Association Health Plans: Loss of State Oversight Means Regulatory Vacuum & More Fraud Press Conference July 21, 2005 Mila Kofman, J.D., Assistant Professor Health Policy Institute, Georgetown University direct; main hpi.georgetown.edu/ahp.html

BACKGROUND: HEALTH INSURANCE SCAMS ( a.k.a. phony health insurance, MEWA scams, “cash cows”): Collect premiums $$$ (millions) Collect premiums $$$ (millions) Pay small claims Pay small claims Leave victims without insurance and with medical bills Leave victims without insurance and with medical bills

BACKGROUND: HOW DO THESE SCAMS WORK? Target small businesses and self-employed people: Target small businesses and self-employed people: fictitious associationsfictitious associations legitimate trade & professional associationslegitimate trade & professional associations Too good to be true… Too good to be true… Lower than market premiumsLower than market premiums Good provider networksGood provider networks Falsely claim: good rates b/c exempt from state law (“ERISA”)Falsely claim: good rates b/c exempt from state law (“ERISA”)

BACKGROUND: HEALTH INSURANCE SCAMS 50 states & DC 4 scams: $85 million in unpaid medical bills and 100,000 victims 144 entities identified by states and federal government 41 shut down by states; 3 shut down by feds U.S. GAO report: –200,000 policyholders –$252 million in unpaid bills

BACKGROUND: VICTIMS Worse than being uninsured Worse than being uninsured –Permanent physical conditions –Debt and bad credit Bankruptcy – businesses and people Bankruptcy – businesses and people Can’t get new insurance (uninsurable or preexisting medical conditions) Can’t get new insurance (uninsurable or preexisting medical conditions)

BACKGROUND: WHO REGULATES? Shared regulation: state insurance departments and the U.S. Department of Labor Pre-1983 regulation (ERISA passed in 1974) – fraud Pre-1983 regulation (ERISA passed in 1974) – fraud Congress amends ERISA – shared regulation Congress amends ERISA – shared regulation

REPORT’S FINDINGS: AHPs (HR 525/S 406) LEGISLATION WILL LEAD TO MORE HEALTH INSURANCE SCAMS Opens door for criminals to get a federal license to operate Opens door for criminals to get a federal license to operate Creates a regulatory vacuum and opportunities for fraud Creates a regulatory vacuum and opportunities for fraud Unintended consequence: more scams and more victims Unintended consequence: more scams and more victims

Opens door for criminals to get a federal license to operate Repeat offenders: no prohibition Repeat offenders: no prohibition Relies on self-reporting and self-regulation Relies on self-reporting and self-regulation No requirement to investigate before issuing a license (no background checks) No requirement to investigate before issuing a license (no background checks) –automatic licensing for fully insured AHPs

Creates a regulatory vacuum Prohibits states from shutting down illegal operations Prohibits states from shutting down illegal operations Prohibits states from making it illegal to sell phony insurance to federal AHPs Prohibits states from making it illegal to sell phony insurance to federal AHPs Doesn’t give U.S. Dept of Labor administrative authority it would need (like states currently have: C&D) and restricts authority of federal regulators Doesn’t give U.S. Dept of Labor administrative authority it would need (like states currently have: C&D) and restricts authority of federal regulators Restricts authority of federal courts Restricts authority of federal courts

Creates a regulatory vacuum cont.: federal resources problem U.S. Dep’t of Labor: audit plans under its authority once every 300 years U.S. Dep’t of Labor: audit plans under its authority once every 300 years High non-compliance rate with current laws (30% noncompliance with health provisions in ERISA) High non-compliance rate with current laws (30% noncompliance with health provisions in ERISA) M-1 Form registration: no enforcement M-1 Form registration: no enforcement Individual violations of ERISA tolerated and consumers advised to get their own lawyers to enforce rights Individual violations of ERISA tolerated and consumers advised to get their own lawyers to enforce rights

Creates a regulatory vacuum cont.: broad preemption and “ERISA Shield” Preemption standard: new, broad, and vague: Preemption standard: new, broad, and vague: “supersede any an all State laws…preclude, or have the effect of precluding, a health insurance issuer from offering health insurance coverage in connection with an association health plan which is certified under part 8” Real legal questions for federal courts Real legal questions for federal courts ERISA abuse by criminals ERISA abuse by criminals Lesson from history (pre-1983): fraud and insolvency when states’ authority was limited Lesson from history (pre-1983): fraud and insolvency when states’ authority was limited

LIKELY OUTCOME: More health insurance scams More health insurance scams More victims More victims Millions of dollars in unpaid medical bills Millions of dollars in unpaid medical bills Small businesses going bankrupt Small businesses going bankrupt America’s workers going bankrupt America’s workers going bankrupt Delayed or foregone medical care Delayed or foregone medical care