a

GAO

United States General Accounting Office

Report to Congressional Requesters

February 2004 PRIVATE HEALTH 

INSURANCE

Employers and 

Individuals Are 

Vulnerable to 

Unauthorized or 

Bogus Entities Selling 

Coverage

GAO-04-312
www.gao.gov/cgi-bin/getrpt?GAO-04-312.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Kathryn G. 

Allen at (202) 512-7118. 

Highlights of GAO-04-312, a report to 

congressional requesters 

February 2004

PRIVATE HEALTH INSURANCE 

Employers and Individuals Are 

Vulnerable to Unauthorized or Bogus 

Entities Selling Coverage 

DOL and the states identified 144 unique entities not authorized to sell health 

benefits coverage from 2000 through 2002. The number of entities newly 

identified increased each year, almost doubling from 31 in 2000 to 60 in 2002. 

Many of these entities targeted employers and policyholders in multiple 

states, and, of the seven states with 25 or more entities, five were located in 

the South. 

DOL and the states reported that the 144 unique entities 

• sold coverage to at least 15,000 employers, including many small employers;

• covered more than 200,000 policyholders; and 

• left at least $252 million in unpaid medical claims, only about 21 percent of 

which had been recovered at the time of GAO’s 2003 survey. 

States and DOL often identified these entities based on consumer complaints. 

DOL often relied on states to stop these entities within their borders while DOL 

focused its investigations on larger entities operating in multiple states and, in 

three cases, obtained court orders to stop these entities nationwide. Most of the 

states’ prevention activities were geared to increasing public awareness and 

notifying the agents who sold this coverage, while DOL focused its efforts on 

alerting employer groups and small employers. 

In commenting on a draft of this report, DOL, the National Association of 

Insurance Commissioners, Florida, and Texas highlighted their efforts to 

increase public awareness, coordinate investigations, and take enforcement 

actions regarding these entities. 

Number of Unauthorized Entities That Operated in Each State, 2000-2002 

Note: Some of the unauthorized entities operated in more than one state so the total number of 

entities identified by DOL and the states exceeds the total of 144 unique entities. 

Health insurance premiums have 

increased at double-digit rates over 

the past few years. While 

searching for affordable options, 

some employers and individuals 

have purchased coverage from 

certain entities that are not 

authorized by state insurance 

departments to sell this coverage. 

Such unauthorized entities—also 

sometimes referred to as bogus 

entities or scams—may collect 

premiums and not pay some or all 

of the legitimate medical claims 

filed by policyholders. GAO was 

asked to identify the number of 

these entities that operated from 

2000 through 2002, the number of 

employers and policyholders 

covered, the amount of unpaid 

claims, and the methods state and 

federal governments employed to 

identify such entities and to stop 

and prevent them from operating. 

GAO analyzed information on these 

entities obtained from the 

Department of Labor (DOL) and 

from a survey of the 50 states and 

the District of Columbia. GAO also 

interviewed officials at DOL 

headquarters, at three regional 

offices, and at state insurance 

departments responsible for 

investigating these entities in four 

states—Colorado, Florida, Georgia, 

and Texas. 
Page i GAO-04-312 Unauthorized Entities Selling Health Benefits

Contents

Letter 1

Results in Brief 3

Background 5

DOL and States Identified 144 Unique Unauthorized Entities 

Operating from 2000 through 2002 7

Unauthorized Entities Covered Thousands of Employers and 

Policyholders, Leaving Hundreds of Millions of Dollars in Unpaid 

Claims 13

States and DOL Employed Similar Methods to Identify Unauthorized 

Entities and Prevent Them from Operating, but Different Methods 

to Stop Them 15

Agency and Other External Comments 23

Appendixes

Appendix I: Methodology for Identifying Unauthorized Entities 27

Survey of State Insurance Departments 27

Federal Data on Unauthorized Entity Investigations 28

Consolidating State and Federal Data on Unauthorized Entities 28

Appendix II: Employers Mutual, LLC and Federal and State Actions 31

Employers Mutual Created Associations, Hired Firms, and Paid 

Companies Established by Its Principals 31

Employers Mutual Collected About 

$16 Million in Premiums but Did Not Pay over $24 Million in 

Medical Claims 32

States, Then DOL, Acted against Employers Mutual 33

Appendix III: Discount Plans Have Been Marketed as Health Insurance in 

Some States 38

Overview of Discount Plans 38

Discount Plans Misrepresented in Some States 39

Appendix IV: Consumer Alert Developed by the National Association of 

Insurance Commissioners 42

Appendix V: Department of Labor Memorandum and Insurance Tips for 

Small Employers 44

Appendix VI: Comments from the Department of Labor 46

Tables Table 1: Types of Unauthorized Entities Identified by DOL and 

States, 2000-2002 12

Table 2: Impact of 10 Large Unauthorized Entities, 2000-2002 14
Contents

Page ii GAO-04-312 Unauthorized Entities Selling Health Benefits

Table 3: Methods States Used to Identify Unauthorized Entities, 

2000-2002 16

Table 4: TROs and Injunctions for Three Unauthorized Entities, as 

of December 2003 19

Table 5: States’ Experience with Discount Plans, 2000-2002 40

Figures Figure 1: Number of Unauthorized Entities That Operated in Each 

State, 2000-2002 9

Figure 2: Number of Newly Identified Unique Unauthorized 

Entities, 2000-2002 10

Figure 3: Florida’s Public Awareness Campaign against 

Unauthorized Entities 22

Figure 4: Key Events of Employers Mutual from Establishment to 

Closure 36

Figure 5: Consumer Alert from NAIC 43

Figure 6: Insurance Tips for Small Employers 45

Abbreviations

DOL Department of Labor

EBSA Employee Benefits Security Administration

ERISA Employee Retirement Income Security Act of 1974

MEWA multiple employer welfare arrangement

NAIC National Association of Insurance Commissioners

TRO temporary restraining order

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Page 1 GAO-04-312 Unauthorized Entities Selling Health Benefits

United States General Accounting Office

Washington, D.C. 20548

A

February 27, 2004 Letr

The Honorable Charles E. Grassley

Chairman

Committee on Finance

United States Senate

The Honorable Olympia J. Snowe

Chair

Committee on Small Business and Entrepreneurship

United States Senate

The Honorable Christopher S. Bond

United States Senate

As health insurance premiums in the private health insurance market 

increased at double-digit rates over the past several years, some employers, 

particularly small employers with fewer than 50 employees, have faced 

difficulty in obtaining affordable coverage. Small employers cited cost as 

the major obstacle they faced in providing health care coverage to their 

employees. As they looked for affordable options, some employers and 

individuals have purchased health care coverage from certain entities that 

have not complied with state insurance law or with federal and state 

requirements for coverage provided to multiple employers. These 

unauthorized entities—also sometimes referred to as bogus entities or as 

scams or fraudulent insurers—may price their products below market rates 

but may not meet financial and benefit protections typically associated 

with health insurance products that are authorized, licensed, and regulated 

by the states. These entities collect premiums from individuals or 

employers but may not pay some or all legitimate claims filed by the 

policyholders or those covered by the policies.

According to several media reports during the past few years, employers 

and individuals may increasingly be targeted by entities not authorized to 

sell health coverage. These entities were also particularly problematic in 

two earlier periods during the past 30 years—the mid-1970s to early 1980s 

and the late 1980s to early 1990s. When these entities do not pay legitimate 

claims, different parties can be harmed, including individual policyholders 

who may be held responsible for their own medical bills, which can mean 

owing thousands of dollars. Providers are also at increased risk of not 

being paid for services already rendered. Concerned about this situation, 

you asked us to determine the prevalence of these entities and their impact 
Page 2 GAO-04-312 Unauthorized Entities Selling Health Benefits

on employers, especially small employers, and policyholders. Specifically, 

we examined 

1. the number and types of unauthorized entities selling health benefits 

that federal and state governments identified from 2000 through 2002;

2. the number of employers, including small employers, and policyholders 

covered by these entities, the amount of associated unpaid claims, and 

the amounts recovered from these entities; and

3. the methods federal and state governments have employed to identify 

such entities and to stop or prevent them from continuing to operate.

To identify the number of unauthorized entities from 2000 through 2002, we 

analyzed information we obtained from the federal and state governments. 

We obtained federal-level data from the Department of Labor’s (DOL) 

Employee Benefits Security Administration (EBSA). EBSA conducts civil 

and criminal investigations of employer-based health benefits plans, which 

include entities that did not meet federal and state requirements.1

 To obtain 

state-level data, we surveyed and received responses from officials at 

departments of insurance or equivalent offices in all 50 states and the 

District of Columbia.2

 Because multiple states and EBSA provided 

information on some of the same entities, we relied on several different 

sources, along with our judgment regarding similar entity names, to 

consolidate the federal and state information and identify the number of 

unique entities. Some states did not report on entities that they were still 

investigating. Therefore, the number we report likely represents the 

minimum number of unauthorized entities operating from 2000 through 

2002. We also asked states to provide information on a related type of 

problematic arrangement—discount arrangements that may be 

misrepresented as insurance. To determine the types of entities, the 

number of employers and policyholders covered, the amount of unpaid 

claims, and the amounts recovered from these entities, we analyzed the 

data EBSA and the states reported to us. DOL and the states could not 

1

EBSA regulates employer-based pension and welfare benefits plans, which include 

employer-based health benefits. Specifically, the Office of Enforcement in EBSA, among 

other activities, conducts investigations through its regional offices to find and correct 

violations of federal law that relate to employer-based pension and welfare benefits plans.

2

Throughout this report, we include the District of Columbia in our discussion of states; we 

refer to each state’s insurance department, division, or office as an insurance department.
Page 3 GAO-04-312 Unauthorized Entities Selling Health Benefits

provide comparable data on how many people in total were affected by 

these entities. Therefore, we combined the data that states reported on the 

number of policyholders with the data that DOL reported on the number of 

participants and refer to them throughout this report as policyholders. 

