Private Health Insurance
Employers and Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage Gao ID: GAO-04-312 February 27, 2004Health 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.
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.
GAO-04-312, Private Health Insurance: Employers and Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage
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Report to Congressional Requesters:
February 2004:
PRIVATE HEALTH INSURANCE:
Employers and Individuals Are Vulnerable to Unauthorized or Bogus
Entities Selling Coverage:
[Hyperlink, http: //www.gao.gov/cgi-bin/getrpt?GAO-04-312]:
GAO Highlights:
Highlights of GAO-04-312, a report to congressional requesters
Why GAO Did This Study:
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.
What GAO Found:
DOL and the states identified 144 unique entities not authorized to
sell health benefits coverage from 2000 through 2002. The number of
entities newly identified increased each year, almost doubling from 31
in 2000 to 60 in 2002. Many of these entities targeted employers and
policyholders in multiple states, and, of the seven states with 25 or
more entities, five were located in the South.
DOL and the states reported that the 144 unique entities
* sold coverage to at least 15,000 employers, including many small
employers;
* covered more than 200,000 policyholders; and
* left at least $252 million in unpaid medical claims, only about 21
percent of which had been recovered at the time of GAO‘s 2003 survey.
States and DOL often identified these entities based on consumer
complaints. DOL often relied on states to stop these entities within
their borders while DOL focused its investigations on larger entities
operating in multiple states and, in three cases, obtained court
orders to stop these entities nationwide. Most of the states‘
prevention activities were geared to increasing public awareness and
notifying the agents who sold this coverage, while DOL focused its
efforts on alerting employer groups and small employers.
In commenting on a draft of this report, DOL, the National Association
of Insurance Commissioners, Florida, and Texas highlighted their
efforts to increase public awareness, coordinate investigations, and
take enforcement actions regarding these entities.
www.gao.gov/cgi-bin/getrpt?GAO-04-312.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Kathryn G. Allen at
(202) 512-7118.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DOL and States Identified 144 Unique Unauthorized Entities Operating
from 2000 through 2002:
Unauthorized Entities Covered Thousands of Employers and Policyholders,
Leaving Hundreds of Millions of Dollars in Unpaid Claims:
States and DOL Employed Similar Methods to Identify Unauthorized
Entities and Prevent Them from Operating, but Different Methods to Stop
Them:
Agency and Other External Comments:
Appendixes:
Appendix I: Methodology for Identifying Unauthorized Entities:
Survey of State Insurance Departments:
Federal Data on Unauthorized Entity Investigations:
Consolidating State and Federal Data on Unauthorized Entities:
Appendix II: Employers Mutual, LLC and Federal and State Actions:
Employers Mutual Created Associations, Hired Firms, and Paid Companies
Established by Its Principals:
Employers Mutual Collected About $16 Million in Premiums but Did Not
Pay over $24 Million in Medical Claims:
States, Then DOL, Acted against Employers Mutual:
Appendix III: Discount Plans Have Been Marketed as Health Insurance in
Some States:
Overview of Discount Plans:
Discount Plans Misrepresented in Some States:
Appendix IV: Consumer Alert Developed by the National Association of
Insurance Commissioners:
Appendix V: Department of Labor Memorandum and Insurance Tips for
Small Employers:
Appendix VI: Comments from the Department of Labor:
Tables:
Table 1: Types of Unauthorized Entities Identified by DOL and States,
2000-2002:
Table 2: Impact of 10 Large Unauthorized Entities, 2000-2002:
Table 3: Methods States Used to Identify Unauthorized Entities, 2000-
2002:
Table 4: TROs and Injunctions for Three Unauthorized Entities, as of
December 2003:
Table 5: States' Experience with Discount Plans, 2000-2002:
Figures:
Figure 1: Number of Unauthorized Entities That Operated in Each State,
2000-2002:
Figure 2: Number of Newly Identified Unique Unauthorized Entities, 2000-
2002:
Figure 3: Florida's Public Awareness Campaign against Unauthorized
Entities:
Figure 4: Key Events of Employers Mutual from Establishment to Closure:
Figure 5: Consumer Alert from NAIC:
Figure 6: Insurance Tips for Small Employers:
Abbreviations:
DOL: Department of Labor:
EBSA: Employee Benefits Security Administration:
ERISA: Employee Retirement Income Security Act of 1974:
MEWA: multiple employer welfare arrangement:
NAIC: National Association of Insurance Commissioners:
TRO: temporary restraining order:
Letter February 27, 2004:
The Honorable Charles E. Grassley:
Chairman:
Committee on Finance:
United States Senate:
The Honorable Olympia J. Snowe:
Chair:
Committee on Small Business and Entrepreneurship:
United States Senate:
The Honorable Christopher S. Bond:
United States Senate:
As health insurance premiums in the private health insurance market
increased at double-digit rates over the past several years, some
employers, particularly small employers with fewer than 50 employees,
have faced difficulty in obtaining affordable coverage. Small employers
cited cost as the major obstacle they faced in providing health care
coverage to their employees. As they looked for affordable options,
some employers and individuals have purchased health care coverage from
certain entities that have not complied with state insurance law or
with federal and state requirements for coverage provided to multiple
employers. These unauthorized entities--also sometimes referred to as
bogus entities or as scams or fraudulent insurers--may price their
products below market rates but may not meet financial and benefit
protections typically associated with health insurance products that
are authorized, licensed, and regulated by the states. These entities
collect premiums from individuals or employers but may not pay some or
all legitimate claims filed by the policyholders or those covered by
the policies.
According to several media reports during the past few years, employers
and individuals may increasingly be targeted by entities not authorized
to sell health coverage. These entities were also particularly
problematic in two earlier periods during the past 30 years--the mid-
1970s to early 1980s and the late 1980s to early 1990s. When these
entities do not pay legitimate claims, different parties can be harmed,
including individual policyholders who may be held responsible for
their own medical bills, which can mean owing thousands of dollars.
Providers are also at increased risk of not being paid for services
already rendered. Concerned about this situation, you asked us to
determine the prevalence of these entities and their impact 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.[Footnote 1] To obtain state-level data, we surveyed
and received responses from officials at departments of insurance or
equivalent offices in all 50 states and the District of
Columbia.[Footnote 2] Because multiple states and EBSA provided
information on some of the same entities, we relied on several
different sources, along with our judgment regarding similar entity
names, to consolidate the federal and state information and identify
the number of unique entities. Some states did not report on entities
that they were still investigating. Therefore, the number we report
likely represents the minimum number of unauthorized entities operating
from 2000 through 2002. We also asked states to provide information on
a related type of problematic arrangement--discount arrangements that
may be misrepresented as insurance. To determine the types of entities,
the number of employers and policyholders covered, the amount of unpaid
claims, and the amounts recovered from these entities, we analyzed the
data EBSA and the states reported to us. DOL and the states could not
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.[Footnote 3] We also reviewed
relevant literature. While we obtained information on the methods that
federal and state governments employed to identify these entities and
to stop and prevent them from operating, we did not evaluate the
effectiveness of these methods.
Appendix I provides more detailed information on our methodology. We
performed our work from January 2003 through February 2004 in
accordance with generally accepted government auditing standards.
Results in Brief:
DOL and the states identified 144 unique entities not authorized to
sell health benefits coverage from 2000 through 2002. Over these 3
years, the number of such entities newly identified each year almost
doubled from 31 in 2000 to 60 in 2002. Many of these entities operated
in more than one state and some operated under more than one name or
with more than one affiliated entity. These entities most often
marketed their products in southern states. For example, of the seven
states that had 25 or more entities, five were located in the South.
The operators of these entities often characterized the entities in one
of several ways that gave an appearance of being exempt from state
insurance regulation when they should have been subject to regulation.
The most common characterizations were as (1) associations, in which
these entities either sold their products through associations they
created or through established associations of employers or
individuals, and (2) professional employer organizations, which
contracted with employers to administer employee benefits and perform
other administrative services for contract employees. Relatedly, 14
states also reported that at least some discount plans, in which the
purchaser receives a discount from the full cost of certain health care
services from participating providers, were misrepresented as
insurance, and 8 of these states identified small employers as a
particular target of these misrepresented discount plans.
