Testimony 

Before the Committee on Finance, U.S. 

Senate

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 9:30 a.m. EST 

Wednesday, March 3, 2004 PRIVATE HEALTH 

INSURANCE 

Unauthorized or Bogus 

Entities Have Exploited 

Employers and Individuals 

Seeking Affordable 

Coverage 

Statement of 

Kathryn G. Allen, Director 

Health Care—Medicaid and Private Health Insurance Issues 

Robert J. Cramer, Managing Director 

Office of Special Investigations 

GAO-04-512T 
www.gao.gov/cgi-bin/getrpt?GAO-04-512T.

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 or Robert J. Cramer 

at (202) 512-7455. 

Highlights of GAO-04-512T, a testimony 

before the Committee on Finance, U.S. 

Senate 

March 3, 2004

PRIVATE HEALTH INSURANCE 

Unauthorized or Bogus Entities Have 

Exploited Employers and Individuals 

Seeking Affordable Coverage 

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

benefits coverage from 2000 through 2002. Although every state was 

affected by at least 5 of these entities, these entities were most often 

identified in southern states. These unauthorized entities covered at least 

15,000 employers and more than 200,000 policyholders. The entities also 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. 

In most cases, the operators characterized their entities as one of several 

types to give the appearance of being exempt from state regulation, but 

states found that they actually were subject to state regulation. Other 

characteristics that were common among at least some of these entities 

included 

• adopting names that were familiar to consumers or similar to legitimate 

firms, 

• marketing their products through licensed agents and with other health 

care or administrative service companies, 

• setting premiums below market rates, 

• marketing to employers or individuals that were particularly likely to be 

seeking affordable insurance alternatives, and 

• paying initial claims while collecting additional premiums before ceasing 

claims payments. 

Employers Mutual adopted many of these characteristics as it collected 

approximately $16 million in premiums from over 22,000 people in 2001, 

leaving more than $24 million in medical claims unpaid. 

Both federal and state governments—individually and collaboratively—took 

action against these entities and sought to increase public awareness. For 

example, state insurance departments issued cease and desist orders against 

41 of the 144 entities, and DOL obtained court orders against three large 

entities from 2000 through 2002. States also took other actions against some 

entities’ operators and agents that received commissions for marketing these 

entities. Further state or federal actions remain possible as many 

investigations remain ongoing. 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. 

As health insurance premiums have 

risen at double-digit rates in recent 

years, employers and individuals 

who have sought to purchase more 

affordable coverage have fallen 

prey to certain entities that may 

offer attractively priced premiums 

but do not fulfill the expectations 

of those buying health insurance. 

These unauthorized entities—also 

known as bogus entities or 

scams—may not meet the financial 

and benefit requirements typically 

associated with health insurance 

products or other arrangements 

that are authorized, licensed, and 

regulated by the states. 

This testimony is based on GAO’s 

recent report Private Health 

Insurance: Employers and 

Individuals Are Vulnerable to 

Unauthorized or Bogus Entities 

Selling Coverage, GAO-04-312

(Feb. 27, 2004). In this testimony, 

GAO was asked to identify the 

number of entities that operated 

from 2000 through 2002 and the 

number of employers and 

policyholders affected, approaches 

and characteristics of these 

entities’ operations, and the actions 

federal and state governments took 

against these entities. GAO 

analyzed information obtained 

from the Department of Labor 

(DOL) and from a survey of 

insurance departments in the 

states; interviewed officials at DOL 

and at insurance departments in 

Colorado, Florida, Georgia, and 

Texas; and examined the 

operations of one of the largest 

entities—Employers Mutual, LLC. 
Page 1 GAO-04-512T 

Mr. Chairman and Members of the Committee: 