Most states and DOL reported to us from March through June 2003. The 

data we report likely underestimate the total numbers of employers and 

policyholders covered as well as the amounts of unpaid claims and 

amounts recovered to pay for these claims because neither EBSA nor 

states could provide this information for some entities. To identify the 

methods that the federal and state governments employed to identify these 

entities and to stop and prevent them from continuing to operate, we 

analyzed information obtained from DOL, our state survey, state insurance 

departments’ Web sites, and other research, as well as through interviews 

with federal and state officials; officials of several associations, including 

the National Association of Insurance Commissioners (NAIC); and experts 

on these entities. We interviewed federal officials at DOL headquarters and 

at three EBSA regional offices—Atlanta, Dallas, and San Francisco—and 

state officials at insurance departments in four states—Colorado, Florida, 

Georgia, and Texas. We selected the EBSA regional offices and states based 

on recommendations from federal and state officials and others we 

contacted who suggested that these regions and states had been affected 

by relatively more of these entities. We also interviewed association 

officials and several experts who had published research addressing 

unauthorized or fraudulent entities.3

 We also reviewed relevant literature. 

While we obtained information on the methods that federal and state 

governments employed to identify these entities and to stop and prevent 

them from operating, we did not evaluate the effectiveness of these 

methods. 

Appendix I provides more detailed information on our methodology. We 

performed our work from January 2003 through February 2004 in 

accordance with generally accepted government auditing standards.

Results in Brief DOL and the states identified 144 unique entities not authorized to sell 

health benefits coverage from 2000 through 2002. Over these 3 years, the 

number of such entities newly identified each year almost doubled from 31 

3

See Mila Kofman, Kevin Lucia, and Eliza Bangit, “Health Insurance Scams: How 

Government Is Responding and What Further Steps Are Needed,” The Commonwealth 

Fund (2003), for a recent review of related issues.
Page 4 GAO-04-312 Unauthorized Entities Selling Health Benefits

in 2000 to 60 in 2002. Many of these entities operated in more than one state 

and some operated under more than one name or with more than one 

affiliated entity. These entities most often marketed their products in 

southern states. For example, of the seven states that had 25 or more 

entities, five were located in the South. The operators of these entities 

often characterized the entities in one of several ways that gave an 

appearance of being exempt from state insurance regulation when they 

should have been subject to regulation. The most common 

characterizations were as (1) associations, in which these entities either 

sold their products through associations they created or through 

established associations of employers or individuals, and (2) professional 

employer organizations, which contracted with employers to administer 

employee benefits and perform other administrative services for contract 

employees. Relatedly, 14 states also reported that at least some discount 

plans, in which the purchaser receives a discount from the full cost of 

certain health care services from participating providers, were 

misrepresented as insurance, and 8 of these states identified small 

employers as a particular target of these misrepresented discount plans.

DOL and the states reported that the 144 unauthorized entities covered at 

least 15,000 employers and more than 200,000 policyholders from 2000 

through 2002. The states reported that more than half of the entities they 

identified frequently targeted their health benefits to small employers. At 

the time of our 2003 survey, DOL and the states reported that the identified 

entities did not pay at least $252 million in medical claims and only about 

$52 million—about 21 percent of the total unpaid claims—had been 

recovered on behalf of policyholders and those covered by the policies. Ten 

of the 144 entities covered about 64 percent of the affected employers and 

about 56 percent of the policyholders, and accounted for 46 percent of the 

unpaid claims.

States and DOL employed similar methods to identify these unauthorized 

entities and to prevent them from operating, but used different methods to 

stop their activities. To identify these entities, state insurance departments 

and DOL often relied on consumer complaints. The primary action states 

took to stop the entities’ activities was to issue cease and desist orders. 

State insurance departments issued these orders against 41 of the 144 

unique entities identified from 2000 through 2002. Such an order, however, 

only applies to the activity in the issuing state. DOL relied on the states to 

issue cease and desist orders while it conducted investigations to obtain 

evidence that it could use to stop these entities in multiple states through 

the federal courts. DOL obtained court orders against three entities from 
Page 5 GAO-04-312 Unauthorized Entities Selling Health Benefits

2000 through 2002. Each of these three entities affected consumers in more 

than 40 states; combined, the three entities affected an estimated 25,000 

policyholders and accounted for about $39 million in unpaid claims. 

Because most of the DOL investigations were ongoing as of August 2003, 

further actions remain possible. States and DOL primarily focused their 

prevention efforts on improving public awareness, including the need for 

consumers, employers, and insurance agents to verify an entity’s legitimacy 

with insurance departments.

We provided a draft of this report to DOL, NAIC, and the four state 

insurance departments whose officials we interviewed. DOL, NAIC, 

Florida, and Texas provided written comments. DOL identified initiatives it 

has taken to improve coordination with states and law enforcement 

agencies, and also summarized its criminal enforcement actions. NAIC, 

Florida, and Texas commented that the report illustrated the extent to 

which unauthorized entities have harmed individuals and small employers, 

and they provided additional information on how the federal and state 

governments have coordinated and collaborated in their efforts and noted 

other public awareness and criminal enforcement efforts they have 

undertaken.

Background Generally, employers can provide health coverage in two ways. They can 

purchase coverage from health insurers, such as local Blue Cross and Blue 

Shield plans; other private insurance carriers; or managed care plans, such 

as health maintenance organizations. Alternatively, they can self-fund their 

plans—that is, they assume the risk associated with paying directly for at 

least some of their employees’ health care costs—and typically contract 

with an insurer or other company to administer benefits and process 

claims. When small employers offer health coverage, most tend to purchase 

insurance rather than self-fund. Only about 12 percent of the 

establishments at firms with fewer than 50 employees that offered 

coverage in 2001 had a self-funded plan,4

 compared with about 58 percent 

of the establishments at firms with 50 or more employees. Moreover, about

4

An establishment is a workplace or physical location where business is conducted or 

operations are performed. A firm includes a company’s headquarters and all divisions, 

subsidiaries, and branches and may consist of one or more establishments under common 

ownership or control.
Page 6 GAO-04-312 Unauthorized Entities Selling Health Benefits

76 percent of the establishments at the largest firms—those with 500 or 

more employees—offered at least one self-funded plan.5

States regulate the insurance products that many employers purchase.6

Each state’s insurance department enforces the state’s insurance statutes 

and rules. Among the functions state insurance departments typically 

perform are licensing insurance companies, managed care plans, and 

agents who sell these products; regulating insurers’ financial operations to 

ensure that funds are adequate to pay policyholders’ claims; reviewing 

premium rates; reviewing and approving policies and marketing materials 

to ensure that they are not vague and misleading; and implementing 

consumer protections such as those relating to appeals of denied claims.7

The federal government regulates most private employer-sponsored 

pension and welfare benefit plans (including health benefit plans) as 

required by the Employee Retirement Income Security Act of 1974 

(ERISA).8

 These plans include those provided by an employer, an employee 

organization (such as a union), or multiple employers through a multiple 

employer welfare arrangement (MEWA).9

 DOL is primarily responsible for 

administering Title I of ERISA. Among other requirements, ERISA 

establishes plan reporting and disclosure requirements and sets

5

Agency for Healthcare Research and Quality, 2001 Employer-Sponsored Health Insurance 

Data. Private-Sector Data by Firm Size, Industry Group, Ownership, Age of Firm, and 

Other Characteristics (Rockville, Md.: 2003), 

http://www.meps.ahrq.gov/mepsdata/ic/2001/index100.htm (downloaded Sept. 3, 2003).

6

The McCarran-Ferguson Act, March 9, 1945, Ch. 20, § 2, 59 Stat. 33, 34, establishes the 

primary authority of the states to regulate the business of insurance, unless federal law 

provides otherwise. 

7

State insurance regulators established NAIC to help promote effective insurance 

regulation, to encourage uniformity in approaches to regulation, and to help coordinate 

states’ activities. Among other things, NAIC develops model laws and regulations to assist 

states in formulating their policies to regulate insurance.

8

Pub. L. No. 93-406, 88 Stat. 829.

9

MEWAs, which can be insured or self-funded, are plans or other arrangements that provide 

health and welfare benefits to the employees of two or more employers. Under ERISA, 

MEWAs do not include certain plans that the Secretary of Labor finds are the result of 

collective bargaining agreements, or plans established or maintained by a rural electric 

cooperative or a rural telephone cooperative association.
Page 7 GAO-04-312 Unauthorized Entities Selling Health Benefits

fiduciary standards for the persons who manage and administer the plans.10

These requirements generally apply to all ERISA-covered employersponsored health plans, but certain requirements vary depending on the 

size of the employer or whether the coverage is through an insurance 

policy or a self-funded plan. In addition, ERISA generally preempts states 

from directly regulating employer-sponsored health plans (while 

maintaining states’ ability to regulate insurers and insurance policies). 

Therefore, under ERISA, self-funded employer group health plans generally 

are not subject to the state oversight that applies to the insurance 

companies and health insurance policies. Prior to 1983, a number of states 

attempted to subject MEWAs to state insurance law requirements, but 

MEWA sponsors often claimed ERISA-plan status and federal preemption. 

A 1983 amendment to ERISA made it clear that health and welfare benefits 

provided through MEWAs were subject to both federal and state 

oversight.11 The federal and state governments now coordinate the 

regulation of MEWAs, with states having the primary responsibility to 

regulate the fiscal soundness of MEWAs and to license their operators and 

DOL enforcing ERISA’s requirements.

DOL and States 

Identified 144 Unique 

Unauthorized Entities 

Operating from 2000 

through 2002

DOL and the states identified 144 unauthorized entities from 2000 through 

2002. Many of these entities marketed their products in more than one 

state, and some operated under more than one name or with more than one 

affiliated entity. These entities operated most often in southern states. The 

number of such entities newly identified each year grew from 31 in 2000 to 

60 in 2002. About 80 percent of these entities characterized themselves as 

one of four arrangements or some combination of the four. In addition, 

some states reported that discount plans misrepresented their products as 

health insurance. 

10Under ERISA, a fiduciary generally is any person who exercises discretionary authority or 

control respecting the management or administration of an employee benefit plan or the 

management or disposition of the plan’s assets.

11Pub. L. No. 97-473, § 302, 96 Stat. 2605, 2612.
Page 8 GAO-04-312 Unauthorized Entities Selling Health Benefits

Unauthorized Entities Were 

Concentrated in the South 

and the Number Identified 

Grew Rapidly from 2000 

through 2002 

DOL and 42 states12 identified 144 unique unauthorized entities from 2000 

through 2002. Many of these entities marketed their products in more than 

one state, and some operated under more than one name or with more than 

one affiliated entity. This likely represents the minimum number of 

unauthorized entities operating from 2000 through 2002 because some 

states did not report on entities that they were still investigating. Of the 144 

unique entities, the states identified 77 entities that DOL did not, DOL 

identified 40 that the states did not, and both the states and DOL identified 

another 27. 

