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Consumer Alert: Beware of Health Insurance Scams
Scams Related to New Federal Healthcare Reforms
Updated 2010

The U.S. Department of Health and Human Services (HHS) and the National Association of Insurance Commissioners (NAIC) have notified state insurance commissioners of national reports indicating that deceptive sales representatives misrepresenting the new federal healthcare reforms are selling fraudulent health insurance policies through door-to-door solicitations, the use of toll-free telephone numbers and other means.   

These predators, as well as some licensed agents, are urging consumers to obtain coverage during a non-existent “limited enrollment” period that they falsely claim was made possible by the passage of the Patient Protection and Affordable Care Act of 2009 (PPACA).

The PPACA will provide new insurance options in the near future; many of the initial changes will go into effect by September 2010. In the meantime, however, there are no provisions in the PPACA that require consumers to make immediate changes to their health coverage.  Therefore, consumers should beware of policies that are time limited, offer limited benefits, or advertise themselves as required by the PPACA.

Many of the provisions of the PPACA incorporate or are variations of requirements that have long existed in the New Jersey individual and small employer markets. These include:

  • Guaranteed availability of coverage to every small employer and individual
  • Guaranteed renewability
  • Modified community rating
  • A minimum medical loss ratio of 80% in the individual and small employer markets, and
  • Making continuation coverage available for certain dependents after they reach a plan’s limiting age.

Some of the more common deceptive practices engaged in by health insurance fraudsters of which consumers should be made aware include:

  • A salesperson shows up at the door or calls attempting to sell a policy called an “ObamaCare” policy or a policy that the salesperson says is necessitated or required by the PPACA.  All uncovered Americans will be required to purchase health insurance under the PPACA, but this requirement will not go into effect until 2014

  • The salesperson says the premium offer is only good for a limited enrollment period.  There is no open enrollment period currently associated with the PPACA.  A consumer should be wary if they are being pressured to buy a policy because the price or option is only good for a short time

  • The salesperson doesn’t explain what is covered under the policy or does not provide a full list of what is covered.

  • The salesperson claims the coverage will be “grandfathered” or exempted from changes required by the PPACA.  Only policies purchased before the PPACA was signed into law on March 23, 2010 will be “grandfathered” or exempted from changes required by the PPACA.  Any policy purchased after that date must comply with all of the changes required by the PPACA to satisfy the individual mandate in 2014.

Consumers should immediately contact the Department at 609-292-7272 or 1-800-446-7467 if they are contacted by an individual engaging in any of the above activities.

As a result of the cost of health insurance, small employers and individual consumers are seeking ways of finding health care coverage that is within their budget. Unfortunately, this environment creates a setting for scams in which criminals market various low-cost fraudulent health plans, often claiming that state insurance laws don't apply. These individuals and their associated companies recruit unlicensed persons and insurance agents to sell so-called "ERISA plans," "union plans” or other purported “legitimate insurance." Claims may be initially paid by these fraudulent plans, however, in many cases people are left with no valid insurance coverage and thousands of dollars of unpaid medical bills, as the scam operators strip premium dollars and leave these fraudulent enterprises bankrupt. Additionally, there has been a proliferation of non-insurance products that are marketed as alternatives to traditional health insurance. While such plans may look like regular insurance, many come with significantly greater risks and fail to provide any savings in healthcare costs.  Some plans may fail to pay any claims and do not in fact provide any insurance coverage at all but are only discount plans.

How to Protect Yourself Against Fraudulent Health Insurance Plans

"Red flags" to Look For

  • Offers received via Fax, listing toll-free numbers or a website with no identifying information which can change or be taken down as soon as the plan comes under investigation.
  • Coverage is offered at lower rates and with better benefits than can be found from licensed insurers -- the offer is "too good to be true."

  • The agent or company tells you that this is a "one-time deal" or your "last chance" for this special savings.

  • Claims that the Plan is registered with the Secretary of State. (The Department regulates health insurance plans.)

  • You are asked to pay a “membership fee.”

  • You are told that the plan is not regulated under State law.

  • You have purchased coverage and claims are not being paid.

  • A "union plan" is sold by an agent.

  • A "union plan" is available but no other traditional union benefits are present.

  • The agent or company becomes evasive when you ask about state insurance licenses.