We are pleased to be here today as you address how employers and 

individuals have been exploited by unauthorized or bogus entities selling 

health benefits. As private health insurance premiums have risen at 

double-digit rates in recent years, employers and individuals who have 

sought to purchase more affordable coverage have fallen prey to certain 

entities that may offer attractively priced premiums but do not fulfill the 

expectations of those buying health insurance coverage. These 

unauthorized entities—also sometimes referred to as bogus entities or 

scams—may price their products below market rates to attract purchasers 

but may not meet the financial and benefit requirements typically 

associated with health insurance products or other arrangements that are 

authorized, licensed, and regulated by the states. When these entities do 

not pay legitimate claims for the costs of care that policyholders incur, the 

harm can affect several parties: individuals may be held responsible for 

their own medical bills, which can mean owing thousands of dollars; 

employers may find that they have paid premiums for nonexistent 

coverage for their employees; and health care providers may be at 

increased risk of not being paid for services already rendered. In addition, 

federal and state governments may need to invest significant public 

resources to investigate and shut down these unauthorized entities. 

Our testimony will summarize findings of a report that we are releasing 

today that examines the prevalence of these entities and their impact on 

employers, especially small employers, and policyholders.1

 At your 

request, Mr. Chairman, together with Senator Snowe, Chair of the Senate 

Committee on Small Business and Entrepreneurship, and Senator Bond, 

we examined (1) the number of unauthorized entities selling health 

benefits that federal and state governments identified from 2000 through 

2002, the number of employers and policyholders affected, and the amount 

of unpaid claims involved, (2) approaches and characteristics of these 

entities’ operations, and (3) the methods federal and state governments 

have employed to identify such entities and to stop or prevent them from 

continuing to operate. We surveyed each state’s insurance department in 

 1

U.S. General Accounting Office, Private Health Insurance: Employers and Individuals 

Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage, GAO-04-312

(Washington, D.C.: Feb. 27, 2004). We conducted our work for the report from January 2003 

through February 2004 in accordance with generally accepted government auditing 

standards. 
Page 2 GAO-04-512T 

2003, including that of the District of Columbia,2 and also obtained data 

from the Department of Labor’s (DOL) Employee Benefits Security 

Administration (EBSA), which conducts civil and criminal investigations 

of employer-based health plans.3

 We consolidated information from DOL 

and the states to determine the unduplicated number of entities identified 

from 2000 through 2002 and the numbers of affected employers and 

policyholders.4

 We also asked states to provide information on a related 

type of problematic arrangement—discount arrangements that may be 

misrepresented as insurance. We interviewed officials with EBSA, 

including those in three of its regional offices (Atlanta, Dallas, and San 

Francisco); the National Association of Insurance Commissioners (NAIC); 

insurance departments in four states that were identified as being affected 

by a relatively large number of these entities (Colorado, Florida, Georgia, 

and Texas); and other experts and associations, including those 

representing insurance agents and administrators of employers’ health 

benefits. Because many of the federal and state investigations regarding 

these entities were ongoing at the time we did our work, we generally do 

not name specific entities except in situations in which publicly disclosed 

actions have been taken against an entity. We also examined in detail the 

operations of one of the largest entities identified during this period, 

Employers Mutual, LLC, and the actions federal and state governments 

took to stop it from operating. 

In summary, DOL and the states identified 144 unique entities not 

authorized to sell health benefits coverage from 2000 through 2002. 

Although every state was affected, with at least five entities marketed in 

each state, these entities were most often identified in southern states. 

Specifically, of the seven states with at least 25 entities, five were located 

in the South. These 144 unauthorized entities covered at least 15,000 

employers and more than 200,000 policyholders from 2000 through 2002. 

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

 2

Throughout this testimony, 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. 

3

In conducting our state survey, we asked 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 insurance scams.” We asked EBSA to provide information using 

a similar definition. 

4

States provided data on the number of policyholders and DOL provided data on the 

number of participants; we refer to the combined data as policyholders in this testimony. 
Page 3 GAO-04-512T 

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. 

Most unauthorized entities characterized themselves as one of several 

types of arrangements and some had other approaches in common. For 

example, 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. 

Some entities selected names that resembled legitimate insurers or 

employee benefit firms and recruited insurance agents, administrative 

services companies, and health care provider networks to enhance their 

appearance of legitimacy to consumers and employers. The entities 

typically set their prices below market rates to be attractive especially to 

employers or individuals seeking more affordable health insurance 

alternatives. One of the largest entities, Employers Mutual, used a name 

similar to the long-established, Iowa-based Employers Mutual Casualty 

Company; established associations to sell its products; marketed its 

products through licensed insurance agents and contracted with other 

companies for administrative services; and, according to court documents, 

set premiums by underpricing the average of sample rates posted on the 

Internet. According to court documents and DOL, during a 10-month 

period in 2001, Employers Mutual collected approximately $16 million in 

premiums from over 22,000 people and did not pay more than $24 million 

in medical claims for which they were liable. 