Unauthorized entities identified by DOL and the states from 2000 through 

2002 operated in every state, ranging from 5 entities in Delaware and 

Vermont to 31 in Texas. (See fig. 1.) Some of the unauthorized entities 

operated in more than one state so the total number of entities identified by 

DOL and the states exceeds the total of 144 unique entities. Unauthorized 

entities were concentrated in certain states and regions. Seven states had 

25 or more entities that operated during this period; 5 of these states were 

located in the South. In addition to the 31 entities in Texas, there were 30 in 

Florida, 29 each in Illinois and North Carolina, 28 in New Jersey, 27 in 

Alabama, and 25 in Georgia. 

12Nine of the 51 states responding to our survey did not report identifying any unauthorized 

entities from 2000 through 2002. However, entities identified by DOL through its multistate 

investigations operated in these states.
Page 9 GAO-04-312 Unauthorized Entities Selling Health Benefits

Figure 1: Number of Unauthorized Entities That Operated in Each State, 2000-2002

Note: Some of the unauthorized entities operated in more than one state so the total number of entities 

identified by DOL and the states exceeds the total of 144 unique entities. 

The number of unauthorized entities newly identified by DOL and the 

states each year almost doubled from 2000 through 2002. The number 

increased significantly from 2000 to 2001, and it continued to increase from 

2001 to 2002. (See fig. 2.)

Source: GAO analysis of DOL and state data.

25 to 31 unauthorized entities

15 to 24 unauthorized entities

5 to 14 unauthorized entities
Page 10 GAO-04-312 Unauthorized Entities Selling Health Benefits

Figure 2: Number of Newly Identified Unique Unauthorized Entities, 2000-2002

Note: The total excludes three unauthorized entities because one state did not provide the year it 

identified them.

Several DOL officials, state officials, and experts pointed to rapidly 

increasing health care costs and the weak economy as two factors 

contributing to the recent growth in the number of identified unauthorized 

entities. They suggested that the pressure of rising premiums and 

decreasing revenues may have increased employers’ demand for more 

affordable employee health benefits, particularly among small employers, 

and thereby created an environment where unauthorized entities could 

spread. From 2000 through 2002, firms with fewer than 50 workers 

experienced an average annual increase in their workers’ health benefits of 

about 13.3 percent, whereas firms with 50 or more workers experienced an 

average annual increase of 10.9 percent.13 The United States economy also 

showed signs of weakness in the third quarter of 2000 when it experienced 

growth of 0.6 percent, and suffered a recession in 2001. The economy’s 

subsequent recovery in 2002 was marked by moderate economic growth 

but rising unemployment. Negative or weak growth in employers’ revenues, 

13We based our calculation on data reported in Kaiser Family Foundation and Health 

Research and Educational Trust, Employer Health Benefits 2000 Annual Survey, Employer 

Health Benefits 2001 Annual Survey, and Employer Health Benefits 2002 Annual Survey 

(Menlo Park, Calif. and Chicago: 2000, 2001, and 2002). 

31

50

60

0

10

20

30

40

50

70

60

2000 2001 2002

Source: GAO analysis of DOL and state data.

Number of entities identified
Page 11 GAO-04-312 Unauthorized Entities Selling Health Benefits

compounded by rising premiums particularly for small employers, created 

an attractive environment for unauthorized entities, as small employers 

and others sought cheaper employee health benefit options. 

Entities Characterized 

Themselves as One of 

Several Common Types of 

Arrangements 

About 80 percent of the unauthorized entities identified by DOL and the 

states characterized themselves as associations, professional employer 

organizations, unions, single-employer ERISA plans, or some combination 

of these arrangements. The operators of these entities often characterized 

the entities as one of these common types to give the appearance of being 

exempt from state regulation, but often states found that they actually were 

subject to state regulation as insurance arrangements or MEWAs. Under 

ERISA, both states and the federal government regulate MEWAs, with 

states focusing on regulating the fiscal soundness of MEWAs and licensing 

their operators and DOL enforcing ERISA’s requirements. 

Specifically, as shown in table 1, 27 percent of the entities identified by the 

states and DOL characterized themselves as associations in which 

employers or individuals bought health benefits through existing 

associations, or through newly created associations established by the 

unauthorized entities. For example, Employers Mutual, LLC, an entity that 

operated in 2001, sold coverage through an existing association. Employers 

Mutual also created 16 associations as vehicles for selling its products. (See 

app. II for a more detailed discussion of Employers Mutual, LLC.) In 

addition, 26 percent of the entities identified were professional employer 

organizations, also known as employee leasing firms, which contracted 

with employers to administer employee benefits and perform other 

administrative services for contract employees. Another 9 percent of the 

entities identified claimed to be union arrangements that would be exempt 

from state regulation. However, they lacked legitimate collective 

bargaining agreements and were therefore subject to state oversight. Eight 

percent of the entities identified characterized themselves as singleemployer ERISA plans and claimed to be administering a self-funded plan 

for a single employer. Such plans, when administered with funds from one 

employer for the benefit of that employer’s workers, are exempt from state 

insurance regulation under ERISA. However, assets for several employers 

were commingled in these entities, making them MEWAs subject to state 

regulation. 
Page 12 GAO-04-312 Unauthorized Entities Selling Health Benefits

Table 1: Types of Unauthorized Entities Identified by DOL and States, 2000-2002

Source: GAO survey of states and DOL data.

a

“Combination” is any combination of two or more unauthorized entity types, for example, “association” 

and “professional employer organization.”

b

Some examples of “other” include individual and small group insurance and third-party administrators 

for single-employer ERISA plans that states identified as unauthorized. 

c

Percentages do not add to 100 percent due to rounding.

Some States Reported That 

Discount Plans 

Misrepresented Themselves 

as Health Insurance 

Some discount plans, in which the purchaser receives a discount from the 

full cost of certain health care services from participating providers, were 

misrepresented as insurance. Unlike legitimate insurance, discount plans 

do not assume any financial risk nor do they pay any health care claims. 

Instead, for a fee they provide a list of health care providers that have 

agreed to provide their services at a discounted rate to participants. In 

response to our survey, 40 states reported that they were aware that 

discount plans were marketed in their state, and 14 states reported that 

some discount plans were inappropriately marketed as health insurance 

products in some manner. Among these 14 states, 8 reported that the 

inappropriately marketed discount plans targeted small employers. While 

discount plans are not problematic as long as purchasers clearly 

understand the plans, these 14 states reported that some discount plans 

were marketed as health insurance with terms or phrases such as “medical 

plan,” “health benefits,” or “pre-existing conditions immediately accepted.” 

(See app. III for more information on discount plans.)

Entity type Number Percentage

Association 39 27

Professional employer organization 37 26

Union 13 9

Single-employer ERISA 11 8

Combinationa 14 10

Otherb/unknown 30 21

Total 144 100c
Page 13 GAO-04-312 Unauthorized Entities Selling Health Benefits

Unauthorized Entities 

Covered Thousands of 

Employers and 

Policyholders, Leaving 

Hundreds of Millions of 

Dollars in Unpaid 

Claims

At least 15,000 employers, including many small employers, purchased 

coverage from unauthorized entities, affecting more than 200,000 

policyholders from 2000 through 2002. The states reported that more than 

half of the organizations they identified frequently targeted their health 

benefits to small employers. At the time of our 2003 survey, DOL and states 

reported that the 144 entities had not paid at least $252 million in medical 

claims, and only about 21 percent of these claims, about $52 million, had 

been recovered on behalf of those covered by these entities. Ten of the 144 

entities covered the majority of employers and policyholders and 

accounted for almost one half of unpaid claims. 

Based on our survey of states and information from DOL, we estimate that 

unauthorized entities sold coverage to at least 15,158 employers. The states 

reported that more than half of the entities they identified targeted their 

health benefits to small employers.14 Furthermore, unauthorized entities 

covered at least 201,949 policyholders across the United States from 2000 

through 2002. The number of individuals covered by unauthorized entities 

was even greater than the number of policyholders covered because a 

policyholder could be an employer or an individual with dependents. 

Therefore, any one policyholder could represent more than one individual. 

At the time of our 2003 survey, DOL and state officials reported that 

unauthorized entities had not paid at least $252 million in medical claims. 

This represents the minimum amount of unpaid claims associated with 

these entities identified from 2000 through 2002 because in some cases 

DOL and the states did not have complete information on unpaid claims for 

the entities they reported to us.

Federal and state governments reported that about 21 percent of unpaid 

claims had been recovered from entities identified from 2000 through 

2002—$52 million of $252 million.15 These recoveries could include assets 

seized from unauthorized entities that had been shut down or frozen from 

other uses. Licensed insurance agents have also settled unpaid claims 

voluntarily or through state or court action. However, the amount of unpaid 

claims recovered could grow over time as ongoing investigations are 

resolved. Investigations of unauthorized entities are complex and require 

14DOL could not quantify the share of employers purchasing from unauthorized entities that 

were small employers. 

15Most states and DOL reported to us from March through June 2003.
Page 14 GAO-04-312 Unauthorized Entities Selling Health Benefits

significant resources and time to thoroughly probe because operators often 

maintain poor records and hide assets, sometimes offshore. DOL and state 

officials explained that by the time they become aware of an unauthorized 

entity—often when medical claims are not being paid—the entity is 

sometimes on the verge of bankruptcy and may have few remaining assets 

with which to pay claims. Thus, while some additional assets may be 

recovered from the entities identified from 2000 through 2002, it is likely 

that many of the assets will remain unrecovered.

Ten large entities identified by DOL and the states covered a majority of 

employers and policyholders and accounted for nearly half of unpaid 

claims. Of the 144 unique entities, 10 covered about 64 percent of the 

employers and about 56 percent of the policyholders. They also accounted 

for 46 percent of the unpaid claims. (See table 2.) Some of these large 

entities grew rapidly and existed for short periods. For example, from 

January through October 2001, Employers Mutual enrolled over 22,000 

policyholders; covered about 1,100 employers; and amassed over 

$24 million in unpaid claims, none of which have been paid. 

Table 2: Impact of 10 Large Unauthorized Entities, 2000-2002

Source: GAO analysis of DOL and state data.

Note: Neither DOL nor states were able to report the number of employers or policyholders or the 

amount of unpaid claims for some unauthorized entities.

a

DOL data were as of June 2003 and most state data were reported from March through June 2003.

