that States play in regulating insurance is

one of the reasons that I think we need to oppose legislation to exempt the association health plans from State regulation.

The National Governors Association, the National Association of

Insurance Commissioners, represented here today by Wisconsin’s

Fred Nepple, the National Associations of Attorneys General, and

virtually every other State-wide organization has come out in opposition to this exemption.

I think we need to take this opportunity to explore what we can

do to strengthen both our State and our Federal prevention and enforcement efforts, and I really look forward to opportunities that

this testimony will afford us in looking more carefully at options

available in public policy.

But, again, Mr. Chairman, I appreciate your interest in holding

this hearing and look forward to the testimony this morning from

the witnesses who have come.

The CHAIRMAN. Your statement gives me a chance to highlight

something I said in my opening comments that you would not have

had a chance to hear.

It happens that I am making a special point to make clear to everybody that this is not a hearing about association health plans,

this is about scam artists, and mostly because associated health

plans are under the jurisdiction of the other committee, the Health

Committee. So, just to clarify, we are not getting into that. Thank

you, Mr. Leader.

We have Kathryn G. Allen, Director of Healthcare—Medicaid

and Private Health Insurance Issues of the U.S. General Accounting Office. This report that is going to be released today was asked

for by Senators Bond and Snowe as well.
12

Then we have Robert Cramer, Managing Director, Office of Special Investigations of the U.S. Accounting Office. Then we have

Ann L. Combs, Assistant Secretary, Department of Labor, Washington, DC.

I have got longer introductions for you that I am going to put in

the record. You are very important people. Particularly, as you

know, Ms. Allen, I rely very much on your agency to help in the

oversight that we do. So, we thank you for doing your good work,

and particularly reporting today. Go ahead.

[The information appears in the appendix.]

STATEMENT OF KATHRYN G. ALLEN, DIRECTOR,

HEALTHCARE—MEDICAID AND PRIVATE HEALTH INSURANCE ISSUES, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

Ms. ALLEN. Thank you, Mr. Chairman and members of the committee. It is a pleasure to be here today as you address this very

important topic of how employers and individuals who are seeking

affordable health coverage have been exploited by unauthorized or

so-called bogus entities selling health benefits.

With the double-digit premium increases in the past few years,

lower-priced policies that appear to provide comprehensive coverage can seem very attractive to those seeking affordable coverage.

But, Mr. Chairman, as you have already said this morning, if low

premiums seem to be too good to be true, they probably are. These

unauthorized entities typically begin to market their plans and

they begin to collect large amounts of premiums in their early

phases, and they pay some small claims at first so as not to arouse

suspicion.

But before long, as we have already heard, they begin to delay,

and they ultimately default on, payments of large amounts of legitimate medical claims, often in the millions of dollars.

When this happens, many parties are harmed. This includes the

policyholders themselves and their family members, who can end

up with thousands of dollars in unpaid bills; employers, who found

that they have paid much in premiums for non-existent coverage

for their employees; and health care providers themselves, who are

at increased risk of not being paid for services they have already

rendered.

My remarks today will summarize the findings of the report that

is being released today. Our findings are based on our survey of the

insurance departments of all 50 States and the District of Columbia, as well as our work with the Department of Labor and with

selected States.

My remarks will address three issues: the extent of the problem

nationwide, characteristics that some of these unauthorized or

bogus entities have in common, and, finally, actions that State and

Federal Governments have taken to identify and stop these entities

from spreading.

My colleague, Mr. Cramer, will then elaborate on how many of

these issues have played out in one of the most problematic entities

that we have already heard about this morning, Employers Mutual.
13

First, from the year 2000 to 2002, the States and the Department

of Labor identified 144 unique or different entities nationwide that

were selling health benefits coverage, although they were not licensed by the States and they were not authorized to provide coverage.

The harm caused by these entities was extensive. These 144 entities covered at least 15,000 employers and about 202,000 policyholders nationwide. This covers far more lives than the 202,000,

because often policyholders represent more than one individual.

At the time of our work, these entities had left more than $250

million in medical claims unpaid, only about 20 percent of which

had been recovered on behalf of policyholders.

The harm was, indeed, widespread and growing during this 3-

year period. Every State was affected, with at least five entities operating in every State in the Nation. Seven States had 25 or more

entities operating within their borders.

The number of unauthorized entities doubled during the period

of our review, from 31 identified in the year 2000 to over 60 new

ones identified in 2002.

Second, the entities took various steps to enhance their appearance of legitimacy. Some used names similar to well-known firms

in order to appeal to individuals’ good faith in established, reputable businesses.

These entities often marketed their products through licensed

agents and they often established relationships with networks of

health care providers or other companies that provide administrative services for employers.

To increase their attractiveness, they typically set their premiums well below market rates and they market to employers and

individuals, including small businesses who are likely to be seeking

affordable health coverage.

They often appeal to individuals in industries or professions that

are more likely to be uninsured, such as the construction or transportation industries.

Third, and finally, the unauthorized entities often characterize

themselves in a way to give the appearance of being exempt from

State regulation. States, however, in reviewing these operations

generally found them to in fact be subject to State regulation,

which enabled them to then take action against them.

Once identified, the States and Department of Labor, both individually and collaboratively, took action against these entities and

sought to increase public awareness to prevent their spread.

For example, State insurance departments issued cease and desist orders which commanded them to essentially stop operation for

more than 40 of these entities. However, these cease and desist orders typically apply only to entities operating within individual

State borders.

States also have filed civil and criminal cases and they have

fined or revoked the licenses of agents who received commissions

from marketing these entities. During this period, the Department

of Labor also obtained court orders to stop the activities nationwide

of three large entities, each of which was operating in more than

40 States.
14

In closing, Mr. Chairman, it is clear that increased demand for

more affordable health coverage has created an environment ripe

for exploitation. As a result, too many employers and individuals

have paid far too much for non-existent health care coverage.

In such an environment, it is important that the Federal and

State governments work together to remain vigilant to prevent,

identify, and stop these entities from operating.

They must also continue to urge individuals, employers, and insurance agents to verify the legitimacy of these entities offering

coverage before committing to purchase their products.

Mr. Chairman, this concludes my prepared statement.

The CHAIRMAN. Thank you, Ms. Allen.

[The prepared statement of Ms. Allen appears in the appendix.]

The CHAIRMAN. Now, Mr. Cramer?

STATEMENT OF ROBERT J. CRAMER, MANAGING DIRECTOR,

OFFICE OF SPECIAL INVESTIGATIONS, U.S. GENERAL ACCOUNTING OFFICE

Mr. CRAMER. Good morning, Mr. Chairman and members of the

committee. Thank you for the opportunity to appear here today to

summarize some of the evidence that the Office of Special Investigations at GAO has gathered concerning Employers Mutual,

which was one of the most widespread of the 144 unauthorized

companies we know of that have recently sold bogus health insurance to the public.

Four individuals, who I will refer to as the principals, operated

Employers Mutual during the year 2001, collecting about $16 million in health insurance premiums in every State of the Union and

the District of Columbia from over 22,000 people.

Today, Employers Mutual, which is under investigation by law

enforcement authorities, has been shut down. There are, however,

more than $24 million in health insurance claims against Employers Mutual that have never been paid.

Following the pattern of companies that offer bogus health insurance, Employers Mutual, as has been mentioned, took the name of

a well-established Iowa insurance company, which of course had

absolutely no connection with Employers Mutual.

Notably, both in 1998 and again in 2000, one of the principals

of Employers Mutual was barred from conducting any insurance

business in the State of California, having been found to do so on

two occasions without authorization. Nevertheless, Employers Mutual set up two offices in California and essentially operated its

business within that State.

Again, following the pattern of those who offer bogus health insurance plans, two of the Employers Mutual principals formed 16

associations that had names that covered workers in a wide array

of industries and professions, such as farmers, construction workers, mechanics, and food service employees.

Employers Mutual principals were named as the managing members of these associations and created on paper health insurance

plans for workers who would join these associations.

The principals contracted with legitimate firms to market these

plans to employers nationwide. Employers Mutual did not obtain
15

State licenses to operate health insurance businesses and claimed

that it was exempt from regulation by the Department of Labor.

One of the principals, who was not a licensed actuary, had no

formal training, set the premiums for the 16 associations by going

online and calculating the average rate charged by insurance companies and reducing them so that Employers Mutual, of course, offered the lowest prices.

The principals also formed two companies that purported to provide networks of health care providers for people insured by Employers Mutual. At least one of them had no employees and provided absolutely no services, but was paid hundreds of thousands

of dollars by Employers Mutual.

Additionally, the principals formed two other companies which

purported to provide investment services for Employers Mutual.

However, all four of these companies were found by the District

Court in Nevada to be vehicles to illegally divert premiums.

Over here on the right is a chart, the one labeled ‘‘Proceeds of

Employers Mutual Insurance Scam.’’ It gives a general idea of the

flow of the money. On the very bottom of it, there are 16 little

boxes representing the 16 associations that were formed.

There is a line going up with the box in the middle showing ap- proximately $16.1 million that Employers Mutual received. The

other four bottom boxes show actual legitimate expenses that were

paid by Employers Mutual. They did pay out $4.8 million in insurance claims and they did pay $1.4 million to insurance agents, brokers who sold the insurance, as well as about $600,000 for claims

processing.

The upper part of the chart shows the ill-gotten gains here.

