The Wall Street Journal - States Probe Health-Policy Sales Promoted Through Associations

2/25/2003

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

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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 , a trade group representing several insurers. "It is a reasonable way to create a viable group to purchase health insurance."

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.

Nonprofit Groups That Tout Insurance Have Hidden Links

Associations That Offer Deals Are Often Set Up by Insurers

WILLOW SPRINGS, Mo. -- In 1998, Robbie and Shirley Collins were offered health insurance through the Eagle Consumer Association, a nonprofit organization with almost 40,000 members. At $168 a month, the policy was less expensive than coverage offered by the state's Blue Cross and Blue Shield carrier. So Mr. Collins, a 39-year-old lumberyard employee, paid $90 in annual dues to join Eagle Consumer.

Mr. Collins thought he had a good deal with an independent association. What he didn't know was that Eagle Consumer was founded by Central Reserve Life Insurance Co., which issued his policy. In fact, one of the company's managers was president of the association at the time Mr. Collins enrolled. And last year, the family was hit with three rate increases over the course of seven months, pushing the monthly premium up 76% to $451 for the couple and their two young sons.

The Collins family is among a growing number of Americans -- primarily the self-employed, early retirees and families whose employers don't offer coverage -- now buying health insurance through associations. These groups make enticing promises to people looking for affordable medical coverage: large memberships that yield group discounts; advocacy on behalf of the "little guy"; and independent endorsements of the best policies available at the best rates.

What the groups don't tell customers is how they exploit a giant loophole in the rules that protect policyholders. More than two decades ago, states began to recognize that associations offering insurance to their members across the country potentially faced 50 sets of conflicting laws. The solution in most states was to exempt these groups from many regulations, especially when it came to rates. In return, an association had to demonstrate that it wasn't established just to sell insurance -- a standard adopted by more than 40 states.

An investigation of insurance industry practices shows that this exemption has led to widespread abuse. Some consumers are misled into thinking they are dealing with associations that make independent decisions about the insurance they endorse. In reality insurers and insurance agents are frequently creating or buying their own associations and making them look like traditional nonprofit groups. They often make misleading claims about the groups' origins and membership size. Far from being independent, many of these associations serve primarily as a marketing arm for the insurer or agency. Some associations turn over a portion of their dues to insurers or insurance agents.

The health coverage sold through these associations isn't always what it seems, either. Associations typically don't have to get government approval for premium increases or explain to regulators how they set their rates. That means they can, and often do, offer low teaser rates that rise sharply after consumers enroll. Policyholders sometimes find unexpected gaps in their policies after they fall ill. Some consumers become trapped by an illness that makes them uninsurable elsewhere.

Eagle Consumer offers members discounts on travel, flowers and other items. It was formed in 1990 by Central Reserve Life, says Ernest J. White, a retired lobbyist for the insurer, which is a unit of Ceres Group Inc. in Cleveland. Mr. White says he served as the association's president until 1995, while continuing to work for the insurer. Robert D. Haas, now retired, headed Eagle Consumer from 1995 to 1998, also while working for the insurer. Mr. Haas says he was "more or less a figurehead." Today, a Missouri insurance agent runs Eagle Consumer.

As for the Collins family, Ceres says that last year its association policyholders in Missouri all received the same premium increases, pegged to the date they signed their contracts. The company cited rising medical costs. A Ceres spokeswoman says "all relationships with the Eagle Consumer Association are separate and distinct."

Government officials estimate that there could be as many as two million policyholders nationwide with association coverage. A review of state-insurance-department filings, association records and interviews with industry executives and regulators shows that more than 50 associations are used as a marketing arm by about two dozen insurers.

Supporters of association coverage say it gives working-class people access to more insurance choices at affordable prices at a time when many insurers have stopped selling to individuals because of losses or frustrations with regulation. "Even if you go ahead and form an association just for the purposes of insurance, why should that even be a concern?" says George Katosic, a Dallas attorney who has represented associations. "The more ways that health insurance is made available to consumers, especially at a reasonable premium, the better."

Some state insurance officials agree. But regulators in a few states say that as the association business has grown, so have the number of complaints from consumers. South Carolina's insurance department is considering legislation to force association carriers to follow the same rules as other insurers. Texas officials say they plan to scrutinize relationships between associations and their endorsed carriers. South Dakota already is looking at associations to make sure they were not formed only to sell insurance. It refuses to allow policies endorsed by those associations to be sold in the state.