Dollars in millions

Employers Policyholders Unpaid claimsa

Number Percentage Number Percentage Amount Percentage

Ten entities 9,676 63.8 112,429 55.7 $116.0 46.0

All others 5,482 36.2 89,520 44.3 $136.2 54.0

Total 15,158 100.0 201,949 100.0 $252.2 100.0
Page 15 GAO-04-312 Unauthorized Entities Selling Health Benefits

States and DOL 

Employed Similar 

Methods to Identify 

Unauthorized Entities 

and Prevent Them 

from Operating, but 

Different Methods to 

Stop Them

States and DOL took generally similar actions to identify unauthorized 

entities and prevent them from operating, but they followed different 

approaches to stop these entities’ activities. States and DOL often relied on 

the same method to learn of the entities’ operations—through consumer 

complaints. In addition, NAIC played an important role in the identification 

process by helping to coordinate and distribute state and federal 

information on these entities. To stop the operations of these entities, state 

agencies issued cease and desist orders, while DOL took action through the 

federal courts. Both state and DOL officials said that increased public 

awareness was important to help prevent such entities from continuing to 

operate. 

States and DOL Relied on 

Similar Methods to Identify 

Unauthorized Entities

States and DOL identified unauthorized entities through similar methods. 

While states reported that most often they became aware of the entities’ 

operations from consumers’ complaints, they also received complaints 

about these entities from several other sources, such as agents, employers, 

and providers. DOL also often learned of these entities through consumer 

complaints. In addition to information obtained through NAIC, state 

insurance departments and EBSA regional offices relied on each other to 

learn of the entities’ activities. 

States Identified Entities 

Primarily through Consumer 

Complaints, as Well as through 

Other Methods

States identified entities operating within their borders through several 

different methods, including complaints from consumers, information 

coordinated by NAIC, information from DOL, and a combination of these 

and other methods. States most often identified unauthorized entities 

operating within their borders through consumer complaints. (See table 3.) 
Page 16 GAO-04-312 Unauthorized Entities Selling Health Benefits

Table 3: Methods States Used to Identify Unauthorized Entities, 2000-2002

Source: GAO analysis of state survey responses.

Note: In total, states reported 288 unauthorized entities operating within their borders. We determined 

that, after accounting for duplicate identifications among states and DOL, 144 unique entities operated 

from 2000 through 2002. 

a

“Other” includes identification through an insurance company, contact with another state, and other 

methods.

In addition to consumer complaints, states relied on other sources to help 

identify the unauthorized entities, with NAIC being the second most 

frequent source of information. In December 2000, NAIC started to share 

information from state and federal investigators on these entities with all 

states and DOL. In about 71 percent of the 98 cases where states reported 

using the NAIC information to identify unauthorized entities, they also 

reported using information from one or more other sources—most often 

consumer complaints. In addition, DOL and insurance agents, either alone 

or in combination with other identification methods, helped states identify 

the entities. For example, DOL submitted quarterly reports to NAIC that 

identified all open civil investigations, the individuals being investigated, 

and the EBSA office conducting the investigations. NAIC shared this and 

other information from EBSA regional offices with state investigators 

throughout the country. 

DOL Identified Entities through 

Consumer and State Contacts

Federal investigators also often identified unauthorized entities through 

consumers’ complaints. According to EBSA officials, consumers call DOL’s 

customer service lines when they have complaints or questions and speak 

with benefits advisers about the employer-based health benefits plans in 

which they are enrolled. Regional directors in EBSA’s Atlanta, Dallas, and 

San Francisco offices said they open investigations when benefit advisers 

cannot resolve the complaints.

Identification method

Number of entities identified through the method 

alone or combined with other methods

Consumer complaints 164

NAIC information 98

DOL information 49

Insurance agent complaints 46

Othera 45

Employer complaints 28

Provider complaints 16
Page 17 GAO-04-312 Unauthorized Entities Selling Health Benefits

Federal investigators also relied on states to help identify unauthorized 

entities. An EBSA headquarters official told us that states usually alerted 

federal investigators to the entities operating within their regions. The 

directors of the three EBSA regional offices we interviewed said they had 

received referrals from state insurance department officials within their 

regions. 

State Insurance 

Departments Issued Cease 

and Desist Orders to Stop 

Unauthorized Entities, 

While DOL Took Action 

through the Federal Courts

States generally issued cease and desist orders to stop the activities of 

unauthorized entities. In contrast, DOL obtained injunctive relief through 

the federal courts by obtaining temporary restraining orders (TRO) or 

preliminary or permanent injunctions to stop unauthorized entities’ 

activities. DOL often relied on states to stop unauthorized entities through 

cease and desist orders while it conducted investigations, usually in 

multiple states, to obtain the evidence needed to stop these entities’ 

activities nationwide through the courts.

States Issued Cease and Desist 

Orders to Stop Activities of 

Unauthorized Entities

After identifying the unauthorized entities, the primary mechanism states 

used to stop them from continuing to operate was the issuance of cease 

and desist orders. Generally, these cease and desist orders told the 

operators of the entities, and affiliated parties, to stop marketing and 

selling health insurance in that state and in some cases explicitly 

established their continuing responsibility for the payment of claims and 

other obligations previously incurred. About 71 percent of the states (30 of 

42 states) that reported unauthorized entities operating within their 

borders from 2000 through 2002 issued at least one cease and desist order 

to stop an entity’s activities during that time. The number of cease and 

desist orders issued by each of the 30 states ranged from 1 to 11, averaging 

about 4 per state. Alabama, Illinois, and Texas, three states in which more 

than 25 unauthorized entities operated, reported issuing the most cease 

and desist orders. A cease and desist order applies to activities only within 

the state that issues the order. Therefore, in several cases, more than one 

state issued a cease and desist order against the same entity. For example, 

14 states reported that they each issued a cease and desist order to stop 

Employers Mutual’s operations within their borders. States issued a total of 

108 cease and desist orders that affected 41 of the 144 unique entities 

nationwide. About 58 percent of policyholders and nearly half of unpaid 

claims were associated with these 41 entities. 

State insurance departments generally had the authority to issue cease and 

desist orders. The insurance department officials we interviewed in 

Colorado, Florida, Georgia, and Texas said that the insurance 
Page 18 GAO-04-312 Unauthorized Entities Selling Health Benefits

commissioner or holder of an equivalent position could issue a cease and 

desist order when there was enough evidence to support the need. From 

2000 through 2002, these four states told us that they issued 25 cease and 

desist orders against about 58 percent of the entities they identified. 

According to these insurance department officials, the time needed to 

obtain a cease and desist order varied depending on such factors as the 

complexity of the entity to be stopped, a state’s resources for conducting 

investigations, and whether others had already conducted investigations. 

States typically shared information on the cease and desist orders they 

issued with NAIC. NAIC has developed a system to capture information on 

various state insurance regulatory actions, including cease and desist 

orders issued. States have access to the information reported through this 

system. 

States took other actions against the entities, sometimes in conjunction 

with issuing cease and desist orders. For example, in 48 instances states 

responding to our survey reported that they took actions against or sought 

relief from the agents who sold the entities’ products, including fining 

them, revoking their licenses, or ordering them to pay outstanding claims.16

States also reported that they took actions against the entity operators in 25 

instances and filed cases in court in 14 instances. 

DOL Stopped Unauthorized 

Entities’ Activities through 

Federal Courts

DOL can take enforcement action to stop an unauthorized entity’s activities 

through the federal courts—that is, by seeking injunctive relief and, in 

some cases, pursuing civil and criminal penalties. An injunction is an order 

of a court requiring one to do or refrain from doing specified acts. 

Injunctive relief sought by DOL against unauthorized entities includes 

TROs, which may be issued without notice to the affected party and are 

effective for up to 10 days; preliminary injunctions, which may be issued 

only with notice to the affected party and the opportunity for a hearing; and 

permanent injunctions, which are granted after a final determination of the 

16The four states whose officials we interviewed had laws that specified the consequences 

that unauthorized entities, or the agents and others who represented them, would face. For 

example, Florida enacted a statute to increase the penalty for certain agents and others 

representing unauthorized insurers from a second-degree misdemeanor to a third-degree 

felony, punishable by up to 5 years in prison and up to a $5,000 fine, effective October 1, 

2002. Fla. Stat. ch. 626.902(1)(a), (b) (2003) (as amended by 2002 Laws, ch. 2002-206). An 

existing Florida statute already required certain persons representing unauthorized insurers 

in the state to be held financially responsible for unpaid claims. Fla. Stat. ch. 626.901(2) 

(2003). Some agents purchase professional liability insurance—called errors and omissions 

coverage—that in some cases may pay outstanding medical claims.
Page 19 GAO-04-312 Unauthorized Entities Selling Health Benefits

facts. DOL’s enforcement actions apply to all states affected by the entity. 

To obtain a TRO, DOL must offer sufficient evidence to support its claim 

that an ERISA violation has occurred and that the government will likely 

prevail on the merits of the case. Documenting that a fiduciary breach took 

place can be difficult, time-consuming, and labor-intensive because DOL 

investigators often must work with poor or nonexistent records, 

uncooperative parties, and multiple trusts and third-party administrators.

As of December 2003, DOL had obtained TROs against three entities for 

which investigations were opened from 2000 through 2002. In two of these 

cases, DOL also obtained preliminary injunctions and in one case a 

permanent injunction. (See table 4.) Each of these actions affected people 

in at least 41 states. These three entities combined affected an estimated 

25,000 policyholders and accounted for about $39 million in unpaid claims.

Table 4: TROs and Injunctions for Three Unauthorized Entities, as of December 2003

Source: EBSA.

a

Generally, these TROs froze the unauthorized entity’s assets; removed the operators; prevented the 

operators from managing the entity; and appointed an independent fiduciary to manage the entity, 

account for assets, and pay claims.

b

Preliminary injunction extended appointment of fiduciary and prevented health care providers from 

taking action against participants to collect unpaid bills.

c

Preliminary injunction ordered termination of the entity and prevented health care providers from 

taking action against participants to collect unpaid bills or other actions. 

DOL and state officials told us that they coordinate their investigations and 

other efforts. For example, one EBSA regional director said his office has 

met with the states in the region and, when needed, provides information to 

help states obtain cease and desist orders to stop unauthorized entities. 

