State to Crack Down on Illegal Health Insurers

State Insurance Commissioner John Garamendi, cracking down on unlicensed health insurance vendors that prey on employees of small businesses, announced Friday that he is requiring state licensing for a broader range of health insurers.

About 500,000 Californians are now paying for coverage by “suspect” companies that represent themselves as insurers but often are scam artists who are nowhere to be found when it comes time to pay claims, Garamendi said. More than 200 individuals are under investigation by the department for involvement with possible illegal health plans, he said.

Garamendi warned employers to beware of brokers offering plans “that seem too good to be true--they usually are.” He said his office is sending out questionnaires aimed at reaching every employer in California, especially small ones, that will help them scrutinize potential insurers. Garamendi also urged employers to call his office’s hot line, (800) 927-HELP, to verify that prospective insurers are licensed.

The insurance department also issued a bulletin Friday to agents, brokers and insurers informing them that any individual or organization selling any form of health insurance coverage in California will now be required by law to be licensed by the department. Licensed organizations must file financial statements and maintain minimum reserves for paying claims. Previously, certain types of providers of health insurance to small companies were not required to be licensed, but Garamendi said Friday that his office is implementing a new interpretation of the law requiring more extensive licensing.

Cathy Green, who said she is a victim of an unlicensed insurer, told a press conference that she is being sued by her hospital and pursued by bill collectors because her insurer has not paid about $250,000 worth of bills for treatment of a serious kidney condition. She continues to pay $370 a month in premiums. Green said she has little recourse because the insurer is not licensed and not covered by the state’s health insurance guaranty fund.

There are “tens of thousands” of cases like Green’s in California, Garamendi said.

Rip-offs by unlicensed insurers are a nationwide problem, but Californians are especially vulnerable because relatively more of them work for small firms than people in many other states. Small companies find it difficult and expensive to obtain insurance from legitimate companies, so when brokers approach with cheap health insurance deals, many employers and employees take their offers out of desperation.

Garamendi’s crackdown expands the state’s regulatory powers into an area formerly handled by the U.S. Department of Labor.

Until now in California, some health coverage sold to small employers was regulated not by the state insurance commissioner, but by the Labor Department under powers granted by the Employee Retirement Income Security Act of 1974, or ERISA. The central mandate of ERISA is to regulate pensions, but the act also covers some health benefits.

But the overworked federal agency has been unable to stop frequent cases of fraud. Recent rulings by the agency show that it favors regulation of these health plans by states, Garamendi said.

Because the jurisdiction of regulatory agencies is still under some dispute, Garamendi admitted that he may face legal battles. A spokeswoman for the department said the state believes that it can enforce the new regulations at current staffing levels, “but if we need more people, that will be addressed.”