Private Health Insurance: Unauthorized or Bogus Entities Have
Exploited Employers and Individuals Seeking Affordable Coverage
(03-MAR-04, GAO-04-512T).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-512T
ACCNO: A09409
TITLE: Private Health Insurance: Unauthorized or Bogus Entities
Have Exploited Employers and Individuals Seeking Affordable
Coverage
DATE: 03/03/2004
SUBJECT: Consumer protection
Federal/state relations
Fraud
Health insurance
Insurance companies
Insurance regulation
Medical expense claims
Colorado
Florida
Georgia
Texas
******************************************************************
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GAO-04-512T
United States General Accounting Office
GAO Testimony
Before the Committee on Finance, U.S.
Senate
For Release on Delivery Expected at 9:30 a.m. EST
Wednesday, March 3, 2004 PRIVATE HEALTH INSURANCE
Unauthorized or Bogus Entities Have Exploited Employers and Individuals Seeking
Affordable Coverage
Statement of
Kathryn G. Allen, Director
Health Care-Medicaid and Private Health Insurance Issues
Robert J. Cramer, Managing Director
Office of Special Investigations
GAO-04-512T
Highlights of GAO-04-512T, a testimony before the Committee on Finance,
U.S. Senate
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.
March 3, 2004
PRIVATE HEALTH INSURANCE
Unauthorized or Bogus Entities Have Exploited Employers and Individuals Seeking
Affordable Coverage
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
o adopting names that were familiar to consumers or similar to
legitimate firms,
o marketing their products through licensed agents and with other health
care or administrative service companies,
o setting premiums below market rates,
o marketing to employers or individuals that were particularly likely to
be seeking affordable insurance alternatives, and
o 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.
www.gao.gov/cgi-bin/getrpt?GAO-04-512T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Kathryn G. Allen at (202)
512-7118 or Robert J. Cramer at (202) 512-7455.
Mr. Chairman and Members of the Committee:
We are pleased to be here today as you address how employers and
individuals have been exploited by unauthorized or bogus entities selling
health benefits. As private 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 coverage. These
unauthorized entities-also sometimes referred to as bogus entities or
scams-may price their products below market rates to attract purchasers
but 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. When these entities do
not pay legitimate claims for the costs of care that policyholders incur,
the harm can affect several parties: individuals may be held responsible
for their own medical bills, which can mean owing thousands of dollars;
employers may find that they have paid premiums for nonexistent coverage
for their employees; and health care providers may be at increased risk of
not being paid for services already rendered. In addition, federal and
state governments may need to invest significant public resources to
investigate and shut down these unauthorized entities.
Our testimony will summarize findings of a report that we are releasing
today that examines the prevalence of these entities and their impact on
employers, especially small employers, and policyholders.1 At your
request, Mr. Chairman, together with Senator Snowe, Chair of the Senate
Committee on Small Business and Entrepreneurship, and Senator Bond, we
examined (1) the number of unauthorized entities selling health benefits
that federal and state governments identified from 2000 through 2002, the
number of employers and policyholders affected, and the amount of unpaid
claims involved, (2) approaches and characteristics of these entities'
operations, and (3) the methods federal and state governments have
employed to identify such entities and to stop or prevent them from
continuing to operate. We surveyed each state's insurance department in
1U.S. General Accounting Office, Private Health Insurance: Employers and
Individuals Are Vulnerable to Unauthorized or Bogus Entities Selling
Coverage, GAO-04-312 (Washington, D.C.: Feb. 27, 2004). We conducted our
work for the report from January 2003 through February 2004 in accordance
with generally accepted government auditing standards.