Furthermore, DOL officials said that they rely on the states to obtain cease 

Unauthorized entity 

Number of 

states 

affected TRO issueda

Preliminary 

injunction 

obtained

Permanent 

injunction 

obtained Other results

Employers Mutual 51 December 

2001

February 2002b September 

2003

In September 2003, a federal court 

ordered the principals to pay about 

$7.3 million

OTR Truckers Health and 

Welfare Fund 

44 June 2002 None None In September 2002, one defendant 

agreed to pay an amount that was less 

than 1 percent of the unpaid claims

Service and Business 

Workers of America Local 

125 Benefit Fund

41 October 2002 October 2002c None None
Page 20 GAO-04-312 Unauthorized Entities Selling Health Benefits

and desist orders to stop these entities’ activities in individual states while 

conducting the federal investigations. For example, DOL and states 

coordinated and cooperated extensively during the investigation of 

Employers Mutual and provided mutual support in obtaining cease and 

desist orders and the TRO. Several states issued cease and desist orders 

against this entity before DOL obtained the TRO. In addition, DOL officials 

said DOL does not take enforcement action in some cases where (1) states 

have successfully issued cease and desist orders to protect consumers 

because no more action is needed to prevent additional harm, (2) the entity 

was expected to pay claims, or (3) the entity ceased operations. 

From 2000 through 2002, EBSA opened investigations of 69 entities.17 These 

investigations involved 13 entities in 2000, 31 in 2001, and 25 in 2002.18

Overall, EBSA reported 67 civil and 17 criminal investigations opened from 

2000 through 2002 involving the 69 entities. Civil investigations of these 

entities focused on ERISA violations, particularly breaches of ERISA’s 

fiduciary requirements,19 while criminal investigations focused on such 

crimes as theft and embezzlement. In some cases, unauthorized entities can 

face simultaneous civil and criminal investigations. As of August 2003, 

EBSA was continuing to investigate 51 of these entities. As a result, further 

federal actions remain possible. For example, in addition to the three 

investigations that had yielded TROs or injunctions, EBSA had referred 

four other case investigations to the DOL Solicitor’s Office for potential 

enforcement action and obtained subpoenas in five cases.

States and DOL Alerted the 

Public and Used Other 

Methods to Help Prevent 

Unauthorized Entities from 

Continuing to Operate

To help prevent unauthorized entities from continuing to operate, officials 

in the insurance departments we interviewed in four states—Colorado, 

Florida, Georgia, and Texas—took various actions to alert the public and to 

inform insurance agents about these entities. NAIC developed model 

consumer and agent alerts to help states increase public awareness. DOL 

primarily targeted its prevention efforts to employer groups and small 

employers. The states and DOL emphasized the need for consumers and 

17The states also identified 27 of these 69 entities. 

18Based on the percentage of total investigative staff days spent on unauthorized entities, 

EBSA estimated that its field office costs for these investigations totaled about $4.2 million 

for fiscal years 2000, 2001, and 2002 and the first 10 months of fiscal year 2003. 

19For example, a fiduciary’s failure to operate the plan prudently and for the exclusive 

benefit of the plan participants would be a fiduciary violation.
Page 21 GAO-04-312 Unauthorized Entities Selling Health Benefits

employers to check the legitimacy of health insurers before purchasing 

coverage, thus helping to prevent unauthorized entities from continuing to 

operate. 

States Alerted Consumers and 

Agents and Benefited from NAIC 

Efforts

Insurance department officials we interviewed in four states took various 

actions to prevent unauthorized entities from continuing to operate. Each 

of these states issued news releases to alert the public about these entities 

in general and to publicize the enforcement actions they took against 

specific entities. To help states increase public awareness, NAIC developed 

a model consumer alert in the fall of 2001, which it distributed to all the 

states and has available on its Web site. (See app. IV.) The four states’ 

insurance departments also maintained Web sites that allow the public to 

search for those companies authorized to conduct insurance business 

within their borders. These states have also taken other actions to increase 

public awareness. For example, in April 2002, Florida released a public 

service announcement to television news markets throughout the state to 

warn about these entities. In addition, in the spring of 2003, Florida placed 

billboards throughout the state to warn the public through its “Verify 

Before You Buy” campaign. (See fig. 3.) 
Page 22 GAO-04-312 Unauthorized Entities Selling Health Benefits

Figure 3: Florida’s Public Awareness Campaign against Unauthorized Entities

In addition to increasing public awareness, the four state insurance 

departments alerted insurance agents about unauthorized entities. Using 

bulletins, newsletters, and other methods, these states warned agents 

about these entities, the implications associated with selling their products, 

and the need to verify the legitimacy of all entities. Georgia, for example, 

sent a warning to insurance agents in May 2002, which highlighted the 

characteristics of these entities, reminded agents that they could lose their 

licenses and be held liable for paying claims when the entities do not pay, 

and noted that the state insurance department Web site contained a list of 

all licensed entities. NAIC also developed a model agent alert to help agents 

identify these entities. A national association representing agents and 

brokers and many state insurance departments distributed this alert. The 

Web sites for the four states’ insurance departments contained information 

on the enforcement actions they took against agents. The Texas insurance 

department’s Web site, for example, provided the disciplinary actions that 

the state took as of August 2003 against individuals who acted as agents for 

unauthorized insurers. These agents were fined, ordered to make 

Source: Florida Department of Financial Services.
Page 23 GAO-04-312 Unauthorized Entities Selling Health Benefits

restitution, lost their licenses, or faced a combination of some or all of 

these actions. 

DOL Alerted Employer Groups 

and Provided Guidance and 

Assistance to States and Others

DOL primarily focused its efforts to prevent unauthorized entities from 

continuing to operate on employer groups, small employers, and the states. 

To help increase public awareness about these entities, on August 6, 2002, 

the Secretary of Labor notified over 70 business leaders and associations, 

including the U.S. Chamber of Commerce and the National Federation of 

Independent Business, about insurance tips that the department had 

developed and asked them to distribute the tips to small employers. 

Consistent with the advice states provided, among other things, the tips 

advised small employers to verify with a state insurance department 

whether any unfamiliar companies or agents were licensed to sell health 

benefits coverage. (See app. V.) Also, the three EBSA regional offices we 

reviewed had initiated various activities within the states in their regions. 

For example, EBSA’s Atlanta regional office sponsored conferences that 

representatives from 10 states and NAIC attended. Federal and state 

representatives discussed ERISA-related issues and their investigations at 

these conferences. Furthermore, since 2000, DOL initiated several 

technical assistance efforts to help states and others better understand 

ERISA-related issues. These efforts are intended to help prevent 

unauthorized entities from avoiding state regulation.20

Agency and Other 

External Comments

We provided a draft of this report to DOL, NAIC, and the four state 

insurance departments (Colorado, Florida, Georgia, and Texas) whose 

officials we interviewed. DOL, NAIC, Florida, and Texas provided written 

comments on the draft. Colorado and Georgia did not provide comments 

on the draft. 

20For example, DOL updated and rereleased its publication, Multiple Employer Welfare 

Arrangements Under the Employee Retirement Income Security Act (ERISA): A Guide to 

Federal and State Regulation (Washington, D.C.: 2003), which is intended to facilitate state 

regulatory and enforcement efforts regarding MEWAs as well as federal and state 

coordination. DOL distributed the publication to states and provided copies to others who 

made requests through DOL’s toll-free hotline. Also, from January 2000 through October 15, 

2003, DOL issued 13 advisory opinion and information letters regarding ERISA preemption 

and state insurance regulation of MEWAs to assist state regulators and prosecutors in 

enforcing state insurance laws against unauthorized entities. DOL has issued over 100 

letters on MEWAs or similar types of arrangements since ERISA was enacted in 1974.
Page 24 GAO-04-312 Unauthorized Entities Selling Health Benefits

DOL identified initiatives it has taken to improve coordination with states 

and law enforcement agencies and highlighted its criminal enforcement 

actions. We modified the report to include additional examples of this 

coordination, such as the Atlanta EBSA regional office’s meetings with 

states and coordination on investigation and enforcement actions. We 

recognize other activities are underway, such as making available 

electronic information that MEWAs are required to report to EBSA and 

sharing information with law enforcement agencies, but it was not the 

purpose of this report to identify the full range of DOL activities related to 

MEWAs and coordination with states on employer benefit and insurance 

issues. Although DOL also provided additional information on its criminal 

enforcement actions, we did not include these data in the report because 

these enforcement actions did not all relate to the investigations of the 69 

entities DOL opened from 2000 through 2002 that were the focus of our 

analysis. DOL’s comments are reprinted in appendix VI.

NAIC’s written comments provided additional information on efforts it has 

taken to increase awareness of unauthorized insurance and acknowledged 

the difficulties associated with determining the number of unique 

unauthorized entities. NAIC noted that it began a national media campaign 

on unauthorized insurance that will run from January through June 2004 

and, as part of the campaign, it developed a new brochure for consumers 

entitled “Make Sure Before You Insure.” In addition, NAIC is updating its 

ERISA Handbook, which contains basic information about ERISA and its 

interaction with state law, to highlight different types of unauthorized 

entities and to provide guidance to state regulators on recognizing and 

shutting down these entities. Because NAIC recently initiated its media 

campaign and its scope was continuing to develop at the time we 

completed our work, we did not incorporate this information in the body of 

the report. In addition to the report’s description of consumer and agent 

alerts that NAIC had distributed, NAIC also noted that in June 2003 it 

distributed a model regulatory alert to all its members that emphasized the 

need for third-party administrators and others to ensure that they do not 

become unwitting supporters of these entities. NAIC also suggested that 

the report include a more comprehensive list of state insurance regulation 

and laws. While the draft report included key functions that state insurance 

departments perform in regulating health insurance, it was beyond the 

scope of this report to comprehensively address the extent and variety of 

state insurance requirements affecting health insurance. We did, however, 

add a reference in the final report to consumer protection laws that states 

are responsible for enforcing. Finally, NAIC commented that many entities 

may be operating under multiple names, which makes it difficult to 
Page 25 GAO-04-312 Unauthorized Entities Selling Health Benefits

precisely count the number of such entities. As discussed in the draft 

report, our estimates of the number of unique unauthorized entities 

attempted to account for this complexity by consolidating information 

from multiple states or DOL where there was information to link entities. 

We added additional information to the report’s methodology to highlight 

the steps we took to determine the number of these entities. 

Written comments from the Florida Department of Financial Services 

noted that there has been cooperation among the federal and state 

governments in addressing the problems associated with unauthorized 

entities, stating that no state or federal agency effort could succeed without 

regulators sharing information. In addition, Florida stressed how 

unauthorized entities rely on associated entities and persons to succeed 

and proliferate. For example, unauthorized entities used licensed and 

unlicensed reinsurers, third-party administrators, and agents to help 

defraud the public. Florida indicated that these structures made it difficult 

for states to detect the entities.

