Left Holding the Bag

Agents and brokers who sell unlicensed health plans to self-insured employers face the prospect of being liable for unpaid medical claims, losing their state insurance license and serving time in prison.

by Hank Kearney
Best's Review
May, 2003

Over the past year or so, as a growing number of unlicensed health plans have been uncovered throughout the country, many agents and brokers have been pulled into courts by unhappy clients. These insurance professionals face the prospect of paying hundreds of thousands of dollars in unpaid medical claims--the medical claims of their clients' employees.

Several of the agents and brokers who sold the plans, representing them to employers as benefits plans that meet the requirements of the Employee Retirement Income Security Act of 1974, may lose their state insurance licenses. ERISA was enacted by the federal government to protect the interests of participants (employees and their dependents) in employer-sponsored benefit plans. Functionally enacted to regulate pensions, certain sections of the ERISA regulations apply to employee welfare benefit plans, which are health insurance plans for employees and their families.

Fraudulent health plans typically attempt to recruit licensed insurance agents to sell their plans and offer coverage regardless of underwriting at lower rates with better benefits than licensed insurers can provide. The phony plan usually pays initial claims, but eventually delays payments. Unlicensed entities don't participate in a state guaranty fund, which means consumers aren't protected from unpaid claims.

Recently there have been a number of court cases around the country where health insurance agents and brokers who sold ERISA self-insured health plans are being held liable for their client's group health claims. There are many challenges with the sale of ERISA self-insured health plans including actual definitions, regulatory jurisdiction and unlicensed carriers.

Health insurance agents and brokers actively selling to medium-to-large groups are at risk of errors and omissions claims, censure by state licensing bureaus, or worse. A new Florida law, which went into effect Oct. 1, 2002, said agents who sell unlicensed insurance could face a third-degree felony charge, punishable by up to five years in prison and a $5,000 fine per count, and lose their license.

Time and Time Again

With yet another cycle of group health insurance premium increases, many agents are dealing with frustrated clients and their unhappy employees. As in similar cycles of the past, agents and their clients are looking for ways to control health insurance premiums. There are the standard cost shifting measures such as increasing copays and moving the business to more restrictive networks. And in the past 18 months or so "defined contribution" or "consumer directed" health plans with all their ensuing issues have emerged. But none of this is especially innovative and little has developed in the fundamentals of group health insurance.

So, for those agents and their clients who want to explore variations of group health plan financing while minimizing adverse selection, or how health plans operate within, and outside of, federal and state regulations, this is a cautionary article.

We are in the midst of another era of unlicensed and unauthorized health insurance companies springing up around the country selling socalled self insured products. For the reasons noted above, and the resulting easy dollar to be made, many health plans are touting themselves as ERISA plans. They may say they are ERISA association plans, or union plans, or ERISA employer plans, or simply selfinsured health plans. And some may be. But for every one that is a bona fide ERISA group health plan there are many that are not and the buyer will look to the agent or broker to make that distinction. Unfortunately, there are few guidelines to judge a group health plan's self-insured status. And while some states are taking proactive steps to educate agents, such as Florida's recently enacted continuing education requirements specific to unauthorized insurers, many state departments of insurance have been slow to assist the agents and brokers in this legal mine field.

Agents' Role

Technically, agents do not sell selfinsured or ERISA plans. This is the position taken by many departments of insurance and while agents don't sell self-insured or ERISA health plans, they most certainly sell selfinsured services. The challenge many agents face with working on selfinsured plans is the validity of the plan itself and it's up to the agent to start understanding what exactly is involved with the sale of these benefit programs.

All ERISA plans must follow key requirements from the Department of Labor and it is clearly a red flag to any agent or broker should an entrepreneur, insurance company, thirdparty administrator or other entity not produce even these basic requirements.The basic requirements can be found at the department's Web site, www.dol.gov.

Agents are involved in the two most important aspects of any true self-insured group health plan: the TPAs and the stop-loss or excess insurance. Should an agent begin to work in the area of self-insured benefit programs, these two services will be the key to success. However, agents need to carefully choose the TPA. In the past, agents have gotten into trouble by working with a marketing company or managing agency that has prepackaged important services such as the TPA, stop-loss carrier, benefit communication and trust account.

