Horowitz & Associates Health & Life Insurance

States Probe Health-Policy Sales Promoted Through Associations
Chad Terhune
2005-11-08

1,317 words
25 February 2003
The Wall Street Journal
A3
English
(Copyright (c) 2003, Dow Jones & Company, Inc.)

Several states are examining what they believe are sales abuses and deceptive practices in the growing market for health insurance sold through associations.

While low premiums have made these policies attractive for many of the nation's 41 million people without health coverage, insurance regulators contend that many consumers are being misled when they purchase policies through some associations.

Topping the list of concerns are steep, unforeseen rate increases and the hidden ties between insurers and associations that profess to represent consumers. Also, state regulators are digging into new allegations about falsified insurance applications and unauthorized billing of association dues.

In California, the insurance commissioner has launched an investigation into business practices in the association health-insurance market. Other states, including Colorado, Iowa and Montana, are in the midst of similar inquiries. Meanwhile, states such as Florida, South Carolina, West Virginia and Washington are considering new limits on the rates insurers charge association policyholders or restrictions on an insurer's relationship with an association.

Until recently, regulators paid little attention to this market because they believed the associations would be looking out for members who purchased health insurance. An individual or family typically must join an association to purchase a policy. Many states exempt these policies from many regulations, especially regarding rates. The associations are generally nonprofit groups, with dues-paying members receiving various benefits.

In return, most states require that an association offering policies be formed and maintained for purposes other than the sale of insurance -- as in the case of professional groups serving farmers or photographers, for instance. But in many cases the nonprofit groups -- which generally portray themselves as representing consumers -- appear to be little more than marketing arms for insurers or insurance agencies. This practice was the subject of a November page-one article in The Wall Street Journal.

John Garamendi, California's insurance commissioner, said his agency will "review the whole association health marketplace as to its legality, its business practices and appropriateness under law." He said the action was prompted by a significant number of consumer complaints and the Journal article. "It concerns me that people are brought in on a false understanding of what the association is," Mr. Garamendi said.

In Florida, where about 600,000 policyholders have coverage through associations and similar groups, insurance officials found that some insurers have created, acquired and warehoused associations to sell insurance. Complaints from association policyholders in Florida rose to 856 in 2001 from 177 in 1998. Tom Gallagher, Florida's chief financial officer and former insurance commissioner, is asking lawmakers who will convene next month to force insurers selling through associations and similar groups to comply with the same rate regulation that applies to other individual policies.

Association carriers have said they operate within the law. They warn that states risk losing insurers and driving up the number of uninsured if they regulate excessively. "I don't think there is anything wrong with an insurance company setting up an association to sell insurance," said Merrill Matthews, director of the Council for Affordable Health Insurance, a trade group representing several insurers. "It is a reasonable way to create a viable group to purchase health insurance."

West Virginia officials disagree. At the request of Insurance Commissioner Jane Cline, the state legislature is expected to approve legislation next month that bars insurers from having an "affiliation" with or exerting control over an association. "We are attempting to make sure that the association is not an alter ego of the insurance company," said Greg Elam, associate counsel at the West Virginia insurance commissioner's office.

Regulators have focused much of their attention on two of the leading insurers in this market, Mega Life & Health Insurance Co. and Mid-West National Life Insurance Co., both units of UICI, a Dallas insurance company. In recent months, UICI has faced allegations from regulators and former company employees about misrepresenting coverage limits to consumers as well as hiding its ties to certain associations.

UICI said it is considering "more thorough disclosure of its relationships with the membership associations" that endorse its policies. The company has said any misrepresentation of coverage was an isolated incident. UICI said associations remain a "viable and efficient means of delivering affordable and accessible health insurance."

Meanwhile, some state regulators are looking into allegations that UICI agents falsified some applications -- in a practice known as "clean sheeting" -- and sometimes forged customer signatures.

Former agents of UICI in Iowa, Nebraska and Florida say they were instructed by company managers to omit individuals' pre-existing medical conditions from the insurance application to ensure a sale and avoid a denial from insurance-company underwriters. When a new agent included these medical conditions on the application, supervisors sometimes instructed them to rewrite the application without the information and forge the customer's signature on the altered application, four former UICI managers and agents said in interviews.

John Ahlf, a former UICI agent and manager in Iowa who left the company last year, said he was told to leave out history of alcoholism, drug addictions and other medical conditions that raised "unnecessary red flags" in the application process. These omissions by an agent can harm policyholders later when an insurer refuses to pay claims or revokes coverage due to the faulty disclosure.

A spokesman for Iowa's insurance department says the agency is "investigating all aspects of UICI's business," and declined to comment further. UICI declined to comment on the Iowa inquiry, and the company said it has never condoned "clean sheeting" or forgery.

In another area of concern, Colorado insurance officials said they have received complaints from UICI customers who were charged association dues -- contrary to their expectations -- for several months after their insurance was canceled. "UICI has to take some responsibility for that even though they are allegedly a separate entity from the associations," said Erin Toll, director of compliance at the Colorado Division of Insurance.

In November, Colorado fined Mega Life and Mid-West National $75,000 apiece for misleading consumers about their health coverage, among other sales violations, and ordered restitution for certain policyholders. UICI has denied the alleged violations in Colorado.

A former employee of Specialized Association Services Inc., a Dallas company that manages the associations that endorse UICI insurance, said some policyholders have been routinely billed for association dues without their consent after they canceled their insurance and membership. This billing practice could violate federal law against "negative-option" sales.

Sandra L. Thompson, a senior customer-service representative at SAS when she was fired in December, said it was common for the billing department to "reactivate" accounts of canceled members and automatically deduct money from their bank accounts from the time she began working there in 1999. Dues start at $8 a month and increase to $36.95 to $45 a month in the two biggest associations that endorse UICI insurance, the National Association for the Self-Employed and the Alliance for Affordable Services.

UICI said the allegations about billing are erroneous. Jeffrey Jensen, owner of SAS, purchased the business several years ago from his father, UICI Chairman Ronald Jensen. Jeffrey Jensen said SAS doesn't reactivate canceled member accounts or deduct dues after membership has ended. He declined to comment on Mrs. Thompson's termination, saying it was a private matter. Mrs. Thompson said she was fired because she knew too much about UICI's ties to the associations.

Robert Hughes, president of the National Association for the Self-Employed, said the group is independent of UICI and that its members aren't charged dues without their permission. Board members of the Alliance for Affordable Services referred questions to a spokeswoman who couldn't be reached for comment. In addition to health insurance, the Alliance offers individuals and families business advice and discounts on hotels and other items.

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