As insurance scams rise sharply, patients are left holding the bill

At first, Nancy Humphreys was simply annoyed when the union through which she purchased medical insurance told her she had to switch to a new health plan. A few months later, her annoyance turned to despair.

In the summer of 2001, Humphreys, a 57-year-old Richmond, Calif., freelance writer, was rushed to the hospital and underwent emergency surgery after her appendix burst. She spent two weeks recovering in the hospital. By October, she began receiving a series of suspicious notices from collection agencies saying her medical bills remained unpaid by her new insurance company, Nevada-based Employers Mutual LLC. She called her union but was dissatisfied with its response. The union, she said, told her the problem must be on her end. Nor did she get much help from Employers Mutual.

A few weeks later, she stumbled across a news story on the Internet that reported Employers Mutual wasn’t authorized to sell health insurance in California or any other state. Regulators in several states, the story said, were investigating the company in connection with millions of dollars in unpaid claims. In late 2001, a federal judge in Nevada shut down Employers Mutual, and some state and federal agencies, including the California Department of Insurance, are investigating company officials.

“I have over $110,000 in outstanding hospital bills,” Humphreys says. “I had barely even heard of insurance fraud before this and certainly never thought it could happen to me.”

When buying health insurance these days, it’s wise to take a moment and remember what your mother told you: If it’s too good to be true, it probably is. Health insurance scams that hook victims with glossy brochures and low rates are on the rise around the country. Earlier this month, the General Accounting Office, Congress’ research arm, reported that the number of new health insurance scams doubled from 2000 to 2002. During that period, the report estimates that more than 200,000 people were stuck with hundreds of millions of dollars in unpaid claims. Fifteen out of 144 companies believed to be selling unlicensed plans were based in California, the report said.

Even when the scams are detected and legal action ensues, the companies often lack the financial assets to make good on unpaid claims; policyholders often are left holding the bag. In some cases, people have been turned away from doctors’ offices because they couldn’t afford treatment or have been saddled with medical bills that pushed them into bankruptcy. While most states have funds to help pay claims for customers of licensed companies that go bust, they generally don’t pay for those duped by illegal plans.

“By the time most of these people learn they’ve been taken, it’s too late,” says Mila Kofman, an assistant professor at Georgetown University’s Institute for Health Care Research and Policy in Washington, D.C.

Health insurance scams tend to proliferate during periods when medical costs are soaring, as they are today, and the economy is sluggish. Some experts say the current situation is worse now than in the past, partly because of the huge number of uninsured Americans -- an estimated 44 million. The popularity of the Internet also has provided scam artists with a cheap way to market their schemes.

The hardest hit by the scams are lower- and middle-class Americans who are struggling with spiraling health care premiums that put many insurance plans out of reach. According to the Kaiser Family Foundation, a health policy group based in Menlo Park, Calif., health insurance premiums rose 13.9% last year, the third consecutive year of double-digit increases. The average cost of family coverage is now nearly $9,100 per year. Some of the easier scams for consumers to spot are those marketed via e-mail -- “$99 Health Insurance, All Rxs, All Appts!!!” -- or even on signs tacked to telephone poles near busy streets. Other schemes are more sophisticated. Some sham operators deliberately use company names that are deceptively close to established name-brand firms. Others use popular tactics such as claiming a health plan is sponsored by a dubious association or union that can offer group rates to individuals. Hint: If you get asked to buy health insurance through a pilots’ association and you don’t fly, it’s probably not a good idea.

A high number of fake plans are sold to small businesses and labor unions, such as Humphreys’, which buy employee insurance through legitimate brokers and often don’t realize that the plans are phony.

“The companies that get taken aren’t necessarily naive. They’re just under enormous pressure to keep employee health costs down,” says Dennis Jay, executive director of the Washington, D.C.-based Coalition Against Insurance Fraud.

Marie Almond, a 61-year-old business consultant from Albemarle, N.C., bought an $800-a-month insurance policy for herself and two business partners three years ago through a licensed broker. She didn’t realize the plan was a fake until months later, when she was diagnosed with breast cancer during a routine exam and the hospital said her insurance wasn’t valid.

When she later developed an abscess around her surgery incision site, the hospital refused to admit her because she had an outstanding bill of $70,000, which remains unpaid. Her doctor performed the necessary follow-up surgery in his office.

“All of these people ought to go to jail and never get out,” says Almond, who is in remission.

It’s unlikely Almond will see that happen. Relatively few individuals or companies face civil or criminal charges. According to the GAO report, state regulators have taken action against 14 of the 144 companies suspected of selling unlicensed plans. And the U.S. Department of Labor reports it had 160 health insurance fraud prosecutions open at the end of 2003. But experts say the majority of those are civil, not criminal cases, and most involve “cease and desist” orders that merely shut a company down.

The result: Many of the scam artists who are caught simply close shop in one state and open up in another a short time later. “A number of the people behind these schemes today are the same ones involved in similar schemes in the past. To them, getting shut down temporarily is just a cost of doing business,” says Kofman of Georgetown.

For now, Humphreys is taking comfort in the fact that a federal judge in Nevada overseeing the case against Employers Mutual has temporarily stopped collection agencies from contacting the company’s former customers about their unpaid bills. Still, she says concern over the debt and the eventual outcome of the situation often keeps her up at night. “In the worst-case scenario,” she says, “I could lose my house.”

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How to spot a scam

If the health plan is significantly less expensive than other plans (say, 25% or more cheaper), but promises generous benefits and a large network of physicians.

The plan purports to accept people with serious illnesses and medical conditions that other plans typically reject.

The agent or sales representative seems a little too eager to sign you.

The insurance agent contacts you by phone or direct mail. Credible group plans usually are sponsored by your employer and aren’t sold directly to individuals.

The plan isn’t licensed in your state and the agent (falsely) assures you that a federal law known as ERISA exempts the plan from state licensing. When in doubt, contact your state insurance department and check on licensing status and complaints. (In California, the statewide fraud hotline number is [800] 927-4357.)

The sales agent or rep doesn’t have clear answers to your questions, seems ill informed or avoids sharing information.

You’ve never heard of the health plan -- and don’t know anyone who has. Watch for plans with names that closely resemble, but are slightly different from, legitimate insurers with names you recognize.

Your hospital calls to complain that your health plan isn’t paying your medical bills. The plan’s reps make flimsy excuses or stop returning your phone calls.

Source: Coalition Against Insurance Fraud