DOL and the states reported that the 144 unauthorized entities covered
at least 15,000 employers and more than 200,000 policyholders from 2000
through 2002. The states reported that more than half of the entities
they identified frequently targeted their health benefits to small
employers. At the time of our 2003 survey, DOL and the states reported
that the identified entities did not pay at least $252 million in
medical claims and only about $52 million--about 21 percent of the
total unpaid claims--had been recovered on behalf of policyholders and
those covered by the policies. Ten of the 144 entities covered about 64
percent of the affected employers and about 56 percent of the
policyholders, and accounted for 46 percent of the unpaid claims.
States and DOL employed similar methods to identify these unauthorized
entities and to prevent them from operating, but used different methods
to stop their activities. To identify these entities, state insurance
departments and DOL often relied on consumer complaints. The primary
action states took to stop the entities' activities was to issue cease
and desist orders. State insurance departments issued these orders
against 41 of the 144 unique entities identified from 2000 through
2002. Such an order, however, only applies to the activity in the
issuing state. DOL relied on the states to issue cease and desist
orders while it conducted investigations to obtain evidence that it
could use to stop these entities in multiple states through the federal
courts. DOL obtained court orders against three entities from 2000
through 2002. Each of these three entities affected consumers in more
than 40 states; combined, the three entities affected an estimated
25,000 policyholders and accounted for about $39 million in unpaid
claims. Because most of the DOL investigations were ongoing as of
August 2003, further actions remain possible. States and DOL primarily
focused their prevention efforts on improving public awareness,
including the need for consumers, employers, and insurance agents to
verify an entity's legitimacy with insurance departments.
We provided a draft of this report to DOL, NAIC, and the four state
insurance departments whose officials we interviewed. DOL, NAIC,
Florida, and Texas provided written comments. DOL identified
initiatives it has taken to improve coordination with states and law
enforcement agencies, and also summarized its criminal enforcement
actions. NAIC, Florida, and Texas commented that the report illustrated
the extent to which unauthorized entities have harmed individuals and
small employers, and they provided additional information on how the
federal and state governments have coordinated and collaborated in
their efforts and noted other public awareness and criminal enforcement
efforts they have undertaken.
Background:
Generally, employers can provide health coverage in two ways. They can
purchase coverage from health insurers, such as local Blue Cross and
Blue Shield plans; other private insurance carriers; or managed care
plans, such as health maintenance organizations. Alternatively, they
can self-fund their plans--that is, they assume the risk associated
with paying directly for at least some of their employees' health care
costs--and typically contract with an insurer or other company to
administer benefits and process claims. When small employers offer
health coverage, most tend to purchase insurance rather than self-fund.
Only about 12 percent of the establishments at firms with fewer than 50
employees that offered coverage in 2001 had a self-funded
plan,[Footnote 4] 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.[Footnote 5]
States regulate the insurance products that many employers
purchase.[Footnote 6] Each state's insurance department enforces the
state's insurance statutes and rules. Among the functions state
insurance departments typically perform are licensing insurance
companies, managed care plans, and agents who sell these products;
regulating insurers' financial operations to ensure that funds are
adequate to pay policyholders' claims; reviewing premium rates;
reviewing and approving policies and marketing materials to ensure that
they are not vague and misleading; and implementing consumer
protections such as those relating to appeals of denied
claims.[Footnote 7]
The federal government regulates most private employer-sponsored
pension and welfare benefit plans (including health benefit plans) as
required by the Employee Retirement Income Security Act of 1974
(ERISA).[Footnote 8] These plans include those provided by an employer,
an employee organization (such as a union), or multiple employers
through a multiple employer welfare arrangement (MEWA).[Footnote 9] 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.[Footnote 10] 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.[Footnote 11] The federal and state
governments now coordinate the regulation of MEWAs, with states having
the primary responsibility to regulate the fiscal soundness of MEWAs
and to license their operators and DOL enforcing ERISA's requirements.
DOL and States Identified 144 Unique Unauthorized Entities Operating
from 2000 through 2002:
DOL and the states identified 144 unauthorized entities from 2000
through 2002. Many of these entities marketed their products in more
than one state, and some operated under more than one name or with more
than one affiliated entity. These entities operated most often in
southern states. The number of such entities newly identified each year
grew from 31 in 2000 to 60 in 2002. About 80 percent of these entities
characterized themselves as one of four arrangements or some
combination of the four. In addition, some states reported that
discount plans misrepresented their products as health insurance.
Unauthorized Entities Were Concentrated in the South and the Number
Identified Grew Rapidly from 2000 through 2002:
DOL and 42 states[Footnote 12] 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.
Figure 1: Number of Unauthorized Entities That Operated in Each State,
2000-2002:
[See PDF for image]
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.
[End of figure]
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.):
Figure 2: Number of Newly Identified Unique Unauthorized Entities,
2000-2002:
[See PDF for image]
Note: The total excludes three unauthorized entities because one state
did not provide the year it identified them.
[End of figure]
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.[Footnote 13]
The United States economy also showed signs of weakness in the third
quarter of 2000 when it experienced growth of 0.6 percent, and suffered
a recession in 2001. The economy's subsequent recovery in 2002 was
marked by moderate economic growth but rising unemployment. Negative or
weak growth in employers' revenues, compounded by rising premiums
particularly for small employers, created an attractive environment for
unauthorized entities, as small employers and others sought cheaper
employee health benefit options.
Entities Characterized Themselves as One of Several Common Types of
Arrangements:
About 80 percent of the unauthorized entities identified by DOL and the
states characterized themselves as associations, professional employer
organizations, unions, single-employer ERISA plans, or some combination
of these arrangements. The operators of these entities often
characterized the entities as one of these common types to give the
appearance of being exempt from state regulation, but often states
found that they actually were subject to state regulation as insurance
arrangements or MEWAs. Under ERISA, both states and the federal
government regulate MEWAs, with states focusing on regulating the
fiscal soundness of MEWAs and licensing their operators and DOL
enforcing ERISA's requirements.
Specifically, as shown in table 1, 27 percent of the entities
identified by the states and DOL characterized themselves as
associations in which employers or individuals bought health benefits
through existing associations, or through newly created associations
established by the unauthorized entities. For example, Employers
Mutual, LLC, an entity that operated in 2001, sold coverage through an
existing association. Employers Mutual also created 16 associations as
vehicles for selling its products. (See app. II for a more detailed
discussion of Employers Mutual, LLC.) In addition, 26 percent of the
entities identified were professional employer organizations, also
known as employee leasing firms, which contracted with employers to
administer employee benefits and perform other administrative services
for contract employees. Another 9 percent of the entities identified
claimed to be union arrangements that would be exempt from state
regulation. However, they lacked legitimate collective bargaining
agreements and were therefore subject to state oversight. Eight percent
of the entities identified characterized themselves as 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.
Table 1: Types of Unauthorized Entities Identified by DOL and States,
2000-2002:
Entity type: Association;
Number: 39;
Percentage: 27.
Entity type: Professional employer organization;
Number: 37;
Percentage: 26.
Entity type: Union;
Number: 13;
Percentage: 9.
Entity type: Single-employer ERISA;
Number: 11;
Percentage: 8.
Entity type: Combination[A];
Number: 14;
Percentage: 10.
Entity type: Other[B] /unknown;
Number: 30;
Percentage: 21.
Entity type: Total;
Number: 144;
Percentage: 100[C].
Source: GAO survey of states and DOL data.
[A] "Combination" is any combination of two or more unauthorized entity
types, for example, "association" and "professional employer
organization.":
[B] Some examples of "other" include individual and small group
insurance and third-party administrators for single-employer ERISA
plans that states identified as unauthorized.
[C] Percentages do not add to 100 percent due to rounding.