Both federal and state governments—individually and collaboratively—

took action against these entities and sought to increase public awareness. 

For example, state insurance departments issued cease and desist 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. 

States reported also taking other actions, such as filing cases against the 

entities’ operators in civil or criminal courts or fining agents or revoking 

their licenses for selling unauthorized coverage. DOL obtained court 

orders against three large entities from 2000 through 2002 that prevented 

their operations nationwide. Further actions remain possible as many 

investigations remain ongoing. 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. 
Page 4 GAO-04-512T 

States regulate the insurance products that many employers and 

individuals purchase. 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 the agents who sell their 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 various consumer protections, such as 

assisting people who do not receive health benefits that are covered 

through insurance products or by providing an appeals process for denied 

claims.5

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).6

 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).7

 DOL is primarily 

responsible for administering Title I of ERISA. Among other requirements, 

ERISA establishes plan reporting and disclosure requirements and sets 

fiduciary standards for the persons who manage and administer the plans.8

These requirements generally apply to all ERISA-covered employer 

sponsored health plans, but certain requirements vary depending on the 

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

insurance policy or a self-funded plan where the employer assumes the 

risk associated with paying directly for at least some of their employees’ 

health care costs. In addition, ERISA generally preempts states from 

directly regulating employer-sponsored health plans (although maintaining 

 5

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. 

6

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

7

MEWAs 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 collective bargaining agreements, or plans established 

or maintained by a rural electric cooperative or a rural telephone cooperative association. 

8

Under 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. 

Background 
Page 5 GAO-04-512T 

states’ authority 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 insurance companies and 

health insurance policies. The federal and state governments coordinate 

their 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 the states identified 144 unauthorized entities from 2000 through 

2002. This likely represents the minimum number of unauthorized entities 

operating during this period because some states did not report on entities 

that they were still investigating. The number of unauthorized entities 

newly identified by DOL and the states each year almost doubled from 

2000, when 31 were newly identified, through 2002, when 60 were newly 

identified. 

DOL and the states found that every state had at least 5 entities operating 

in it. Specifically, the number of entities per state ranged from 5 in 

Delaware and Vermont to 31 in Texas. (See fig. 1.) Many 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 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, 30 were in Florida, 29 

each in Illinois and North Carolina, 28 in New Jersey, 27 in Alabama, and 

25 in Georgia. 

DOL and States 

Identified 144 Unique 

Unauthorized Entities 

Operating from 2000 

through 2002 That 

Left More Than 

$250 Million in Unpaid 

Claims 
Page 6 GAO-04-512T 

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. 

At least 15,000 employers purchased coverage from unauthorized entities, 

affecting more than 200,000 policyholders from 2000 through 2002. The 

number of individuals covered by unauthorized entities was even greater 

than the more than 200,000 policyholders covered because the 

policyholder could be an employer that purchased coverage on behalf of 

its employees or the policyholder could be an individual with dependents. 

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

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 states reported that the 144 

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 

Source: GAO analysis of DOL and state data.

25 to 31 unauthorized entities

15 to 24 unauthorized entities

5 to 14 unauthorized entities
Page 7 GAO-04-512T 

about 21 percent of unpaid claims had been recovered from entities 

identified from 2000 through 2002—$52 million of $252 million. These 

recoveries could include assets seized from unauthorized entities that 

have been shut down or frozen from other uses. Licensed insurance agents 

who have marketed products offered by these entities have also 

reimbursed unpaid claims either voluntarily or through state or court 

action.9

 Additional assets may be recovered from the entities identified 

from 2000 through 2002 because investigations and federal and state 

actions remain ongoing.10 However, it is likely that many of the assets will 

remain unrecovered because federal and state investigators report that the 

entities often are nearing bankruptcy when detected or otherwise have 

few remaining assets with which to pay claims. 