Many associations do make decisions that are in the best interests of their members. Bar associations and other professional groups use their group-buying power to guarantee members health coverage regardless of their medical history. For example, Communicating for Agriculture and the Self-Employed, a 80,000-member group started 30 years ago, dropped its endorsement of an insurer in 1998 because its policies weren't covering members' medical bills.

Founding Father

Many in the industry credit Texas insurance titan Ronald Jensen with popularizing the notion of marketing health coverage through associations. Mr. Jensen founded UICI, a Dallas-based insurance company, in 1984. A year later he took over the National Association for the Self-Employed from an insurance agent. His system of a nationwide force of agents selling association-endorsed health policies captured the attention of the insurance industry. "Everybody tried to match us after we became successful," he says. "They set up their own associations and they tried to do everything exactly like us."

NASE also does political lobbying on behalf of small-business owners and offers advice over the phone about business problems. It offers a variety of discounts.

Mr. Jensen, the 72-year-old chairman of UICI, says the insurance company "probably at times gets closer than it should" to the three associations through which it primarily sells insurance. But he says, "The bottom line is: Can I look members in the eye and tell them they are getting a good deal? You are damn right I can."

One of the groups UICI sells policies through is Americans for Financial Security, a 30,000-member association based in Dallas that promises small entrepreneurs savings on items such as phone service, package delivery and health insurance. Mr. Jensen's son, Jeffrey, started the association in 1992. A UICI executive served on Americans for Financial Security's three-member board, but recently resigned. Jeffrey Jensen declined to be interviewed.

UICI had 313,000 association policyholders as of Sept. 30, up from about 200,000 policyholders at the start of 2001. It sells association policies in 38 states. Revenue at the UICI division that sells those policies rose 24% last year to $700 million. Those results have helped make UICI an industry leader and wowed investors. The company's stock price has more than doubled since Jan. 1, 2001, when it was $5.94 a share. It closed Wednesday at $16.15, up 56 cents, or 3.59%, in 4 p.m. composite trading on the New York Stock Exchange.

Many association policyholders buy their insurance after responding to newspaper advertisements, direct-mail pieces or signs tacked to telephone poles by agents promoting "Affordable Health Insurance." They are approached by insurance agents who wear shirts or carry business cards identifying themselves as association representatives.

At a training session in 1993, an executive at Ronald Jensen's insurance agency, now owned by UICI, told agents selling association policies about the advantages of being seen as an enroller. "It feels like a much lower pressure presentation," the executive said, according to a transcript. "The whole temperature of a presentation is different, isn't it, if we're in there as a NASE enroller as opposed to an insurance agent?"

The transcript was used as evidence by Kansas policyholders in a suit filed in federal court in Kansas City against Ronald Jensen, NASE, UICI and another insurer in 1998. The suit alleged that they had "implemented a fraudulent marketing scheme" by "intentionally representing to consumers that NASE was independent and had negotiated the best possible deal for consumers in health insurance." UICI says it settled for $1 million without admitting any liability.

Behind the Scenes

Even for sophisticated consumers, it is hard to figure out whether an association is truly independent. The National Business Association, based in Dallas, says it was founded in 1982 and aims to "assist the self-employed and small business community in achieving their professional goals," according to its Web site. The organization offers discounts on auto repair and other items, college scholarships and business services such as software to help obtain business loans. It also publishes a magazine for small-business owners.

But back in 1982, the group was known as the Health Through Exercise Association, according to Missouri records. It was started by Dale Turvey, owner of National Association Consultants Inc. in Chesterfield, Mo., which forms nonprofit associations.

An insurance agent, Mr. Turvey sometimes taps his employees, family members and friends to serve as officers of these associations. He acts as benefits administrator for several associations, including the Eagle Consumer group and often recommends which insurer the groups should endorse. "To the best of my knowledge, none of the associations we manage or administer are controlled by an insurance company or agency," he says.

