A national health insurer and its majority owners, Wall Street powerhouses Goldman Sachs Group Inc. and Blackstone Group, were accused in a lawsuit Wednesday of defrauding their California customers with “junk insurance” that provided little or no protection.
The suit filed by the Los Angeles city attorney’s office alleges that HealthMarkets Inc. and its affiliates trained sales agents to deceive customers — mostly self-employed individuals and small businesses — into buying confusing policies riddled with exclusions and limitations.
It also contended that Goldman Sachs and Blackstone knew about the alleged insurance scams in California when they bought a majority stake in HealthMarkets in 2006.
The lawsuit is the latest trouble for the Texas company, which conducts business in 41 states. In the last two years, regulators from California and more than 30 other states have fined HealthMarkets or its affiliates nearly $40 million over alleged deceptive business practices.
The city attorney’s suit, based on state laws for unfair competition and false advertising, accuses the defendants of engaging in a “scheme to defraud California consumers … through the sale of junk insurance,” which it defined as coverage that has “hidden or obscure” terms.
“All their marketing and training and advertising was aimed at convincing people that this was comprehensive coverage that will protect you in your time of need. It certainly did not prove to be that way,” Chief Assistant City Atty. Jeffrey Isaacs said.
Representatives for HealthMarkets, Goldman and Blackstone could not be reached for comment.
But the company has started addressing its problems on its website. A link — truth.HealthMarkets.com — dismisses what the insurer calls “negative opinions” about the company posted on the Internet by lawyers and former agents.
“No company in the service business is without issues involving customer satisfaction, and HealthMarkets is no exception,” HealthMarkets said on its website. “We encourage our customers to contact us directly with their questions and concerns so we can resolve issues.”
California generated 13% of its $1.1 billion in premium revenue last year, regulatory filings show. The California Department of Insurance would not disclose how many policyholders the HealthMarkets companies have in the state.
Los Angeles prosecutors began investigating HealthMarkets about a year ago.
They based Wednesday’s lawsuit on the allegations of 13 people and on interviews with several current and former sales agents from two of the insurer’s subsidiaries, Mega Life & Health Insurance Co. and Mid-West National Life Insurance Co.
One couple listed anonymously in the lawsuit was Doug and Dana Christensen of Los Angeles, according to Dana, her lawyer and the city attorney’s office.
The suit said the couple bought a Mega Life insurance policy in 2001 that included up to $100,000 worth of coverage for chemotherapy — an important feature for Doug Christensen, who had survived a bout of cancer.
But the sales agent did not inform the couple that the drug benefit was capped at $1,000 a day, far below the cost of treatment, the lawsuit alleged. The couple wound up paying for treatments and three surgeries out of pocket because their insurance policy did not cover the expenses.
Doug Christensen died in 2002, leaving his widow with more than $450,000 in unpaid medical bills, she said in an interview. She sued Mega Life, settling five years ago for $1.7 million. But she said that medical bills, taxes and attorneys’ fees left her with nothing.
“I’m broke,” said Christensen, 52. “It’s pretty much a nightmare that won’t go away. We thought we had done the right thing and were lucky that we had an insurance policy. But what they promised wasn’t there.”
The city attorney’s lawsuit did not specify the damages sought, but Isaacs said the maximum civil penalty of $2,500 per violation could lead to “tens of millions of dollars” in damages.
The suit also named Mega Life and Mid-West as defendants, as well as three nonprofit associations alleged to be fronts for deceptive activities.
Agents for the nonprofits — National Assn. for the Self-Employed, Americans for Financial Security Inc. and Alliance for Affordable Services — portrayed themselves and their policies as independent of HealthMarkets when, in reality, they were affiliated with the company, the suit said.
HealthMarkets, its subsidiaries and its affiliates have faced investigations in several states where consumers have lodged complaints or filed lawsuits.
In 2005, regulators from 35 states, including California, opened an inquiry into its business practices.
The regulators cited numerous problems with agent training and disclosure about the relationships between the HealthMarkets companies and the nonprofit associations. HealthMarkets agreed in 2008 to pay $20 million to the affected states, including $2 million to California.
Last August, Massachusetts Atty. Gen. Martha Coakley announced a $17-million settlement with HealthMarkets and two subsidiaries that barred them from selling health plans in the state for five years.
She had accused them of misrepresenting their policies and illegally requiring customers to pay fees to join the nonprofit associations to gain access to health plans. Insurance regulators in the state imposed an additional $2-million penalty.
“These companies used unfair and deceptive marketing and other practices to convince Massachusetts residents to buy health plans with limited benefits,” Coakley said at the time.