In its written comments, the Texas Department of Insurance suggested that 

we further elaborate on legal actions states have taken against 

unauthorized entities. In addition to issuing cease and desist orders, Texas 

stressed that states have (1) used restraining orders and injunctions, 

similar to DOL, to stop unauthorized entities, (2) assessed penalties against 

operators of these entities, and (3) taken actions against agents who sold 

unauthorized products. For example, in 2002, Texas placed a major entity 

into receivership, seized its assets, and initiated actions to recover more 

assets. In 2003, Texas finalized penalties against the operators of 

Employers Mutual. In addition, Texas explained that states have devoted 

significant resources to penalizing agents who have accepted commissions 

from unauthorized entities. In addition to actions we reported, the Texas 

Department of Insurance indicated that it has taken other steps to increase 

consumer awareness of these entities. For example, Texas said that it had 

issued a bulletin to all health insurance companies and claims 

administrators warning about unauthorized entities and provided public 

information to various news organizations, assisting them with their 

reporting on these entities. Texas also highlighted the criminal 

investigations the state has conducted and wrote that its insurance fraud 

division has referred cases to DOL and others. While the report includes 

illustrative examples of key legal actions, including actions against agents 

involved with unauthorized entities, and public awareness efforts taken by 

the states, we primarily focused on the more common actions taken by 

states as reported in response to our survey. 
Page 26 GAO-04-312 Unauthorized Entities Selling Health Benefits

DOL and the other reviewers also provided technical comments that we 

incorporated as appropriate.

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

date. We will then send copies to the Secretary of Labor, appropriate 

congressional committees, and other interested parties. We will also make 

copies available to others upon request. In addition, this report will be 

available at no charge on GAO’s Web site at http://www.gao.gov.

Please call me at (202) 512-7118 or John E. Dicken at (202) 512-7043 if you 

have additional questions. Joseph A. Petko, Matthew L. Puglisi, Rashmi 

Agarwal, George Bogart, and Paul Desaulniers were major contributors to 

this report.

Kathryn G. Allen

Director, Health Care—Medicaid

and Private Health Insurance Issues
Page 27 GAO-04-312 Unauthorized Entities Selling Health Benefits

Appendix I

Methodology for Identifying Unauthorized Apendxies

Entities ApendxiI

To identify the number of unique unauthorized entities nationwide from 

2000 through 2002 and to obtain information, such as the number of 

employers covered and unpaid claims, pertaining to each of these entities, 

we obtained and analyzed data from state and federal sources. We obtained 

state-level data through a survey we sent to officials located in insurance 

departments or equivalent offices in all 50 states and the District of 

Columbia and federal-level data from the Department of Labor’s (DOL) 

Employee Benefits Security Administration (EBSA). We also obtained 

information from the states on a related type of problematic arrangement—

discount plans that sometimes are misrepresented as health insurance. 

Survey of State 

Insurance Departments

To obtain data on unauthorized entities and other types of problematic 

plans in each state, we e-mailed a survey to individuals identified by the 

National Association of Insurance Commissioners (NAIC) as each state 

insurance department’s multiple employer welfare arrangement (MEWA) 

contact. A NAIC official indicated that these individuals would be the most 

knowledgeable in the states on the issue of unauthorized entities. All the 

states responded to our survey. 

Part I of the survey asked for selected data elements on the entities. We 

asked the states to use the following definition: “an unauthorized health 

benefits plan is defined as an entity that sold health benefits, collected 

premiums, and did not pay or was likely not to pay some or all covered 

claims. These entities are also known as health insurance scams.” First, we 

asked officials in each state to tell us how many of these entities covering 

individuals in the state they identified during each of 3 calendar years—

2000, 2001, and 2002. For each entity the state identified during the 3-year 

period, we requested information such as the (1) number of employers 

covered, (2) number of policyholders covered, (3) total amount of unpaid 

claims in the state, and (4) amount of unpaid claims recovered. We also 

obtained information on the type of the entity, how the state identified the 

entity, and what actions the state took regarding the entity. Part II of the 

survey collected information on other types of problematic plans—

including discount plans—and whether these other types of plans targeted 

small employers.

To determine the number of entities states identified in each calendar year, 

we relied on states to determine at what stage of their investigative process 

they would deem an entity to be unauthorized. Therefore, states could have 

reported both those entities they determined were unauthorized after 

completing an investigation and against which they took formal action and 
Appendix I

Methodology for Identifying Unauthorized 

Entities

Page 28 GAO-04-312 Unauthorized Entities Selling Health Benefits

those entities still being investigated and for which no formal action had 

been taken.

Federal Data on 

Unauthorized Entity 

Investigations 

To obtain federal-level data on unauthorized entities, we asked EBSA to 

provide data from the civil and criminal case investigations it opened from 

2000 through 2002 involving these entities. To identify which of its civil and 

criminal investigations of employer-based health benefits plans fell within 

the scope of our research, we asked EBSA to use a similar definition of 

unauthorized entities as included on our state survey. For each of the civil 

and criminal investigations of these entities EBSA opened during the 3-year 

period, we asked EBSA to provide the same type of data about 

unauthorized entities that we requested on the survey we sent to all the 

states.1

 In addition, we asked EBSA to identify all the states that were 

affected by each entity it was investigating—information that states could 

not easily provide. Furthermore, where EBSA was conducting both civil 

and criminal investigations of an entity, we asked it to report that entity 

only one time.

Because EBSA and states provided the names of entities that were still 

under investigation at the time of our survey, we agreed not to report the 

names of any of these entities unless the investigation had already been 

made public. Therefore, we report only the names of three unauthorized 

entities for which DOL had issued media releases when it obtained 

temporary restraining orders (TRO) or injunctions to stop their activities.

Consolidating State 

and Federal Data on 

Unauthorized Entities

To determine the number of unauthorized entities that operated from 2000 

through 2002, we analyzed information on the entities identified by the 

states and investigated by EBSA. Specifically, we analyzed the names of 288 

entities that states identified and 69 entities that EBSA investigated.2

 In 

many cases, two or more states or EBSA reported the name of the same 

entity. We compared the entity names and, using several data sources—for 

1

EBSA provided the data that it collected on the number of participants in these entities, 

whereas states reported on the number of policyholders. We consolidated the data reported 

by DOL and states and refer to these data as policyholders.

2

Nine of the 51 states responding to our survey did not identify any unauthorized entities 

from 2000 through 2002. EBSA conducted three separate investigations that we determined 

related to different components of one large entity identified by several states.
Appendix I

Methodology for Identifying Unauthorized 

Entities

Page 29 GAO-04-312 Unauthorized Entities Selling Health Benefits

example, copies of the cease and desist orders states provided to NAIC, 

interviews of state officials, survey responses that included multiple names 

for the same entity, and media reports—and our judgment regarding similar 

names, consolidated them into a count of unique entities. Based on this 

analysis, we consolidated the 357 entity names identified or investigated by 

the states and EBSA to 144 unique unauthorized entities nationwide, 

including 77 entities identified only by the states; 40 entities investigated 

only by EBSA; and 27 entities identified by one or more states and also 

investigated by EBSA.

To identify the total number of employers covered, policyholders covered, 

amount of unpaid claims, and recoveries on the claims for the 144 unique 

unauthorized entities identified nationwide from 2000 through 2002, we 

consolidated the data provided by the states and EBSA. To develop 

unduplicated counts for each of the data elements, we developed a data 

protocol. We matched the names of the states that reported each of these 

27 entities to the names of the states in which EBSA reported that these 

entities operated. Because the EBSA data generally were more consistent 

and comprehensive—particularly since not all states reported on some of 

the multistate entities reported by EBSA—we used the EBSA-reported data 

rather than the state-reported data for each element. However, if a state 

reported an entity to us and EBSA did not report that it was aware that the 

entity operated in that state, we included that state’s data. Also, where 

EBSA data were missing for a data element, we included state-reported 

data in our totals when provided.3

To identify the year that each of the 144 unauthorized entities was 

identified, we used the earliest year either EBSA or a state reported for 

when each of the 144 entities was identified. To determine how many 

entities operated in each state, we combined the EBSA data and the data 

reported by the states. Because some of the entities EBSA investigated 

were nationwide or were in multiple states, the number of entities we 

report as operating in each state is greater than the number of entities 

states directly identified on our survey. For example, while nine states 

reported to us that they did not identify any entities from 2000 through 

3

For example, for one of the 27 entities that both EBSA and states identified, EBSA reported 

that it operated in 13 states, 7 of which also reported this entity to us. In addition, 1 other 

state, not identified by EBSA, reported this entity to us and we included this state’s data. 

Also, because EBSA did not provide any data on the number of employers and policyholders 

for this entity, we used the data reported by the 8 states. 
Appendix I

Methodology for Identifying Unauthorized 

Entities

Page 30 GAO-04-312 Unauthorized Entities Selling Health Benefits

2002, EBSA indicated that several of the entities it was investigating 

operated in these states. 

The data we report for each of the elements—the number of employers 

covered, policyholders covered, amount of unpaid claims, and recoveries 

on the claims—may be underestimated. EBSA and some states reported 

that some of the data were unknown for each of these elements. In 

addition, while the states provided most of the requested data, they did not 

provide some of the data for some entities. Furthermore, in several cases, 

EBSA and the states provided a range in response to our request for data. 

When they did this, we used the lowest number in the range. For example, 

whereas EBSA reported unpaid claims for one of these entities from 

$13 million to $20 million, we reported unpaid claims as $13 million. In 

some cases, EBSA and the states reported that the data they provided were 

estimated. 
Page 31 GAO-04-312 Unauthorized Entities Selling Health Benefits

Appendix II

Employers Mutual, LLC and Federal and State 

Actions ApendxiI

Employers Mutual, LLC was one of the most widespread unauthorized 

entities operating in recent years, covering a significant number of 

employers and policyholders and accounting for millions of dollars in 

unpaid claims during a 10-month period in 2001. According to court 

documents and DOL, four of the entity’s principals were associated with 

the collection of approximately $16 million in premiums from over 22,000 

people and with the entity’s nonpayment of more than $24 million in 

medical claims. DOL and states took actions to terminate Employers 

Mutual’s operations and an independent fiduciary was appointed by a U.S. 

district court in December 2001 to administer the entity and, if necessary, 

implement its orderly termination. In September 2003, the court ordered 

the principals to pay $7.3 million for their breach of fiduciary 

responsibilities.

