Private Health Insurance: Employers and Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage
Published: 2004-02-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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 (1) sold coverage to at least 15,000 employers, including many small employers; (2) covered more than 200,000 policyholders; and (3) 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.

section_title: Letter
paragraphs: 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  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. 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. 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  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. 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.
subsections: section_title: Background
paragraphs: 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, compared with about 58 percent  of the establishments at firms with 50 or more employees. Moreover, about 76 percent of the establishments at the largest firms—those with 500 or  more employees—offered at least one self-funded plan.
States regulate the insurance products that many employers 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  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.
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). 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). 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.  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 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. 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.
section_title: DOL and States Identified 144 Unique Unauthorized Entities Operating from 2000 through 2002
paragraphs: 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.
subsections: section_title: Unauthorized Entities Were Concentrated in the South and the Number Identified Grew Rapidly from 2000 through 2002
paragraphs: DOL and 42 states 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.
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.)
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. 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,  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.
section_title: Entities Characterized Themselves as One of Several Common Types of Arrangements
paragraphs: 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 single- employer 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.
section_title: Some States Reported That Discount Plans Misrepresented Themselves as Health Insurance
paragraphs: 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.)
section_title: Unauthorized Entities Covered Thousands of Employers and Policyholders, Leaving Hundreds of Millions of Dollars in Unpaid Claims
paragraphs: 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. 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. 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  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.
section_title: States and DOL Employed Similar Methods to Identify Unauthorized Entities and Prevent Them from Operating, but Different Methods to Stop Them
paragraphs: 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.
subsections: section_title: States and DOL Relied on Similar Methods to Identify Unauthorized Entities
paragraphs: 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.
subsections: section_title: States Identified Entities Primarily through Consumer Complaints, as Well as through Other Methods
paragraphs: 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.)
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.
section_title: DOL Identified Entities through Consumer and State Contacts
paragraphs: 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.
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.
section_title: State Insurance Departments Issued Cease and Desist Orders to Stop Unauthorized Entities, While DOL Took Action through the Federal Courts
paragraphs: 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.
subsections: section_title: States Issued Cease and Desist Orders to Stop Activities of Unauthorized Entities
paragraphs: 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  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.  States also reported that they took actions against the entity operators in 25  instances and filed cases in court in 14 instances.
section_title: DOL Stopped Unauthorized Entities’ Activities through Federal Courts
paragraphs: 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  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.
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  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. These  investigations involved 13 entities in 2000, 31 in 2001, and 25 in 2002.  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, 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.
section_title: States and DOL Alerted the Public and Used Other Methods to Help Prevent Unauthorized Entities from Continuing to Operate
paragraphs: 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  employers to check the legitimacy of health insurers before purchasing  coverage, thus helping to prevent unauthorized entities from continuing to  operate.
subsections: section_title: States Alerted Consumers and Agents and Benefited from NAIC Efforts
paragraphs: 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.)
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  restitution, lost their licenses, or faced a combination of some or all of  these actions.
section_title: DOL Alerted Employer Groups and Provided Guidance and Assistance to States and Others
paragraphs: 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.
section_title: Agency and Other External Comments
paragraphs: 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.
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  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.
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.
section_title: Methodology for Identifying Unauthorized Entities
paragraphs: 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.
subsections: section_title: Survey of State Insurance Departments
paragraphs: 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  those entities still being investigated and for which no formal action had  been taken.
section_title: Federal Data on Unauthorized Entity Investigations
paragraphs: 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. 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.
section_title: Consolidating State and Federal Data on Unauthorized Entities
paragraphs: 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. 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  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.
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  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.
section_title: Employers Mutual, LLC and Federal and State Actions
paragraphs: 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.
subsections: section_title: Employers Mutual Created Associations, Hired Firms, and Paid Companies Established by Its Principals
paragraphs: Employers Mutual was established in Nevada in July 2000 and began  operations in January 2001. 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. 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  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. 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.
section_title: Employers Mutual Collected About $16 Million in Premiums but Did Not Pay over $24 Million in Medical Claims
paragraphs: 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  December 2001 through February 2004. 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.
section_title: States, Then DOL, Acted against Employers Mutual
paragraphs: 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. Nevada therefore issued a cease  and desist order against Employers Mutual in June 2001. 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 authority as required by Florida law. 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.
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. 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, 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. 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 recovered by DOL and the independent fiduciary. 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.
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.
section_title: Discount Plans Have Been Marketed as Health Insurance in Some States
paragraphs: 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.
subsections: section_title: Overview of Discount Plans
paragraphs: 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.
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.
section_title: Discount Plans Misrepresented in Some States
paragraphs: 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.
Fourteen states reported that discount plans were misrepresented as  health insurance to some degree. 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.
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.
section_title: Consumer Alert Developed by the National Association of Insurance Commissioners
paragraphs: 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.)
section_title: Department of Labor Memorandum and Insurance Tips for Small Employers
paragraphs: 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. 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.
section_title: Comments from the Department of Labor
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