[End of table]
Some States Reported That Discount Plans Misrepresented Themselves as
Health Insurance:
Some discount plans, in which the purchaser receives a discount from
the full cost of certain health care services from participating
providers, were misrepresented as insurance. Unlike legitimate
insurance, discount plans do not assume any financial risk nor do they
pay any health care claims. Instead, for a fee they provide a list of
health care providers that have agreed to provide their services at a
discounted rate to participants. In response to our survey, 40 states
reported that they were aware that discount plans were marketed in
their state, and 14 states reported that some discount plans were
inappropriately marketed as health insurance products in some manner.
Among these 14 states, 8 reported that the inappropriately marketed
discount plans targeted small employers. While discount plans are not
problematic as long as purchasers clearly understand the plans, these
14 states reported that some discount plans were marketed as health
insurance with terms or phrases such as "medical plan," "health
benefits," or "pre-existing conditions immediately accepted." (See app.
III for more information on discount plans.):
Unauthorized Entities Covered Thousands of Employers and Policyholders,
Leaving Hundreds of Millions of Dollars in Unpaid Claims:
At least 15,000 employers, including many small employers, purchased
coverage from unauthorized entities, affecting more than 200,000
policyholders from 2000 through 2002. The states reported that more
than half of the organizations they identified frequently targeted
their health benefits to small employers. At the time of our 2003
survey, DOL and states reported that the 144 entities had not paid at
least $252 million in medical claims, and only about 21 percent of
these claims, about $52 million, had been recovered on behalf of those
covered by these entities. Ten of the 144 entities covered the majority
of employers and policyholders and accounted for almost one half of
unpaid claims.
Based on our survey of states and information from DOL, we estimate
that unauthorized entities sold coverage to at least 15,158 employers.
The states reported that more than half of the entities they identified
targeted their health benefits to small employers.[Footnote 14]
Furthermore, unauthorized entities covered at least 201,949
policyholders across the United States from 2000 through 2002. The
number of individuals covered by unauthorized entities was even greater
than the number of policyholders covered because a policyholder could
be an employer or an individual with dependents. Therefore, any one
policyholder could represent more than one individual.
At the time of our 2003 survey, DOL and state officials reported that
unauthorized entities had not paid at least $252 million in medical
claims. This represents the minimum amount of unpaid claims associated
with these entities identified from 2000 through 2002 because in some
cases DOL and the states did not have complete information on unpaid
claims for the entities they reported to us.
Federal and state governments reported that about 21 percent of unpaid
claims had been recovered from entities identified from 2000 through
2002--$52 million of $252 million.[Footnote 15] These recoveries could
include assets seized from unauthorized entities that had been shut
down or frozen from other uses. Licensed insurance agents have also
settled unpaid claims voluntarily or through state or court action.
However, the amount of unpaid claims recovered could grow over time as
ongoing investigations are resolved. Investigations of unauthorized
entities are complex and require significant resources and time to
thoroughly probe because operators often maintain poor records and hide
assets, sometimes offshore. DOL and state officials explained that by
the time they become aware of an unauthorized entity--often when
medical claims are not being paid--the entity is sometimes on the verge
of bankruptcy and may have few remaining assets with which to pay
claims. Thus, while some additional assets may be recovered from the
entities identified from 2000 through 2002, it is likely that many of
the assets will remain unrecovered.
Ten large entities identified by DOL and the states covered a majority
of employers and policyholders and accounted for nearly half of unpaid
claims. Of the 144 unique entities, 10 covered about 64 percent of the
employers and about 56 percent of the policyholders. They also
accounted for 46 percent of the unpaid claims. (See table 2.) Some of
these large entities grew rapidly and existed for short periods. For
example, from January through October 2001, Employers Mutual enrolled
over 22,000 policyholders; covered about 1,100 employers; and amassed
over $24 million in unpaid claims, none of which have been paid.
Table 2: Impact of 10 Large Unauthorized Entities, 2000-2002:
Dollars in millions.
Ten entities;
Employers: Number: 9,676;
Employers: Percentage: 63.8;
Policyholders: Number: 112,429;
Policyholders: Percentage: 55.7;
Unpaid claims[A]: Amount: $116.0;
Unpaid claims[A]: Percentage: 46.0.
All others;
Employers: Number: 5,482;
Employers: Percentage: 36.2;
Policyholders: Number: 89,520;
Policyholders: Percentage: 44.3;
Unpaid claims[A]: Amount: $136.2;
Unpaid claims[A]: Percentage: 54.0.
Total;
Employers: Number: 15,158;
Employers: Percentage: 100.0;
Policyholders: Number: 201,949;
Policyholders: Percentage: 100.0;
Unpaid claims[A]: Amount: $252.2;
Unpaid claims[A]: Percentage: 100.0.
Source: GAO analysis of DOL and state data.
Note: Neither DOL nor states were able to report the number of
employers or policyholders or the amount of unpaid claims for some
unauthorized entities.
[A] DOL data were as of June 2003 and most state data were reported
from March through June 2003.
[End of table]
States and DOL Employed Similar Methods to Identify Unauthorized
Entities and Prevent Them from Operating, but Different Methods to Stop
Them:
States and DOL took generally similar actions to identify unauthorized
entities and prevent them from operating, but they followed different
approaches to stop these entities' activities. States and DOL often
relied on the same method to learn of the entities' operations--through
consumer complaints. In addition, NAIC played an important role in the
identification process by helping to coordinate and distribute state
and federal information on these entities. To stop the operations of
these entities, state agencies issued cease and desist orders, while
DOL took action through the federal courts. Both state and DOL
officials said that increased public awareness was important to help
prevent such entities from continuing to operate.
States and DOL Relied on Similar Methods to Identify Unauthorized
Entities:
States and DOL identified unauthorized entities through similar
methods. While states reported that most often they became aware of the
entities' operations from consumers' complaints, they also received
complaints about these entities from several other sources, such as
agents, employers, and providers. DOL also often learned of these
entities through consumer complaints. In addition to information
obtained through NAIC, state insurance departments and EBSA regional
offices relied on each other to learn of the entities' activities.
States Identified Entities Primarily through Consumer Complaints, as
Well as through Other Methods:
States identified entities operating within their borders through
several different methods, including complaints from consumers,
information coordinated by NAIC, information from DOL, and a
combination of these and other methods. States most often identified
unauthorized entities operating within their borders through consumer
complaints. (See table 3.):
Table 3: Methods States Used to Identify Unauthorized Entities, 2000-
2002:
Identification method: Consumer complaints;
Number of entities identified through the method alone or combined
with other methods: 164.
Identification method: NAIC information;
Number of entities identified through the method alone or combined
with other methods: 98.
Identification method: DOL information;
Number of entities identified through the method alone or combined
with other methods: 49.
Identification method: Insurance agent complaints;
Number of entities identified through the method alone or combined
with other methods: 46.
Identification method: Other[A];
Number of entities identified through the method alone or combined
with other methods: 45.
Identification method: Employer complaints;
Number of entities identified through the method alone or combined
with other methods: 28.
Identification method: Provider complaints;
Number of entities identified through the method alone or combined
with other methods: 16.
Source: GAO analysis of state survey responses.
Note: In total, states reported 288 unauthorized entities operating
within their borders. We determined that, after accounting for
duplicate identifications among states and DOL, 144 unique entities
operated from 2000 through 2002.
[A] "Other" includes identification through an insurance company,
contact with another state, and other methods.
[End of table]
In addition to consumer complaints, states relied on other sources to
help identify the unauthorized entities, with NAIC being the second
most frequent source of information. In December 2000, NAIC started to
share information from state and federal investigators on these
entities with all states and DOL. In about 71 percent of the 98 cases
where states reported using the NAIC information to identify
unauthorized entities, they also reported using information from one or
more other sources--most often consumer complaints. In addition, DOL
and insurance agents, either alone or in combination with other
identification methods, helped states identify the entities. For
example, DOL submitted quarterly reports to NAIC that identified all
open civil investigations, the individuals being investigated, and the
EBSA office conducting the investigations. NAIC shared this and other
information from EBSA regional offices with state investigators
throughout the country.