2003, including that of the District of Columbia,2 and also obtained data
from the Department of Labor's (DOL) Employee Benefits Security
Administration (EBSA), which conducts civil and criminal investigations of
employer-based health plans.3 We consolidated information from DOL and the
states to determine the unduplicated number of entities identified from
2000 through 2002 and the numbers of affected employers and
policyholders.4 We also asked states to provide information on a related
type of problematic arrangement-discount arrangements that may be
misrepresented as insurance. We interviewed officials with EBSA, including
those in three of its regional offices (Atlanta, Dallas, and San
Francisco); the National Association of Insurance Commissioners (NAIC);
insurance departments in four states that were identified as being
affected by a relatively large number of these entities (Colorado,
Florida, Georgia, and Texas); and other experts and associations,
including those representing insurance agents and administrators of
employers' health benefits. Because many of the federal and state
investigations regarding these entities were ongoing at the time we did
our work, we generally do not name specific entities except in situations
in which publicly disclosed actions have been taken against an entity. We
also examined in detail the operations of one of the largest entities
identified during this period, Employers Mutual, LLC, and the actions
federal and state governments took to stop it from operating.
In summary, DOL and the states identified 144 unique entities not
authorized to sell health benefits coverage from 2000 through 2002.
Although every state was affected, with at least five entities marketed in
each state, these entities were most often identified in southern states.
Specifically, of the seven states with at least 25 entities, five were
located in the South. These 144 unauthorized entities covered at least
15,000 employers and more than 200,000 policyholders from 2000 through
2002. At the time of our 2003 survey, DOL and the states reported that the
2Throughout this testimony, we include the District of Columbia in our
discussion of states; we refer to each state's insurance department,
division, or office as an insurance department.
3In conducting our state survey, we asked states to use the following
definition: "an unauthorized health benefits plan is defined as an entity
that sold health benefits, collected premiums, and did not pay or was
likely not to pay some or all covered claims. These entities are also
known as insurance scams." We asked EBSA to provide information using a
similar definition.
4States provided data on the number of policyholders and DOL provided data
on the number of participants; we refer to the combined data as
policyholders in this testimony.
identified entities did not pay at least $252 million in medical claims
and only about $52 million-about 21 percent of the total unpaid claims-had
been recovered on behalf of policyholders and those covered by the
policies.
Most unauthorized entities characterized themselves as one of several
types of arrangements and some had other approaches in common. For
example, the operators of these entities often characterized the entities
in one of several ways that gave an appearance of being exempt from state
insurance regulation when they should have been subject to regulation.
Some entities selected names that resembled legitimate insurers or
employee benefit firms and recruited insurance agents, administrative
services companies, and health care provider networks to enhance their
appearance of legitimacy to consumers and employers. The entities
typically set their prices below market rates to be attractive especially
to employers or individuals seeking more affordable health insurance
alternatives. One of the largest entities, Employers Mutual, used a name
similar to the long-established, Iowa-based Employers Mutual Casualty
Company; established associations to sell its products; marketed its
products through licensed insurance agents and contracted with other
companies for administrative services; and, according to court documents,
set premiums by underpricing the average of sample rates posted on the
Internet. According to court documents and DOL, during a 10-month period
in 2001, Employers Mutual collected approximately $16 million in premiums
from over 22,000 people and did not pay more than $24 million in medical
claims for which they were liable.
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 unique entities identified from 2000 through 2002.
Such an order, however, only applies to the activity in the issuing state.
States reported also taking other actions, such as filing cases against
the entities' operators in civil or criminal courts or fining agents or
revoking their licenses for selling unauthorized coverage. DOL obtained
court orders against three large entities from 2000 through 2002 that
prevented their operations nationwide. Further 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.
Background States regulate the insurance products that many employers and
individuals purchase. Each state's insurance department enforces the
state's insurance statutes and rules. Among the functions state insurance
departments typically perform are licensing insurance companies, managed
care plans, and the agents who sell their products; regulating insurers'
financial operations to ensure that funds are adequate to pay
policyholders' claims; reviewing premium rates; reviewing and approving
policies and marketing materials to ensure that they are not vague and
misleading; and implementing various consumer protections, such as
assisting people who do not receive health benefits that are covered
through insurance products or by providing an appeals process for denied
5
claims.