There are four boxes in the upper portion of the chart. Those are

the four companies that the principals formed to illegally divert

proceeds of the insurance plans. Then, at the top, the four principals were ordered by the District Court in Nevada to pay over $7

million which documents showed had been diverted to them.

When the Nevada insurance regulators became aware of Employers Mutual, they issued a cease and desist order in June of 2001.

Other States subsequently also issued cease and desist orders

against Employers Mutual.

In December of 2001, based on a petition from the Department

of Labor, the U.S. District Court for the District of Nevada granted

a temporary restraining order against the company and its principals, freezing their assets and prohibiting them from conducting

further business.

Just to sum up, in addition to Joan Piantadosi and Marie Almond, the two victims who testified here, there are thousands of

other victims of Employers Mutual. In our interviews of those victims, we have heard tales of sickness, shock at the discovery that

there was no health insurance, debt, ruined credit histories, and

sometimes personal bankruptcies, and, of course, anxiety that

made a sickness far worse than it should have been simply because

people were buying what turned out to be illusory health insurance

from Employers Mutual.

Thank you for the opportunity to testify.

[The prepared statement of Mr. Cramer appears in the appendix.]
16

The CHAIRMAN. I want to wait for questions. But did anybody go

to jail because of this, or is this not considered criminal activity?

Mr. CRAMER. There is a pending criminal investigation by the

authorities ongoing at this point in time.

The CHAIRMAN. All right.

Ms. Combs?

STATEMENT OF ANN L. COMBS, ASSISTANT SECRETARY,

DEPARTMENT OF LABOR, WASHINGTON, DC

Ms. COMBS. Thank you. Good morning, Chairman Grassley,

Leader Daschle, and members of the committee. Thank you for inviting me to testify today on behalf of the Department of Labor’s

Employee Benefits Security Administration, which has administered the Employee Retirement Income Security Act, or ERISA, for

30 years.

The CHAIRMAN. Can I interrupt you for just a minute?

Ms. COMBS. Certainly.

The CHAIRMAN. I am going to have Senator Kyl take over because I have to go to the floor to manage the FSC/ETI bill. So, I

am going to excuse myself. I will submit questions for answer in

writing.

Ms. COMBS. Thank you. And thanks, again, for the opportunity

to be here.

The CHAIRMAN. Thank you very much. Just proceed.

Ms. COMBS. All right. Thank you.

I would like to ask that my full statement and the educational

materials that we have produced be included in the record.

[The prepared statement of Ms. Combs appears in the appendix.]

Ms. COMBS. ERISA has successfully encouraged the development

of quality employment-based health benefits for most Americans,

but despite its overall success, small businesses and self-employed

individuals remain vulnerable to insurance fraud.

In my testimony today I am going to highlight what DOL, and

in particular the Employee Benefits Security Administration, are

doing to protect small businesses, workers, and their families.

As we have heard from today’s very compelling witnesses, insurance scams come with profound human costs. All too often, victims

of health insurance scams discover they have been lied to when facing pressing health needs.

It is only after they have received care and the hospital or the

doctor bills them for the full amount, or that they have requested

approval of a medical procedure when they informed that they

have no insurance, that workers are made painfully aware that

they have been defrauded.

A major illness or surgery can cost hundreds of thousands of dollars. These situations devastate workers and their families, threatening their financial security. There is no higher priority at the

DOL than finding the people who perpetrate these scams and shutting them down.

Health insurance scams typically occur when a corrupt promoter

falsely promises low-cost health insurance coverage, collects premiums from unwitting businesses and workers, and then fails to

make good when the claims are filed.
17

Given the high cost of securing coverage and market conditions

that put them at a disadvantage, small employers and workers in

small businesses are the most vulnerable to these scams.

In this environment, it is no wonder that health insurance scam

artists can find small employers who are willing to jump at what

looks like a great deal, but which turns out to be, as the Chairman

said, too good to be true.

In practice, many of these scams are multiple employer welfare

arrangements, or MEWAs, under the statute. MEWAs are entities

that provide health benefits to employees of two or more unrelated

employers who are not parties to collective bargaining agreements.

States and the Federal Government jointly regulate MEWAs.

While States can require MEWA operators to be licensed and can

oversee their financial soundness, the Department of Labor enforces our fiduciary provisions, which require them to prudently

handle any plan assets and act in the sole interest of the plan

beneficiaries.

In addition to DOL and the States, other Federal agencies such

as the Justice Department and the National Association of Insurance Commissioners are involved in our enforcement efforts.

I am proud of the hard work and the cooperation all of the agencies, both State and federal, have demonstrated in our efforts to

prevent, investigate, and prosecute individuals who prey on vulnerable workers and their families.

DOL takes a three-pronged approach to stopping health insurance scams. First, we focus on prevention by educating employers

and consumers so that they can avoid being taken advantage of.

Second, we aggressively pursue civil and criminal enforcement

actions, working with the States and the NAIC to shut them down.

Third, we support legislation to create a secure and affordable alternative for small businesses so that they can find health insurance that is secure and that will pay benefits when they are due.

That is the association health plan legislation.

First, let me focus on prevention. We work hard to educate purchasers of insurance. Secretary Chao personally provided detailed

guidance and a fact sheet with tips on how to avoid being taken

advantage of to over 80 leaders of America’s small business community and asked them to distribute that information to their

memberships.

We also publish and distribute educational materials explaining

the law and Federal and State regulation of MEWAs, and we have

guidance for workers on what to do when their claims have not

been paid or they lose their coverage.

All of these materials are available on our Web site and are distributed in outreach sessions that we hold with consumers, small

employers, service providers, and insurance commissioners

throughout the country.

The second prong of our approach is enforcement. We conduct

thorough investigations, exchange relevant information with States

and other Federal agencies, file civil complaints, and bring criminal

indictments.

From 1990 through December, 2003, we have conducted 621 civil,

and 107 criminal investigations of health plans that have affected
18

nearly 2 million participants and their families, and we have identified violations involving almost $140 million.

Over the years, DOL and the States have developed strong working relationships. We exchange case-specific information regarding

ongoing investigations on a regular basis. We participate in NAIC

quarterly meetings to exchange information about health issues

that are of concern to the regulators, and our staffs meeting informally whenever the need arises.

Our field offices also regularly conduct MEWA training sessions

with outside agencies to discuss investigations. For example, our

Atlanta and Dallas regional offices sponsored a conference recently

with nearly a dozen regional State representatives to discuss these

issues.

We also have made presentations to the FBI’s Health Care Fraud

Task Force regarding these issues, and we conduct a training session for them at their Federal center in Glenco.

We undertake projects such as these on an ongoing basis to keep

our investigators and the other regulators that we work with up to

speed on the latest issues and, as I said, to share information about

cases.

When we uncover a corrupt situation, we seek a temporary restraining order from a Federal court to freeze the assets of both the

insurance operation and its promoters. The goal is to shut them

down.

We work closely with State insurance departments and the

NAIC, and we typically ask the court to appoint an independent fiduciary, who then takes charge of the plan, marshals the assets for

the payment of claims, and works to hold individuals personally

liable for losses.

We share our investigative findings with the States to help them

obtain the cease and desist orders that they can get to deal with

operations within the borders of their States.

Cooperation has been crucial in the investigation of Employers

Mutual. I was going to discuss that, but Mr. Cramer has gone

through that today. We were very involved in that, including getting the temporary restraining order, asking the court to appoint

an independent fiduciary, and we were successful getting a judgment in the Federal court in Nevada, ordering the principals of

Employers Mutual to pay $7.3 million in losses.

Since that time, the independent fiduciary has established that

the losses totaled $26 million, and the Secretary will amend her request for the court to increase the judgment to cover the full

amount.

We also stand ready to assist the States and the independent fiduciary, both of whom have ongoing actions against the over 303

agents who sold these policies, to recover additional monies for the

victims of this abuse.

Health insurance scams threaten the economic security and the

health of America’s workers and small businesses. Insurance failures, as we heard this morning so graphically, hurt real people who

simply cannot absorb these large-dollar losses. We always remember that our job is not about statistics. Our mission is to protect

hardworking Americans and their families.
19

We are committed to shutting down these health scams and

stand ready to work with Congress to expand access to affordable,

quality health insurance that has rigorous protections from fraud

and abuse and strong enforcement provisions as well so we are able

to make sure that promises that are made to people about their

health insurance are kept.

Thank you for the opportunity to testify today and for allowing

me to go over my time. I look forward to your questions.

Senator KYL. Thank you, Ms. Combs.

Senator Rockefeller may have to leave shortly, so if it is all right

with Senator Thomas, I will call first on Senator Rockefeller, then

Senator Thomas.

Senator DASCHLE. Thank you, Mr. Chairman.

In West Virginia, the State insurance commissioner, which is not

a particularly large office, closely monitors, as do you, Ms. Combs,

every health insurance company for small employers, which is

what an AHP is.

For example, they require every insurer to submit information

every quarter on their financial status. They follow up with on-site

audits. If an insurer does not meet our financial standards, the

State works out a plan of recovery to make sure that funds are

available to pay consumers and providers.

The commissioner also can, and has in the past, taken over management of the insurance company to protect consumers. So, that

is one side.

Now, my understanding is that AHPs are essentially self-reporting with respect to the Department of Labor. DOL is not expected

in the legislation to be a proactive regulator. The AHP is, in fact,

itself, to notify the Department of Labor when they have a problem, which could take months, or more.

