Association Health Plans: Loss of State Association Health Plans: Loss of State Oversight Means Regulatory Vacuum & Oversight Means Regulatory Vacuum &

More FraudMore FraudPress ConferencePress Conference

July 21, 2005July 21, 2005

Mila Kofman, J.D.,Mila Kofman, J.D., Assistant Professor Assistant Professor Health Policy Institute, Georgetown UniversityHealth Policy Institute, Georgetown University

202-784-4580 direct; 202-687-0880 main202-784-4580 direct; 202-687-0880 mainmk262@georgetown.edumk262@georgetown.edu

hpi.georgetown.edu/ahp.html hpi.georgetown.edu/ahp.html www.healthinsuranceinfo.netwww.healthinsuranceinfo.net

BACKGROUND: HEALTH BACKGROUND: HEALTH INSURANCE SCAMSINSURANCE SCAMS

((a.k.a. phony health insurance, MEWA a.k.a. phony health insurance, MEWA scams, “cash cows”):scams, “cash cows”):

Collect premiums $$$ (millions)Collect premiums $$$ (millions) Pay small claimsPay small claims Leave victims without insurance and with medical Leave victims without insurance and with medical

billsbills

BACKGROUND: HOW DO THESE BACKGROUND: HOW DO THESE SCAMS WORK?SCAMS WORK?

• Target small businesses and self-employed people:Target small businesses and self-employed people:• fictitious associationsfictitious associations

• legitimate trade & professional associations legitimate trade & professional associations

• Too good to be true…Too good to be true…• Lower than market premiumsLower than market premiums

• Good provider networksGood provider networks

• Falsely claim: good rates b/c exempt from state law Falsely claim: good rates b/c exempt from state law (“ERISA”)(“ERISA”)

BACKGROUND: BACKGROUND: HEALTH INSURANCE HEALTH INSURANCE SCAMSSCAMS

50 states & DC 4 scams: $85 million in unpaid medical bills and

100,000 victims 144 entities identified by states and federal government

41 shut down by states; 3 shut down by feds U.S. GAO report: 2000-2002

– 200,000 policyholders– $252 million in unpaid bills

BACKGROUND: BACKGROUND: VICTIMSVICTIMS

Worse than being uninsuredWorse than being uninsured

– Permanent physical conditionsPermanent physical conditions

– Debt and bad creditDebt and bad credit Bankruptcy – businesses and peopleBankruptcy – businesses and people Can’t get new insurance (uninsurable or Can’t get new insurance (uninsurable or

preexisting medical conditions)preexisting medical conditions)

BACKGROUND: BACKGROUND: WHO WHO REGULATES?REGULATES?

Shared regulation: state insurance departments Shared regulation: state insurance departments and the U.S. Department of Laborand the U.S. Department of Labor

Pre-1983 regulation (ERISA passed in Pre-1983 regulation (ERISA passed in 1974) – fraud1974) – fraud

Congress amends ERISA – shared Congress amends ERISA – shared regulationregulation

REPORT’S FINDINGS: AHPs (HR 525/S REPORT’S FINDINGS: AHPs (HR 525/S 406) LEGISLATION WILL LEAD TO 406) LEGISLATION WILL LEAD TO

MORE HEALTH INSURANCE SCAMSMORE HEALTH INSURANCE SCAMS

Opens door for criminals to get a federal Opens door for criminals to get a federal license to operatelicense to operate

Creates a regulatory vacuum and Creates a regulatory vacuum and opportunities for fraudopportunities for fraud

Unintended consequence: more scams and Unintended consequence: more scams and more victimsmore victims

Opens door for criminals to get a Opens door for criminals to get a federal license to operatefederal license to operate

Repeat offenders: no prohibitionRepeat offenders: no prohibition Relies on self-reporting and self-regulation Relies on self-reporting and self-regulation No requirement to investigate before No requirement to investigate before

issuing a license (no background checks) issuing a license (no background checks)

– automatic licensing for fully insured automatic licensing for fully insured AHPsAHPs

Creates a regulatory vacuumCreates a regulatory vacuum

Prohibits states from shutting down illegal Prohibits states from shutting down illegal operationsoperations

Prohibits states from making it illegal to sell Prohibits states from making it illegal to sell phony insurance to federal AHPsphony insurance to federal AHPs

Doesn’t give U.S. Dept of Labor administrative Doesn’t give U.S. Dept of Labor administrative authority it would need (like states currently have: authority it would need (like states currently have: C&D) and restricts authority of federal regulators C&D) and restricts authority of federal regulators

Restricts authority of federal courtsRestricts authority of federal courts

Creates a regulatory vacuum cont.: federal Creates a regulatory vacuum cont.: federal resources problemresources problem

U.S. Dep’t of Labor: audit plans under its authority U.S. Dep’t of Labor: audit plans under its authority once every 300 years once every 300 years

High non-compliance rate with current laws (30% High non-compliance rate with current laws (30% noncompliance with health provisions in ERISA)noncompliance with health provisions in ERISA)

M-1 Form registration: no enforcementM-1 Form registration: no enforcement Individual violations of ERISA tolerated and Individual violations of ERISA tolerated and

consumers advised to get their own lawyers to consumers advised to get their own lawyers to enforce rightsenforce rights

Creates a regulatory vacuum cont.: broad Creates a regulatory vacuum cont.: broad preemption and “ERISA Shield”preemption and “ERISA Shield”

Preemption standard: new, broad, and vague:Preemption standard: new, broad, and vague:““supersede any an all State laws…preclude, or have supersede any an all State laws…preclude, or have

the effect of precluding, a health insurance issuer the effect of precluding, a health insurance issuer from offering health insurance coverage in from offering health insurance coverage in connection with an association health plan which is connection with an association health plan which is certified under part 8”certified under part 8”

Real legal questions for federal courtsReal legal questions for federal courts ERISA abuse by criminalsERISA abuse by criminals Lesson from history (pre-1983): fraud and Lesson from history (pre-1983): fraud and

insolvency when states’ authority was limitedinsolvency when states’ authority was limited

LIKELY OUTCOME:LIKELY OUTCOME:

More health insurance scamsMore health insurance scams More victimsMore victims Millions of dollars in unpaid medical billsMillions of dollars in unpaid medical bills Small businesses going bankruptSmall businesses going bankrupt America’s workers going bankruptAmerica’s workers going bankrupt Delayed or foregone medical careDelayed or foregone medical care