The federal government regulates most private employer-sponsored pension
and welfare benefit plans (including health benefit plans) as required by
the Employee Retirement Income Security Act of 1974 (ERISA).6 These plans
include those provided by an employer, an employee organization (such as a
union), or multiple employers through a multiple employer welfare
arrangement (MEWA).7 DOL is primarily responsible for administering Title
I of ERISA. Among other requirements, ERISA establishes plan reporting and
disclosure requirements and sets fiduciary standards for the persons who
manage and administer the plans.8 These requirements generally apply to
all ERISA-covered employer sponsored health plans, but certain
requirements vary depending on the size of the employer or whether the
coverage provided is through an insurance policy or a self-funded plan
where the employer assumes the risk associated with paying directly for at
least some of their employees' health care costs. In addition, ERISA
generally preempts states from directly regulating employer-sponsored
health plans (although maintaining
5State insurance regulators established NAIC to help promote effective
insurance regulation, to encourage uniformity in approaches to regulation,
and to help coordinate states' activities. Among other things, NAIC
develops model laws and regulations to assist states in formulating their
policies to regulate insurance.
6Pub. L. No. 93-406, 88 Stat. 829.
7MEWAs are plans or other arrangements that provide health and welfare
benefits to the employees of two or more employers. Under ERISA, MEWAs do
not include certain plans that the Secretary of Labor finds are collective
bargaining agreements, or plans established or maintained by a rural
electric cooperative or a rural telephone cooperative association.
8Under ERISA, a fiduciary generally is any person who exercises
discretionary authority or control respecting the management or
administration of an employee benefit plan or the management or
disposition of the plan's assets.
DOL and States Identified 144 Unique Unauthorized Entities Operating from 2000
through 2002 That Left More Than $250 Million in Unpaid Claims
states' authority to regulate insurers and insurance policies). Therefore,
under ERISA, self-funded employer group health plans generally are not
subject to the state oversight that applies to insurance companies and
health insurance policies. The federal and state governments coordinate
their regulation of MEWAs, with states having the primary responsibility
to regulate the fiscal soundness of MEWAs and to license their operators,
and DOL enforcing ERISA's requirements.
DOL and the states identified 144 unauthorized entities from 2000 through
2002. This likely represents the minimum number of unauthorized entities
operating during this period because some states did not report on
entities that they were still investigating. The number of unauthorized
entities newly identified by DOL and the states each year almost doubled
from 2000, when 31 were newly identified, through 2002, when 60 were newly
identified.
DOL and the states found that every state had at least 5 entities
operating in it. Specifically, the number of entities per state ranged
from 5 in Delaware and Vermont to 31 in Texas. (See fig. 1.) Many entities
marketed their products in more than one state, and some operated under
more than one name or with more than one affiliated entity. These entities
were concentrated in certain states and regions. Seven states had 25 or
more entities that operated during this period; 5 of these states were
located in the South. In addition to the 31 entities in Texas, 30 were in
Florida, 29 each in Illinois and North Carolina, 28 in New Jersey, 27 in
Alabama, and 25 in Georgia.
Figure 1: Number of Unauthorized Entities That Operated in Each State,
2000-2002
Source: GAO analysis of DOL and state data.
Note: Some of the unauthorized entities operated in more than one state so
the total number of entities identified by DOL and the states exceeds the
total of 144 unique entities.
At least 15,000 employers purchased coverage from unauthorized entities,
affecting more than 200,000 policyholders from 2000 through 2002. The
number of individuals covered by unauthorized entities was even greater
than the more than 200,000 policyholders covered because the policyholder
could be an employer that purchased coverage on behalf of its employees or
the policyholder could be an individual with dependents. Therefore, any
one policyholder could represent more than one individual. The states
reported that more than half of the entities they identified frequently
targeted their health benefits to small employers.
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. This
represents the minimum amount of unpaid claims associated with these
entities identified from 2000 through 2002 because in some cases DOL and
the states did not have complete information on unpaid claims for the
entities they reported to us. Federal and state governments reported that
about 21 percent of unpaid claims had been recovered from entities
identified from 2000 through 2002-$52 million of $252 million. These
recoveries could include assets seized from unauthorized entities that
have been shut down or frozen from other uses. Licensed insurance agents
who have marketed products offered by these entities have also reimbursed
unpaid claims either voluntarily or through state or court action.9
Additional assets may be recovered from the entities identified from 2000
through 2002 because investigations and federal and state actions remain
ongoing.10 However, it is likely that many of the assets will remain
unrecovered because federal and state investigators report that the
entities often are nearing bankruptcy when detected or otherwise have few
remaining assets with which to pay claims.
