The way Dana Christensen sees it, she and her husband got scammed. In early 2001, seven years after Doug had successfully battled bone cancer, the couple needed new health insurance. So they were all ears when a representative from a group called the National Association for the Self-Employed knocked on the door of Doug's boat repair business in Marina del Rey, Calif. The rep offered what sounded like a great deal: For just $434 a month, MEGA Life & Health Insurance Co. would cover them both. The policy even carried a chemotherapy rider in case Doug's cancer came back.
But when the cancer did return later that year, they received a shock: A few months after Doug started chemotherapy, Cedars-Sinai Medical Center refused to treat him anymore, saying he had already used up the MEGA coverage. The problem: It capped chemo coverage at $1,000 a day, even though Doug's cost up to $18,000 -- fine print Dana says they were never told about. The doctor got Doug transferred to another hospital. But after he died in October, 2002, at the age of 48, Dana was stuck with almost $500,000 in medical bills that MEGA refused to cover, and now lives on her boat to save money on rent. "He said to me one day, 'I know it's too late for me, but this should not happen to people,"' recalls Dana, who says the NASE rep never told them that it functions as MEGA's marketing arm and only sells MEGA insurance. Last year, she sued MEGA and NASE for failing to disclose the caps and for endorsing a "sham" policy by pretending NASE was an independent group.
NASE President Robert Hughes says that "we are separate [from MEGA] and always have been separate." However, he also says that its representatives have dual roles and sell both NASE memberships and MEGA policies. In a written response to BusinessWeek, MEGA's parent, UICI Inc. (UICI ) of North Richland Hills, Tex., said: "We believe the Christensens' coverage was properly represented to the consumers." On Aug. 18, a California judge denied a motion by MEGA and NASE to dismiss the Christensens' case. A trial on charges of fraud and unfair trade practices is set for January, 2005.
The U.S. today is awash in these and other kinds of insurance disputes. Across the country, insurers are pitching a kaleidoscope of plans that collect millions in premiums and fees but don't pay all claims or serve up shabby service. This summer alone, Montana has issued 15 cease-and-desist orders against medical discount plans hawking coverage for $89.95 a month, no questions asked. In Florida, officials have shut down 200 fake insurance operators in the past two years. In February, the General Accounting Office found that 144 unlicensed health insurers covering 200,000 people have left $252 million in unpaid medical claims in recent years. Overall, health-care fraud cost $54 billion in 2003 and is growing by at least 3% a year, according to the National Healthcare Anti-Fraud Assn., a nonprofit group in Washington, D.C.
Driving the trend is a punishing combination of soaring health-care costs and shrinking employer coverage. The ranks of uninsured Americans jumped again last year, by 1.4 million, to 45 million, according to new data released Aug. 26 by the Census Bureau. As more families are tossed out of employer coverage, they're left to fend for themselves in the bewildering world of health insurance.
Indeed, the number of consumers buying medical policies on their own has jumped by nearly 1.5 million since 2000, to 17.5 million last year. Given the crushing cost of family coverage, increasingly desperate Americans are susceptible to anyone who has a deal to offer. "We have an availability and an affordability issue -- and that's when scams proliferate," says Florida Chief Financial Officer Tom Gallagher, who oversees insurance regulation in the state.
Nor is the problem easy to fix. Some, such as fake health insurers and bogus Medicare drug cards, are outright illegal. Others, like NASE and MEGA, claim legitimacy, saying they play a dual role by providing insurance as well as marketing it, even though NASE doesn't always tell would-be members like the Christensens that it serves as the insurer's marketing arm. Many take advantage of a crazy quilt of regulations that often allows them to skirt legal oversight. For example, 40 states exempt associations such as NASE from state insurance laws if they provide other benefits to members besides insurance, such as travel discounts.
Trouble is, few states police such associations to determine their legitimacy. The Bush Administration's plan to push medical savings accounts managed by private firms could make the problem worse, some critics say, by placing more responsibility for health-care costs in the hands of individuals. "There is potential for real harm in this marketplace," says Kansas Insurance Commissioner Sandy Praeger, who chairs the health insurance committee at the National Association of Insurance Commissioners (NAIC). Even so, support for federally regulated association plans (AHP) is growing. AHP legislation has been approved by the House of Representatives, and the GOP platform calls for its passage.
What particularly troubles state authorities is how sophisticated many schemes are. Three years ago, Florida insurance investigator Vincent Mazzara began scrutinizing an alleged scam by a company called Insurance Maternity Consultants Inc., whose headquarters is listed as a mailbox drop in Miami. The owner, Angel Alcedes Golindano, marketed health insurance to pregnant women, mostly Hispanics. He duped them into paying $3,000 per policy, officials say, by claiming he had found a loophole that excluded pregnancy for unemployed women from being a preexisting condition.
In fact, Florida investigators say, Golindano was doctoring their applications to make them appear to be employees of two other companies. Then he bought real insurance coverage in their names through Miami-based health insurer AvMed Health Plans, paying the $2,000 premium and pocketing the $1,000 difference. AvMed complained to officials after it received $2.3 million in claims from Golindano's fake employees -- nearly all of them pregnant. "It was very slick," says Mazzara. Golindano, who couldn't be reached for comment, was arraigned in a Miami court on Aug. 24 and a trial was set for November.
Some operators use regulatory loopholes in some states even after they get shut down in others. In June, Montana State Auditor John Morrison closed down the Montana operations of Health One Inc., a Houston company that charged $89.95 per month for access to a network of doctors who allegedly offered discount medical and vision care but in reality, says Morrison, provided no discount. But when he asked Health One's home state to shutter all of its operations around the country, Texas couldn't help. Unlike Montana law, Texas insurance law doesn't apply to discount medical plans because they're offering discounts, not insurance, say Texas officials. Many other states have similar rules, the NAIC says, though last month Minnesota ordered Health One to stop selling there. Repeated calls to Health One were not returned.
Still, some headway has been made. The Labor Dept. has opened more than 170 investigations into fraudulent health insurers. On May 24, the Federal Trade Commission sued Pharmacycards.com, which attempted to debit $10 million from 90,000 consumers' bank accounts without their knowledge. It did so by telling payment-processing companies that they had bought discount drug cards, many under the new Medicare plan that took effect on June 1. Repeated calls to Pharmacycards.com weren't returned.
"A VERY SCARY PLACE"
Florida, with its huge senior citizen population, has taken the lead in battling health-insurance fraud. Lawmakers last year required all out-of-state health plans to carry a bold warning that consumers forfeit their state protections against fraud and could face premium hikes by buying them. In January, a new law will require medical discount plans to register with the state. Individual health insurance "is the least regulated market out there and a very scary place to be," says Torre A. Grissom, senior analyst in Florida's Office of Insurance Regulation.
As for the Christensens, Dana's suit against NASE and MEGA is still pending, even as parent UICI set aside $25 million to settle at least four separate suits alleging that the insurer fraudulently used NASE and other associations to sell its insurance. In May, MEGA said that "without acknowledging fault, liability, or wrongdoing of any kind and subject to satisfaction of certain conditions, it has agreed to settle a substantial number of its pending 'association group' lawsuits." Details remain confidential. "They are taking advantage of people who think they are buying health insurance, but they're not," charges Anthony Stuart, a plaintiffs lawyer representing Christensen. True or not, opportunities for hoodwinking desperate consumers will only grow as Corporate America steadily pares back coverage and more people have to fend for themselves.
By Brian Grow in Atlanta