I do not understand. Since when have we relied on insurance

companies to regulate themselves, if I am correct? I would think

that you would be concerned about consumers joining AHPs because, in effect, the history has been one of health claims not being

paid. Then all of a sudden you are getting asked by the public, by

the Congress, and others, what happened? Why were you not more

accountable to the public?

Ms. COMBS. Well, first, AHPs can offer fully insured products,

and we expect that many of them would. If they offer a fully insured product, that insurance product would continue to be regulated and overseen by the States. So, we envision a very active role

for the States in continuing the work that they do in overseeing insurance products.

The legislation does also allow for self-insured AHPs, similar to

self-insurance that is available to large employers and collectively

bargained plans. That would be overseen by the Department of

Labor.

There are several provisions in the legislation that we believe

would work to prevent the kinds of situations we have seen like

Employers Mutual. First, and importantly, every association health

plan, whether insured or self-insured, would be required to file a

certification with the Department of Labor.

One of the big problems that we have——
20

Senator ROCKEFELLER. You mean, certification at the beginning

of their existence?

Ms. COMBS. Exactly.

Senator ROCKEFELLER. What about along the way?

Ms. COMBS. They have to file annual reports. But we know who

they are. One of the big problems with the current situation, with

employers mutual and others, has been—and I think you will hear

this from the States as well—that we are always coming in after

the fact after we hear complaints from consumers, because these

people, frankly—not to put too fine a point on it—are crooks.

They are not licensed by the States. They do not sign up. So, we

will know and will be able to isolate who they are and they will

be a viable alternative.

Association health plans will be required to register with the

Federal Government. We will keep a list and they have to file annual reports.

They do have to have a qualified actuary who has to certify then

to us, with penalties that are associated, about their reserves, their

solvency, and their claims-paying ability. There would be, for the

first time, Federal solvency standards for self-insured health insurance. There is no such thing now under ERISA. So, association

health plans would have solvency standards.

There would be a requirement that they have stop-loss insurance

and there would be a fund created which would require all association health plans to pay a premium so that, in the event one went

insolvent, the premiums for the stop-loss insurance would continue

to be paid so we could pay out that tail of claims that was in the

pipeline and had yet to be filed.

The legislation also gives us the ability to contract with State insurance departments or others, as needed, to make sure that the

requirements of the legislation are being met.

Senator ROCKEFELLER. Would the AHP be required to report to

you if they are having any difficulties at all?

Ms. COMBS. There are reporting requirements on an annual

basis. If there are situations where there is a precipitous spike in

claims or a drop in reserves, they do have, I believe I am correct,

reporting requirements. But we can certainly fill that in for the

record what, specifically, the cycle is on reporting.

Senator ROCKEFELLER. The annual basis thing would worry me

a little bit. A lot can happen in a year.

Ms. COMBS. Certainly, one of the things, as I said in my testimony, we view the legislation as creating a viable, secure alternative. It is one of the reasons it is so important, is the reason people become victims of these horrible scam operators, is they are

vulnerable. They are looking for affordable health insurance and

they are taken in.

We really need to work together, I believe, to create a secure,

sound alternative. We want to work with the States and with you,

obviously, to make sure that the association health plan legislation

has sufficient protections and sufficient penalties included in it so

that we can avoid these kinds of situations.

If we can get to a position where people either buy the fully insured product or they have to buy product from something that is
21

regulated by the Federal Government, we can isolate and put the

bad actors out of business and dry up the demand.

Senator ROCKEFELLER. Real quickly. Do you have any concept of

how many people you actually have working full-time on this matter in the Department of Labor?

Ms. COMBS. Well, we have, right now, 930.

Senator ROCKEFELLER. On only this problem.

Ms. COMBS. Only on MEWAs? We have a MEWA coordinator in

each region—we have 10 regions—whose job is to solely coordinate

the efforts. But both of our enforcement staffs work on this on an

ongoing basis, and we have about 600 people, in general, who work

on enforcement. They are not dedicated solely to MEWAs or the

health insurance scams. But we do have a coordinator in each office whose sole job is to coordinate that.

We also have benefit advisors. If I can just beg your indulgence.

We have over 100 benefit advisors around the country who deal

with individuals who call us with concerns or complaints.

When we see a pattern of complaints about one insurer, that will

trigger an investigation. That is when we go in. We currently have

130 open cases right now, civil cases, and another 28 criminal

cases, looking at these scams. It is a very high priority for us.

Senator KYL. Thank you.

Senator Thomas, do you have any questions?

Senator THOMAS. Just very briefly.

Ms. Allen and Mr. Cramer identified some of the problems there,

144 different things in every State. Yet, you have talked about how

great a job is going on here. I do not understand that. It does not

seem to me like whatever is happening is working.

There has to be something more, particularly between States. So,

I guess I am asking you, why are you so optimistic about what you

are doing when this is the result?

Ms. COMBS. Well, I would not say I am optimistic. I think we

work very well cooperatively and we have done a good job, given

the tough situation.

Senator THOMAS. I am talking about results. I am not talking

about how cooperative you are. I am talking about the results.

Ms. COMBS. Well, we have had 87 criminal indictments.

Senator THOMAS. But you have got 144 out there still operating.

Ms. COMBS. It is a growing problem. As health insurance costs

grow and as people are struggling to find affordable health

insurance——

Senator THOMAS. What about licensing? They say they are not licensed.

Ms. COMBS. Well, the licensing is done by the States.

Senator THOMAS. Absolutely.

Ms. COMBS. And I do not mean to push that off on the States.

Senator THOMAS. But you have got this big, coordinated thing.

Why do we not get that operating? I just am very impatient with

what is going on here because there is an opportunity to do something and apparently we are not enforcing the things that we are

capable of doing.

Ms. COMBS. I share your frustration. However, these people are

not licensed because they are crooks. They do not want to be licensed. So, we have to find them and shut them down.
22

Senator THOMAS. You have got 600 people out there in your

group, besides the States. It does not take too long to figure out

who is advertising or who is putting it out there that is not licensed.

Ms. COMBS. Right. I think that is why we have worked hard on

the education piece that Chairman Grassley mentioned. It is very

important that we get the word out for people to help them avoid

being taken advantage of, and we do think there needs to be a legislative alternative.

We are very committed to creating a new vehicle for small businesses, in particular, to get affordable health insurance so that

they will not be subject to these scam artists. We do think there

needs to be a change in the law.

Senator THOMAS. I am sorry, but I just cannot really understand

what you are saying. You are supposed to be licensed, right?

Ms. COMBS. An insurance company. Yes.

Senator THOMAS. Yes. Is that not part of the answer?

Ms. COMBS. Absolutely.

Senator THOMAS. Then why is that so hard to enforce? I have

been involved in this a little bit. It just does not seem to me like

you are being realistic about the possibilities of doing something

that is not too hard to understand.

Ms. COMBS. Well, again, our hook here is ERISA, so we are not

the agency that enforces licensure.

Senator THOMAS. I understand that. But you say you are cooperating and working with the States.

Ms. COMBS. Yes. Absolutely.

Senator THOMAS. You are exactly right. When you get the association thing, you are going to have more of a problem than you

have now. And if you cannot handle the problem you have now,

how are you going to do that?

Ms. COMBS. Well, the certification is essentially a Federal license. If you do not have a certification, then an AHP can shut you

down.

Senator THOMAS. Apparently licenses do not work.

Ms. COMBS. Well, we will be able to shut you down if we get a

complaint. If we see an advertisement like the Senator had, we can

shut them down.

Senator THOMAS. You are able to shut them down now.

Ms. COMBS. It takes longer.

Senator THOMAS. You are not, but you can work with the States.

Ms. COMBS. It is a frustrating situation. It is.

Senator THOMAS. I would say so.

Ms. COMBS. I do not mean to argue with you.

Senator THOMAS. I am not arguing either. I am just saying, you

went through all the good things you are doing, but the results are

not good.

Ms. COMBS. No. The results are not good. It is a tragedy.

Senator THOMAS. All right.

Senator KYL. Thank you. We have a problem in that there is activity on the floor which will probably preclude the Chairman from

coming back to chair the hearing, and both Senator Thomas and

I will have to leave in the not-too-distant future.
23

Therefore, what I am going to ask is for any other members to

submit questions of this panel in writing. You will have an opportunity to respond to those questions in writing.

Unless you have anything else you would like to say at this

point, what I would like to do is make sure that the third panel

can come forward and make their presentations before we have to

adjourn the hearing.

So, let me thank all three of you for being here. You may get

some questions in writing. If so, we will look forward to your answers to those.

Thank you again for being here.

Ms. COMBS. Thank you very much.

Senator KYL. As this panel is leaving, I will call forward Fred

Nepple, who is chair of the ERISA Working Group, National Association of Insurance from Austin, Texas; Jose Montemayor, the

Commissioner of Insurance of the Texas Department of Insurance

in Austin, Texas; and Mila Kofman, assistant research professor of

the Health Policy Institute at Georgetown University here in

Washington, DC.

We welcome all three of you. If we stick to the clock and the

lights, we should be able to get all the testimony in before the

hearing needs to be adjourned. So, I welcome all three of you.

Mr. Nepple, let us begin with you. We will just go down the line

and conclude with Ms. Kofman, if that would be all right with you

all.