A few entities were responsible for a large share of the affected employers 

and policyholders and the resulting unpaid claims. Of the 144 unique 

entities, 10 alone covered about 64 percent of the employers and about 56 

percent of the policyholders. They also accounted for 46 percent of the 

unpaid claims. 

In addition to the unauthorized entities selling health benefits, 14 states 

reported that discount plans were inappropriately marketed as health 

insurance products in some manner. 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. While discount plans are not 

problematic as long as purchasers clearly understand them, 14 of these 

states reported that some discount plans were misrepresented as health 

insurance. For example, some discount plans were marketed with terms or 

phrases such as “medical plan,” “health benefits,” or “pre-existing 

conditions immediately accepted.” However, state insurance departments 

do not regulate discount plans because they are not considered to be 

health insurance. Thus, 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. 

 9

The four states whose officials we interviewed had laws imposing penalties on agents and 

others who represented such products. 

10Most states and DOL reported to us from March through June 2003. 
Page 8 GAO-04-512T 

The 144 entities that federal and state governments identified from 2000 

through 2002 varied in size and specific characteristics, but most were 

variations of one of four types of arrangements and some had other 

approaches in common that enhanced their appearance of legitimacy and 

attractiveness to prospective purchasers. For example, about 80 percent of 

the entities characterized themselves as one of four arrangements—

associations, professional employer organizations, unions, or singleemployer ERISA plans—or some combination of these arrangements. 

According to DOL and the states, specifically: 

• 27 percent of the entities characterized themselves as association 

arrangements through which employers or individuals bought health 

benefits through existing legitimate associations or through newly created 

associations established by the unauthorized entities. Although some of 

these entities claimed that this structure would shield them from oversight 

by federal or state governments, these associations would be subject to 

federal and state oversight if they were determined to be MEWAs. 

• 26 percent of the entities were identified as 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. However, professional 

employee organizations could be subject to federal and state requirements 

if, in addition to providing administrative services, they managed assets or 

controlled benefits for multiple employers. 

• 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. 

• 8 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 one 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. 

• 10 percent of the entities were reported as a combination of one of these 

or other types of arrangements. 

Most Unauthorized 

Entities Characterized 

Themselves as One of 

Several Types of 

Arrangements and 

Some Had Other 

Approaches in 

Common 
Page 9 GAO-04-512T 

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. 

These entities sometimes took other steps to enhance their appearance of 

legitimacy and make their products attractive to prospective purchasers. 

For example, some entities 

• adopted names that were familiar to consumers or similar to those of 

legitimate firms; 

• marketed their products through licensed agents; 

• established relationships with networks of health care providers and with 

companies that provide administrative services for employers offering 

health benefits; 

• set premiums below market rates; 

• marketed to employers or individuals that were particularly likely to be 

seeking affordable insurance alternatives, such as small employers, 

workers in industries such as construction or transportation who are 

disproportionately more likely to be uninsured, and self-employed 

individuals; and 

• paid initial claims while collecting additional premiums before ceasing 

claims payments. 

One of the most widespread entities during the period we examined that 

illustrates some of these approaches was Employers Mutual, incorporated 

in Nevada in July 2000. According to court documents and DOL, four 

individuals (“the principals”) operated Employers Mutual and, during a 

10-month period from January through October 2001, collected a total of 

approximately $16 million in premiums in every state from over 22,000 

people. Today, more than $24 million in medical claims against Employers 

Mutual remain unpaid. 

The name Employers Mutual is similar to the name of a long-established 

Iowa-based insurance company marketed throughout the United States, 

Employers Mutual Casualty Company, which had no affiliation with 

Employers Mutual. Notably, both in 1998 and in 2000, one of the 

Employers Mutual principals was found to have engaged in the health care 
Page 10 GAO-04-512T 

insurance business in California without a license and was barred from 

engaging in any insurance business in that state. 