Employers Mutual 

Created Associations, 

Hired Firms, and Paid 

Companies Established 

by Its Principals

Employers Mutual was established in Nevada in July 2000 and began 

operations in January 2001.1

 The name Employers Mutual is similar to 

Employers Mutual Casualty Company, a long-established Iowa-based 

insurance company marketed throughout the United States, which had no 

affiliation with Employers Mutual. By February 2001, Employers Mutual 

had established 16 associations covering a wide array of industries and 

professions, such as the American Coalition of Consumers and the National 

Association of Transportation Workers, that created employee health 

benefit plans for association members to join.2

 Employers Mutual was 

responsible for managing the plans offered through these 16 associations, 

which claimed to be fully funded and were created to cover certain medical 

expenses of enrolled participants. Employers Mutual ultimately claimed 

that its association structure did not require it to register or to seek 

licensure from states, and that it also precluded the entity from DOL 

1

Prior to Employers Mutual’s creation, one of its principals was associated with other 

unauthorized entities. 

2

The other associations were the American Association of Agriculture, the Association of 

Automotive Dealers and Mechanics, the Association of Barristers and Legal Aids, the 

Communications Trade Workers Association, the Construction Trade Workers Association, 

the Association of Cosmetologists, the Culinary and Food Services Workers Association, the 

Association of Educators, the Association of Health Care Workers, the National Alliance of 

Hospitality and Innkeepers, the Association of Manufacturers and Wholesalers, the 

Association of Real Estate Agents, the Association of Retail Sellers, and the National 

Coalition of Independent Truckers. Employers Mutual also sold coverage through existing 

associations such as the National Writers Union, an association representing approximately 

7,000 freelance writers.
Appendix II

Employers Mutual, LLC and Federal and 

State Actions

Page 32 GAO-04-312 Unauthorized Entities Selling Health Benefits

regulation under the Employee Retirement Income Security Act of 1974 

(ERISA).

Employers Mutual’s principals contracted with legitimate firms to market 

the plans and process the claims, and with their own companies 

purportedly to provide health care and investment services. Licensed 

insurance agents marketed the 16 plans nationwide. Employers Mutual 

hired a firm to process the claims from members of its associations’ 

employee health benefits plans and to handle other administrative tasks 

from January 2001 until the firm terminated its services in October 2001 for, 

among other reasons, nonpayment of a bill. According to court filings, 

Employers Mutual also contracted with four firms, purportedly health care 

provider networks and investment firms, established and owned by 

Employers Mutual principals. A district court later cited evidence that the 

provider networks were paid despite the fact that one of them had no 

employees and provided no services to plan members.3

 Furthermore, the 

district court noted that no contracts between the investment firms and 

Employers Mutual were presented into evidence and no information was 

introduced concerning the services these firms performed for this entity. 

Employers Mutual 

Collected About 

$16 Million in 

Premiums but Did Not 

Pay over $24 Million in 

Medical Claims

From the time Employers Mutual commenced operations in January 2001 

through October 2001, more than 22,000 policyholders in all 50 states and 

the District of Columbia paid approximately $16.1 million in premiums. 

According to court documents and the independent fiduciary appointed to 

administer Employers Mutual, one of this entity’s principals allegedly set 

the premiums for the 16 plans after he calculated the average of sample 

rates posted by other insurance companies on the Internet and reduced 

them to ensure that Employers Mutual would offer competitive prices. 

DOL has determined that of the $16.1 million collected in premiums, 

Employers Mutual paid about $4.8 million in medical claims. According to 

DOL, the principals made payments for other purposes besides the 

payment of claims, including about $2.1 million in marketing, about 

$0.6 million in claims processing, and about $1.9 million to themselves or 

their companies. Approximately $1.9 million in Employers Mutual’s assets 

had been recovered by the independent fiduciary since his appointment in 

3

Chao v. Graf, No. 01-0698, 2002 WL 1311122 (D. Nev. Feb. 1, 2002) (order granting 

preliminary injunction).
Appendix II

Employers Mutual, LLC and Federal and 

State Actions

Page 33 GAO-04-312 Unauthorized Entities Selling Health Benefits

December 2001 through February 2004.4 The independent fiduciary and 

DOL reported that they were prevented from fully accounting for the 

money collected and paid out by Employers Mutual, its principals, and 

contracted companies due to the scope of its operations and the disarray 

and incompleteness of the records they were able to recover. 

The independent fiduciary reported that insurance claims totaling over 

$24 million remain unpaid as of February 2004. He paid $134,000 to a 

prescription service provider immediately after his appointment, and no 

additional medical claims have been paid. In March 2003, the fiduciary filed 

suit in federal court to recover the unpaid claims from the insurance agents 

who marketed Employers Mutual plans. 

States, Then DOL, 

Acted against 

Employers Mutual

When Nevada insurance regulators became aware of Employers Mutual, 

they found that it was transacting insurance business without a certificate 

of authority as required by Nevada law.5

 Nevada therefore issued a cease 

and desist order against Employers Mutual in June 2001.6 In August 2001, 

Florida insurance regulators found that Employers Mutual was engaged in 

the business of insurance, including operating as a MEWA, without a 

certificate of authority7

 as required by Florida law.8 Florida ordered 

Employers Mutual to stop selling insurance within Florida’s borders 

pending an appeal by the entity, although at the time the state did not find 

evidence of delays or failures to pay medical claims. Other states, including 

Alabama, Colorado, Oklahoma, Texas, and Washington, filed cease and 

desist orders against Employers Mutual by December 2001.

4

The independent fiduciary has spent about $1.6 million of the $1.9 million seized, primarily 

for the administrative cost of processing approximately 100,000 claims that had not been 

adjudicated and for legal and other costs, with approximately $0.3 million remaining as of 

February 2004. The U.S. District Court in Nevada ordered the independent fiduciary to 

process all unadjudicated claims in its February 1, 2002 order granting a preliminary 

injunction.

5

Nev. Rev. Stat. §§ 685B.030, 685B.035 (2003).

6

Cease and Desist Order: Employers Mutual, L.L.C., Nevada Department of Business and 

Industry Division of Insurance case no. 01.658 (June 14, 2001).

7

Immediate Final Order in the matter of Employers Mutual, L.L.C., Florida Department of 

Insurance case no. 42659-01-CO (Aug. 14, 2001).

8

Fla. Stat. ch. 624.401, 624.437 (2003).
Appendix II

Employers Mutual, LLC and Federal and 

State Actions

Page 34 GAO-04-312 Unauthorized Entities Selling Health Benefits

On November 21, 2001, the Nevada Commissioner of Insurance signed an 

Order of Seizure and Supervision seizing and taking possession of 

Employers Mutual funds held in Nevada bank accounts and granting the 

Nevada Commissioner supervision over the assets of Employers Mutual in 

Nevada.9

 Nevada also reported that it engaged in a discussion involving 26 

state insurance departments that led to an agreement with Employers 

Mutual to facilitate payments of claims nationwide. On December 13, 2001, 

the U.S. District Court for the District of Nevada granted a TRO against 

Employers Mutual and its four principals,10 and on December 20, 2001, the 

Nevada Commissioner surrendered all of Employers Mutual’s assets that 

she had recently seized to the independent fiduciary. In the TRO, DOL 

alleged that the principals

• used plan assets to benefit themselves;

• failed to discharge their obligations as fiduciaries with the loyalty, care, 

skill, and prudence required by ERISA; and

• paid excessive compensation for services provided to Employers 

Mutual.

The TRO temporarily froze the assets of all the principals involved in this 

entity and prohibited them from conducting further activities related to the 

business. It also appointed an independent fiduciary to administer 

Employers Mutual and associated entities and, if necessary, implement 

their orderly termination. 

After a subsequent hearing, the U.S. District Court for the District of 

Nevada issued a preliminary injunction on February 1, 2002, leading to the 

interim shutdown of Employers Mutual nationwide.11 On April 30, 2002, the 

same court issued a quasi-bankruptcy order establishing a procedure for 

the orderly dissolution of the plans and payment of claims with assets

9

Employers Mutual, L.L.C., Nevada Department of Business and Industry Division of 

Insurance case no. 01.658 (Nov. 21, 2001).

10Chao v. Graf, No. 01-0698, (D. Nev. Dec. 13, 2001) (order granting temporary restraining 

order).

11Chao v. Graf, No. 01-0698, 2002 WL 1311122 (D. Nev. Feb. 1, 2002) (order granting 

preliminary injunction).
Appendix II

Employers Mutual, LLC and Federal and 

State Actions

Page 35 GAO-04-312 Unauthorized Entities Selling Health Benefits

recovered by DOL and the independent fiduciary.12 On September 10, 2003, 

the court issued a default judgment granting a permanent injunction 

against the principals and ordered them to pay $7.3 million in losses 

suffered as a result of their breach of fiduciary obligations to 

beneficiaries.13

In March 2003, the independent fiduciary filed suit in Nevada on behalf of 

the participants against Employers Mutual’s principals alleging, among 

other things, that they participated in racketeering, fraud, and conspiracy. 

The independent fiduciary also sued the insurance agents, who either 

marketed or sold the plans, for malpractice as part of that action. The 

fiduciary has requested damages and relief for unpaid or unreimbursed 

claims. In October 2003, the court ordered the suit to mediation in February 

2004. The fiduciary and some agents, before the beginning of mediation, 

reached a proposed settlement that was before the court for approval as of 

February 2004.

Figure 4 contains a chronology of events from Employers Mutual’s 

establishment to state and federal actions to shut it down. 

12Chao v. Graf, No. 01-0698 (D. Nev. Apr. 30, 2002) (order establishing a quasi-bankruptcy).

13Chao v. Graf, No. 01-0698 (D. Nev. Sept. 10, 2003) (order granting permanent injunction).
Appendix II

Employers Mutual, LLC and Federal and 

State Actions

Page 36 GAO-04-312 Unauthorized Entities Selling Health Benefits

Figure 4: Key Events of Employers Mutual from Establishment to Closure 

January - October 2001

Employers Mutual collects 

approximately $16 million in 

premiums from over 22,000 

policyholders.

January - October 2001

Employers Mutual pays 

principals’ investment firms.

May 2001

Principals establish two provider 

networks.

June 14, 2001

Nevada issues cease 

and desist order against 

Employers Mutual.

August - December 2001

Alabama, Colorado, Florida, 

Oklahoma, Texas, and 

Washington take action against 

Employers Mutual.

October 3, 2001

Claims processing firm 

terminates contract with 

Employers Mutual.

