The idea was to relax. After 40 years in publishing, David and Darlene Henderson retired nine years ago to Penn Valley, Calif., a sleepy town 60 miles north of Sacramento. The couple signed up for health insurance through the National Association for the Self-Employed (NASE), a small-business group that offered them both coverage through MEGA Life & Health Insurance Co. for $416 per month. A brochure stated that the plan would provide up to $1 million in coverage.
Then in 2000, Darlene found a lump in her breast and had a mastectomy. The next year, David had emergency surgery for an aortic aneurysm, followed by three colon procedures. By April, 2001, their medical bills totaled more than $210,000. But for David and Darlene, both 66, the troubles were just beginning. MEGA refused to cover Darlene's bills because, the company alleged, her breast cancer resulted from a preexisting condition she had failed to disclose. The Hendersons say they held back no such information. And MEGA's benefits, which the Hendersons allege were poorly explained, covered only $33,169 of David's $191,424 in bills. "You think you're on a sunny sea," says David. "Then you're sucked into this Bermuda Triangle." The couple has filed a lawsuit against NASE and MEGA's parent company, UICI, based in North Richland Hills, Tex., charging fraud and unfair business practices. The company denies those allegations.
The Hendersons aren't alone. Three major players in the individual insurance market, including UICI, have racked up an inordinate number of complaints for their size. In addition to UICI, Golden Rule Insurance and American Medical Security have been hit with a barrage of state investigations. In fact, since 1995, MEGA and the other main unit of UICI, Mid-West National Life Insurance Co., have been the subject of 14 investigations by state insurance officials, according to data provided by the National Association of Insurance Commissioners (NAIC).
The investigations, though, haven't fazed investors, including Blackstone Group, which on Sept. 15 bought UICI for $1.7 billion. With their often hefty margins and growing profits, smaller companies that offer individual insurance are in demand. The Blackstone deal follows the purchase last December of American Medical Security by PacifiCare Health Systems (PHS ) in Cypress, Calif., and UnitedHealth Group's (UNH ) deal for Golden Rule in 2003. The new parents are making progress cleaning up these companies, but some question whether they will finish the job. Warns California Insurance Commissioner John Garamendi: "They damn well better."
One big reason to get back in regulators' good graces: The individual health insurance market is poised to boom. With 45 million people uninsured and penny-pinching companies cutting back, more Americans are being forced to get their own protection. The number of people buying health insurance on their own jumped by 900,000, to 17 million from 2000 to 2003 -- the latest year for which data are available -- according to Mathematica Policy Research Inc. Meanwhile, employment-based coverage fell by 5.2 million, to 159.2 million.
Soaring demand is one reason why UnitedHealth paid $500 million in 2003 for Golden Rule, of Lawrenceville, Ill., problems and all. Since 1995, Golden Rule has faced 15 investigations by insurance officials for aggressive sales tactics and questionable marketing. That compares with just nine investigations at UnitedHealth, though Golden Rule's revenues barely equaled 3% of UnitedHealth's 2003 revenues. At its low point, in 2002, Golden Rule settled for $660,000 a nine-state investigation that found its small-group policies required employees to submit "proof of good health," a violation of federal health-care rules. In addition to the payment, Golden Rule agreed to make "substantive" changes in the way it does business in those states.
Since taking over Golden Rule, UnitedHealth has made further strides. Complaints against the outfit have dropped by more than half. And as UnitedHealth expands Golden Rule, it is encouraging consumers to check health-care costs via its online "treatment cost estimator" so they aren't surprised by big out-of-pocket bills. "When we acquire a company, we take responsibility for all their past conduct," says Mark F. Lindsay, UnitedHealth's vice-president for communications and strategy.
American Medical Security has been in a similar spotlight. The Green Bay (Wis.) insurer clashed with Florida regulators in 2002 when it hiked premiums for policyholders who got sick. That sparked a nationwide review of such practices. Still, last December, California insurer PacifiCare acquired AMS for $505 million. A PacifiCare executive says the company has moved quickly to package AMS' low-end health plans with the more comprehensive coverage that it already offered.
Blackstone may have a tougher job cleaning up UICI. There are still many unhappy customers such as the Hendersons, whose lawsuit against UICI Inc. is ongoing. The company says it will fight the case. In a written response, Chief Executive William J. Gedwed says: "At the time of application, Mr. and Mrs. Henderson withheld material information concerning Mrs. Henderson's pre-application health history." As a result, the company believes it had the right to terminate both Hendersons' coverage, though it chose to cut only Darlene's. Moreover, Gedwed says David Henderson has received $90,000 in benefits from UICI -- not the $33,000 he claims to have been paid. The difference, says the Hendersons' attorney Anthony Stuart, is that UICI adds in discounts it receives as a member of a hospital network. A trial is scheduled to begin in California Superior Court in January.
The company also faces a multi-state investigation launched in May by Washington and Alaska regulators. Moreover, according to the NAIC, complaints at its MEGA unit were more than double the national average, albeit down from four times higher than average in 2003. UICI's Gedwed disputes the NAIC's complaint-rate calculations because, he says, they unfairly penalize companies with large numbers of individual policyholders, who use state regulators instead of corporate HR departments, to file complaints. California Commissioner Garamendi held hearings in San Francisco on Sept. 21 into so-called "illusory" insurance policies that offer limited benefits that barely cover medical costs. UICI points out that it paid $1.4 billion in medical claims last year.
Dogged by such criticism, UICI hired PricewaterhouseCoopers LLC this year to help it through the multi-state investigation. Gedwed says UICI has also implemented a system of follow-up calls to ensure that new customers fully understand their benefits.
Blackstone is trying to further mend fences. Three weeks ago execs met with Washington State Commissioner Mike Kreidler, who heads the multi-state investigation. While the company won't disclose specifics, it says it is planning to improve UICI's customer service and regulatory compliance. That's little comfort to the Hendersons and others like them who claim they've been shortchanged and left to fend for themselves.
By Brian Grow in Atlanta, with Joseph Weber in Chicago