Two of the principals formed 16 associations having names relating to 

workers in a wide array of industries and professions, such as farmers, 

construction workers, mechanics, and food service employees. Principals 

were named as the “managing members” of all 16 associations and created 

an employee health benefit plan for each association. The principals 

contracted with legitimate firms to process claims and to market the plans 

to employers nationwide. Employers Mutual claimed that it was exempt 

from DOL regulation. 

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

training, set the premiums for the 16 plans after he calculated the average 

of sample rates posted by insurance companies on the Internet and 

reduced them to ensure that Employers Mutual offered low prices. The 

principals also formed two companies, Columbia Health Network and 

Western Health Network, that purported to provide networks of health 

care providers for people insured by Employers Mutual. Additionally, the 

principals formed two other companies, Graf Investments and WRK 

Investments, which purported to provide investment services. However, 

these companies were found to be vehicles for the illegal diversion of over 

$1.3 million of plan assets.11

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 law12 and issued a cease and desist 

order against Employers Mutual in June 2001.13 Subsequently, other states 

also issued cease and desist orders against Employers Mutual. In 

December 2001, based on a petition from DOL, the U.S. District Court for 

the District of Nevada granted a temporary restraining order against 

Employers Mutual and its four principals.14 The restraining order 

temporarily froze the assets of all the principals and prohibited them from 

 11Chao v. Graf, No. 01-0698, (D. Nev. Sep. 10, 2003) (order granting permanent injunction). 

12Nev. Rev. Stat. §§ 685B.030, 685B.035 (2003). 

13Cease and Desist Order: Employers Mutual, L.L.C., Nevada Department of Business and 

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

14Chao v. Graf, No. 01-0698, (D. Nev. Dec. 13, 2001) (order granting temporary restraining 

order). 
Page 11 GAO-04-512T 

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. On 

September 10, 2003, the district 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.15 The fiduciary has also sued and sought settlements from 

insurance agents who marketed or sold Employers Mutual’s plan for 

damages and relief from unpaid or unreimbursed claims. Employers 

Mutual is also under investigation by law enforcement authorities. 

Appendix I includes a chronology of events from Employers Mutual’s 

establishment to state and federal actions to shut it down. 

Both federal and state governments have responsibility for identifying 

unauthorized entities and stopping and preventing them from exploiting 

businesses and individuals. DOL’s EBSA conducts civil and criminal 

investigations of employer-based health benefits plans that are alleged to 

violate federal law as part of its responsibilities for enforcing ERISA. For 

example, EBSA may identify entities whose operators have breached their 

ERISA fiduciary responsibilities, which generally require managing benefit 

plans and assets in the interest of participants. State insurance 

departments investigate entities and individuals that violate state 

insurance or MEWA requirements, such as selling insurance without a 

license. Because some entities may violate both federal ERISA 

requirements and state insurance requirements, both EBSA and states may 

investigate the same entities or coordinate investigations. Of the 144 

unique entities DOL and states identified, 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. 

States and DOL often relied on the same method to learn of the entities’ 

operations—through consumer complaints. States also received 

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

employers, and providers. In addition, NAIC played an important role in 

the identification process by helping to coordinate and distribute state and 

federal information on these entities, and states and DOL also reported 

that they coordinated directly. For example, DOL submitted quarterly 

reports to NAIC that identified all open civil investigations, the individuals 

 15Chao v. Graf, No. 01-0698, (D. Nev. Sept. 10, 2003) (order granting permanent injunction). 

States and DOL Share 

Responsibility for 

Identifying, Stopping, 

and Preventing the 

Establishment of 

Unauthorized Entities 
Page 12 GAO-04-512T 

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. 

After identifying the unauthorized entities, the primary mechanism states 

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

and desist order. Generally, a state cease and desist order tells the 

operator of the entity, and affiliated parties, to stop marketing and selling 

health insurance in that state and in some cases explicitly establishes their 

continuing responsibility for the payment of claims and other obligations 

previously incurred. Such an order, however, only applies to the activity in 

the issuing state. Thirty states reported that they issued a total of 108 

cease and desist orders that affected 41 of the 144 unique entities.16 About 

58 percent of policyholders and nearly half of the total unpaid claims were 

associated with these 41 entities. States also took other actions against 

some 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. States also reported 

that they took actions against the entity operators in 25 instances and filed 

cases in court in 14 instances to pursue civil or criminal penalties. 