  • The agent or company insists on cash payments.

  • The agent or company asks for detailed personal financial information that is not needed to write health insurance.
Types of Health Plans

Traditional Health Insurance -
These insurance products are protected by what is called a "guarantee fund" which provides reimbursement for covered services in the event an insurer becomes insolvent. The State has substantial oversight over the financial solvency of insurance carriers. This is one way in which New Jersey State law protects you. If you are looking to buy an insurance or HMO product, you need to make sure the entity is licensed to sell business in New Jersey.

Self-funded Plans - An alternative to an insurance product is a self-funded (or sometimes called a self-insured) plan. A self-funded benefit plan is one in which an individual, employer or union retains a substantial portion of the risk of loss from medical expenses rather than transferring the risk, for a fee, to an insurance company or HMO.

Single Employer Plans - These are benefit plans set up by a single employer, usually a large employer, for its employees. True single employer plans are regulated solely by the federal government. However, fraudulent plan operators often attempt to avoid state regulation by misrepresenting that an arrangement is a "single employer plan," particularly when marketing to small employers. If you have any doubts, contact the NJ Department of Banking and Insurance.

Multiple Employer Plans - In many cases a group of employers may be covered under a self-funded plan. For a group of employers, these arrangements are known as multiple employer welfare arrangements or "MEWAs." These self-funded arrangements are often referred to as "ERISA" plans, named after the federal Employee Retirement Income Security Act, a law that regulates these plans. MEWAs are regulated jointly by the Federal Department of Labor and State insurance departments.

Consumer Information on Self-Funded MEWAs

There is no state guarantee fund applicable either to self-funded single employer plans or a self-funded MEWAs. If a MEWA refuses to pay a claim or goes bankrupt, the NJ Department of Banking and Insurance will not be able to provide assistance to ensure that valid claims are paid. A significant number of MEWAs nationally have been unable to pay claims as a result of insufficient funding, inadequate reserves or because of individuals who have drained the MEWA's assets through excessive administrative fees and outright embezzlement.

MEWAs operating in New Jersey - All MEWAs are required file an "M-1" with the U.S. Department of Labor. If you are offered coverage that is not from a licensed insurance company, you should check whether the entity has submitted an M-1 filing.

Further, even if a MEWA has filed an M-1, the filing does not ensure that the entity is operating lawfully and has complied with all federal and state laws. Moreover, an M-1 filing does not ensure that the entity is financially sound. There are many instances of entities filing false, misleading or inaccurate M-1 information. The Department of Banking and Insurance registers all self-funded MEWAs that are permitted to operate in the New Jersey.

Before Enrolling in a MEWA:

1. Contact the Department of Banking and Insurance to make sure the company and the agent are permitted to conduct business in New Jersey.

2. Never pay for insurance until you are certain the agent and company are legitimate.

3. Fraudulent policies are often sold through direct mail solicitations or over the Internet. Be especially cautious before responding to these solicitations.

4. Always pay by check or money order, and write your policy number on the check.

5. Ask for a receipt for all payments. The receipt should include your policy number, the date of payment and the name of the health plan.

6. If you don't receive your plan documents within 30 days, call the company and demand proof of coverage.

7. Read the plan documents when you receive them. If you have any questions or concerns, contact your agent, the company or the Department of Banking and Insurance.

Information About Discount Programs

A Discount Program is a program under which a subscriber is able to access medical services or supplies at a discounted rate from participating providers, such as doctors and hospitals. While these products are sometimes marketed to look like insurance, they are not insurance programs. If you are not sure whether the product is insurance, you should ask whether a licensed insurance carrier is offering the product and verify this information with the insurance company.

If you do not have health insurance coverage in addition to a discount program, you can be left with a substantial liability for payment to providers. For example, a 10% discount applied to what generally would be $100,000 bill for medical services would still leave a person with a $90,000 liability. While some reputable entities offer discount programs, fraudulent operators are also marketing such services.

Before Purchasing a Discount Program:

  • Ask for a list of participating providers
  • Contact each provider that you intend to visit
  • Find out what the provider normally charges for the services you are interested in receiving.
  • Make sure the provider offers the promised reduction in fees.
More Information

If you have questions regarding legitimate health insurance plans, contact the Department at 609-292-7272 or 1-800-446-7467.
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