DOL Identified Entities through Consumer and State Contacts:
Federal investigators also often identified unauthorized entities
through consumers' complaints. According to EBSA officials, consumers
call DOL's customer service lines when they have complaints or
questions and speak with benefits advisers about the employer-based
health benefits plans in which they are enrolled. Regional directors in
EBSA's Atlanta, Dallas, and San Francisco offices said they open
investigations when benefit advisers cannot resolve the complaints.
Federal investigators also relied on states to help identify
unauthorized entities. An EBSA headquarters official told us that
states usually alerted federal investigators to the entities operating
within their regions. The directors of the three EBSA regional offices
we interviewed said they had received referrals from state insurance
department officials within their regions.
State Insurance Departments Issued Cease and Desist Orders to Stop
Unauthorized Entities, While DOL Took Action through the Federal
Courts:
States generally issued cease and desist orders to stop the activities
of unauthorized entities. In contrast, DOL obtained injunctive relief
through the federal courts by obtaining temporary restraining orders
(TRO) or preliminary or permanent injunctions to stop unauthorized
entities' activities. DOL often relied on states to stop unauthorized
entities through cease and desist orders while it conducted
investigations, usually in multiple states, to obtain the evidence
needed to stop these entities' activities nationwide through the
courts.
States Issued Cease and Desist Orders to Stop Activities of
Unauthorized Entities:
After identifying the unauthorized entities, the primary mechanism
states used to stop them from continuing to operate was the issuance of
cease and desist orders. Generally, these cease and desist orders told
the operators of the entities, and affiliated parties, to stop
marketing and selling health insurance in that state and in some cases
explicitly established their continuing responsibility for the payment
of claims and other obligations previously incurred. About 71 percent
of the states (30 of 42 states) that reported unauthorized entities
operating within their borders from 2000 through 2002 issued at least
one cease and desist order to stop an entity's activities during that
time. The number of cease and desist orders issued by each of the 30
states ranged from 1 to 11, averaging about 4 per state. Alabama,
Illinois, and Texas, three states in which more than 25 unauthorized
entities operated, reported issuing the most cease and desist orders. A
cease and desist order applies to activities only within the state that
issues the order. Therefore, in several cases, more than one state
issued a cease and desist order against the same entity. For example,
14 states reported that they each issued a cease and desist order to
stop Employers Mutual's operations within their borders. States issued
a total of 108 cease and desist orders that affected 41 of the 144
unique entities nationwide. About 58 percent of policyholders and
nearly half of unpaid claims were associated with these 41 entities.
State insurance departments generally had the authority to issue cease
and desist orders. The insurance department officials we interviewed in
Colorado, Florida, Georgia, and Texas said that the insurance
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.[Footnote 16] States also reported that
they took actions against the entity operators in 25 instances and
filed cases in court in 14 instances.
DOL Stopped Unauthorized Entities' Activities through Federal Courts:
DOL can take enforcement action to stop an unauthorized entity's
activities through the federal courts--that is, by seeking injunctive
relief and, in some cases, pursuing civil and criminal penalties. An
injunction is an order of a court requiring one to do or refrain from
doing specified acts. Injunctive relief sought by DOL against
unauthorized entities includes TROs, which may be issued without notice
to the affected party and are effective for up to 10 days; preliminary
injunctions, which may be issued only with notice to the affected party
and the opportunity for a hearing; and permanent injunctions, which are
granted after a final determination of the facts. DOL's enforcement
actions apply to all states affected by the entity. To obtain a TRO,
DOL must offer sufficient evidence to support its claim that an ERISA
violation has occurred and that the government will likely prevail on
the merits of the case. Documenting that a fiduciary breach took place
can be difficult, time-consuming, and labor-intensive because DOL
investigators often must work with poor or nonexistent records,
uncooperative parties, and multiple trusts and third-party
administrators.
As of December 2003, DOL had obtained TROs against three entities for
which investigations were opened from 2000 through 2002. In two of
these cases, DOL also obtained preliminary injunctions and in one case
a permanent injunction. (See table 4.) Each of these actions affected
people in at least 41 states. These three entities combined affected an
estimated 25,000 policyholders and accounted for about $39 million in
unpaid claims.
Table 4: TROs and Injunctions for Three Unauthorized Entities, as of
December 2003:
Unauthorized entity: Employers Mutual;
Number of states affected: 51;
TRO issued[A]: December 2001;
Preliminary injunction obtained: February 2002[B];
Permanent injunction obtained: September 2003;
Other results: In September 2003, a federal court ordered the
principals to pay about $7.3 million.
Unauthorized entity: OTR Truckers Health and Welfare Fund;
Number of states affected: 44;
TRO issued[A]: June 2002;
Preliminary injunction obtained: None;
Permanent injunction obtained: None;
Other results: In September 2002, one defendant agreed to pay an
amount that was less than 1 percent of the unpaid claims.
Unauthorized entity: Service and Business Workers of America Local 125
Benefit Fund;
Number of states affected: 41;
TRO issued[A]: October 2002;
Preliminary injunction obtained: October 2002[C];
Permanent injunction obtained: None;
Other results: None.
Source: EBSA.
[A] Generally, these TROs froze the unauthorized entity's assets;
removed the operators; prevented the operators from managing the
entity; and appointed an independent fiduciary to manage the entity,
account for assets, and pay claims.
[B] Preliminary injunction extended appointment of fiduciary and
prevented health care providers from taking action against participants
to collect unpaid bills.
[C] Preliminary injunction ordered termination of the entity and
prevented health care providers from taking action against participants
to collect unpaid bills or other actions.
[End of table]
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.[Footnote 17] These investigations involved 13 entities in
2000, 31 in 2001, and 25 in 2002.[Footnote 18] Overall, EBSA reported
67 civil and 17 criminal investigations opened from 2000 through 2002
involving the 69 entities. Civil investigations of these entities
focused on ERISA violations, particularly breaches of ERISA's fiduciary
requirements,[Footnote 19] while criminal investigations focused on
such crimes as theft and embezzlement. In some cases, unauthorized
entities can face simultaneous civil and criminal investigations. As of
August 2003, EBSA was continuing to investigate 51 of these entities.
As a result, further federal actions remain possible. For example, in
addition to the three investigations that had yielded TROs or
injunctions, EBSA had referred four other case investigations to the
DOL Solicitor's Office for potential enforcement action and obtained
subpoenas in five cases.
States and DOL Alerted the Public and Used Other Methods to Help
Prevent Unauthorized Entities from Continuing to Operate:
To help prevent unauthorized entities from continuing to operate,
officials in the insurance departments we interviewed in four states--
Colorado, Florida, Georgia, and Texas--took various actions to alert
the public and to inform insurance agents about these entities. NAIC
developed model consumer and agent alerts to help states increase
public awareness. DOL primarily targeted its prevention efforts to
employer groups and small employers. The states and DOL emphasized the
need for consumers and employers to check the legitimacy of health
insurers before purchasing coverage, thus helping to prevent
unauthorized entities from continuing to operate.
States Alerted Consumers and Agents and Benefited from NAIC Efforts:
Insurance department officials we interviewed in four states took
various actions to prevent unauthorized entities from continuing to
operate. Each of these states issued news releases to alert the public
about these entities in general and to publicize the enforcement
actions they took against specific entities. To help states increase
public awareness, NAIC developed a model consumer alert in the fall of
2001, which it distributed to all the states and has available on its
Web site. (See app. IV.) The four states' insurance departments also
maintained Web sites that allow the public to search for those
companies authorized to conduct insurance business within their
borders. These states have also taken other actions to increase public
awareness. For example, in April 2002, Florida released a public
service announcement to television news markets throughout the state to
warn about these entities. In addition, in the spring of 2003, Florida
placed billboards throughout the state to warn the public through its
"Verify Before You Buy" campaign. (See fig. 3.):
Figure 3: Florida's Public Awareness Campaign against Unauthorized
Entities:
[See PDF for image]
[End of figure]
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.