Stan Firebaugh, the owner of a national insurance agency in Dallas, says he took control of the Health Through Exercise group in 1987. At around that time its name was changed to the National Business Association. Mr. Firebaugh's insurance agency made a proposal to American National Insurance Co. of Galveston, Texas, on how to put the National Business Association to use, according to officials with the agency and the insurer. "The concept embodied in this proposal -- namely that of mass-marketing health insurance products via monthly bank authorizations to self-employed individuals through a captive, nonprofit association -- is a successful, well-established concept," the agency wrote. The NBA began endorsing American National as its insurer in 1989. Mr. Firebaugh's agency receives commissions on policy sales and a share of association dues.

He denies any involvement with the proposal to American National and says the National Business Association is completely independent. The association "was never set up to sell strictly health insurance," he says.

For a decade, Patrick Archibald served as president or a board member of the National Business Association and manager of Mr. Firebaugh's insurance agency. In effect, he was touting his agency's product to his association's members. He left the insurance agency in 1998 but stayed on at the association until April 2001. Mr. Archibald could not be reached.

"The association was portrayed as independent," says Betty Wendland, 61, a retired saleswoman who joined the NBA and bought its insurance in 1999. "You joined this group and then you buy this insurance. I never assumed they were one and the same." Mrs. Wendland's rates went up 61% over the course of eight months before she found a new policy from a different insurer last year. "At my age, it isn't easy to get insurance," she says.

Mrs. Wendland and some other policyholders learned about the cozy relationship from an agent after American National cut benefits and raised premiums in 1999.

She and others filed a class-action suit in 2000 in state court in Austin, Texas, claiming that the NBA, Mr. Firebaugh's agency and American National had marketed insurance "through a sham organization." The suit alleges that more than 60,000 customers were defrauded and that the NBA "exists primarily for the purpose of selling health insurance and making profits."

William Watson, American National's chief health actuary, said in a deposition last year that it didn't concern him that Mr. Archibald was running the association and the insurance agency. American National declined to comment because the litigation is pending. The defendants, including Mr. Archibald and Mr. Firebaugh, have denied the allegations in the suit.

Unhappy Customers

Some policies offered by associations are hard to understand. UICI's typical policies feature a complex schedule of coverage for medical expenses. For example, many UICI policies cap hospital room and board benefits at $300 to $400 per day. Hospital room and board on average cost nearly $700 a day last year, according to insurance-industry data. Customers can add "riders" to augment their coverage. Most policies offered by other insurers pay nearly all of a patient's medical expenses after co-payments and deductibles are met.

Merrideth Tidwell, a former manager for UICI in Sarasota, Fla., says her superiors taught agents to withhold information about coverage limits from prospective customers. Ms. Tidwell, a top producing agent, according to a UICI internal newsletter, says she was instructed by managers to tear out a page from a brochure that explains coverage limits, or to not give brochures to customers.

The brochure, for example, explains that on UICI's Freedom 300 plan the insurer pays 100% "up to $300 per day" for hospital room and board, "up to $900 per day" for intensive care and that an 80% payment of miscellaneous in-hospital charges is capped at a "maximum of $18,000."

Rather than share that information, Ms. Tidwell says her managers created their own sales sheet for agents by photocopying the "plan benefit" page and adding 100% or 80% along the-right hand side, leaving out the maximums. This sales sheet makes it appear that the policies would pay 100% of hospital room and board, intensive care, an anesthesiologist's charges and some other surgical expenses on an unlimited basis. Four other UICI agents say they also were told to use the sheets in their sales presentations.

"They are training agents to trick the consumer," says Ms. Tidwell, 27. Last summer, she says, she began looking into typical hospital charges and competitors' policies. She says she was fired last month after she began raising questions about sales practices. Her bosses told her she was fired because her husband had begun selling a competitor's policies, she says.

UICI Chief Executive Gregory Mutz says he is "appalled" by the claim that agents are trained to withhold information. "I find it incomprehensible and outrageous that any agent engages in behavior that is clearly unethical and clearly illegal," Mr. Mutz says. UICI says it terminated two of Ms. Tidwell's supervisors last week after an internal investigation. The company says it is retraining some of its 2,800 active agents.