A few entities were responsible for a large share of the affected
employers and policyholders and the resulting unpaid claims. Of the 144
unique entities, 10 alone covered about 64 percent of the employers and
about 56 percent of the policyholders. They also accounted for 46 percent
of the unpaid claims.
In addition to the unauthorized entities selling health benefits, 14
states reported that discount plans were inappropriately marketed as
health insurance products in some manner. Unlike legitimate insurance,
discount plans do not assume any financial risk nor do they pay any health
care claims. Instead, for a fee they provide a list of health care
providers that have agreed to provide their services at a discounted rate
to participants. In response to our survey, 40 states reported that they
were aware that discount plans were marketed in their state. While
discount plans are not problematic as long as purchasers clearly
understand them, 14 of these states reported that some discount plans were
misrepresented as health insurance. For example, some discount plans were
marketed with terms or phrases such as "medical plan," "health benefits,"
or "pre-existing conditions immediately accepted." However, state
insurance departments do not regulate discount plans because they are not
considered to be health insurance. Thus, while state insurance departments
might be aware that discount plans operated within their borders, they
would not necessarily be able to quantify the extent to which they exist.
9The four states whose officials we interviewed had laws imposing
penalties on agents and others who represented such products.
10Most states and DOL reported to us from March through June 2003.
Most Unauthorized Entities Characterized Themselves as One of Several Types of
Arrangements and Some Had Other Approaches in
o
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. For example, about 80 percent of
the entities characterized themselves as one of four arrangements-
associations, professional employer organizations, unions, or
singleemployer ERISA plans-or some combination of these arrangements.
According to DOL and the states, specifically: 27 percent of the entities
characterized themselves as association
Common arrangements through which employers or individuals bought health
benefits through existing legitimate associations or through newly created
associations established by the unauthorized entities. Although some of
these entities claimed that this structure would shield them from
oversight by federal or state governments, these associations would be
subject to federal and state oversight if they were determined to be
MEWAs.
o 26 percent of the entities were identified as professional employer
organizations, also known as employee leasing firms, which contracted with
employers to administer employee benefits and perform other administrative
services for contract employees. However, professional employee
organizations could be subject to federal and state requirements if, in
addition to providing administrative services, they managed assets or
controlled benefits for multiple employers.
o 9 percent of the entities identified claimed to be union arrangements
that would be exempt from state regulation. However, they lacked
legitimate collective bargaining agreements and were therefore subject to
state oversight.
o 8 percent of the entities identified characterized themselves as
singleemployer ERISA plans and claimed to be administering a self-funded
plan for a single employer. Such plans, when administered with funds from
one employer for the benefit of one employer's workers, are exempt from
state insurance regulation under ERISA. However, assets for several
employers were commingled in these entities, making them MEWAs subject to
state regulation.
o 10 percent of the entities were reported as a combination of one of
these or other types of arrangements.
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.
These entities sometimes took other steps to enhance their appearance of
legitimacy and make their products attractive to prospective purchasers.
For example, some entities
o adopted names that were familiar to consumers or similar to those of
legitimate firms;
o marketed their products through licensed agents;
o established relationships with networks of health care providers and
with companies that provide administrative services for employers offering
health benefits;
o set premiums below market rates;
o 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
o paid initial claims while collecting additional premiums before
ceasing claims payments.
One of the most widespread entities during the period we examined that
illustrates some of these approaches was Employers Mutual, incorporated in
Nevada in July 2000. According to court documents and DOL, four
individuals ("the principals") operated Employers Mutual and, during a
10-month period from January through October 2001, collected a total of
approximately $16 million in premiums in every state from over 22,000
people. Today, more than $24 million in medical claims against Employers
Mutual remain unpaid.
The name Employers Mutual is similar to the name of a long-established
Iowa-based insurance company marketed throughout the United States,
Employers Mutual Casualty Company, which had no affiliation with Employers
Mutual. Notably, both in 1998 and in 2000, one of the Employers Mutual
principals was found to have engaged in the health care
insurance business in California without a license and was barred from
engaging in any insurance business in that state.
