Health plan "too good"? It may be illegal

The old adage, "If it sounds too good to be true, it probably is," applies now more than ever when it comes to health insurance. That's because more people -- some unscrupulous, others just incompetent -- are selling something they call health insurance that really isn't.

The unscrupulous ones simply want to take your money. The incompetent may be well-intentioned, but lack the business sense and financial resources to cover the claims when they start rolling in.

While firm numbers are hard to come by, industry watchdogs have seen a startling increase in the number of illegal health care plans, says Janie Miller, chair of the health insurance and managed care committee of the National Association of Insurance Commissioners. In a just-released study, Georgetown University's Health Policy Institute found that health insurance scams have been rising over the past two years as insurance premiums have increased at double-digit rates.

Among the findings: Since 2001, four unauthorized plans have left nearly 100,000 people with approximately $85 million in unpaid medical debts and without health coverage. The study was commissioned by the Commonwealth Fund, a private foundation supporting independent research on health and social issues.

Typically, scam health plans proliferate when insurance premiums are rising, prompting people to look for less expensive alternatives. "These people can sell their plans, because the market is seeking cheaper forms of coverage," says Miller.

Those sellers often target individuals and small business owners who don't appreciate the possibility of fraud and don't have the resources to thoroughly investigate potential insurers. Others may be deceived by crooks who say they're affiliated with a trade group and claim to offer coverage for individuals working in a particular industry.

The plans can sound quite legitimate. Their names often include such words as "assurance" or "mutual." The company or trade association names sound similar to the names of well-known, legitimate businesses or professional organizations. They're usually promoted through flyers, radio and Internet ads; some make themselves look more credible by recruiting licensed insurance agents.

What's more, those operating the plans may actually pay the first few claims and then stop, leaving policyholders wondering what is going on. "They're like Ponzi schemes," says Jerry Goldsholle, chief executive officer with, a consumer legal information site based in Mill Valley, Calif. "The operators get a lot of people to purchase the so-called insurance and pay premiums. Then, they'll shut down and leave town without paying claims."

Red flags
Here are some warning signs that a supposed health care plan won't be around to actually cover you when you need it:

* Low, low premiums: If the plan offers premiums much lower than what other firms are charging -- say, less than half the going rate -- watch out, says Dave Evans, vice president of the Independent Insurance Agents and Brokers of America in Alexandria, Va. "Ask if their benefits are less generous, or what's going on," says Evans.
* Easy, easy applications: Your antenna should shoot up if the application for coverage contains only a few questions. "A legitimate individual plan is going to ask sometimes extensive medical questions in order to properly price the product based on a person's medical condition," says the NAIC's Miller.
* Union or no union: Be skeptical of an agent trying to sell you a union plan and you're not in the union.
* Unlicensed agents: Watch out if an agent tells you he doesn't need a license because the insurance is exempt from regulation.

Checking up on a plan
The best way to determine if a health insurance plan is on the up-and-up is to contact your state's insurance regulators. To conduct business in your state, legitimate health insurers file documents with the appropriate regulatory agency. The regulators review these documents, as well as the insurers' financial statements, to make sure they will be able to pay the claims that are likely to come due.

One ploy that some unscrupulous peddlers of scam health plans use is to claim that their plans are either "ERISA" or "union" plans and thus are exempt from regulation by the states. They're usually twisting the truth.

To be sure, "ERISA" -- which refers to the federal Employee Retirement Income Security Act -- plans are regulated by the U.S. Department of Labor rather than state insurance departments. However, ERISA plans are sponsored by employers for their employees. They are not sold by insurance agents and Miller says, "I'm not aware of any way that an ERISA plan could be sold to an individual."

Similarly, some plans legitimately can be called "union" health insurance plans. They also are regulated by the Department of Labor and each year must file what's known as a Form 5500 with the government. But there has to be a true union behind it. They are sold to union members through the union, not insurance agents. To check whether a union plan is on the up-and-up, ask how long the association has been around and what its mission is, says Evans. "It should be a legitimate trade association," he adds.

After the fact
If you've purchased insurance from an illegal plan, you'll want to find new coverage ASAP. You can work with your state insurance commissioner to find companies that cover individuals or small businesses.

If you do have to file claims and the insurance company doesn't pay, you'll be responsible for the charges. No governmental safety net exists, as it does for those covered under licensed plans. If a legitimate plan goes bankrupt, all states have "guaranty funds" that will pay individuals' claims, up to varying limits. These funds aren't available if you've purchased insurance from an unlicensed provider.

More trouble ahead
Even if you never need to make a claim under a scam policy, you still may run into trouble down the road. Here's why: During the period you thought you were covered by the phony policy, you actually had no insurance at all. Once you obtain new, legitimate coverage, any medical condition you have will be excluded as a "pre-existing condition" for some period of time. Regulations on this vary by state and depend on whether you're purchasing individual or group coverage.

When an insurance commissioner learns of an illegal plan operating within the state, he or she typically will try to obtain a restraining order and shut it down as quickly as possible. The goal is stop the plan from operating, so that others aren't deceived into purchasing phony coverage.

Unfortunately, bringing the peddlers of illegal health care plans to justice -- and forcing them to pay up, face jail time or both -- is difficult. Many plan operators move from state to state and use a variety of names. They may file bankruptcy to avoid paying claims or fines. Insurance regulators often operate with small staffs, making it difficult for them to allocate resources to take illegitimate operators to court.

Your health care coverage is too important not to spend a few minutes checking it out. Doing so can help ensure that if you need medical attention, you can concentrate on getting well, rather than worrying about whether your bills will be paid.

For more information, read the Consumer Alert on the Web site of the National Association of Insurance Commissioners.

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