Mr. NEPPLE. Thank you, Senator.

Senator KYL. Thank you.

STATEMENT OF FRED NEPPLE, CHAIR OF ERISA WORKING

GROUP, NATIONAL ASSOCIATION OF INSURANCE, AND GENERAL COUNSEL, WISCONSIN OFFICE OF THE COMMISSIONER OF INSURANCE

Mr. NEPPLE. Good morning, members of the committee. My name

is Fred Nepple. I am general counsel for the Wisconsin office of the

Commissioner of Insurance. I am also chair of the National Association of Insurance Commissioners ERISA Working Group.

It is in this capacity that I come before you today to discuss the

NAIC’s efforts to assist in the identification, elimination, and prosecution of unauthorized health plans.

Unauthorized health plans have had a destructive ripple effect

impacting every aspect of the health care system, consumers, employers, providers, licensed health plans, and the States.

The number and scope of unauthorized health plans has spiked

as health insurance premiums continue to rise at a double-digit

pace. States and the Federal Government have been aggressive in

their response, but the problem persists and we should do more.

All of the unauthorized health plans discussed in the GAO report, though they take on several different forms, have two factors

in common: they offer a plan that claims to provide health benefits

subject to ERISA, and they all claim to be exempt from State insurance regulation under ERISA.

The operators of unauthorized health plans rely on aggressive assertions of ERISA preemption to convince licensed agents and others to market their plans without alerting regulators.
24

When the State insurance regulators or the U.S. Department of

Labor challenge operators, they commonly resist investigations and

discovery with claims of ERISA preemption. They delay by claiming to have troubled information systems, poor claims records, inadequate accounting procedures, and litigation among themselves.

Operators of these plans are prepared to engage in extended litigation with regulators to further delay enforcement actions. This

gains some additional time to collect premiums and dissipate assets

while unfunded claims mount.

To address the problem of unauthorized health plans, the NAIC

has implemented a number of initiatives. First, points of contact.

The NAIC maintains a list of contacts in each State which is posted on its Web site.

This list identifies an individual in every State insurance department who is familiar with the issue of fraudulent plans and who

can answer questions from the public and the insurance agent community.

Most insurance departments have this information on their Web

site, as well as in their publications. This has proved to be an important tool for accelerating identification of suspicious plans.

Bulletins for consumer and agent education. The NAIC has developed bulletins for use by State insurance departments to draw

attention to the issue of fraudulent plans and to provide guidance.

The consumer alert warns consumers about ERISA and union

plan scams, has suggestions on how to be a smart shopper and to

avoid fraudulent plans, and advises consumers to report to their

State insurance department attempts to sell them fraudulent and

often so-called union plans.

The agent alert reminds agents of their duty to inform State insurance departments any time they are approached by a suspicious

entity.

Direct consumer education. The NAIC has budgeted almost

$300,000 to initiate a national media campaign on unauthorized insurance. This effort has just begun and will run through June,

2004.

This project includes media campaign development, media production, media relations, and Web site development. As a first step

in the campaign, the NAIC printed a brochure, ‘‘Make Sure Before

you Insure,’’ which identifies signs of potential fraud and ways consumers can protect themselves. Needless to say, many State insurance departments have already conducted this type of media campaign.

Information for licensed insurers. The NAIC sent to all NAIC

members in June, 2003 a model regulatory alert for stop-loss carriers and third party administrators. The alert reminds stop-loss

carriers and third party administrators that, as part of their commitment to good business practices, they are obligated to review

their internal controls and business practices to ensure they do not

become unwitting accomplices of illegal health plans. Many State

insurance departments have already utilized this bulletin.

Information for regulators. The NAIC distributes the ERISA

handbook, which is currently being updated, which highlights for

regulators the different types of unauthorized entities that seem to
25

be most prevalent and provides additional guidance on recognizing

and shutting down fraudulent plans.

Information sharing among States and the Federal Government.

The NAIC helps coordinate information-sharing among States and

the Department of Labor on a continual basis.

Information is exchanged about suspect entities, individuals,

third party administrators, agents, marketing firms, stop-loss carriers, re-insurers, and provider groups, essentially everyone involved in every aspect of what is often a complex, convoluted, and

extensive scam. Over the years, States have become more focused

on sharing information through these efforts.

The NAIC also engages in interstate coordination on specific investigations and is in the process of developing a model law that

will stiffen and ease prosecution of unauthorized insurance.

In conclusion, unauthorized health plans are a growing problem

that negatively impacts the public and the health care system. The

NAIC works closely with the States and Federal Government to facilitate the prevention, identification, and elimination of unauthorized health plans.

I thank you for giving me the opportunity to speak today and I

welcome the discussion that this hearing brings to us.

Senator KYL. Thank you, Mr. Nepple. I would welcome discussion too, but because of the time, I might announce in advance, you

may get some questions in writing as well. I will have to leave in

a moment. I will turn the chair over to Senator Thomas.

But Mr. Montemayor, it is yours. Thank you.

[The prepared statement of Mr. Nepple appears in the appendix.]

STATEMENT OF JOSE MONTEMAYOR, COMMISSIONER OF

INSURANCE, TEXAS DEPARTMENT OF INSURANCE, AUSTIN, TX

Mr. MONTEMAYOR. Thank you, Mr. Chairman. Thank you, members. I really appreciate the opportunity to be here. I did submit

a full statement for the record, but Senators, we need your help.

We really do.

The view from the trenches is not so much that the problem is

not that the States cannot stop the illegal ERISA plans from operating in their jurisdictions. The real problem is that the shield of

a potential exemption from State regulation under ERISA currently creates the opportunity for scams to operate for a rather

long period of time before they are recognized formally as illegal,

and before formal action can be taken against them.

So, we do have the authority to shut these scams down and we

do stop them, but we normally cannot do so until after a great deal

of harm has been done.

In Texas, we have issued cease and desist orders against many

of these plans. We have put one which is in Texas into a receivership. We have ordered millions of dollars in penalties against those

who sold the plan. In 2003 alone, the last year, I issued over 100

orders against licensed insurance agents who sold unauthorized insurance, basically ordering three things.

I ordered them to pay, themselves, the unpaid claims, I issued

fines to all of them, which are normally offset as they made claims

payments, and in many cases I revoked their license.
26

The perpetrators, as it was pointed out to you, all have this common theme. They all sort of grabbed onto this ERISA preemption.

They got great-looking documents that they put out to the public,

and they are quite believable. They are very convincing and creative.

The examples abound. You heard about Employers Mutual. We

put one in receivership ourselves called American Benefits Plan,

and there is another plan called TRG. Clearly, most of the problem

is, the people that wound up being victimized, as you learned, were

the small employers who probably do not realize that most other

employer plans or union plans are not available for sale to the general public.

Legitimately, you and I cannot buy into, say, the Coca-Cola

health plan or the Teamsters health plan unless you are either an

employee of Coke or you are a Teamster. That is the bridge, the

leap forward that is being taken here that normally winds up with

all of that harm. That is the common method.

Most of these people thought they were getting a great deal on

health insurance. Many State departments of insurance were unaware that these plans were within their borders until all the complaints started flooding in. So, even then, it takes time to prove

that the plans were operating as non-exempt MEWAs as opposed

to exempt single employer or union plans.

I have got five solutions for you where we really need your help.

Number one, we would request that the committee consider expanding powers of the Department of Labor to take action against

illegal ERISA plans.

Currently, most of the focus appears to be on the breach of fiduciary duty or fraud in order to take civil or criminal action. This

is, of course, a far cry from what we are able to do at the States.

At the States, we can merely show that the insurer is either insolvent or it is in hazardous financial condition and we can shut

it down just on that. It is so much easier to demonstrate that a

plan is broke as opposed to the breach of fiduciary duties. I think

similar authority should be given to the DOL.

It is always particularly important because you have got to remember that ERISA health plans have no statutory requirements

to maintain reserves to pay their claims, or that there is no guaranty fund protection should they actually fail.

The second recommendation is that DOL should also be given authority to issue preliminary cease and desist orders against plans

that are in a financially hazardous condition. While this will not

take care of the whole problem, it will at least stop them in their

tracks from signing up new victims as they go on before we do

eventually shut them down.

Third, there should be some specific criminal or civil penalties for

falsely holding themselves out to be legitimate ERISA plans. I

mean, you and I cannot hold ourselves out to be doctors, or a lawyer, or an accountant. You cannot hold yourself to be something

you are not without incurring a penalty. There is no such penalty

for holding yourself out to be a legitimate ERISA plan without actually being one.

Fourth, I recommend that ERISA plans be required to make up

a preliminary filing. You heard this before. Disclosing, for example,
27

who will be operating the plan, who will be insured by this plan,

and what back-up insurance do they have?

As mentioned previously, one of the factors that allows the quick

growth of unauthorized plans is the inability of employers and consumers to check. For example, in Texas we have got a 1–800 line

and we are online. You can always call our 1–800 line or get online

and figure out who is legitimate, who is not, who is licensed.

In the case of ERISA plans, there is a gap of about 19 months.

I think there is a Form 5500 that they can file after a year of operation, and then 7 months later they are required to make a filing.

There is a 19-month gap there where they can virtually operate

under the radar and they can truthfully say to anybody that comes

to shop, there is no place for you to call and check on us, you are

just going to have to take my word on it.

