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The Daily News of Los Angeles

Employers and individual consumers are confronting an increase in bogus health insurance policies, leaving many snarled in costly lawsuits and unpaid medical claims, according to a recent U.S. General Accounting Office study.

The report found that 144 unauthorized entities sold coverage in the United States to at least 15,000 employers between 2000 and 2002. A majority of the policies were sold in the South, although at least 15 to 24 unauthorized groups sold fraudulent coverage in California. The activity generated approximately $252 million in unpaid medical claims, while leaving more than 200,000 people without coverage.

As health insurance premiums continue to rise at double-digit rates, the GAO said more people are in search of affordable coverage. In many cases, the quest has resulted in driving demand for health care policies that lack sufficient funding. And with a majority of data suggesting health care costs will trend even higher, the frequency of fraudulent activity is likely to increase.

“These findings are not very surprising when you consider there has been a fair amount of consolidation in the industry. With less competition and rising costs, we’ll probably see more of these types of entrants into the market,” said Russell Korobkin, a professor at the University of California, Los Angeles, School of Law. “The state should be policing the solvency of these companies because I’m sure some of these entities would not have the expertise to remain in business.”

During the GAO’s three-year study, the number of illicit entities doubled, with many operating in more than one state and occasionally under different names. The owners usually characterized their businesses so they would have the appearance of being exempt from state insurance regulation. The most common characterizations included professional employer organizations, along with vaguely qualified associations that were established through employers and individuals, the GAO reported.

Such oversight of the industry falls under two jurisdictions in California: the Department of Managed Health Care and the Department of Insurance. The former generally oversees health maintenance organizations, while the latter monitors preferred provider organizations.

G. Lewis Shartrand, general counsel for the DMHC, said there have been isolated incidents of insurance fraud, but most of them involve Mexican immigrants who are sold products by entities that lack appropriate licensure. “It’s the third-party administrators who are usually ripe for fraud,” Shartrand said. “And when we hear about these problems we usually call the local district attorney or another relevant agency to try to get them prosecuted.”

The California Department of Insurance has also noticed an increase in fraudulent health plans. However, Norman Williams, a spokesman for the department, said the evidence is only anecdotal at this point. “And the insurance commissioner says always be cautious if it seems too good to be true,” Williams said.

But that message is muffled for the hundreds of thousands of recent immigrants to California. Throughout lower-income neighborhoods in Los Angeles, notaries and check-cashing stores are selling health insurance. And those enticing options coupled with a language barrier are setting a dangerous precedent.

“The problem is that the rise in unlicensed plans is a symptom of the affordability crisis in the California market,” said Jerry Flanagan, a leading advocate on health care reform at The Foundation For Taxpayer & Consumer Rights in Santa Monica. “And oftentimes there is no promise for health care savings.”

Many health plans are attempting to tap underserved communities by mounting educational campaigns. Michael Chee, a spokesman for Thousand Oaks-based Blue Cross of California, said the company has a “strong position on this and we constantly emphasize that people should buy health insurance from reputable companies.”

Agendas aside, most consumer advocates agree with Chee. However, “to solve this problem, health care in general should be made more affordable. But it’s a tough political fight to clamp down on these things,” Flanagan said.

Many companies have attempted to woo underserved communities by accepting different forms of identification. Last summer, Health Net of California began accepting matricula consular cards – issued by the Mexican embassy – that enabled Mexican citizens to purchase health insurance from the company.

The federal government regulates most private employer-sponsored pension and benefit plans as required by the Employee Retirement Income Security Act of 1974. But the GAO says that under ERISA, self-funded employer group health plans are not subject to state oversight, increasing the probability of illicit activity.

Flanagan said until there is more regulation and consumer education in the industry, these loopholes are likely to stir more trouble for employers and individuals seeking affordable health insurance.
Evan Pondel, (818) 713-3662 or [email protected]

Consumer Watchdog
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