DOL Alerted Employer Groups and Provided Guidance and Assistance to
States and Others:
DOL primarily focused its efforts to prevent unauthorized entities from
continuing to operate on employer groups, small employers, and the
states. To help increase public awareness about these entities, on
August 6, 2002, the Secretary of Labor notified over 70 business
leaders and associations, including the U.S. Chamber of Commerce and
the National Federation of Independent Business, about insurance tips
that the department had developed and asked them to distribute the tips
to small employers. Consistent with the advice states provided, among
other things, the tips advised small employers to verify with a state
insurance department whether any unfamiliar companies or agents were
licensed to sell health benefits coverage. (See app. V.) Also, the
three EBSA regional offices we reviewed had initiated various
activities within the states in their regions. For example, EBSA's
Atlanta regional office sponsored conferences that representatives from
10 states and NAIC attended. Federal and state representatives
discussed ERISA-related issues and their investigations at these
conferences. Furthermore, since 2000, DOL initiated several technical
assistance efforts to help states and others better understand ERISA-
related issues. These efforts are intended to help prevent unauthorized
entities from avoiding state regulation.[Footnote 20]
Agency and Other External Comments:
We provided a draft of this report to DOL, NAIC, and the four state
insurance departments (Colorado, Florida, Georgia, and Texas) whose
officials we interviewed. DOL, NAIC, Florida, and Texas provided
written comments on the draft. Colorado and Georgia did not provide
comments on the draft.
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
[Hyperlink, 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.
Signed by:
Kathryn G. Allen:
Director, Health Care--Medicaid and Private Health Insurance Issues:
[End of section]
Appendixes:
Appendix I: Methodology for Identifying Unauthorized Entities:
To identify the number of unique unauthorized entities nationwide from
2000 through 2002 and to obtain information, such as the number of
employers covered and unpaid claims, pertaining to each of these
entities, we obtained and analyzed data from state and federal sources.
We obtained state-level data through a survey we sent to officials
located in insurance departments or equivalent offices in all 50 states
and the District of Columbia and federal-level data from the Department
of Labor's (DOL) Employee Benefits Security Administration (EBSA). We
also obtained information from the states on a related type of
problematic arrangement--discount plans that sometimes are
misrepresented as health insurance.
Survey of State Insurance Departments:
To obtain data on unauthorized entities and other types of problematic
plans in each state, we e-mailed a survey to individuals identified by
the National Association of Insurance Commissioners (NAIC) as each
state insurance department's multiple employer welfare arrangement
(MEWA) contact. A NAIC official indicated that these individuals would
be the most knowledgeable in the states on the issue of unauthorized
entities. All the states responded to our survey.
Part I of the survey asked for selected data elements on the entities.
We asked the states to use the following definition: "an unauthorized
health benefits plan is defined as an entity that sold health benefits,
collected premiums, and did not pay or was likely not to pay some or
all covered claims. These entities are also known as health insurance
scams." First, we asked officials in each state to tell us how many of
these entities covering individuals in the state they identified during
each of 3 calendar years--2000, 2001, and 2002. For each entity the
state identified during the 3-year period, we requested information
such as the (1) number of employers covered, (2) number of
policyholders covered, (3) total amount of unpaid claims in the state,
and (4) amount of unpaid claims recovered. We also obtained information
on the type of the entity, how the state identified the entity, and
what actions the state took regarding the entity. Part II of the survey
collected information on other types of problematic plans--including
discount plans--and whether these other types of plans targeted small
employers.
To determine the number of entities states identified in each calendar
year, we relied on states to determine at what stage of their
investigative process they would deem an entity to be unauthorized.
Therefore, states could have reported both those entities they
determined were unauthorized after completing an investigation and
against which they took formal action and those entities still being
investigated and for which no formal action had been taken.
Federal Data on Unauthorized Entity Investigations:
To obtain federal-level data on unauthorized entities, we asked EBSA to
provide data from the civil and criminal case investigations it opened
from 2000 through 2002 involving these entities. To identify which of
its civil and criminal investigations of employer-based health benefits
plans fell within the scope of our research, we asked EBSA to use a
similar definition of unauthorized entities as included on our state
survey. For each of the civil and criminal investigations of these
entities EBSA opened during the 3-year period, we asked EBSA to provide
the same type of data about unauthorized entities that we requested on
the survey we sent to all the states.[Footnote 21] In addition, we
asked EBSA to identify all the states that were affected by each entity
it was investigating--information that states could not easily provide.
Furthermore, where EBSA was conducting both civil and criminal
investigations of an entity, we asked it to report that entity only one
time.
Because EBSA and states provided the names of entities that were still
under investigation at the time of our survey, we agreed not to report
the names of any of these entities unless the investigation had already
been made public. Therefore, we report only the names of three
unauthorized entities for which DOL had issued media releases when it
obtained temporary restraining orders (TRO) or injunctions to stop
their activities.
Consolidating State and Federal Data on Unauthorized Entities:
To determine the number of unauthorized entities that operated from
2000 through 2002, we analyzed information on the entities identified
by the states and investigated by EBSA. Specifically, we analyzed the
names of 288 entities that states identified and 69 entities that EBSA
investigated.[Footnote 22] 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.[Footnote 23]
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.
[End of section]
Appendix II: Employers Mutual, LLC and Federal and State Actions:
Employers Mutual, LLC was one of the most widespread unauthorized
entities operating in recent years, covering a significant number of
employers and policyholders and accounting for millions of dollars in
unpaid claims during a 10-month period in 2001. According to court
documents and DOL, four of the entity's principals were associated with
the collection of approximately $16 million in premiums from over
22,000 people and with the entity's nonpayment of more than $24 million
in medical claims. DOL and states took actions to terminate Employers
Mutual's operations and an independent fiduciary was appointed by a
U.S. district court in December 2001 to administer the entity and, if
necessary, implement its orderly termination. In September 2003, the
court ordered the principals to pay $7.3 million for their breach of
fiduciary responsibilities.
Employers Mutual Created Associations, Hired Firms, and Paid Companies
Established by Its Principals:
Employers Mutual was established in Nevada in July 2000 and began
operations in January 2001.[Footnote 24] 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.[Footnote
25] 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.[Footnote 26] Furthermore, the district court noted that no
contracts between the investment firms and Employers Mutual were
presented into evidence and no information was introduced concerning
the services these firms performed for this entity.
Employers Mutual Collected About $16 Million in Premiums but Did Not
Pay over $24 Million in Medical Claims:
From the time Employers Mutual commenced operations in January 2001
through October 2001, more than 22,000 policyholders in all 50 states
and the District of Columbia paid approximately $16.1 million in
premiums. According to court documents and the independent fiduciary
appointed to administer Employers Mutual, one of this entity's
principals allegedly set the premiums for the 16 plans after he
calculated the average of sample rates posted by other insurance
companies on the Internet and reduced them to ensure that Employers
Mutual would offer competitive prices.
DOL has determined that of the $16.1 million collected in premiums,
Employers Mutual paid about $4.8 million in medical claims. According
to DOL, the principals made payments for other purposes besides the
payment of claims, including about $2.1 million in marketing, about
$0.6 million in claims processing, and about $1.9 million to themselves
or their companies. Approximately $1.9 million in Employers Mutual's
assets had been recovered by the independent fiduciary since his
appointment in December 2001 through February 2004.[Footnote 27] The
independent fiduciary and DOL reported that they were prevented from
fully accounting for the money collected and paid out by Employers
Mutual, its principals, and contracted companies due to the scope of
its operations and the disarray and incompleteness of the records they
were able to recover.
The independent fiduciary reported that insurance claims totaling over
$24 million remain unpaid as of February 2004. He paid $134,000 to a
prescription service provider immediately after his appointment, and no
additional medical claims have been paid. In March 2003, the fiduciary
filed suit in federal court to recover the unpaid claims from the
insurance agents who marketed Employers Mutual plans.
States, Then DOL, Acted against Employers Mutual:
When Nevada insurance regulators became aware of Employers Mutual, they
found that it was transacting insurance business without a certificate
of authority as required by Nevada law.[Footnote 28] Nevada therefore
issued a cease and desist order against Employers Mutual in June
2001.[Footnote 29] 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[Footnote 30] as required by Florida law.[Footnote 31] 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.[Footnote 32] 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,[Footnote 33] 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.[Footnote 34] 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.[Footnote 35] 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.
