Mila Kofman, J.D., Assistant Professor Health Policy Institute, Georgetown University

1. Association Health Plans: Loss of State Oversight Means Regulatory Vacuum & More FraudPress ConferenceJuly 21, 2005 Mila Kofman, J.D.,Assistant Professor Health Policy Institute, Georgetown University 202-784-4580 direct; 202-687-0880 main mk262@georgetown.edu hpi.georgetown.edu/ahp.html www.healthinsuranceinfo.net

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

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

4. 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: 2000-2002 200,000 policyholders $252 million in unpaid bills BACKGROUND: HEALTH INSURANCE SCAMS

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

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

7. 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 • Creates a regulatory vacuum and opportunities for fraud • Unintended consequence: more scams and more victims

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

9. Creates a regulatory vacuum • Prohibits states from shutting down illegal operations • 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 • Restricts authority of federal courts

10. Creates a regulatory vacuum cont.: federal resources problem • 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) • M-1 Form registration: no enforcement • Individual violations of ERISA tolerated and consumers advised to get their own lawyers to enforce rights

11. Creates a regulatory vacuum cont.: broad preemption and “ERISA Shield” • 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 • ERISA abuse by criminals • Lesson from history (pre-1983): fraud and insolvency when states’ authority was limited

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