The fifth recommendation, just briefly. The States must be given

explicit authority to subpoena jurisdictional information. Typically

what happens, we even get a lot of resistance, even saying, as we

start investigating the purported ERISA plans to even determine

if they are a MEWA or an illegal MEWA, is that they are protected

from even having to give us some information because the Federal

law preempts our authority even to ask. So, it is very, very problematic.

So, in conclusion, I appreciate you giving me this opportunity. It

is a huge problem. We have taken a number of actions. There are

some definite things that can be done in the here and now to improve on what we have got and get to the very issues we are asking

about that cause us an enormous amount of frustration. Thank

you, Senator.

Senator THOMAS. Thank you.

[The prepared statement of Mr. Montemayor appears in the appendix.]

Senator THOMAS. Ms. Kofman?

STATEMENT OF MILA KOFMAN, ASSISTANT RESEARCH PROFESSOR, HEALTH POLICY INSTITUTE, GEORGETOWN UNIVERSITY, WASHINGTON, DC

Ms. KOFMAN. Thank you very much. As you can tell from my

voice, I have laryngitis, so my statement will be pretty brief.

Senator THOMAS. Do you have insurance? [Laughter.]

Ms. KOFMAN. Luckily, I am married to a Federal employee.

Thank you. [Laughter.]

My name is Mila Kofman and I am an assistant research professor at Georgetown University’s Health Policy Institute. My expertise is with private health insurance and my most recent research has focused on health insurance scams.

Thank you for investigating this serious problem. It is an honor

for me to be here to share with you findings of my research. It is

also terrific that the GAO findings are completely consistent with

my research findings, which I reported on last year.

I would respectfully request that my written statement and the

Commonwealth report summarizing the research findings be made

part of the record.

Senator THOMAS. It shall be.

Ms. KOFMAN. Thank you.
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[The prepared statement of Ms. Kofman appears in the appendix.]

Ms. KOFMAN. An influx in phony health plans is a symptom of

a larger problem, which is the lack of affordable health insurance,

desperate employers and people looking for alternatives to keep

themselves and their families insured.

You heard from two victims this morning. I can give you lots and

lots of other victims. One person decided to forego cancer treatment

when he learned that his health coverage was phony. He did not

want to burden his family to be responsible for his additional bills

for cancer treatment. He is now dead.

I have another person I spoke to who now has long-lasting, lifelong physical conditions. She cannot see out of one of her eyes. So,

the victims you heard from this morning are the lucky ones, the

survivors. Many are not going to survive the cycle of scams.

Many victims, I know, are still uninsured as a result. They do

not have access to employer-based health insurance and, because

of existing medical conditions, they cannot find new insurance in

the individual market. The ones that do are surcharged or their existing conditions are not covered. So, it is an ongoing problem even

after the scam is shut down.

I will not go into the details of the facade of legitimacy that these

scams operate under. You heard from the GAO and some of the

other folks here.

I do want to talk briefly about the operators of the scams. The

scams I looked at, they are all repeat offenders. They have done it

before. They know how to do it, and that is how they can get away

with it.

You heard from the GAO about one of the principals of Employers Mutual. He was shut down by the California Insurance Department in 1999, then was shut down again in 2000 for running a

similar scam. That is the same year he started Employers Mutual.

They sometimes change their names, they sometimes move to

new States, other times they do not even bother. They just change

the name of the scam and stay in the same office selling phony

health insurance again and again.

Where does the money go? You heard Employers Mutual collected over $16 million in premiums and only paid a small portion

of that in claims and legitimate expenses. Well, they run pretty

slim operations. One company had a P.O. box and no employees

and was taking in millions of dollars. Another company had a

small office in a shopping center, again, a national scam, taking in

millions of dollars.

They live the lifestyle of the rich and not-so-famous. They have

country club memberships. They take worldwide vacations. They

buy expensive houses. One operator bought a castle in Ireland.

They rent expensive properties behind gated communities. They

pay off expensive mortgages. They buy expensive cars. That is

where the premiums go.

The ones who do not spend the money hide the assets offshore

in offshore bank accounts. They are very good at that. They move

assets around very quickly. In one case, the Federal District Court

judge ordered assets to be frozen. In response to that, the operators

moved assets around into new banks and new bank accounts.
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Well, this Federal judge was pretty smart. The next order seizing

assets and freezing them was done under seal. In fact, he issued

subsequent orders and they are still under seal, which means that

the operators do not know that the assets have been frozen.

I agree with you, Senator Thomas, government response is not

as good as it should be. Although there is a lot of efforts by States

and some by the Department of Labor to address this problem, unfortunately government institutions—Federal Government institutions, that is—are not doing what they are supposed to do to protect the victims.

The biggest problem is that operators of these scams are still out

there and they can do the same thing again and again. They have

not been indicted. These people are still not in jail.

Civil actions do not stop them. You need more Federal actions

and you need faster actions by the Federal Department of Labor.

It is unacceptable that it takes 2 years to go to Federal court to

shut an entity down.

The same entity that States shut down 2 years ago, the Department of Labor just recently went to Federal court to shut down. By

then, it is too late. All the assets have been hidden or spent. That

does not help victims. Thank you. My time is up. I am happy to

take questions.

Senator THOMAS. Well, thank you. Thank you all very much. I

think you have shed a lot of light on this. Ms. Kofman, if the States

see someone that looks like they are operating illegally, but they

say they are working under ERISA, can they not get a response as

to whether they are or are not right away?

Ms. KOFMAN. It takes time. It is just a delay tactic. These operators know that, as long as they can stay out there and stay out of

State court, they can hide assets and spend the money. It does take

time to get a determination that these things are not ERISA.

In many instances, these operators remove State cases to Federal

court to delay State action. One State spent half a million dollars

litigating the ERISA question.

Senator THOMAS. Mr. Commissioner, I get the impression that

that is kind of what you hear when someone is doing something.

ERISA does not list them, does not know?

Mr. MONTEMAYOR. There is that gap, that long gap of time that

they are not required to register.

Senator THOMAS. Just to identify whether they are in ERISA or

not?

Mr. MONTEMAYOR. Right. They are self-anointed, originally. They

are not required to file anything with anybody until their first filing, which I think is a 5500, or something like that, which is due

at the end of their first year of their operations.

That is not due in for another 7 months after that, so you can

almost go about 19 months completely legitimately as a declared

ERISA plan. I mean, we have packed a lot of convenience into

ERISA to facilitate groups coming together and getting that coverage, and I think that they have just been using that. I think if

they register initially right off the bat before they sign up the first

person, it would help tremendously.
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Senator THOMAS. I see. This is part of the problem. This is one

of the difficulties for the States to really function with some of

them. Is that correct?

Mr. NEPPLE. That is correct, Senator. In fact, right now, I opened

an investigation on Monday on a union plan that we learned was

sold to several people in the State of Wisconsin. I brought in two

Wisconsin agents and questioned them on Monday. I expect I am

going to issue a demand for records from the union when I get

back.

I expect the unions can claim that it is exempt under ERISA and

refuse to produce the records, which puts me in the position of

proving the negative as to whether they, in fact, are a collectively

bargained plan established pursuant to a collective bargaining

agreement.

I will do that. It will take time. Meanwhile, fortunately, only five

people in the State of Wisconsin who have been covered will be

moved to our high-risk plan or other coverage.

Senator THOMAS. That is interesting. They talked about the cooperative activity. Is there a relationship, pretty close, between your

State operations and DOL?

Mr. MONTEMAYOR. No question about it. We talk to those folks

every single week. In my department, I have got a coordinator just

for the Texas Department of Insurance, assigned full-time to nothing but that, and about 20 people part-time supporting him on the

civil side.

On the criminal side, I have got a full-fledged criminal team on

my fraud division after this very same thing, putting cases together

to give them to a prosecutor and prosecuting them. In our efforts,

we always tie in with the DOL folks in the Dallas office and coordinate that.

Senator THOMAS. Well, I really appreciate your listing the things

you think for remedies. That is really where we are. We all know

we have got a problem. The first panel laid that out pretty well.

But the solutions. Do you basically agree with the five things he

mentioned?

Mr. NEPPLE. I think they are very worthwhile areas that we

should work on, carefully, Senator.

Senator THOMAS. Ms. Kofman, do you have any suggestions other

than that in terms of resolving the problem?

Ms. KOFMAN. Yes. I think there is a perception out there that the

Justice Department is not prosecuting these cases, and I think

there is good reason for that perception, because we have not seen

any criminal indictments on these current operators. So one of the

suggestions I have for you is to ask the Justice Department why

they are not going forward with these cases.

In one Federal case, the District Court judge had to order the

U.S. Attorney’s Office to open a criminal investigation based on evidence that he saw in a private civil case where there was evidence

of money laundering, fraud, health care fraud, wire fraud, all sorts

of RICO violations. A Federal judge had to order the Justice Department to investigate. That is a big problem.

Senator THOMAS. Yes. Well, this seems like this is different than

someone who unlawfully goes in and does a couple of things and
31

disappears. These are people that are out there, and so on. It

seems like there ought to be some remedies, and I appreciate that.

Well, thank you so much. The record will stay open, unusually,

for 3 weeks in case someone wants to ask you some more questions.

But it is my understanding that the Chairman has a plan to look

at this issue further and ensure that the responsible agencies have

the tools to do the jobs that are there.