[Footnote 36]
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.
Figure 4: Key Events of Employers Mutual from Establishment to Closure:
[See PDF for image]
Note: Includes information from the preliminary injunction, the
permanent injunction, and cease and desist orders from, Alabama,
Colorado, Florida, Nevada, Oklahoma, Texas, and Washington.
[A] All subsequent references to the U.S. District Court in this figure
refer to the U.S. District Court for the District of Nevada.
[End of figure]
[End of section]
Appendix III: Discount Plans Have Been Marketed as Health Insurance in
Some States:
Plans that provide reduced rates for selected medical services rather
than comprehensive health insurance benefits are known as discount
plans. These plans are not health insurance as they do not assume any
financial risk. Discount plans were marketed in most states. However,
in some states, discount plans were inappropriately marketed by using
health insurance terms and these misrepresented plans were targeted to
small employers.
Overview of Discount Plans:
Discount plans charge consumers a monthly membership fee in exchange
for a list of health care professionals and others who will provide
their services at a discounted rate. Because they do not assume any
financial risk or pay any health care claims, discount plans are not
health insurance. Most often, these plans provide discounts for such
services as physicians, dental care, vision care, or pharmacy. Some may
also provide discounts for services provided by hospitals, ambulances,
chiropractors, and other types of specialty medical care. The discounts
offered and monthly fees vary by plan. For example, a consumer may pay
$10 per month to a discount plan for access to lower cost dental
services. A dentist participating in the discount plan may charge plan
members 20 percent less than nonmembers. Therefore, if the fee is
typically $60 for a dentist to perform certain procedures that help
prevent disease--for example, removing plaque and tartar deposits from
teeth--the plan member will pay a discounted fee of $48 to the dentist.
Most state insurance departments do not regulate discount plans because
they are not considered to be health insurance. None of the insurance
departments in the states that we reviewed--Colorado, Florida, Georgia,
and Texas--regulated discount plans. Thus, according to a state
official, while state insurance departments might be aware that
discount plans operated within their borders, they would not
necessarily be able to quantify the extent to which they exist. When
consumers complain about discount plans in Colorado, for example, the
insurance department refers the complaints to the Attorney
General.[Footnote 37]
State officials indicated that discount plans are not problematic as
long as companies market and advertise these plans accurately and
consumers understand that these products are not health insurance.
Advertisements for discount plans can be found on the Internet, through
infomercials on television, on the radio, in local newspapers, on signs
posted along roadways, in unsolicited "spam" e-mails or faxes, and in
direct marketing and mailings. According to state officials, discount
plans have positive and negative aspects. They said that discount plans
can save some money for people who do not have health insurance and who
know they will be using health care services. In addition, they said
consumers can use these plans to augment health insurance policies
providing only catastrophic coverage. However, they said that consumers
needed to understand that using discount plans can result in higher
out-of-pocket costs than typical health insurance. For example, getting
a 20 percent discount on heart-bypass surgery at the average U.S.
charge could still cost an individual about $40,000 out-of-pocket.
Furthermore, it can be difficult for consumers to determine if
providers are actually giving them a discount, as most providers do not
list their charges.
Discount Plans Misrepresented in Some States:
Discount plans were sold in most states. About 78 percent of the states
responding to our survey (40 of 51 states) reported that discount plans
were sold within their borders from 2000 through 2002. (See table 5.)
Most states that reported discount plans were sold within their borders
also reported that these plans were not marketed as health insurance.
Most of the states that reported discount plans from 2000 through 2002
did not indicate any problems with how they were advertised.
Table 5: States' Experience with Discount Plans, 2000-2002:
States' experience with discount plans: Discount plans were sold;
* Plans were not marketed as health insurance;
Number of states: 17.
States' experience with discount plans: Discount plans were sold;
* Plans were sometimes marketed as health insurance;
Number of states: 14.
States' experience with discount plans: Discount plans were sold;
* Plans were sold but states did not know if the plans were marketed
as health insurance or states did not provide information;
Number of states: ; 9.
Subtotal;
Number of states: 40.
States' experience with discount plans: Discount plans were not sold;
Number of states: 9.
States' experience with discount plans: States either did not know if
discount plans were sold or did not provide information;
Number of states: 2.
States' experience with discount plans: Total;
Number of states: 51.
Source: GAO analysis of data reported by states.
[End of table]
Fourteen states reported that discount plans were misrepresented as
health insurance to some degree.[Footnote 38] 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.
[End of section]
Appendix IV: Consumer Alert Developed by the National Association of
Insurance Commissioners:
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.):
Figure 5: Consumer Alert from NAIC:
Consumer Alert from the NAIC:
Protect Yourself Against Illegal Health Plans:
If it seems too good to be true, it probably is. Nationwide, the health
insurance marketplace is facing tough times. The cost of health
insurance is rising. Those seeking to make a profit selling fraudulent
health insurance claim that state insurance laws don't apply. These
entities recruit insurance agents to sell "ERISA plans" or "union
plans" that falsely claim to be exempt from state law. Here are some
tips from the National Association of Insurance Commissioners (NAIC) to
help you protect yourself against illegal health insurance plans:
1. Legitimate' ERISA Plans:
Legitimate ERISA plans (plans governed by the federal Employee
Retirement Income Security Act of 1974) and union plans may be exempt
from state insurance regulation, which is why criminals try to fool
people by making these claims. However, legitimate ERISA or union plans
are established by a union for its own members or by an employer for
the employer's own employees. They are not sold by insurance agents.
2. Get the Facts:
Consumers and employers should take care to ask their agents whether
the health coverage they are purchasing is fully insured by licensed
insurers. A "union plan" sold by an agent, health coverage that seems
unusually "cheap," health coverage that is issued with few questions
about the applicant's health condition or plan material that refers
only to a "stop-loss" insurer should alert a consumer to question the
selling agent or contact the state insurance department.
3. How the Scam Works:
A typical fraudulent health insurance scam attempts to recruit as many
local insurance agents as possible to market the coverage. The health
coverage is not approved by the state insurance department. Agents are
told it is regulated by federal, not state law. In fact, it is totally
illegal. The coverage is typically offered regardless of the
applicant's health condition and at lower rates and with bettor
benefits than can be found from licensed insurers. The scam seeks to
collect a large amount of premium as rapidly as possible.
While claims may be paid initially. the scam will soon begin to delay
payment and offer excuses for failure to pay. Unsuspecting consumers
who thought they were covered for their medical needs are left
responsible for huge medical hills. Employers may be liable for the
medical bills of their employees as well.
4. Avoid Becoming the Next Victim:
How can the average consumer avoid becoming the next victim? Ask hard
questions and do your homework. Read all materials and scrutinize Web
sites carefully. Here are some circumstances and product
characteristics that should prompt consumers to question a health plan
before purchasing it. These include:
* Coverage that boasts low rates and minimal or no underwriting should
be a signal to look deeper.
* Make sure your insurance agent is selling a state-licensed insurance
product. If an insurance agent is trying to sell you a union plan,
report them to your state insurance department.
* Deal with reputable agents. If the person trying to sell you coverage
says he or she doesn't need a license because the coverage isn't
insurance or is exempt from regulation, watch out. Contact your state
insurance department if you have any questions.
* Ask your agent for the name of the insurer and check the benefit
booklet you receive to see whether it names a licensed insurer that is
fully insuring the coverage.
* If your agent or the marketing material says that the plan is covered
only by "stop-loss insurance" or that the plan is an "ERISA" or "union"
plan, contact your state insurance department.
5. Get More Information:
Your state insurance department is your best source for information on
company and agent licensing requirements, as well as available
products. For a list of state health contacts, visit www.naic.org and
click on MEWA Contacts. You can also link to your insurance
department's Web site by clicking on "State Insurance Regulators Web
Sites," then click on your state.
The National Association of Insurance Commissioners is a voluntary
organization of the chief insurance regulatory officials of the 50
states, the District of Columbia and four U.S. territories. The
overriding objectives of state regulators are to protect consumers and
help maintain the financial stability of the insurance industry. If you
would like more information or wish to be removed from the "Consumer
Alert" media list, please contact the Communications Department at
(816) 842.7600 or Communications@naic.org.
