Bogus Insurers Put Patients
On Hook  for Big Doctor Bills

By BERNARD WYSOCKI  JR.
Staff  Reporter of THE WALL STREET JOURNAL

There's a new reason your insurer may not pay next time you get  sick: Your group health plan could be bogus.

Some insurers with dozens of affiliates across the country that  sprang up over the past several years have paid few, if any, claims, possibly  putting tens of thousands of patients on the hook for their own medical bills. The problem has grown so severe that regulators have shut down at least 50 such  operations. Many others are under investigation for operating without a license  or other deficiencies. In one of the biggest cases so far, the U.S. government alleges that more than $6 million in collected premiums was misused, much of it  going straight into the pockets of the insurer's owners.

Spurious health-insurance schemes typically mushroom when the  economy is suffering, but it's worse this time. The operators are more  sophisticated and increasingly national in reach. And the recession squeezed many businesses already struggling to cope with relentlessly escalating  health-insurance costs. The most desperate businesses are easy targets for sales  pitches from shady health plans, which promise generous benefits and sharply lower premiums -- but fail to deliver.

Most victims have no clue anything is wrong with their coverage  until they get sick. Zoraida Gonzalez, a 35-year-old Denver office worker, ran  up $200,000 in medical bills last year after developing breast cancer. She  expected 80% of those expenses to be covered under a $100-a-week policy she got  through her employer -- but the insurer never paid a dime. When she couldn't pay, one doctor turned her account over to a collection agency.

Beyond shutting down the insurers, there isn't much regulators can do to clean up the mess they leave behind. The assets recovered after these  companies are put out of business rarely come close to matching the premiums collected from customers. In addition, safety nets typically established to help  policyholders, such as state guarantee funds, aren't available to victims of  unlicensed carriers.

In many cases, "you're on the hook personally," says James Quiggle, a director of Coalition Against Insurance Fraud, a nonprofit group whose members include insurers such as Allstate and State Farm Mutual Automobile Insurance.

Typical of the insurers targeted by the growing regulatory crackdown is Employers Mutual, a Carson City, Nev., insurer that collected more than $14 million in premiums from 22,000 people in 37 states -- but paid only $3  million in claims, according to a lawsuit filed by the U.S. Department of Labor  in U.S. District Court in Reno. The government also alleges that "a large  portion" of the $6 million funneled into administrative expenses was "diverted"  to company officials and firms they owned. Employers Mutual was shut down by a  federal judge in February. The company has denied the allegations in court  documents.

PROTECTING YOURSELF FROM BOGUS INSURANCE

Here are some warning signs that your group health-insurance plan might not be as good as you think:

• It sounds like a dream come true. Insurers shut down by regulators frequently offered far lower premiums than the  norm -- and promised generous benefits and a large provider network.
  
• Not  healthy? No problem. Suspicious health plans eagerly accept people with serious illnesses and other medical conditions that other insurers usually  reject.
  
•  Hot-and-heavy sales pitch. Questionable insurers  may approach you using an agent, or by phone or direct mail. Legitimate group plans typically are sponsored by your employer -- and not sold directly to  individuals.
  
•  You've never heard of the insurer. If not, the company might not be licensed by your state's insurance department. Agents may falsely assure you that federal law exempts the plan from state requirements -- or use the term "benefits" instead of "insurance."
  
• Your doctor's office is complaining. Often, shaky health insurers keep making  flimsy excuses about why claims aren't being paid -- or quit returning phone  calls altogether.
  
  Source: Coalition Against Insurance  Fraud

At the state level, Colorado has issued 43 cease-and-desist  orders against suspected fly-by-night health insurers in roughly the past year,  including several affiliates of Employers Mutual. A flurry of investigations also is under way in Florida, Indiana, New York, Ohio and Texas -- and regulators are warning other states about the worst cases, since the companies often expand into neighboring states. The Labor Department says it has 102 civil and 17 criminal investigations pending involving multiple-employer health plans.  An official says some of the suspected violations are "technical," and that some plans have simply run into financial difficulties -- and weren't formed "purposely" to withhold claim payments.

Flimsy insurers usually exploit a split in the regulatory system. States regulate insurers, except for certain self-insured, employer-sponsored,  union and trade-association health plans that are covered under federal laws.  The group health insurers accused of failing to pay claims typically portray themselves as being exempt from state oversight -- so they don't bother getting  state licenses to operate. States that are cracking down disagree, charging the insurers with violating state laws.

Loyalty Despite Problems

It's not easy to spot insurers that have no intention of paying claims. Almost all the companies that left policyholders in the lurch initially  paid some claims, usually for small items such as prescription drugs. As a result, some customers remain loyal to their carriers even after problems  emerge. "I've literally had arguments" with customers who think regulators are acting rashly against legitimate operators, says Fred Nepple, an attorney in the Wisconsin insurance commissioner's office.

The insurers sometimes trick prospective customers by giving  themselves names that sound almost identical to those of long-established companies. Employers Mutual Casualty, a 91-year-old Des Moines, Iowa, insurer, has gotten more than 75 complaints from people confusing it with Employers  Mutual.

Mostly, though, suspect insurers get in the door by offering what  many businesses are desperate for: lower premiums without a drastic slip in benefits. That combination persuaded Thomas Osborne to switch his Indianapolis apartment-building company's group health plan last year to North American Indemnity -- a move that cut premiums by as much as 60%. Unpaid claims soon started piling up, though, and Mr. Osborne says he paid $15,000 out of his own pocket to settle the medical bills of one employee.

"The sad part is we should have known [better]," he says now. Mr.  Osborne has joined a class-action suit against the insurer in federal court in Houston. Attorneys for North American Indemnity didn't respond to calls seeking comment.

Going After Frozen Assets

Unfortunately, most businesses taken advantage of by unlicensed  insurers can't afford to pick up unpaid bills, meaning employees probably will  get stuck paying them. Still, there is reason for hope in some cases: Robert Louiseau, special deputy receiver for American Benefit Plans, whose assets were  frozen in March by a Texas state-court judge as an illegal health plan after  signing up 32,000 customers, says he already has seized $8 million of the Fort Worth, Texas, operator's assets -- and is going after an additional $10 million. The company's attorneys couldn't be reached.

Bill Collectors Hover

For now, courts also have ordered some bill collectors to back off while regulators try to recover assets from insurers forced to shut down,  but that's only a short-term fix.

Ms. Gonzalez was able to replace her Employers Mutual policy with  different coverage when she changed jobs -- but she wonders what would happen to her family if a federal court in Nevada lifts an injunction that has helped her  stave off medical creditors. She has two children, and her husband is trying to get a new business off the ground. "I could lose my house," she says.

Write to Bernard Wysocki Jr. at bernie.wysocki@wsj.com

Updated October 2, 2002