They Think They're Insured. They're Not

Millions of Americans are buying medical discount cards that don't deliver on their promises. Now states are taking action

By Aaron Bernstein and Joseph Weber

Michelle S. O'Kelley considered herself a fairly savvy health-care consumer. A diabetic since the age of four, the 42-year-old Minneapolis resident knew that if she went without health coverage for even a short stint, insurers would label her diabetes a preexisting condition and deny coverage for a year. So when she lost her job as an employment counselor last January, O'Kelley hopped online and signed up for a plan offered by the International Association of Benefits (IAB). Its Web site said she would get "insured benefits" from doctors, hospitals, and other providers for $169 a month.

It sounded good. But her discount card knocked just 50 cents off her $75 bottle of insulin. Then in April, when O'Kelley landed a job that provided health care, the insurer denied coverage for illness related to her diabetes for a year. Why? Because, it told her, IAB sells discounts from medical-care providers, not insurance. "I can't believe I was such a sucker," says Kelley.

She's hardly alone. Illinois and Texas have filed lawsuits accusing IAB of misleading consumers into thinking its discount plans are health insurance. (IAB founder James Wood says he's trying to settle the suits and that his 5,000 independent agents tell customers that its plans aren't insurance.) And across the country, a rising tide of complaints about fraud and deception by discount card companies has prompted action by dozens of other states. Twenty now require companies that offer discount cards to say expressly that discount plans aren't insurance.


  Even so, there's a new indicator of spreading card confusion: As many as 17% of the U.S.'s 40 million temporary and part-time workers -- 7 million people -- say they have health insurance when they actually only have discount cards. That's according to a study released in December by the Iowa Policy Project, funded by the Labor Dept. and the Commonwealth Fund and conducted by pollsters Lake, Snell, Perry, Mermin & Associates.

The pollsters first asked a sample of nonstandard workers if they had health insurance. They then re-interviewed those who said yes to determine exactly what they had. University of Iowa economics professor Peter Fisher says he and his colleagues were shocked by the findings, which suggest that discount cards are masking an explosion in the ranks of the uninsured far beyond the 46 million reported by the Census Bureau this fall.

Many discount card companies offer valid savings on services such as doctors' visits and prescription medicines. But because they typically aren't selling insurance, they're usually not regulated by state insurance commissioners, creating an opening for scammers. Todd Cioni, who heads the compliance unit of Maryland's Insurance Commission, says some card companies are fly-by-night hustlers that blast-fax pitches and make cold calls hyping discounts of up to 95% that turn out to be far less.


  In Texas, Family Health Corp. and Family Care/NAPP recently settled a lawsuit over allegedly misleading ads. Although the companies maintain they did nothing wrong, they decided it was advantageous to pay $312,500 to settle the suits, says Kristopher A. Rabie, president of the parent company of Family Health. It does business with Family Care, whose CEO is his father, Mahmoud Rabie.

Some victims get hit by what they see as outright fraud. That happened to Mary (not her real name, which she's too embarrassed to give). When the 32-year-old resident of Havre, Mont., got pregnant, she ponied up $289 for what she was told was health insurance to a Tampa company that has since disconnected its phone. It sent her a card her doctor and hospital wouldn't accept, she says. Says John M. Morrison, state auditor for Montana, which cracked down on card companies last year: "There are a lot of illegal discount plans advertising in misleading ways."

To be sure, many discount cardholders buy their cards from more legitimate players, which can provide a much-needed service. In the past decade or so, soaring medical inflation has prompted the insured and uninsured alike to seek price relief. Card companies can negotiate group discounts of 10% to 30% for individuals, who often can't get the lower prices traditional insurers squeeze out of health providers. Doctors sign on to get new patients.


  The cards offer "tremendous value" to some consumers, says Thomas R. Beauregard, a senior vice-president in the health-access strategies unit of UnitedHealth Group (UNH ). The Minnetonka (Minn.) insurer provides the discount card to 400,000 people, who get it from their employers or buy it at outlets such as Sam's Club. For $6 to $10 a month, they get discounts from UnitedHealth's 400,000-strong provider network.

Overall, Americans have snapped up as many as 20 million discount cards, estimates Vince DiBenedetto, CEO of Chicago-based Coverdell & Co., a unit of Vertrue (VTRU ), a publicly traded marketing outfit. Coverdell alone has 3.5 million cardholders, he says.

While discount card execs say they work hard to make sure customers know their cards aren't insurance, they acknowledge that the industry has a growing image problem. Card companies formed the Consumer Health Alliance in 2002 to self-monitor the industry and work with state regulators. But an investigation by Maryland's Insurance Commission last fall found misleading sales pitches implying that the cards were insurance and involving hidden fees and unauthorized billings. Companies there and in other states hawk cards with messages such as "Save on Healthcare & Prescription Drugs. Everyone Accepted!" and "Healthcare Discounts Up to 95%."


  The only in-depth examination of the industry thus far turned up a raft of similar problems. Last year, researchers at Georgetown University's Health Policy Institute purchased five discount cards available in the Washington area. They called 44 medical providers listed as members of the cards' networks. The result: Only 16 honored the card, and only nine would give an estimated discount prior to performing the service. Only one card listed providers that all offered discounts.

Even when discounts were real, they weren't always what they were cracked up to be. They varied from 4% to 36%, much less than the 80% promised by two cards. In some cases, providers told the Georgetown researchers they offered similar or even greater discounts to uninsured consumers without cards. "We already offer patients willing to prepay their bill a 30% discount," says Michelle R. Leone, vice-president for patient financial services at Beth Israel Deaconess Medical Center in Boston. She says her hospital, which wasn't part of the study, doesn't accept discount cards.

If state governments are able to crack down on the scammers, discount cards could end up helping the uninsured. Florida is one of the strictest, requiring card companies to get licensed like insurers. That has reduced complaints, says Florida Deputy Insurance Commissioner Rich Robleto. He's leading a committee of the National Association of Insurance Commissioners to draw up a model law that all states could adopt. That would be a first step in addressing a growing national problem.

With Amy Barrett in Philadelphia and Catherine Arnst in New York

Bernstein is an editor in BusinessWeek's Washington bureau, and Weber is Chicago bureau chief

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