Source: NAIC. Further reprint or redistribution is strictly
prohibited.
[End of figure]
[End of section]
Appendix V: Department of Labor Memorandum and Insurance Tips for
Small Employers:
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.[Footnote 39] 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.
Figure 6: Insurance Tips for Small Employers:
Fact Sheet:
U.S. Department of Labor:
Employee Benefits Security Administration:
October 2003:
How to Protect Your Employees When Purchasing Health Insurance:
* Compare insurance coverage and costs. Always compare the benefits and
costs of multiple insurance products. If one product appears to offer
similar benefits at a dramatically lower cost, ask questions.
* Confirm that the person offering the product is a licensed insurance
agent with a proven record of reliability. Promoters of insurance scams
often engage unlicensed insurance agents to market their product as a
cheaper alternative to traditional insurance. Check out unknown agents
with your state insurance department.
* Verify that any unfamiliar company, organization or product is
approved by your state insurance department.
* Examine the policy to determine the actual coverage and whether the
promised benefits are fully insured by a licensed insurance company. Do
not confuse representations about stop-loss coverage with a guarantee
of group health benefits. Stop-loss coverage often protects only the
issuer, not the insured individuals.
* Request references of employers enrolled with the provider and get
information from employers about benefit payment history and claim turn
around time.
* Ask about the allocation of premiums charged for commissions, fees
and administration expenses. Allocation of a high percentage of the
premiums to commissions, fees and administrative expenses may indicate
a problem with the product or insurer.
* Contact your Regional Office of the Employee Benefits Security
Administration (U.S. Department of Labor) through its toll-free number
at 1-866-444-EBSA (3272) or at www.askebsa.dol.gov to report problems.
Source: DOL.
[End of figure]
[End of section]
Appendix VI: Comments from the Department of Labor:
U.S. Department of Labor
Assistant Secretary for Employee Benefits Security Administration
Washington, D.C. 20210:
FEB 9 2004:
Ms. Kathryn G. Allen:
Director, Health Care-Medicaid and Private Health Insurance Issues:
United States General Accounting Office:
Washington, D.C. 20548:
Dear Ms. Allen:
Thank you for providing the Department of Labor (DOL) with the
opportunity to comment on the General Accounting Office's draft report
entitled "Private Health Insurance: Employers and Individuals are
Vulnerable to Unauthorized or Bogus Entities Selling Coverage" (GAO-04-
312). I want to take this opportunity to offer a few general comments
on the draft report. We have also enclosed a list of technical comments
for your consideration.
Initially, I want to bring to your attention and highlight the
Department's increased coordination efforts with the States and law
enforcement agencies regarding investigative and oversight
responsibilities of MEWAs and other entities offering health care
coverage. Although your draft report mentions various efforts by the
DOL and the States, I think you should be aware of, and the draft
report should reflect, some of our increasing coordination efforts.
These increased efforts, carried out through the DOL's Employee
Benefits Security Administration, include the following:
Coordination with the State Insurance Departments:
States and the federal government coordinate the regulation of
unauthorized insurance entities (including MEWAs) pursuant to the 1983
amendment to ERISA that made it clear that states are free to regulate
MEWAs whether or not the MEWA may also be an ERISA-covered employee
welfare benefit plan. State insurance laws that set standards requiring
specified levels of reserves or contributions are applicable to MEWAs
even if they are also covered by ERISA.
The states and EBSA carry out their MEWA coordination activities in a
number of ways. For instance, EBSA provides to the National Association
of Insurance Commissioners (NAIC), on a quarterly basis, a list of all
on-going MEWA investigations identifying geographic coverage and
principal players. The NAIL provides EBSA copies of its MEWA Alert,
identifying high profile MEWA investigations by state and identifies
specific insurance department staff contacts. EBSA has also provided
the names and telephone numbers of Regional Office MEWA coordinators
who may be contacted to discuss local MEWA issues.
EBSA also is a regular attendee of and participant in the NAIC
quarterly meetings, particularly at the regulator-only sessions where
specific MEWA investigations are briefed. Over the past five years
EBSA has participated in twenty of the NAIL quarterly meetings to
exchange information about health issues that are of concern to
government regulators. Finally, EBSA has established a web site that
will enable state regulators to electronically access information filed
with EBSA concerning MEWAs (Form M-1).
More locally, EBSA field offices have invited state regulators in their
jurisdiction to attend MEWA training sessions to discuss their current
investigations. Successful examples of this type of coordination
activities are the multi-state events sponsored by EBSA's Atlanta
Region on technical ERISA MEWA issues and included detailed discussions
of actual investigations. There were one or more representatives from
the insurance departments of GA, SC, NC, TN, MS, AL, FL, AK, LA and TX
at these conferences as well as Fred Nepple from Wisconsin's Attorney
General's office, and Chair of the NAIC ERISA working group.
In addition to sharing information, EBSA and state regulators often
will actively work together during the investigative stages of a MEWA
case and provide mutual support to obtain Cease and Desist Orders and
Temporary Retraining Orders to provide protection for MEWA
participants. A notable example of this type of cooperation is the
investigation of Employers Mutual LLC, which, as is more fully
described in the report, involved a MEWA that provided health benefits
to more than 23,000 participants and beneficiaries in all 50 states.
The Department's investigation disclosed numerous instances where
monies were allegedly transferred from the MEWA to the MEWAs operators
to pay excessive expenses rather than paying benefits for the
participants. Because of the multi-state nature of this MEWAs
operations, close coordination with the States was essential,
particularly in Nevada. Cease and Desist Orders were issued by the
departments of insurance in numerous states including: Florida, Nevada,
Illinois, Texas, Iowa, Washington, Pennsylvania, Massachusetts,
Arizona, and Colorado.
EBSA Criminal Enforcement Efforts Related to MEWAs:
In addition to EBSA's civil enforcement actions, EBSA has also pursued
operators of fraudulent MEWAs for criminal prosecution. From 2000 to
2003, EBSA has conducted criminal investigations which have led to ten
indictments. During this time, 11 individuals have also pled guilty to
crimes related to EBSA criminal MEWA investigations. Currently, there
are 28 open criminal investigations on MEWAs. Because of grand jury
secrecy requirements, EBSA cannot disclose any potential indictments
that may result from these investigations.
Additionally, EBSA has made efforts to inform other law enforcement
agencies of the continuing rise of fraudulent MEWAs. In August 2003,
EBSA enforcement staff made presentations to over 30 supervisors of the
FBI Health Care Fraud Task Force regarding fraudulent MEWAs. EBSA
investigators will also be conducting a training session regarding
MEWAs at the Federal Law Enforcement Training Center in February 2004.
Lastly, EBSA has prepared for the NAIC a list of the relevant Title 18
crimes related to the prosecution of operators of fraudulent MEWAs.
In closing, I hope that the above information and our enclosed
technical comments are helpful for
your preparation of the GAO report on unauthorized entities selling
health insurance coverage. If there are any questions on these comments
please contact Dan Maguire, Director, Office of Health Plan Standards
and Compliance Assistance at (202) 219-7222, ext. 2103.
Sincerely,
Signed by:
Ann L. Combs:
Assistant Secretary Employee Benefits Security Administration:
[End of section]
(290251):
FOOTNOTES
[1] EBSA regulates employer-based pension and welfare benefits plans,
which include employer-based health benefits. Specifically, the Office
of Enforcement in EBSA, among other activities, conducts investigations
through its regional offices to find and correct violations of federal
law that relate to employer-based pension and welfare benefits plans.
[2] Throughout this report, we include the District of Columbia in our
discussion of states; we refer to each state's insurance department,
division, or office as an insurance department.
[3] See Mila Kofman, Kevin Lucia, and Eliza Bangit, "Health Insurance
Scams: How Government Is Responding and What Further Steps Are Needed,"
The Commonwealth Fund (2003), for a recent review of related issues.