Two of the principals formed 16 associations having names relating to
workers in a wide array of industries and professions, such as farmers,
construction workers, mechanics, and food service employees. Principals
were named as the "managing members" of all 16 associations and created an
employee health benefit plan for each association. The principals
contracted with legitimate firms to process claims and to market the plans
to employers nationwide. Employers Mutual claimed that it was exempt from
DOL regulation.
One of the principals, who was not a licensed actuary and had no formal
training, set the premiums for the 16 plans after he calculated the
average of sample rates posted by insurance companies on the Internet and
reduced them to ensure that Employers Mutual offered low prices. The
principals also formed two companies, Columbia Health Network and Western
Health Network, that purported to provide networks of health care
providers for people insured by Employers Mutual. Additionally, the
principals formed two other companies, Graf Investments and WRK
Investments, which purported to provide investment services. However,
these companies were found to be vehicles for the illegal diversion of
over $1.3 million of plan assets.11
When Nevada insurance regulators became aware of Employers Mutual, they
found that it was transacting insurance business without a certificate of
authority as required by Nevada law12 and issued a cease and desist order
against Employers Mutual in June 2001.13 Subsequently, other states also
issued cease and desist orders against Employers Mutual. In December 2001,
based on a petition from DOL, the U.S. District Court for the District of
Nevada granted a temporary restraining order against Employers Mutual and
its four principals.14 The restraining order temporarily froze the assets
of all the principals and prohibited them from
11Chao v. Graf, No. 01-0698, (D. Nev. Sep. 10, 2003) (order granting
permanent injunction).
12Nev. Rev. Stat. S:S: 685B.030, 685B.035 (2003).
13Cease and Desist Order: Employers Mutual, L.L.C., Nevada Department of
Business and Industry Division of Insurance case no. 01.658 (June 14,
2001).
14Chao v. Graf, No. 01-0698, (D. Nev. Dec. 13, 2001) (order granting
temporary restraining order).
States and DOL Share Responsibility for Identifying, Stopping, and Preventing
the Establishment of Unauthorized Entities
conducting further activities related to the business. It also appointed
an independent fiduciary to administer Employers Mutual and associated
entities and, if necessary, implement their orderly termination. On
September 10, 2003, the district court issued a default judgment granting
a permanent injunction against the principals and ordered them to pay $7.3
million in losses suffered as a result of their breach of fiduciary
obligations to beneficiaries.15 The fiduciary has also sued and sought
settlements from insurance agents who marketed or sold Employers Mutual's
plan for damages and relief from unpaid or unreimbursed claims. Employers
Mutual is also under investigation by law enforcement authorities.
Appendix I includes a chronology of events from Employers Mutual's
establishment to state and federal actions to shut it down.
Both federal and state governments have responsibility for identifying
unauthorized entities and stopping and preventing them from exploiting
businesses and individuals. DOL's EBSA conducts civil and criminal
investigations of employer-based health benefits plans that are alleged to
violate federal law as part of its responsibilities for enforcing ERISA.
For example, EBSA may identify entities whose operators have breached
their ERISA fiduciary responsibilities, which generally require managing
benefit plans and assets in the interest of participants. State insurance
departments investigate entities and individuals that violate state
insurance or MEWA requirements, such as selling insurance without a
license. Because some entities may violate both federal ERISA requirements
and state insurance requirements, both EBSA and states may investigate the
same entities or coordinate investigations. Of the 144 unique entities DOL
and states identified, the states identified 77 entities that DOL did not,
DOL identified 40 that the states did not, and both the states and DOL
identified another 27.
States and DOL often relied on the same method to learn of the entities'
operations-through consumer complaints. States also received complaints
about these entities from several other sources, such as agents,
employers, and providers. In addition, NAIC played an important role in
the identification process by helping to coordinate and distribute state
and federal information on these entities, and states and DOL also
reported that they coordinated directly. For example, DOL submitted
quarterly reports to NAIC that identified all open civil investigations,
the individuals
15Chao v. Graf, No. 01-0698, (D. Nev. Sept. 10, 2003) (order granting
permanent injunction).
being investigated, and the EBSA office conducting the investigations.
NAIC shared this and other information from EBSA regional offices with
state investigators throughout the country.
