Issue Brief

Association Health Plans: Unhealthy Risk

Association Health Plans (AHPs) are well-intended efforts to help small businesses obtain affordable health coverage. But small businesses and their workers would face a large and intolerable risk of fraud under HR 660 and S 545, which would authorize AHPs.

The bills would federalize oversight of AHPs, largely exempting them from state regulation. The over-stretched U.S. Department of Labor (DOL) thus would have to regulate potentially thousands of new AHPs unilaterally. Eliminating the large regulatory network developed by all 50 states would create a serious oversight vacuum. This would embolden shady operators to sell bogus health coverage to vulnerable small businesses around the U.S., with a potentially devastating impact on policyholders. Federalizing AHPs thus is not the answer. States and the federal government should share oversight. Consider:

Most states have strong early-warning systems. States can shut down fraudulent health plans faster than DOL. State regulators are based within their local markets, and have spent years developing extensive early-warning systems to discover localized swindles faster than a federal agency based hundreds or thousands of miles away.

States can respond quickly. Most states can shut down crooked health plans by issuing emergency cease-and-desist orders within days, while DOL can take several years. DOL must obtain a temporary restraining order and preliminary injunction. To do so, DOL must convince a federal court at a pre-trial hearing that DOL likely would prevail at trial. Illegal operators, meanwhile, are structured to defraud large numbers of policyholders quickly and move assets offshore while DOL slowly gathers the complex and large volume of information needed to meet federal evidentiary requirements.

DOL lacks sufficient staff and budget. DOL is so short-staffed and overburdened that it can review each plan it oversees just once every 300 years, assistant secretary of labor Olena Berg told Congress in 1997. Yet thousands of AHPs could be added to DOL's large bailiwick if new legislation passes, thus stretching the agency's thin staff and budget resources even thinner. The lead AHP bills also provide no funds for more regulators or investigators despite the potentially large increase in DOL's responsibilities. Nor do the bills provide new legal or regulatory tools to strengthen DOL's inability to swiftly shut down illegal plans.

Past is prologue: Illegal operators will exploit the vulnerable. History suggests that illegal health plans will aggressively exploit vulnerable small businesses if AHP legislation passes. Large numbers of bogus group health plans similar to AHPs already have operated in every state over the last two years. They approach small businesses desperate for affordable health coverage in this era of double-digit premium increases. Promising cut-rate premiums, illegal health plans have defrauded more than 100,000 working Americans, leaving at least $100 million in stolen premiums and unpaid medical bills in this short time, the Coalition Against Insurance Fraud estimates. Just one illegal plan, Employers Mutual LLC, has defrauded 29,000 people, stealing nearly $15 million in premiums and leaving $54 million in unpaid bills in only 10 months, according to media reports. More than 200 state and federal investigations are still underway, so omnibus damage estimates likely will keep rising for months to come.

Damage would be significant and devastating. Illegal health plans already have devastated policyholders, a precursor of the damage consumers would face under federally regulated AHPs. Victims lose their premiums, and must pay expensive medical bills from their own pockets when their illegal plan refuses to pay. Major surgery has left some people with $100,000-$200,000 or more in uninsured expenses.

People's health and safety also are threatened when they must delay serious and even life-saving treatment to find new coverage. Their credit often also is ruined when unpaid medical bills pile up as well. Victims and families also face depression and disrupted lives.

Federal oversight encourages more confusion. Federal oversight will encourage bogus health plans to spread by exploiting confusion over who regulates them. Even if Congress authorizes AHPs, states would still regulate non-federally certified AHPs and certain self-funded, multiple-employer health plans. Many crooks now falsely claim ERISA exempts bogus versions of the latter plans from state oversight. This lie sounds convincing to customers, and buys time to steal while regulators and courts sort out the truth. Inevitably, crooks will falsely claim a new AHP law exempts their bogus plans from state oversight. This will greatly complicate the job for state and federal regulators.

Resources — June 2003

James Quiggle, director of communications, Coalition Against Insurance Fraud 202-393-7331;

Howard Goldblatt, director of government affairs, Coalition Against Insurance Fraud 202-393-7332;

Mila Kofman, JD, assistant research professor, Georgetown University 202-784-4580;