November 21, 2001

Nevada seizes Employers 

Mutual's assets held in Nevada 

banks.

December 13, 2001

U.S. District Court for the District 

of Nevadaa

 grants a temporary 

restraining order against 

Employers Mutual and appoints 

an independent fiduciary.

December 20, 2001

Nevada surrenders to 

independent fiduciary the 

Employers Mutual assets 

it seized.

July 28, 2000 

Employers Mutual is 

established in Nevada.

December 27, 2000 

Principals begin to establish 

associations that had trust 

agreements with Employers 

Mutual.

March 3, 2003 

Independent fiduciary files civil 

complaint against Employers 

Mutual’s principals and 

insurance agents and brokers 

that marketed the 16 plans.

September 10, 2003 

U.S. District Court issues a 

default judgment granting a 

permanent injuction against 

Employers Mutual. Principals 

ordered to pay $7.3 million.

October 20, 2003 

U.S. District Court orders the 

civil suit to mediation in 

February 2004.

 2000 2001 2002 2003

Source: U.S. District Court, independent fiduciary, and seven states.

January 2002 

U.S. District Court holds 

hearing.

February 1, 2002

U.S. District Court issues 

preliminary injunction.

April 30, 2002

U.S. District Court issues 

quasi-bankruptcy order.
Appendix II

Employers Mutual, LLC and Federal and 

State Actions

Page 37 GAO-04-312 Unauthorized Entities Selling Health Benefits

Note: Includes information from the preliminary injunction, the permanent injunction, and 

cease and desist orders from, Alabama, Colorado, Florida, Nevada, Oklahoma, Texas, and 

Washington.

a

All subsequent references to the U.S. District Court in this figure refer to the U.S. District 

Court for the District of Nevada.
Page 38 GAO-04-312 Unauthorized Entities Selling Health Benefits

Appendix III

Discount Plans Have Been Marketed as Health 

Insurance in Some States ApendxiI

Plans that provide reduced rates for selected medical services rather than 

comprehensive health insurance benefits are known as discount plans. 

These plans are not health insurance as they do not assume any financial 

risk. Discount plans were marketed in most states. However, in some 

states, discount plans were inappropriately marketed by using health 

insurance terms and these misrepresented plans were targeted to small 

employers.

Overview of Discount 

Plans

Discount plans charge consumers a monthly membership fee in exchange 

for a list of health care professionals and others who will provide their 

services at a discounted rate. Because they do not assume any financial 

risk or pay any health care claims, discount plans are not health insurance. 

Most often, these plans provide discounts for such services as physicians, 

dental care, vision care, or pharmacy. Some may also provide discounts for 

services provided by hospitals, ambulances, chiropractors, and other types 

of specialty medical care. The discounts offered and monthly fees vary by 

plan. For example, a consumer may pay $10 per month to a discount plan 

for access to lower cost dental services. A dentist participating in the 

discount plan may charge plan members 20 percent less than nonmembers. 

Therefore, if the fee is typically $60 for a dentist to perform certain 

procedures that help prevent disease—for example, removing plaque and 

tartar deposits from teeth—the plan member will pay a discounted fee of 

$48 to the dentist.

Most state insurance departments do not regulate discount plans because 

they are not considered to be health insurance. None of the insurance 

departments in the states that we reviewed—Colorado, Florida, Georgia, 

and Texas—regulated discount plans. Thus, according to a state official, 

while state insurance departments might be aware that discount plans 

operated within their borders, they would not necessarily be able to 

quantify the extent to which they exist. When consumers complain about 

discount plans in Colorado, for example, the insurance department refers 

the complaints to the Attorney General.1

1

To alert consumers to discount plans, the Colorado insurance department, along with the 

Colorado Attorney General, issued a joint publication highlighting purchasing tips and 

potential problems—Colorado Division of Insurance and the Colorado Attorney General, 

“Discount Health Plans, What Consumers Should Know About Discount Health Plans,” 

October 2002.
Appendix III

Discount Plans Have Been Marketed as 

Health Insurance in Some States

Page 39 GAO-04-312 Unauthorized Entities Selling Health Benefits

State officials indicated that discount plans are not problematic as long as 

companies market and advertise these plans accurately and consumers 

understand that these products are not health insurance. Advertisements 

for discount plans can be found on the Internet, through infomercials on 

television, on the radio, in local newspapers, on signs posted along 

roadways, in unsolicited “spam” e-mails or faxes, and in direct marketing 

and mailings. According to state officials, discount plans have positive and 

negative aspects. They said that discount plans can save some money for 

people who do not have health insurance and who know they will be using 

health care services. In addition, they said consumers can use these plans 

to augment health insurance policies providing only catastrophic coverage. 

However, they said that consumers needed to understand that using 

discount plans can result in higher out-of-pocket costs than typical health 

insurance. For example, getting a 20 percent discount on heart-bypass 

surgery at the average U.S. charge could still cost an individual about 

$40,000 out-of-pocket. Furthermore, it can be difficult for consumers to 

determine if providers are actually giving them a discount, as most 

providers do not list their charges.

Discount Plans 

Misrepresented in 

Some States

Discount plans were sold in most states. About 78 percent of the states 

responding to our survey (40 of 51 states) reported that discount plans 

were sold within their borders from 2000 through 2002. (See table 5.) Most 

states that reported discount plans were sold within their borders also 

reported that these plans were not marketed as health insurance. Most of 

the states that reported discount plans from 2000 through 2002 did not 

indicate any problems with how they were advertised.
Appendix III

Discount Plans Have Been Marketed as 

Health Insurance in Some States

Page 40 GAO-04-312 Unauthorized Entities Selling Health Benefits

Table 5: States’ Experience with Discount Plans, 2000-2002

Source: GAO analysis of data reported by states.

Fourteen states reported that discount plans were misrepresented as 

health insurance to some degree.2

 For example, the Texas insurance 

department reported that it reviewed discount plans’ advertising materials 

that consumers and insurance agents brought to its attention. According to 

a state insurance department official, one issue that repeatedly arose with 

the marketing materials that the state reviewed was that some discount 

plans were inappropriately advertised as “health plans,” as “health 

benefits,” or with some other phrase similar to insurance. Furthermore, 

this official said that many discount plans had been marketed in Texas. 

Connecticut officials, however, were aware of only one discount plan, an 

out-of-state entity, which inappropriately advertised in the state as a 

“medical plan” providing affordable health care to families and individuals. 

The state officials reported that they did not know whether any 

Connecticut residents had subscribed. Utah officials reported that 

insurance terms were inappropriately used—for example, all preexisting 

conditions were immediately accepted and everyone was accepted 

regardless of medical history. According to Utah officials, advertisements 

did not usually state that they were discount plans and not health 

insurance, but when they did, the print was small and was hard to read. 

States’ experience with discount plans

Number 

of states

Discount plans were sold

• Plans were not marketed as health insurance 17

• Plans were sometimes marketed as health insurance 14

• Plans were sold but states did not know if the plans were marketed as 

health insurance or states did not provide information 9

Subtotal 40

Discount plans were not sold 9

States either did not know if discount plans were sold or did not provide 

information

2

Total 51

2

The 14 states were Alabama, Arkansas, Connecticut, Indiana, Maine, Missouri, Nebraska, 

Oklahoma, South Carolina, Tennessee, Texas, Utah, Washington, and Wyoming.
Appendix III

Discount Plans Have Been Marketed as 

Health Insurance in Some States

Page 41 GAO-04-312 Unauthorized Entities Selling Health Benefits

As with unauthorized entities, small employers may be particularly 

vulnerable to discount plans that are misrepresented as insurance. Officials 

in 8 of the 14 states that reported discount plans were misrepresented as 

insurance also reported that the discount plans were marketed to small 

employers. These eight states were Maine, Nebraska, Oklahoma, 

Tennessee, Texas, Utah, Washington, and Wyoming. 
Page 42 GAO-04-312 Unauthorized Entities Selling Health Benefits

Appendix IV

Consumer Alert Developed by the National 

Association of Insurance Commissioners ApendxiIV

In the fall of 2001, NAIC developed a consumer alert to help prevent 

unauthorized entities from operating. This alert is intended to be a model 

states can use to help inform the public about these entities. NAIC 

distributed the consumer alert to all the states and also made it available on 

its Web site. The alert provides tips that consumers can follow to help 

protect themselves from the entities and sources to contact for additional 

information about these entities. (See fig. 5.)
Appendix IV

Consumer Alert Developed by the National 

Association of Insurance Commissioners

Page 43 GAO-04-312 Unauthorized Entities Selling Health Benefits

Figure 5: Consumer Alert from NAIC

Source: Reprinted with permission from NAIC. Further reprint or redistribution is strictly prohibited.
Page 44 GAO-04-312 Unauthorized Entities Selling Health Benefits

Appendix V

Department of Labor Memorandum and 

Insurance Tips for Small Employers ApendxiV

On August 6, 2002, the Secretary of Labor sent a memorandum to over 70 

business leaders and associations asking them to distribute insurance tips 

for small employers to follow when they purchased health insurance for 

their employees.1

 Because, according to the Secretary, “scam artists” were 

aggressively targeting small employers and their employees, the Secretary 

advised small employers to take extra precautions when obtaining health 

care coverage. The tips, entitled “How to Protect Your Employees When 

Purchasing Health Insurance,” informed small employers that, among other 

things, they should verify with a state insurance department whether any 

unfamiliar companies or agents were licensed to sell health benefits 

coverage. DOL has updated these tips and makes them available on its Web 

site. Figure 6 includes the current version of DOL’s tips. 

1

DOL sent the memorandum to such groups as the Independent Insurance Agents of 

America, National Association for the Self-Employed, National Federation of Independent 

Business, National Restaurant Association, Society of Professional Benefit Administrators, 

and the U.S. Chamber of Commerce. 
Appendix V

Department of Labor Memorandum and 

Insurance Tips for Small Employers

Page 45 GAO-04-312 Unauthorized Entities Selling Health Benefits

Figure 6: Insurance Tips for Small Employers

Source: DOL.
Page 46 GAO-04-312 Unauthorized Entities Selling Health Benefits

Appendix VI

Comments from the Department of Labor ApendxiVI
Appendix VI

Comments from the Department of Labor

Page 47 GAO-04-312 Unauthorized Entities Selling Health Benefits
Appendix VI

Comments from the Department of Labor

(290251) Page 48 GAO-04-312 Unauthorized Entities Selling Health Benefits
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