After identifying the unauthorized entities, the primary mechanism states
used to stop them from continuing to operate was the issuance of a cease
and desist order. Generally, a state cease and desist order tells the
operator of the entity, and affiliated parties, to stop marketing and
selling health insurance in that state and in some cases explicitly
establishes their continuing responsibility for the payment of claims and
other obligations previously incurred. Such an order, however, only
applies to the activity in the issuing state. Thirty states reported that
they issued a total of 108 cease and desist orders that affected 41 of the
144 unique entities.16 About 58 percent of policyholders and nearly half
of the total unpaid claims were associated with these 41 entities. States
also took other actions against some entities, sometimes in conjunction
with issuing cease and desist orders. For example, in 48 instances, states
responding to our survey reported that they took actions against or sought
relief from the agents who sold the entities' products, including fining
them, revoking their licenses, or ordering them to pay outstanding claims.
States also reported that they took actions against the entity operators
in 25 instances and filed cases in court in 14 instances to pursue civil
or criminal penalties.
DOL often relied on states to stop unauthorized entities through cease and
desist orders while it conducted investigations, usually in multiple
states, to obtain the evidence needed to stop these entities' activities
nationwide through the federal courts-that is, by seeking injunctive
relief and, in some cases, pursuing civil and criminal penalties.17 DOL's
enforcement actions apply to all states. To obtain a temporary restraining
order or injunction, DOL must offer sufficient evidence to support its
claim that an ERISA violation has occurred and that the government will
likely prevail on the merits of the case. As of December 2003, DOL had
obtained
16Twelve states that identified unauthorized entities did not report
issuing cease and desist orders regarding the entities they identified,
and nine states did not report identifying unauthorized entities.
17An injunction is an order of a court requiring one to do or refrain from
doing specified acts. Injunctive relief sought by DOL against unauthorized
entities includes temporary restraining orders, which may be issued
without notice to the affected party and are effective for up to 10 days;
preliminary injunctions, which may be issued only with notice to the
affected party and the opportunity for a hearing; and permanent
injunctions, which are granted after a final determination of the facts.
temporary restraining orders against three entities for which
investigations were opened from 2000 through 2002. In two of these cases,
DOL also obtained preliminary injunctions and in one case ultimately
issued a permanent injunction. Each of these actions affected people in at
least 41 states. (See table 1.) These three entities combined affected an
estimated 25,000 policyholders and accounted for about $39 million in
unpaid claims. Documenting that a fiduciary breach took place can be
difficult, timeconsuming, and labor-intensive because DOL investigators
often must work with poor or nonexistent records, uncooperative parties,
and multiple trusts and third-party administrators. As of August 2003,
EBSA was continuing to investigate 51 of the 69 entities it had
investigated from 2000 through 2002. As a result, further federal actions
remain possible.18
Table 1: Temporary Restraining Orders and Injunctions for Three
Unauthorized Entities, as of December 2003
Temporary Preliminary Permanent Unauthorized Number of restraining order
injunction injunction entity states affected issueda obtained obtained
Other results
Employers Mutual 51 December 2001 February 2002b September 2003 In
September 2003, a federal court ordered the principals to pay about $7.3
million.
OTR Truckers 44 June 2002 None None In September 2002,
Health and Welfare one defendant
Fund agreed to pay an
amount that was less
than 1 percent of the
unpaid claims.
Service and 41 October 2002 October 2002c None None
Business Workers of
America Local 125
Benefit Fund
Source: EBSA.
aGenerally, these temporary restraining orders froze the unauthorized
entity's assets; removed the operators; prevented the operators from
managing the entity; and appointed an independent fiduciary to manage the
entity, account for assets, and pay claims.
bPreliminary injunction extended appointment of fiduciary and prevented
health care providers from taking action against participants to collect
unpaid bills.
cPreliminary injunction ordered termination of the entity and prevented
health care providers from taking action against participants to collect
unpaid bills or other actions.
18For example, in addition to the three investigations that had yielded
temporary restraining orders or injunctions, EBSA had referred four other
case investigations to the DOL Solicitor's Office for potential
enforcement action and obtained subpoenas in five cases.