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

some cases, pursuing civil and criminal penalties.17 DOL’s enforcement 

actions apply to all states. To obtain a temporary restraining order or 

injunction, 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. As of December 2003, DOL had obtained 

 16Twelve states that identified unauthorized entities did not report issuing cease and desist 

orders regarding the entities they identified, and nine states did not report identifying 

unauthorized entities. 

17An 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 temporary 

restraining orders, 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 facts. 
Page 13 GAO-04-512T 

temporary restraining orders 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 ultimately issued a 

permanent injunction. Each of these actions affected people in at least 41 

states. (See table 1.) These three entities combined affected an estimated 

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

Documenting that a fiduciary breach took place can be difficult, timeconsuming, 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 August 2003, EBSA 

was continuing to investigate 51 of the 69 entities it had investigated from 

2000 through 2002. As a result, further federal actions remain possible.18

Table 1: Temporary Restraining Orders and Injunctions for Three Unauthorized Entities, as of December 2003 

Unauthorized 

entity 

Number of 

states affected 

 Temporary 

restraining order 

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 

Source: EBSA. 

a

Generally, these temporary restraining orders 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. 

 18For example, in addition to the three investigations that had yielded temporary restraining 

orders 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. 
Page 14 GAO-04-512T 

To help prevent unauthorized entities from continuing to operate, the four 

states we reviewed—Colorado, Florida, Georgia, and Texas—and DOL 

alerted the public and used other methods. These states, which were 

among the states with a moderate or high number of entities, and DOL 

emphasized the need for consumers and employers to check the 

legitimacy of health insurers before purchasing coverage, thus helping to 

prevent unauthorized entities from continuing to operate. 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. Insurance departments in the 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. 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, and some states also released 

public service announcements via radio, television, or billboards. In 

addition to increasing public awareness, the four state insurance 

departments warned insurance agents through bulletins, newsletters, and 

other methods about these entities, the implications associated with 

selling their products, and the need to verify the legitimacy of all entities. 

DOL primarily targeted its prevention efforts to employer groups and small 

employers. For example, 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. Also, the EBSA regional offices 

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. 

Recent double-digit premium increases for health coverage have 

encouraged employers, particularly small employers, and individuals to 

search for affordable coverage. At the same time, however, these premium 

increases have created an environment that makes them vulnerable to 

being exploited by unauthorized or bogus entities. This has been reflected 

by the increasing number of these entities identified by federal and state 

governments in recent years. As a result, tens of thousands of employers 

and hundreds of thousands of individuals have paid premiums for 

essentially nonexistent coverage. As many employers and individuals 

continue to seek affordable health coverage alternatives in this 

Concluding 

Observations 
Page 15 GAO-04-512T 

environment of rising premiums, it is especially important that federal and 

state governments remain vigilant in identifying, stopping, and preventing 

the establishment of these entities and continue to caution individuals, 

employers, and their agents to verify the legitimacy of entities offering 

coverage. 

Mr. Chairman, this completes our prepared statement. We would be happy 

to respond to any questions you or other Members of the Committee may 

have at this time. 

For future contacts regarding this testimony, please call Kathryn G. Allen 

at (202) 512-7118 or Robert J. Cramer at (202) 512-7455. Other individuals 

who made key contributions include John Dicken, Joseph Petko, Matthew 

Puglisi, Andrew O’Connell, and Paul Desaulniers. 

Contacts and 

Acknowledgments 
Page 16 GAO-04-512T 

Figure 2 summarizes key events regarding Employers Mutual, one of the 

most widespread unauthorized entities operating in recent years. 

Employers Mutual collected approximately $16 million in premiums from 

over 22,000 people in 2001, and left more than $24 million in unpaid 

medical claims. 

Appendix I: Chronology of Key Events 

Regarding Employers Mutual, LLC 
Page 17 GAO-04-512T 

Figure 2: Key Events of Employers Mutual, LLC 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 - November 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.
Page 18 GAO-04-512T 

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 references to the U.S. District Court in this figure refer to the U.S. District Court for the District of 

Nevada. 

(290357) 
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