[4] An establishment is a workplace or physical location where business
is conducted or operations are performed. A firm includes a company's
headquarters and all divisions, subsidiaries, and branches and may
consist of one or more establishments under common ownership or
control.
[5] Agency for Healthcare Research and Quality, 2001 Employer-Sponsored
Health Insurance Data. Private-Sector Data by Firm Size, Industry
Group, Ownership, Age of Firm, and Other Characteristics (Rockville,
Md.: 2003), http: //www.meps.ahrq.gov/mepsdata/ic/2001/index100.htm
(downloaded Sept. 3, 2003).
[6] The McCarran-Ferguson Act, March 9, 1945, Ch. 20, § 2, 59 Stat. 33,
34, establishes the primary authority of the states to regulate the
business of insurance, unless federal law provides otherwise.
[7] State insurance regulators established NAIC to help promote
effective insurance regulation, to encourage uniformity in approaches
to regulation, and to help coordinate states' activities. Among other
things, NAIC develops model laws and regulations to assist states in
formulating their policies to regulate insurance.
[8] Pub. L. No. 93-406, 88 Stat. 829.
[9] MEWAs, which can be insured or self-funded, are plans or other
arrangements that provide health and welfare benefits to the employees
of two or more employers. Under ERISA, MEWAs do not include certain
plans that the Secretary of Labor finds are the result of collective
bargaining agreements, or plans established or maintained by a rural
electric cooperative or a rural telephone cooperative association.
[10] 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.
[11] Pub. L. No. 97-473, § 302, 96 Stat. 2605, 2612.
[12] Nine of the 51 states responding to our survey did not report
identifying any unauthorized entities from 2000 through 2002. However,
entities identified by DOL through its multistate investigations
operated in these states.
[13] We based our calculation on data reported in Kaiser Family
Foundation and Health Research and Educational Trust, Employer Health
Benefits 2000 Annual Survey, Employer Health Benefits 2001 Annual
Survey, and Employer Health Benefits 2002 Annual Survey (Menlo Park,
Calif. and Chicago: 2000, 2001, and 2002).
[14] DOL could not quantify the share of employers purchasing from
unauthorized entities that were small employers.
[15] Most states and DOL reported to us from March through June 2003.
[16] The four states whose officials we interviewed had laws that
specified the consequences that unauthorized entities, or the agents
and others who represented them, would face. For example, Florida
enacted a statute to increase the penalty for certain agents and others
representing unauthorized insurers from a second-degree misdemeanor to
a third-degree felony, punishable by up to 5 years in prison and up to
a $5,000 fine, effective October 1, 2002. Fla. Stat. ch. 626.902(1)(a),
(b) (2003) (as amended by 2002 Laws, ch. 2002-206). An existing Florida
statute already required certain persons representing unauthorized
insurers in the state to be held financially responsible for unpaid
claims. Fla. Stat. ch. 626.901(2) (2003). Some agents purchase
professional liability insurance--called errors and omissions
coverage--that in some cases may pay outstanding medical claims.
[17] The states also identified 27 of these 69 entities.
[18] Based on the percentage of total investigative staff days spent on
unauthorized entities, EBSA estimated that its field office costs for
these investigations totaled about $4.2 million for fiscal years 2000,
2001, and 2002 and the first 10 months of fiscal year 2003.
[19] For example, a fiduciary's failure to operate the plan prudently
and for the exclusive benefit of the plan participants would be a
fiduciary violation.
[20] For example, DOL updated and rereleased its publication, Multiple
Employer Welfare Arrangements Under the Employee Retirement Income
Security Act (ERISA): A Guide to Federal and State Regulation
(Washington, D.C.: 2003), which is intended to facilitate state
regulatory and enforcement efforts regarding MEWAs as well as federal
and state coordination. DOL distributed the publication to states and
provided copies to others who made requests through DOL's toll-free
hotline. Also, from January 2000 through October 15, 2003, DOL issued
13 advisory opinion and information letters regarding ERISA preemption
and state insurance regulation of MEWAs to assist state regulators and
prosecutors in enforcing state insurance laws against unauthorized
entities. DOL has issued over 100 letters on MEWAs or similar types of
arrangements since ERISA was enacted in 1974.
[21] EBSA provided the data that it collected on the number of
participants in these entities, whereas states reported on the number
of policyholders. We consolidated the data reported by DOL and states
and refer to these data as policyholders.
[22] Nine of the 51 states responding to our survey did not identify
any unauthorized entities from 2000 through 2002. EBSA conducted three
separate investigations that we determined related to different
components of one large entity identified by several states.
[23] For example, for one of the 27 entities that both EBSA and states
identified, EBSA reported that it operated in 13 states, 7 of which
also reported this entity to us. In addition, 1 other state, not
identified by EBSA, reported this entity to us and we included this
state's data. Also, because EBSA did not provide any data on the number
of employers and policyholders for this entity, we used the data
reported by the 8 states.
[24] Prior to Employers Mutual's creation, one of its principals was
associated with other unauthorized entities.
[25] The other associations were the American Association of
Agriculture, the Association of Automotive Dealers and Mechanics, the
Association of Barristers and Legal Aids, the Communications Trade
Workers Association, the Construction Trade Workers Association, the
Association of Cosmetologists, the Culinary and Food Services Workers
Association, the Association of Educators, the Association of Health
Care Workers, the National Alliance of Hospitality and Innkeepers, the
Association of Manufacturers and Wholesalers, the Association of Real
Estate Agents, the Association of Retail Sellers, and the National
Coalition of Independent Truckers. Employers Mutual also sold coverage
through existing associations such as the National Writers Union, an
association representing approximately 7,000 freelance writers.
[26] Chao v. Graf, No. 01-0698, 2002 WL 1311122 (D. Nev. Feb. 1, 2002)
(order granting preliminary injunction).
[27] The independent fiduciary has spent about $1.6 million of the $1.9
million seized, primarily for the administrative cost of processing
approximately 100,000 claims that had not been adjudicated and for
legal and other costs, with approximately $0.3 million remaining as of
February 2004. The U.S. District Court in Nevada ordered the
independent fiduciary to process all unadjudicated claims in its
February 1, 2002 order granting a preliminary injunction.
[28] Nev. Rev. Stat. §§ 685B.030, 685B.035 (2003).
[29] Cease and Desist Order: Employers Mutual, L.L.C., Nevada
Department of Business and Industry Division of Insurance case no.
01.658 (June 14, 2001).
[30] Immediate Final Order in the matter of Employers Mutual, L.L.C.,
Florida Department of Insurance case no. 42659-01-CO (Aug.14, 2001).
[31] Fla. Stat. ch. 624.401, 624.437 (2003).
[32] Employers Mutual, L.L.C., Nevada Department of Business and
Industry Division of Insurance case no. 01.658 (Nov. 21, 2001).
[33] Chao v. Graf, No. 01-0698, (D. Nev. Dec. 13, 2001) (order granting
temporary restraining order).
[34] Chao v. Graf, No. 01-0698, 2002 WL 1311122 (D. Nev. Feb. 1, 2002)
(order granting preliminary injunction).
[35] Chao v. Graf, No. 01-0698 (D. Nev. Apr. 30, 2002) (order
establishing a quasi-bankruptcy).
[36] Chao v. Graf, No. 01-0698 (D. Nev. Sept. 10, 2003) (order granting
permanent injunction).
[37] To alert consumers to discount plans, the Colorado insurance
department, along with the Colorado Attorney General, issued a joint
publication highlighting purchasing tips and potential problems--
Colorado Division of Insurance and the Colorado Attorney General,
"Discount Health Plans, What Consumers Should Know About Discount
Health Plans," October 2002.
[38] The 14 states were Alabama, Arkansas, Connecticut, Indiana, Maine,
Missouri, Nebraska, Oklahoma, South Carolina, Tennessee, Texas, Utah,
Washington, and Wyoming.
[39] DOL sent the memorandum to such groups as the Independent
Insurance Agents of America, National Association for the Self-
Employed, National Federation of Independent Business, National
Restaurant Association, Society of Professional Benefit
Administrators, and the U.S. Chamber of Commerce.
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