To help prevent unauthorized entities from continuing to operate, the four
states we reviewed-Colorado, Florida, Georgia, and Texas-and DOL alerted
the public and used other methods. 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. To help states increase public
awareness, NAIC developed a model consumer alert in the fall of 2001,
which it distributed to all the states and has available on its Web site.
Insurance departments in the four states took various actions to prevent
unauthorized entities from continuing to operate. Each of these states
issued news releases to alert the public about these entities in general
and to publicize the enforcement actions they took against specific
entities. The four states' insurance departments also maintained Web sites
that allow the public to search for those companies authorized to conduct
insurance business within their borders, and some states also released
public service announcements via radio, television, or billboards. 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. DOL primarily targeted its prevention efforts to employer groups
and small employers. For example, to help increase public awareness about
these entities, on August 6, 2002, the Secretary of Labor notified over 70
business leaders and associations, including the U.S. Chamber of Commerce
and the National Federation of Independent Business, about insurance tips
that the department had developed and asked them to distribute the tips to
small employers. Also, the EBSA regional offices initiated various
activities within the states in their regions. For example, EBSA's Atlanta
regional office sponsored conferences that representatives from 10 states
and NAIC attended.
Concluding Recent double-digit premium increases for health coverage have
encouraged employers, particularly small employers, and individuals to
Observations search for affordable coverage. At the same time, however,
these premium increases have created an environment that makes them
vulnerable to being exploited by unauthorized or bogus entities. This has
been reflected by the increasing number of these entities identified by
federal and state governments in recent years. As a result, tens of
thousands of employers and hundreds of thousands of individuals have paid
premiums for essentially nonexistent coverage. 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.
Mr. Chairman, this completes our prepared statement. We would be happy to
respond to any questions you or other Members of the Committee may have at
this time.
Contacts and For future contacts regarding this testimony, please call
Kathryn G. Allen at (202) 512-7118 or Robert J. Cramer at (202) 512-7455.
Other individuals Acknowledgments who made key contributions include John
Dicken, Joseph Petko, Matthew Puglisi, Andrew O'Connell, and Paul
Desaulniers.
Appendix I: Chronology of Key Events Regarding Employers Mutual, LLC
Figure 2 summarizes key events regarding Employers Mutual, one of the most
widespread unauthorized entities operating in recent years. 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.
July 28, 2000 January - October 2001 January 2002 March 3, 2003
Employers Mutual is
Employers Mutual collects U.S. District Court holds Independent fiduciary
files
established in Nevada. approximately $16 million in hearing. civil
complaint against premiums from over 22,000 Employers Mutual's December
27, 2000 February 1, 2002 principals and insurance
Principals begin to establish policyholders. U.S. District Court issues
agents and brokers that
associations that had trust January - October 2001 preliminary injunction.
marketed the 16 plans. agreements with Employers Employers Mutual pays
April 30, 2002Mutual. principals' investment fir
U.S. District Court
issues a
quasi-bankruptcy order. default judgment granting
May 2001 a
permanent injuction
Principals establish two against
provider networks. Employers Mutual.
Principals
ordered to pay $7.3
million.
ms. U.S. District Court issues September 10, 2003
June 14, 2001
Nevada issues cease October 20, 2003
and desist order against U.S. District Court orders the
Employers Mutual. civil suit to mediation in
August - November 2001 February 2004.
Alabama, Colorado, Florida,
Oklahoma, Texas, and
Washington take action
against Employers Mutual.
October 3, 2001
Claims processing firm terminates contract with
Employers Mutual.
November 21, 2001
Nevada seizes Employers Mutual's assets held in
Nevada banks.
December 13, 2001
U.S. District Court for the District of Nevadaa grants a temporary
restraining order against Employers Mutual and appoints an
independent fiduciary.
December 20, 2001
Nevada surrenders to independent fiduciary the Employers Mutual assets it
seized.
Source: U.S. District Court, independent fiduciary, and seven states.
Note: Includes information from the preliminary injunction, the permanent
injunction, and cease and desist orders from Alabama, Colorado, Florida,
Nevada, Oklahoma, Texas, and Washington.
aAll references to the U.S. District Court in this figure refer to the
U.S. District Court for the District of Nevada.
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