DOL and States Identified 144 Unique Unauthorized Entities Operating from 2000 through 2002 That Left More Than $250 Million in Unpaid Claims

DOL and the states identified 144 unauthorized entities from 2000 through  2002. DOL and the states found that every state had at least 5 entities operating  in it. 1.) These entities were  concentrated in certain states and regions. At least 15,000 employers purchased coverage from unauthorized entities,  affecting more than 200,000 policyholders from 2000 through 2002. 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. Licensed insurance agents  who have marketed products offered by these entities have also  reimbursed unpaid claims either voluntarily or through state or court  action. Most Unauthorized Entities Characterized Themselves as One of Several Types of Arrangements and Some Had Other Approaches in Common

The 144 entities that federal and state governments identified from 2000  through 2002 varied in size and specific characteristics, but most were  variations of one of four types of arrangements and some had other  approaches in common that enhanced their appearance of legitimacy and  attractiveness to prospective purchasers. 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. For example, some entities    adopted names that were familiar to consumers or similar to those of    marketed their products through licensed agents;    established relationships with networks of health care providers and with  companies that provide administrative services for employers offering  health benefits;   set premiums below market rates;    marketed to employers or individuals that were particularly likely to be  seeking affordable insurance alternatives, such as small employers,  workers in industries such as construction or transportation who are  disproportionately more likely to be uninsured, and self-employed  individuals; and   paid initial claims while collecting additional premiums before ceasing  claims payments. States also took other actions against  some entities, sometimes in conjunction with issuing cease and desist  orders. Each of these actions affected people in at least 41  states. As a result, further federal actions remain possible. These states, which were  among the states with a moderate or high number of entities, and DOL  emphasized the need for consumers and employers to check the  legitimacy of health insurers before purchasing coverage, thus helping to  prevent unauthorized entities from continuing to operate. In  addition to increasing public awareness, the four state insurance  departments warned insurance agents through bulletins, newsletters, and  other methods about these entities, the implications associated with  selling their products, and the need to verify the legitimacy of all entities. This has been reflected  by the increasing number of these entities identified by federal and state  governments in recent years. As many employers and individuals  continue to seek affordable health coverage alternatives in this  environment of rising premiums, it is especially important that federal and  state governments remain vigilant in identifying, stopping, and preventing  the establishment of these entities and continue to caution individuals,  employers, and their agents to verify the legitimacy of entities offering  coverage. Employers Mutual collected approximately $16 million in premiums from  over 22,000 people in 2001, and left more than $24 million in unpaid  medical claims. August - November 2001 Alabama, Colorado, Florida,  Oklahoma, Texas, and  Washington take action  against Employers Mutual.
Why GAO Did This Study

As health insurance premiums have risen at double-digit rates in recent years, employers and individuals who have sought to purchase more affordable coverage have fallen prey to certain entities that may offer attractively priced premiums but do not fulfill the expectations of those buying health insurance. These unauthorized entities--also known as bogus entities or scams--may not meet the financial and benefit requirements typically associated with health insurance products or other arrangements that are authorized, licensed, and regulated by the states. This testimony is based on GAO's recent report Private Health Insurance: Employers and Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling Coverage, GAO-04-312 (Feb. 27, 2004). In this testimony, GAO was asked to identify the number of entities that operated from 2000 through 2002 and the number of employers and policyholders affected, approaches and characteristics of these entities' operations, and the actions federal and state governments took against these entities. GAO analyzed information obtained from the Department of Labor (DOL) and from a survey of insurance departments in the states; interviewed officials at DOL and at insurance departments in Colorado, Florida, Georgia, and Texas; and examined the operations of one of the largest entities--Employers Mutual, LLC.

What GAO Found

DOL and the states identified 144 unique entities not authorized to sell health benefits coverage from 2000 through 2002. Although every state was affected by at least 5 of these entities, these entities were most often identified in southern states. These unauthorized entities covered at least 15,000 employers and more than 200,000 policyholders. The entities also left at least $252 million in unpaid medical claims, only about 21 percent of which had been recovered at the time of GAO's 2003 survey. In most cases, the operators characterized their entities as one of several types to give the appearance of being exempt from state regulation, but states found that they actually were subject to state regulation. Other characteristics that were common among at least some of these entities included (1) adopting names that were familiar to consumers or similar to legitimate firms, (2) marketing their products through licensed agents and with other health care or administrative service companies, (3) setting premiums below market rates, (4) marketing to employers or individuals that were particularly likely to be seeking affordable insurance alternatives, and (5) paying initial claims while collecting additional premiums before ceasing claims payments. Employers Mutual adopted many of these characteristics as it collected approximately $16 million in premiums from over 22,000 people in 2001, leaving more than $24 million in medical claims unpaid. Both federal and state governments--individually and collaboratively--took action against these entities and sought to increase public awareness. For example, state insurance departments issued cease and desist orders against 41 of the 144 entities, and DOL obtained court orders against three large entities from 2000 through 2002. States also took other actions against some entities' operators and agents that received commissions for marketing these entities. Further state or federal actions remain possible as many investigations remain ongoing. States and DOL primarily focused their prevention efforts on improving public awareness, including the need for consumers, employers, and insurance agents to verify an entity's legitimacy with insurance departments.