So, we thank you very much for being here and look forward to

working with you in finding some remedies for the things that are

wrong. Thank you very much.

The committee is adjourned.

[Whereupon, at 11:09 a.m., the hearing was concluded.]

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RESPONSES TO QUESTIONS FROM SENATOR GRASSLEY

Question 1. Is this trend in the number of unauthorized entities still growing or

has it peaked?

Answer. During the period that we examined—2000 through 2002—the number

of unauthorized entities newly identified nearly doubled, from 31 to 60. However,

it is not clear what the trend has been since 2002. We asked state and federal officials and experts if the number of unauthorized entities had increased since 2002,

but their responses taken together did not point to any consistent trend. For example, one state official did not know if the numbers would continue to grow beyond

2002, while another state official said that his state experienced a decline in the

number of these entities.

Increased federal, state, and media attention on this issue could result in an increase in the identification of these entities in the short-term, but the direction of

a sustained long-term trend remains to be seen. For example, the National Association of Insurance Commissioners (NAIC) has enhanced its public awareness campaign with a new brochure and is updating its Employee Retirement Income Security Act (ERISA) Handbook to address these entities. Furthermore, your March 3

hearing and the recent release of reports on this topic have brought increased visibility to this issue. This increased federal, state, and public awareness could help

identify more unauthorized entities in the short term and deter them in the long

term.

Question 2. I realize that this is a fact-finding report looking at the extent of the

problem nationwide. It seems to me that the next report should look at the effectiveness of the Department of Labor, and the involvement of the Department of Justice

in their respective activities inidentifying and stopping insurance scam artists? Is

that the next logical step here Ms. Allen?

Answer. In light of the more than $250 million in unpaid claims arising from the

activities of unauthorized or bogus entities nationwide that we documented in our

report, we agree that a more comprehensive review of the federal government’s activities is warranted. As you know, the Department of Labor (DOL) is responsible

for regulating employer-sponsored health benefits, including those offered through

unions, to ensure compliance with federal ERISA requirements. DOL also shares a

joint responsibility with the states to regulate multiple employer welfare arrangements. Some of the unauthorized or bogus entities that did not pay some or all of

the legitimate health care claims filed by policyholders or those covered by the policies identified in our report claimed to be exempt from state insurance regulations

because of ERISA. While our recent report described the type of actions DOL has

taken to identify and stop these entities, we did not assess whether DOL’s actions

were effective. Therefore, we agree that the next step to take would be a study of

the effectiveness of the federal government’s efforts to identify and stop unauthorized or bogus entities.

RESPONSES TO QUESTIONS FROM SENATOR KERRY

Question 1. Did your study provide any insights into differences in state insurance

regulatory and oversight capacity that could explain why some states had as few

as 5 unauthorized entities while others had 25 or more? Are there policy implications from these findings that might improve the effectiveness of current insurance

regulation and enforcement efforts at both the state and federal level?

Answer. As you note, we found that the number of unauthorized entities identified

in each state varied from 5 to 31, with a concentration of these entities noted particularly in southern states. While we did not analyze the effectiveness of various

regulatory and oversight procedures and capabilities at the state and federal level

as part of this study, we did ask state and federal officials and experts if there was

an association between a state’s regulatory environment and the number of unauthorized entities identified within its borders. No such association was reported to

us. Despite a higher prevalence of unauthorized entities in some states, several officials we interviewed indicated that in general states significantly affected by unauthorized entities enforced their regulations against them as energetically as states

that were not as affected by these entities.

DOL and state officials and experts offered several potential reasons, but no definitive explanation, as to why these entities are concentrated in some states. For example, a DOL official noted that states with more of these entities, like Texas, often

have large populations and many small employers, characteristics attractive to unauthorized entities because they represent more business opportunities. A state official suggested that operators might prefer states with large, rapidly growing metro-
110

politan areas adjacent to rural areas—for example, Atlanta—where an entity’s operators can settle anonymously in a large city and not travel far to find lower wage

earners and small employers that are seeking affordable employee health benefits.

However, while several such theories were offered, we did not find any common factors or characteristics among states with more of these entities that could consistently explain why so many of these entities operated in those states.

Question 2. In his closing remarks, Senator Grassley noted that he is going to request that GAO assess the effectiveness of DOL oversight of insurance scams and

examine current coordination efforts among the states, NAIC, and the federal government in addressing this problem. Are there findings from this study that deserve

particular emphasis as you move forward to examine these questions?

Answer. Our report on unauthorized and bogus entities identified several issues

that could warrant further review. For example:

• We found that the Department of Labor obtained temporary

restraining orders against three large national entities that

they identified from 2000 through 2002, and in two of these

cases, obtained injunctions. In other cases, the investigations

remained ongoing at the time we did our work or DOL relied

on state actions to stop the entity’s operations. Further examining the status of the investigations that had not yet resulted

in enforcement action could help identify whether there are

other opportunities for federal enforcement activity.

• One Employee Benefits Security Administration (EBSA) regional office appeared to be particularly proactive in its efforts

to identify and stop the activities of these entities. By further

reviewing practices among different EBSA regional offices,

‘‘best practices’’ might be identified that, as appropriate, could

be applied consistently across all the regional offices.

• Our report showed that some of the methods that DOL used

to share information and coordinate with states, NAIC, and

others appeared to be informal. A further exploration of these

methods would reveal whether DOL and the states’ methods

for information sharing and coordination are sufficient and effective or whether more formalized or standardized procedures

need to be implemented.

• We found that pursuing federal enforcement action through

temporary restraining orders and injunctions can be a lengthy

process. The need for a federal mechanism to stop the activities

of entities that violate ERISA requirements and to provide due

process in the courts must be balanced with the need for timely resolutions of these cases to minimize the damage that unauthorized or bogus entities can cause nationwide.
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PREPARED STATEMENT OF HON. JOHN KERRY

Mr. Chairman, thank you for calling this hearing on the important issue of insurance scams and for requesting the GAO study on which it is based. The GAO report

is particularly timely as we confront continuing double-digit increases in health insurance premiums, continuing increases in the number of uninsured, and growing

concern among those fortunate enough to have insurance that they soon will not be

able to afford to maintain it. As we learned during similar periods in the early

1980s and 1990s, these are the times in which health insurance scams flourish. The

findings of this report can help us develop policy solutions that will contribute to

solving the problem, not exacerbating it.

The GAO report provides essential insights into the very limited effectiveness of

current regulatory procedures in deterring scams in the small-group health insurance market and particularly highlights the inadequacy of Department of Labor

oversight compared with that of the states. During the period 2000 through 2002,

the GAO identified 144 unique unauthorized entities that covered at least 200,000

policyholders and at least $252 million in unpaid medical claims, only about 21 percent of which had been recovered at the time of the GAO 2003 survey. Every state

had at least five such unauthorized entities, although seven states had at least 25

such scams, and Texas topped the list with 31. The report found that 27 percent

of these entities characterized themselves as association arrangements and another

8 percent as single-employer ERISA plans. Often these scams chose names similar

to well established organizations to enhance their appearance of legitimacy.

Thirty states reported that they issued 108 cease and desist orders that affected

41 of the 144 entities covering 58 percent of the policyholders and nearly half of

the claims. The Department of Labor issued temporary restraining orders or injunctions against only 3 entities that combined affected only approximately 13 percent

of the policyholders (approximately 25,000) and 15 percent of the claims (approximately $39 million). In her testimony Assistant Secretary Combs states that finding

and shutting down insurance scams is a national enforcement priority and notes

that the Employment Benefits Security Administration (EBSA) investigative staff

increased 14 percent since President Bush took office. The GAO’s finding that during this time the number of new scams identified by DOL and the states almost

doubled highlights the inadequacy of DOL capacity to address the problem.

The GAO report also notes how ‘‘difficult, time-consuming, and labor-intensive’’

the DOL process is because of the evidence necessary to document an ERISA violation. At the same time the report describes how quickly the unauthorized entities

operate, with the life cycle from initiation to consumer complaints to disappearance

of the principals with millions of dollars of premiums often taking less than a year,

well ahead of the DOL’s enforcement action.

The testimony of Mr. Fred Nepple, representing the National Association of Insurance Commissioners (NAIC), emphasizes that most unauthorized health plans discussed in the GAO report have two factors in common: they claim to offer a plan

subject to ERISA, and they, therefore, claim to be exempt from state insurance regulation. The central role that the ERISA exemption from state regulation plays in

these insurance scams and the DOL’s poor oversight performance are particularly

troubling in the context of the Administration’s aggressive efforts to create national

Association Health Plans (AHPs) under ERISA. AHPs would be under Department

of Labor jurisdiction if self-insured or licensed only in a single state if fully insured.

They would, therefore, not be subject to the kind of state regulation that the GAO

study found was considerably more effective than the oversight provided by the Department of Labor. If DOL is not adequately addressing insurance scams under current ERISA programs, how then could it manage the addition of national AHPs?

The opportunity for unscrupulous operators to create new unauthorized entities that

could be marketed under the guise of national associations is obvious. Not only will

AHPs do little to solve the problem of making affordable high-quality health insurance available to small businesses and their employees desperate to obtain such coverage, they have the potential to greatly exacerbate the problem of insurance scams.