In October 2000, Barbara and Robert Bloedel of Fort Myers, Fla., got a call asking if they were interested in joining Americans for Financial Security, the association founded by Jeffrey Jensen. The Bloedels recently had started their own Internet clothing business. During a visit to their house, the Bloedels say, an agent explained the advantages of joining, including tax and legal advice and discounts on office supplies. The agent assured the Bloedels that the UICI policy endorsed by the group was comparable to their existing coverage, the couple says. The Bloedels paid $540 in annual dues in order to receive the health policy for $358 a month.

When Mr. Bloedel underwent open-heart surgery a year later, the policy paid about $29,000 toward the surgery and a weeklong hospital stay. That left the Bloedels to pay $45,000 out of their retirement savings. The Bloedels likely would have paid far less under their previous Mutual of Omaha Insurance Co. policy, which had a $5,000 deductible. "I'm afraid we made a really stupid decision," says Mrs. Bloedel. "We trusted what the insurance salesman was saying. Insurance is like a foreign language to us."

Now other insurers will not accept Mr. Bloedel because of his heart condition. UICI raised their premiums 34% this fall to $598 a month. "My husband is 10 years from Medicare," says Mrs. Bloedel. "This is going to cost us big-time."

The Bloedels' agent, John L. Patterson, declined to comment, but in a letter to the Florida insurance department he said that the couple "determined that the ... coverage was suitable for their needs." He also denied making any comparison to their previous policy.

Kevin Cruse, a 46-year-old firefighter in Parsons, Kan., says he canceled his National Association for the Self-Employed policy last year after six months because he says it paid so few of his family's medical claims. "The whole pitch was there are two million members nationwide and because of this size membership they can get in there and work for you with this insurance company to keep prices down," Mr. Cruse says. "It was like an angel knocked on my door."

Timothy R. Adams, the Kansas agent who sold Mr. Cruse his policy, says he quit selling UICI insurance in November 2000 because so many of his customers complained, primarily about nonpayment of claims. "There were a lot of times I didn't understand what I was selling," Mr. Adams says.

Mr. Adams says that he does not recall telling customers that NASE had two million members. NASE President Robert Hughes, a Dallas accountant, says the group has about 250,000 members. But two insurance agents in Laguna Hills, Calif., claimed until recently on their Web site that NASE had 2.5 million members.

UICI said it tries to deal promptly with agents who "may say and do things with which we may disagree."

An Extra Source of Revenue

Policyholders often pay a steep price to gain access to an association policy. Consumers are frequently required to pay hundreds of dollars in one-time enrollment fees and monthly dues to join the association -- on top of their insurance premiums.

In some instances, a large share of this association money winds up in the pockets of insurance agents and other industry insiders close to these nonprofit groups, according to a review of tax filings and court records, as well as interviews with regulators and agents.

Members of the National Association for the Self-Employed pay anywhere from $96 to $540 for membership packages. Those purchasing insurance must also pay a one-time fee of $120 to NASE. The National Business Association's dues run between $180 and $420 a year.

In the suit filed by policyholders in Texas against the National Business Association, plaintiffs contend that Mr. Firebaugh, the insurance agency owner, has transferred millions of dollars in dues and enrollment fees from the nonprofit group to companies he controls. Half to two-thirds of the association's dues are paid to Mr. Firebaugh's insurance agency and his agents for enrolling members, according to a marketing agreement signed last year by Mr. Archibald, of the NBA, and an insurance-agency representative. In 2000, according to financial records filed with the court, the National Business Association had revenue of $6 million and paid $4.2 million of that to Mr. Firebaugh's insurance agency as "management/marketing fees."

Mr. Firebaugh declined to comment on those payments. He denies profiting improperly from the sale of association policies.

NASE gives roughly half of its first-year membership dues to insurance agents for enrolling members, says Mr. Hughes, the association's president. He says the association's management firm, which handles mailings, member calls and other daily operations, is paid a per-member fee, which he declined to disclose. The firm, Specialized Association Services Inc., was founded by Ronald Jensen, UICI's chairman, in the 1980s and later sold to Jeffrey Jensen, his son.

Mr. Hughes says Jeffrey Jensen is responsible for reviewing the performance of his father's insurance company and determining whether there are better policies available. Mr. Hughes says the father-son relationship does not pose a conflict of interest. "We view ourselves as having an arm's-length relationship with all of our vendors," Mr. Hughes says.

Ronald Jensen says critics of association coverage are too "worried about form over substance."