Plague of Health-Insurance Scams
Unlicensed companies are conning hundreds of thousands, particularly
small businesses and freelancers.
In June, 2000, Lisa and Dennis Huffstutler were thrilled with their
new health insurer, Vanguard Asset Group. Its plan, sold via a trade
organization Dennis belonged to, was cheaper than their expiring Blue
Cross Blue Shield of Florida HMO policy--$4,800 a year, vs. $5,064.
They could choose their medical health doctors or where to get
supplements. And it covered existing conditions--a
big plus since Lisa and their 4-year-old son have chronic medical
later, their view changed drastically. Hospitals and doctors were
dunning them for $15,000 in unpaid claims. Contacting Vanguard --
which has no connection to the mutual-fund family -- did no good.
"They would say things like, 'The doctors used the wrong code'
or 'The check is in the mail,'" recalls Lisa, who was pregnant
again. She began to fear that her obstetrician would drop her.
PLEA. Just before the baby was born, the West Palm Beach (Fla.)
couple learned what was wrong. The Florida Insurance Dept. issued
a cease-and-desist order on May 14, shutting down the Lake Success
alleged that Vanguard was an illegal, unlicensed operator run by
Dwayne Samuels, who pled guilty in September, 2000, in U.S. district
court in Brooklyn, N.Y., to health-care fraud in connection with
the embezzlement of $8 million from another insurer, Fidelity Group
Inc. of Great Neck, N.Y. (The company has no tie to the Fidelity
Investments fund family.)
Labor Dept. had obtained a court judgment in Feb., 2001, barring
Samuels for life from involvement with federally regulated health
plans. Florida Insurance Dept. officials estimate that Vanguard
bilked at least 100 policyholders in the state out of more than
$500,000. The department has launched a full investigation and may
seek criminal charges against Samuels, whom regulators say hasn't
responded to its order. Efforts to reach Samuels by phone and letter
for comment were unsuccessful.
BY THE SCORE. Luckily, Lisa's doctors kept her on. She delivered
a healthy girl on June 11. But, the family's unpaid medical bills
have ballooned to $20,000. Lisa is uninsured. Dennis and the kids
have only catastrophic coverage.
boom time for medical insurance scams that collect premiums, pay
few, if any, claims, then skip town. Vanguard is the sixth unlicensed
insurer Florida has shut down in the past 18 months. Colorado has
issued cease-and-desist orders against 43 in the last 15 months.
Oklahoma has more than 60 investigations open. Texas, California,
and Georgia all report big spikes in complaints of unpaid claims,
most of them suspected cases of fraud. The U.S. Labor Dept. had
84 civil and 14 criminal investigations open as of June 30. "The
[operators] are the most despicable people around," says Labor
Secretary Elaine L. Chao.
tally of state data shows that three of the largest -- Employers
Mutual LLC (no connection with the legitimate Employers Mutual Casualty
Co. of Des Moines), American Benefit Plans, and TRG Cos. -- collected
more than $50 million in premiums from more than 65,000 people.
None of the companies replied to requests for comment.
AND PREMIUMS. To camouflage their scam, the chameleon-like operators
all use similar tricks. With slick brochures, flyers, and local
media campaigns, they pitch their services to real professional
groups or sell membership in phony ones as a way to get insurance.
The names mimic those of well-known companies or organizations.
Vanguard Group -- the mutual-fund company -- says the bogus insurer
agreed to stop using the Vanguard name last April after it filed
the scams is a 25%-plus rise in premiums since 1998. Insurers are
passing on the cost of restoring benefits slashed by managed care.
That has become a big burden in a weak economy. Many businesses
-- which pay most insurance costs -- have cut coverage or raised
employee contributions. They now pay on average $221 per month for
individuals and $588 for families, up from $173 and $463 in 1998,
the Kaiser Family Foundation says. Scamsters particularly target
freelancers -- like Dennis Huffstutler, a wedding videographer --
or small-business owners, who can't negotiate better rates with
fraud surges in recessions as people lose jobs and coverage. But
today's scale is unprecedented. "It's much worse now than it
was in the late 1980s. And it is going to go on for a number of
years," says Mila Kofman, assistant research professor at Georgetown
University's Institute for Health Care Research & Policy and
a former Labor Dept. investigator.
JURISDICTIONS. A crazy-quilt regulatory system is great cover
for scams. States regulate insurers under the 1945 McCarron-Ferguson
Act. But the 1974 Employee Retirement Income Security Act exempts
plans run by unions or single employers from state regulation. Plans
serving multiple employers -- including those sold via trade groups
such as the 4,000-member Wedding & Event Videographers Association
International, which offered Huffstutler's Vanguard policy -- need
state licenses. But the overlapping jurisdictions create confusion
that unlicensed insurers exploit.
light penalties add to operators' sense of impunity. In many states,
selling insurance without a license is a misdemeanor. Cease-and-desist
orders do little good in states like Florida where regulators lack
police power to arrest suspects and seize assets. Alerted, scamsters
close up shop and move on. Poor coordination between state and federal
officials hampers efforts to use antifraud laws. State regulators
complain that federal investigations take years to complete.
of health-insurance fraud has finally forced state and Labor Dept.
officials to act. They formed a joint task force in spring, 2001,
to share data and get the word out to small businesses. This year,
the Florida legislature made the sale of fraudulent insurance a
third-degree felony punishable by up to five years in jail. Texas
and Georgia regulators now use their police powers more aggressively.
President George W. Bush has endorsed a bill setting federal authority
and solvency guidelines for multi-employer health plans, but broader
health-care battles have bogged it down.
ASSOCIATIONS. Employers Mutual is the biggest and most persistent
health-insurance scam, regulators say. Incorporated in Carson City,
Nev., two years ago, it was operated out of California by James
L. Graf. The California Insurance Dept. permanently banned Graf
from doing business in the state in 1998 after at least three HMOs
and insurers he controlled went bankrupt.
to a February, 2002, Labor Dept. injunction ordering the company
permanently shut down, Employers Mutual sold policies via 16 fictitious
associations with such names as the Association of Barristers &
Legal Aids and the Association of Cosmetologists. It also took in
real groups such as the National Writers Union, which represents
7,000 freelance journalists.
Piantadosi, the 56-year-old owner of a direct marketing company
in Deerfield Beach, Fla., bought an Employers Mutual policy through
the Communications Trade Workers Union, a name that resembles the
Communications Workers of America, a prominent union. The Communications
Trade Workers Union was an affiliate of Employers Mutual.
ENVIRONMENT. At the time federal regulators shut it down, Piantadosi
was awaiting a $450,000 liver transplant. Miami's Jackson Memorial
Hospital confirmed that it initially rejected him for the surgery
after Employers Mutual went bust. Piantadosi's desperate wife, Joan,
held a news conference to publicize his plight. The couple even
sent a telegram to President Bush and Florida Governor Jeb Bush.
The hospital later approved Piantadosi's operation and absorbed
part of the cost. But he still owes $250,000.
even when the culprits are caught, victims seldom get any money
back. Dwayne Samuels, who pled guilty to fraud in the Fidelity Group
case, only agreed in Feb., 2001, to begin paying back the money
to settle a suit the Labor Dept. filed against him in December,
premiums rising and more people losing coverage, the pool of potential
victims keeps growing. As countless Web listings and flyers extolling
astoundingly cheap policies attest, scamsters think they're in a
growth business. Alas, they're right.