Governors, attorneys general, and insurance commissioners, both individually and

through their national organizations, have publicly stated their opposition to the Administration’s AHP proposal because exempting AHPs from state regulation would

be a recipe for disaster.

Instead, creating a single national purchasing pool for small businesses modeled

on the Federal Employee Health Benefits Plan could provide the pooled risk, increased purchasing power, experienced administration, and essential consumer protections necessary to give all small businesses real insurance options. The Small

Employers Health Benefits Program (SEHBP) Act of 2004 recently introduced by

Senators Durbin, Lincoln, and Carper would create such a program. Approaches
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such as this one would limit future insurance scams by addressing the underlying

conditions that foster them.
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RESPONSES TO QUESTIONS FROM SENATOR GRASSLEY

Question 1. How are most illegal health plans first identified?

Answer. The Department of Insurance becomes aware of illegal plans in a number

of different ways. For example, the National Association of Insurance Commissioners has a working group devoted to illegal multiple employer welfare arrangements (MEWAs). Through that working group, regulators can, by e-mail, quickly

spread word of a new multi-state plan which has been discovered in one state. Additionally, licensed insurance agents who have lost business to, or been solicited to

sell, illegal plans often bring them to our attention. Also, when the plans begin to

stop paying claims, consumers will often complain to the Department despite the

fact that the plan was represented to be exempt from state regulation. From such

complaints, it often becomes apparent that the plan involved the co-mingling of assets as a MEWA rather than as truly exempt individual employer plans. Another

useful tool is the practice of the Department of Labor in making MEWA Form M–

1s which are filed annually with that Department, available on the web. See

www.askebsa.dol.gov/epds. While many illegal plans do not file that form because

they deny that they are MEWAs, it is relatively easy to identify likely illegal

MEWAs from those forms which are filed.

Question 2. What state resources are devoted to the shutting down of illegal health

plans?

Answer. On the civil side, the Texas Department of Insurance created an Unauthorized Insurance Team in 2002 to focus on all types of unauthorized insurance,

including health insurance. It currently has 12 attorneys and 9 investigators working on such cases to varying degrees. If litigation against a plan moves to state or

federal district court, the Texas Attorney General represents the Department. On

the criminal side, the Department’s Fraud Unit investigates matters related to illegal health plans for referral to state or federal prosecutors.

Question 3. How long does it typically take your state to shut down a plan once

it is identified?

Answer. This can vary widely depending on the complexity of the case (proving

that different employers’ funds are co-mingled, for instance), available resources,

and the cooperation of the operators. Some unauthorized insurance plans have voluntarily issued notices of termination very soon after initially being contacted by the

Department. Other plans have terminated after being issued emergency cease and

desist orders. Such orders have been issued in as little as three months after identification, but can also take more than a year. On average, it probably takes about

six months to shut down an illegal plan.

Question 4. In your testimony you state that ‘‘ERISA’’ currently creates the opportunity for scams to operate for significant periods of time before they are recognized

as illegal and before formal actions can be taken against them? Can you please expand on this statement and tell us what you see as a solution?

Answer. It is my understanding that ERISA Form 5500 Annual Returns, which

are required of most ERISA plans, are not required to be filed until seven months

after the end of their first plan year. See www.dol.gov/ebsa/pdf/rdguide.pdf. If a

plan admits that it is a MEWA, or otherwise claims that it is ERISA exempt despite

covering multiple employer groups, it is generally required to file the Form M–1 Report by March IS‘ of the following calendar year, or within three months of an ‘‘origination.’’ The primary objection to such a system is that fraudulent operators can

truthfully tell consumers that they were not required to get any regulator’s approval, or even file any plan documents, before commencing operations. The lack of

an advance filing requirement allows some scam operators to operate for a minimum three months without having to file anything. Then, they merely need to assert that they are operating single employer plans in order to avoid filing anything

for another sixteen months. Even if the DOL commenced an investigation immediately at that point based upon the failure to file, it would likely still take many

months for it to develop a sufficient case to shut the illegal plan down. Further,

even if a plan does make its filing, there is nothing equivalent to the state system

where a consumer can readily find out if a company or agent has been approved

to do business in the state. ERISA plans are generally for larger employers, why

shouldn’t those types of plans, in whom so many place their money and their trust,

be required to make some kind of initial filing with the Department of Labor and

their domiciliary states to at least put regulators on notice of their existence? I recommend that all self-funded ERISA plans be required to make preliminary notice

filings with the DOL and the states in which they will operate, disclosing who will

be sponsoring the plan, who will be administering it, who is anticipated to be insured by the plan, and what backing insurance the plan will have, if any, prior to

signing up the first employer.
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Question 5. What does the state do to help the victims of fraudulent plans?

Answer. The Department of Insurance regularly takes action against the operators of illegal plans and against those who sell illegal plans in order to try to obtain

restitution to victims. For instance, since September 1, 2003, the Department has

issued 72 orders against insurance agents for selling unauthorized health insurance

plans. Each order required the agent to pay the unpaid claims of the victims. Where

the plan was based in Texas and there appeared to be the ability to seize assets,

Texas has placed the plan under the same kind of court supervision which the Department of Labor utilizes in order to distribute plan assets fairly. Texas also pursues criminal cases against the operators of fraudulent plans, which could also result in orders for restitution.

RESPONSES TO QUESTIONS SUBMITTED BY SENATOR KERRY

Question 1. In the GAO report, Texas had the distinction of having the highest

number of insurance scams, a total of 31. What makes Texas such fertile ground

for these illegal operators?

Answer. Texas is no more fertile ground for illegal operations than other states.

Texas is; however, a leader in enforcement, taking swift actions whenever these

plans are encountered. Since 2001, Texas has been one of the most aggressive states

in identifying and fighting unauthorized health insurance plans. Rather than simply

acting on complaints filed after the plan has become insolvent, Department staff

watch for new plans. For instance, staff tracks what is being offered to victims of

prior scams. Through such proactive approaches, the Department has identified a

large number of small plans and shut them down before they had a chance to become larger problems. Additionally, however, Texas has been the victim of the combination of a number of market factors—Texas businesses were hard hit by the recession and a large increase in medical care and health insurance costs. Adding

these factors to a high number of uninsured in the state, Texas was a ripe target

for marketers of the scams. Both employers and individuals were looking for ways

to be able to afford health insurance, and these schemes offered an easy way to do

it. Texas’ numbers will likely stay high as staff continue to try to identify small

plans early on. For instance, a number of files have already been opened based upon

the recent filed ERISA Form M–1 reports.

Question 2. In your testimony you make a number of suggestions for new authorities that could strengthen the ability of states to shut down insurance scams claiming ERISA exemption. Are you pursuing the implementation of these ideas with

DOL, NAIC, and within your own state? What are the barriers to implementation,

and how might they be overcome?

Answer. The suggestions made in the testimony would require action on the federal level to amend the ERISA statute. The suggestions would not reduce the exemption of legitimate ERISA plans from state regulation but only increase the ability of the Department of Labor to regulate ERISA plans and the ability of the states

to identify and regulate illegal plans. Nevertheless, resistance to such suggestions

is to be expected. The NAIC has a working group devoted to MEWA issues, and that

group is working to more fully develop proposals flowing from the ideas presented

at the Senate Finance hearing. State legislation which would also make ERISA preemption issues clearer is likely to be pursued.
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RESPONSES TO QUESTIONS FROM SENATOR GRASSLEY

Question 1. It seems that we too often see the same faces committing these scams

over and over again. How do we fix the loopholes that enable these scam artists to

continue doing business?

Answer. Some of the ‘‘loopholes’’ have only recently been addressed, such as the

U.S. Department of Labor regulation establishing standards for determining when

a plan is ‘‘established or maintained pursuant to a collective bargaining agreement.’’

The states have noted that with this regulation, as with other efforts to clarify the

law, operators have adjusted, not discontinued, their schemes. The unfortunate reality is that the complexity of ERISA, and the opportunity for great financial gain,

will always attract criminal behavior. Swift and sure criminal prosecution is the

most effective tool to deter these fraudulent schemes. To this end, states have become more aggressive in prosecuting cases and several states have enacted laws enhancing the penalties for the unauthorized transaction of insurance. Since these are

interstate operations and clearly federal crimes, direction to federal law enforcement

agencies, and additional federal law enforcement resources would greatly assist this

effort.

The NAIC is currently developing a model law, which we hope will be adopted

by all states, which would make the unauthorized transaction of insurance a felony

and enforce greater penalties. The NAIC sees this as a key to keeping these illegal

players out of the insurance market.

Question 2. From what I have seen and heard, it seems that insurance agents are

on the front lines of identifying health insurance scams. Is it fair to say that agents

should be forced to show more diligence in identifying and reporting these fraudulent entities? Should annual training on unauthorized entities be required as a condition of maintaining an agent’s license? If you agree—what needs to happen to

make those changes a reality across the United States.

Answer. All states make it clear in the law that it is illegal for an agent to assist

an unauthorized plan in any way. Agents know that if they fail to exercise due diligence they do so at their professional peril. This can lead to loss of license, criminal

prosecution, or, in many states, personal liability for any claims incurred under the

unlicensed coverage.

Insurance agents are the crucial first line of defense in detecting unlicensed entities. To take advantage of their knowledge and expertise, the NAIC has adopted two

models:

Reporting Requirements for Licensees Seeking To Do Business with Certain Unauthorized MEWAs (No. 220) and the Non-admitted Insurance Model Act (No. 870).