A recent example of such packaging can be found in a Florida case. A company in southern Florida had developed a program that was sold to employers as ERISA self-funded health insurance. Packaged for agents and employers were all the necessary resources for turn-key sales.Today, that company's executives are charged with various felonies and several agents have retained attorneys, filed E&O claims, and even face the loss of their state insurance licenses.

What went wrong? It's tough to point to any one issue, but for the agents involved, the result is the same: they relied on the packaging. Regardless of whether there is a marketing company or not, due diligence is the agent's responsibility. Do not rely on promotional material, client testimonials, executives with the TPA or marketing company, or even legal statements within marketing pieces.

Red Flags Agents and brokers dealing with health plans for self-insured employers should look for these red flags that could signal future legal trouble. Prepackaged services from a marketing company that offer third-party administrators, stop-loss carriers and benefit communications. No stop-loss insurance coverage in place. No access to fund protection information. Multiple employers in one trust account. Third-party administrators sending funds to marketing company.

The first step in selecting a TPA will be to check if the TPA is registered as a business in the state of the agent's client, not just the state of the TPA's headquarters. Also, 33 states and territories regulate TPAs. Agents will need to know the regulations of the state in which their clients operate. An excellent starting point to learn more is the Society of Professional Benefit Administrators, or SPBA, by visiting http://usererols.com/spbca.

Regulated TPAs often will be required to file documented bonding capacity, funding/reserve data, financial statements, and other detailed information.All agents should be aware of the requirements of the state in which they do business and as this is public information, failure to examine each TPA may cause trouble in the future.

The agent also needs to check on the stop-loss insurance company affiliated with the self-insured program. Only the largest of self-insured plans are truly self-insured with no stop-loss or aggregate insurance. Therefore, nearly all plans have some stop-loss insurance. And like other forms of insurance, stop-loss carriers must file with the insurance departments in the states in which they operate. While reinsurers and some operations such as Lloyd's fall outside some state regulations, they should get written confirmation from the state insurance department.

The agent also should become fully comfortable with the organization that has packaged or organized an ERISA health plan. This organization's main role is to market the plan to agents and prospective employers. And most likely they're good at their jobs, supporting the efficacy of their products with professional marketing pieces and letters from satisfied clients. Agents might even receive copies of letters from attorneys who have made the determination that the plan is exempt from state insurance regulations. Agents need to be very wary of such efforts. Perform due diligence on this marketing company, check out the firms' executives and examine the company's state licenses.

Follow the Money

Although verifying state licenses, making reference calls, and even credit checks with Dun & Bradstreet can help ensure the integrity of the plan, the best approach is to follow the money. Every valid self-insured plan puts in place a system of protecting its premiums and expenses and how this is established is perhaps the one sign of trouble. Should an agent be blocked from such information, then don't sell the program.

Many self-insured benefit plans have a process in place to protect funds in a system similar to this, and it's rather simple. With little variation, the money will flow from the employer account to the trust account to the TPA. The TPA, or the trust itself, will issue checks for payment of claims, fees and commissions. One quick and important note here, a separate trust account must be established for each employer. Any attempt to establish multiple employers in one trust account is a red flag that it is probably a multiple employer-welfare arrangement, or a MEWA, and will most certainly result in additional headaches and charges against the agent.

But if things were only so simple. In one case, several agents didn't fully explore and understand the money trail, particularly the money flow between the TPA and the marketing company. The only funds that should be sent from the TPA to the marketing company are commissions. Beware of any TPA that sends funds to the marketing company, which in turn attempts to pay claims, fees, commissions and stop-loss premiums.

Buyer Beware

The old saying "buyer beware" could not be more wrong in the case of selling self-insured ERISA health plans. Although this may sound rudimentary, with a self-insured health plan there is no actual policy. This often-overlooked reality has caused many clients to claim they didn't know they were buying a self-insured ERISA health plan. And while agents can say they told the clients they were buying a self-insured health plan, the agent had better be able to prove it. Agents and brokers need to establish a system by which they can verify that the employer that is buying the plan fully understands exactly what it is burying.

