Health Group’s End No Surprise to State : Insurance Dept. Sought Control Before Recent Bankruptcy Filing

The recent demise of a financially troubled Santa Ana prepaid health group came as no surprise to state insurance officials who tried to take over the organization in 1983.

Late last month, Insurance Benefits Prepaid Trust filed for liquidation in the U.S. Bankruptcy Court in Los Angeles. The trust, which provided medical benefits to employees of small businesses primarily in Orange County, listed assets of about $4.5 million and an equal amount of debts. Between 7,000 and 8,000 people, mostly doctors, are listed as creditors.

In May, 1983, following a financial review, the California Insurance Department moved to place the trust into conservatorship. The trust fought vigorously and obtained a federal court order preventing the state from taking control.

“The tragedy is that the legal courses taken (by the trust) eroded the assets,” state Insurance Commissioner Bruce Bunner said Wednesday. “The attorneys and administrators could have moved in a direction to protect the participants.”

1,300 Employers Served

According to court records, the trust served 1,300 employers with a total of about 40,000 employees and dependents in 1983. More current figures are not available.

Mark Waxman, an attorney representing the trust in the federal court matter, said it is not clear what will happen to the lawsuit between the state and trust. “The goal of the insurance commissioner was to put IBT out of business,” Waxman said.

He said the trustees governing the health plan decided to file for liquidation to pay off as many creditors as possible. “There are significant assets available,” Waxman said.

The trustees were not available for comment, he said.

In August, the trust notified its members that it needed $4.8 million to cover claims. The members’ refusal to pay precipitated the bankruptcy filing, according to an informed source.

Raymond Jue, a deputy attorney general who represents the state Insurance Department, said the state contended that the trust should have been regulated by the state because it was acting as a health insurance company.

50 Trusts Bankrupt

In court documents, trust officials contended that they were governed by the federal Employee Retirement Income Security Act and did not require state supervision.

The intent of that act was to allow big companies, unions and pension funds to provide their own health benefits at a reduced cost, Bunner said. About 50 trusts set up under the act’s guidelines have gone bankrupt in the last 10 years, leaving millions in unpaid claims.

Since June, 1984, the trust’s claims have been processed by Santa Ana-based Western States Medical Co. The company recently closed its doors and no officials could be reached for comment.

Attorney Max Rush, the trust’s court-appointed trustee, has scheduled a meeting of attorneys, accountants and others for Thursday. He declined to comment on the case until after that session.