Model 220 requires licensed agents, and others, to submit information to the insurance department prior to assisting in any way the transaction of insurance by certain types of multiple employer arrangements identified in the model. These reports

help the departments identify unauthorized insurance arrangements before the

transactions occur. The reports also help licensees identify unauthorized insurance

arrangements so that they can protect themselves from potential liability for assisting in the transaction of unauthorized insurance. Model 870 confers potential criminal and civil liability on agents who assist an unauthorized insurer.

Question 3. One other note about insurance agents. Would making insurance

agents liable for the medical bills of victims increase the likelihood that an agent

would pick up the phone and report these scam artists?

Answer. The insurance agent who does not inform the insurance department takes

an enormous risk. Model 220 makes agents who violate the notification rule personally liable in the event that an unauthorized insurer fails to pay a claim or loss.

An agent is liable to the insured for the full amount of the claim or loss in the manner provided by the provisions of the insurance contract.

Question 4. What can be done to better educate consumers as to the existence of

illegal health plans?

Answer. Organized, local media campaigns, like the one being organized by the

NAIC Consumer Protections (EX) Working Group, Unauthorized Insurer Media Outreach Subgroup, are effective ways to educate the general public about the scam artists that want to sign them up with non-existent insurance at ‘‘really affordable’’

rates. Public service announcements, television and radio spots, and billboards are

all valuable ways to reach the public.

The message that consumers can call their state insurance department to learn

if an entity is licensed in their state needs to be widely publicized. People need to

be reminded that if it sounds too good to be true, it probably is, and any way that

message can be delivered is going to help.

Question 5. What improvements can be made at the federal level to enhance communication and cooperation? Is there a way for the federal government to commu-
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nicate to states what plans have true exemption under ERISA and operating in

their jurisdiction?

Answer. The relationship among the states and the federal government has been

increasingly cooperative. Modern technology has made it easier to share information

in a timely fashion. However, both the federal government and states have concerns

about maintaining the confidentiality of ongoing investigations. It is of paramount

importance that information about ongoing investigation not be subject to subpoena.

Not only must the legal due process rights of the accused be protected, but the success of an investigation may depend on making sure that wrongdoers do not have

advance notice of investigations and disappear. Oftentimes, in the interest of safeguarding an investigation, both states and the federal government are understandably reluctant to share information that is very detailed or specific.

Communication and cooperation among the states and the federal government

would be greatly enhanced by a federal privilege and a statutory structure for coordination of investigations. The privilege and structure should safeguard the confidentiality of communications among states and the federal government for the purpose of facilitating investigations into unauthorized insurance activity.

In theory, it would be helpful for the federal government to be required to inform

the states about the plans that have a true exempted status under ERISA and are

operating in their state. In this scenario, failure to have documentation of exempted

status would allow states to act quickly to shut a plan down.

Question 6. What level of resources have states and the NAIC spent on the issue?

Answer. The issue of unauthorized insurance is a priority for the NAIC membership. The NAIC and the states have been active on a variety of fronts in addressing

the issue of unauthorized insurance.

The NAIC Website has a link to a list of MEWA contacts for every state. Each

contact is an insurance department regulator that is familiar with the issue of sham

MEWA plans and is qualified to answer questions from the public and insurance

agent community.

The NAIC has developed a number of informational bulletins for use by state insurance departments to draw attention to the issue of sham MEWA plans, and provide guidance. A consumer alert was designed to warn consumers about ‘‘ERISA’’

and ‘‘union plan’’ scams, to suggest some questions to ask and to advise consumers

to report to the insurance department any attempts by insurance agents to sell

‘‘union’’ plans. An agent alert was developed to remind agents of their duty to inform the insurance department any time they are approached by a suspicious entity.

A model bulletin titled ‘‘Regulatory Alert to Stop Loss Carriers and Third Party Administrators’’ was developed to remind stop loss carriers and third party administrators that, as part of their commitment to good business practices, they are obligated

to review their internal controls and business practices to ensure that they do not

become unwitting supporters of illegal health insurance plans. Like agents, stop loss

insurers and third party administrators may risk regulatory penalties and liability

for unpaid claims under state law for doing business with unauthorized entities.

The ERISA Working Group of the Health Insurance and Managed Care (B) Committee spends the majority of its time on the issue of unauthorized health plans.

The working group coordinates information-sharing among states on a persistent

and constant basis. Information is exchanged about suspect entities, individuals,

TPAs, agents, marketing firms, stop loss carriers, reinsurers, provider groups—essentially everyone involved in every aspect of what are often complex, convoluted

and extensive scams. Over the years, states have been becoming more focused on

information sharing, and the NAIC has been facilitating informationsharing among

the states about potential unauthorized health plans.

The ERISA Working group is finalizing updates to the ‘‘ERISA Handbook’’ (Health

and Welfare Plans Under the Employee Retirement Income Security Act: Guidelines

for State and Federal Regulation), which, in large part, is devoted to creating a practical guide for state regulators to follow in preventing, investigating, identifying,

and taking legal action against entities falsely claiming exemption from state laws

under ERISA.

The NAIC Antifraud (D) Task Force of the Market Regulation and Consumer Affairs (D) Committee has a MEWA Subgroup that is drafting a model act making

it a felony to transact unauthorized insurance. Most states criminalize unauthorized

activity but few make it a felony.

The NAIC has budgeted $295,000 for a National Media Campaign on unauthorized insurance. This effort has already begun and will run through June 2004. This

project will include media campaign development, media production, media relations

and web site development.
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Question 7. We have heard that many of these entities cross state borders. Does

that limit the effectiveness of state insurance departments in taking effective enforcement actions against these entities?

Answer. The fact that many of these scams often operate in more than one state

creates an important federal government role. The problem is the federal government is unable to act as quickly as the states. The federal burden of proving breach

of fiduciary duty is onerous and time consuming, especially when compared to the

states’ administrative process for issuing a cease and desist order.

Question 8. On average how many resources does the NAIC use to investigate

companies selling health insurance on the Internet sites marketing health insurance? Has the NAIC identified any bogus health plans through Internet searches?

Answer. The NAIC, itself, is not a regulatory body and does not conduct investigations. The NAIC is a private non-profit association of the chief regulatory officials

of the fifty states, the District of Columbia and the four territories. The mission of

the NAIC is to assist state insurance regulators, individually and collectively, in

serving the public interest and achieving the following fundamental insurance regulatory goals in a responsive, efficient and cost effective manner, consistent with the

wishes of its members: protect the public interest; promote competitive markets; facilitate the fair and equitable treatment of insurance consumers; promote the reliability, solvency and financial solidity of insurance institutions; and support and improve state regulation of insurance. As such, the NAIC does not investigate companies.

Each state insurance department is responsible for enforcing its own state laws,

which includes the investigation of suspect entities. Suspect entities have increasingly been using the Internet to solicit customers. State insurance departments also

use Internet technology to investigate suspect entities marketing on the Internet.

Question 9. What role does the NAIC play in coordinating among state investigators and Department of Labor investigators? Is this coordination sufficient, or is

there a need for more formal mechanisms to ensure that federal/state and multistate coordination that is necessary occurs?

Answer. The level of State and Department of Labor cooperation has been steadily

improving over the years. State regulators participate in regional Department of

Labor-sponsored conferences on the issue of sham MEWAs plans. These conferences

are helpful and informative for all those attending. Department of Labor investigators participate in NAIC meetings, at least quarterly. State and federal regulators

are able to meet face to face and establish personal contacts that are important in

ensuring timely and effective information sharing.

RESPONSES TO QUESTIONS FROM SENATOR KERRY

Question 1. You note that unauthorized health plans discussed in the GAO Report

have two factors in common: they claim to offer a plan subject to ERISA and they,

therefore, claim to be exempt from state insurance regulation. Since this is now the

third round of insurance scams the country has experienced, why have the states

and the Department of Labor not been able to develop statutes and regulations that

would address the legal gaps that allow these scams to continue? When will it be

completed and how quickly do you anticipate states might adopt it?

Answer. A plan is either licensed and regulated by the state or, in limited circumstances, is exempt from state law and regulated by the federal government. The

problem is that there are criminals who wish to profit from claiming that they are

exempt from state law, even though they have not met the federal requirements for

being exempt. These criminals exploit the complexities of ERISA by creating structures that must be investigated and adjudicated on their factual merits. They exploit both due process and consumers’ need for affordable health insurance.

As long as there remains a way for any plan to be exempt from state regulation

there will be criminals who will fraudulently claim that exemption to evade oversight. And, as long as a claim of federal preemption can be made, states will have

difficulty shutting down known unauthorized plans. As stated in the testimony, operators of illegal health plans are very savvy. They know what claims to make and

what information to hide in order to delay legal proceedings.

Question 2. Mr. Montemayor, Commissioner of the Texas Department of Insurance, in his testimony makes several suggestions for new authorities that could

strengthen the ability of states to shut down insurance scams claiming exemptions.

Is NAIC incorporating these and similar recommendations in the model legislation

you are developing?

Answer. The NAIC ERISA Working Group, which I chair, is currently reviewing

the recommendations made by Commissioner Monteymayor, as well as those proposed by other commissioners and interested parties. We are hopeful these discus-
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sions will yield a list of recommendations very soon that could then be shared with

the Senate Finance Committee.
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