And this disclosure must be made with each client contact from prospecting call through the sales meetings and at the meeting that closes the deal. Fortunately, this doesn't require a lot of extra work on anyone's part.

It will be very helpful to create a checklist for both the buyer and the agent, signed by both, with each receiving a copy. The items an agent might put in a checklist for a selfinsured plan could include the plan sponsor, plan number, plan administrator, fiduciary, name of the plan, requirement to file a Form 500 or Form 55000/R with the U.S. Department of Labor, stop-loss carrier, stoploss attachment points, name of TPA, explanation of the TPA functions, commissions, and fees paid to marketing company. In addition, the list should indicate the name of the trust account in which the employer funds will reside, the bank name and address.

Providing self-insured resources for clients can be advantageous to agents, brokers, and their clients when done correctly. However, assisting and promoting the sale of unlicensed insurance programs can result in the agent's personal liability for unpaid health claims and possibly charges of fraud, misrepresentation, and worse. Agents must provide their own first line of defense. In one state there is a case against an agent and a large brokerage operation for selling a group health plan deemed by the insurance department to be an unlicensed insurance plan. State regulators determined the plan was an "unlicensed insurance product" many months after the sale.

The last time the insurance industry was hit with an influx of fraudulent health plans, in the late 1980s and early 1990s, almost 400,000 people were defrauded and left with more than $123 million in unpaid medical bills, according to Mila Kofman, assistant research professor at the Institute for Health Care Research and Policy at Georgetown University. Hundreds of thousands more were left without health insurance.

This time, the trend is much worse because the plans are national, Kofman said. Employers Mutual, an unlicensed health plan, operated in every state for 10 months before it was shut down. In that time, the company collected about $15 million in premiums, paid out about $3 million in claims and left more than 22,000 people with $30 million in unpaid medical bills.

Unlicensed health-care plans have operated in all 50 states. The following outlines what some regulators have discovered:

Florida regulators stopped seven unlicensed health plans from selling phony health insurance during 2001 and 2002. The seventh, Service and Business Workers of America Local 125, based in Juno Beach, Fla., and headed by Harry Briglio, posed as a union plan and claimed to be exempt from state licensure requirements through the federal Employee Retirement Income Security Act.

Texas regulators shut down Britannia International Life & Casualty for selling unauthorized stop-loss coverage to employers through two plans that were shut down in March 2002 for being illegal: American Benefit Plans and United Employers Voluntary Employees Beneficiary Association. The department also filed an administrative complaint against licensed agent Richard Oleck for marketing the unauthorized products. He may be held responsible for unpaid claims.

Georgia regulators shut down four unlicensed health insurance plans in 2002. In October, Insurance Commis sioner John Oxendine ordered the International Union of Industrial and Independent Workers to stop selling health insurance. The union, which had about 1,000 members, had marketed plans to employers in the metropolitan Atlanta area, as well as Dublin, Macon, Statesboro and Valdosta. Oak Tree Administrators Inc., Paramount, Calif., also was named in that cease-and-desist order. Oxendine shut down three other multiple employer-welfare arrangements: Employers Mutual, L.L.C., of Carson City, Nev; OTR, of Cumming, Ga., and Uni-Med Health Plan of Calhoun, Ga.

In another scam, American Benefit Plans, also known as the National Association of Working Americans, was shut down through a combined effort among insurance departments in Texas, Arkansas and Louisiana. The plan covered more than 32,000 people in 48 states and left about $12 million in unpaid medical bills.

"We see an influx of scams when health insurance premiums go up drastically, and right now we've had double digit increases," Kofman said. The increases are projected to continue, which means the problem is likely to get worse. "Small businesses and self-employed individuals are desperate for alternatives. When a deal comes along, they grab it," she said.

A fraudulent health plan offers insurance premiums at about 20% to 25% below what legitimate health plans offer. The rates are close to what employers paid last year or two years ago, so they don't suspect anything, she said.

The plans target small employers and self-employed individuals by creating phony professional and trade associations and use agents and brokers to market membership into the associations and by selling directly to existing, legitimate trade and professional organizations. For instance, Employers Mutual sold coverage to a national writers' organization. Their strategy is to pay small claims but never large ones.