Phony Health Insurance Plans on the Rise, Impacting Collections

Misleading and outright fraudulent health insurance plans are increasingly being offered across the United States, lulling consumers into a false sense of security when it comes to seeking medical care. 

The trend likely will lead to more medical bad debt – some of which may not be recoverable. One industry expert said the phony or misleading health care plans may even impact other consumer collections.

James Quiggle, director of communications for the Coalition Against Insurance Fraud, a non-profit watchdog based in Washington D.C., told insideARM that the Internet has made it possible for phony or limited benefit health insurance plans to operate in virtually every state in the country. He said plan operators’ aggressive marketing tactics are aimed at anyone in search of health care coverage.

Given the current economy and health insurance environment, that leaves as many as 50 million Americans vulnerable to the scams, with seniors in need of supplemental coverage and people with preexisting conditions especially targeted but least able to afford it.

“There is a large market for boomers and seniors out there who need affordable coverage, especially in a down economy where insurance is growing more expensive and harder to obtain,” Quiggle said.

Small business operators also are being preyed upon, he said.

“Group health coverage is very hard to get if you’re a small operator and have only a handful of employees.  Scammers know this and are descending on small businesses,” he said.

Quiggle added that even some legitimate insurers have knowingly or unknowingly partnered with fake insurance providers that offered limited or misleading plans. Last year the New York State Insurance Department fined American Medical and Life Insurance Company (AMLI), $700,000 for selling limited benefit health insurance plans in ways that misled people into believing they had full health insurance coverage. The department also imposed restrictions on the New York-based company, banning it from selling limited benefit products in the state and forced it to pull its nationwide television commercial – its main marketing tool.

Earlier this month, Minnesota Attorney General Lori Swanson announced that her department is suing out-of-state operators Direct Medical Network Solutions, Inc., also known as Direct Medical; and Association Healthcare Management, Inc., d/b/a Family Care (“Family Care”).

Swanson’s lawsuit against the Texas-based companies alleges that both deceptively marketed and sold their limited discount plans to consumers by misleading them into believing that the plans are health insurance or insurance-like products in part, by using insurance terms such as “deductable,” “co-pay” and “premium” to confuse consumers. The plans also claimed to pay 80 percent of their expenses, the lawsuit alleges.

Though some consumers may be liable for medical expenses they thought were covered by their health insurance plan, Kaulkin Ginsberg Analyst Michael Klozotsky said state regulators could choose to lift liability from consumers taken in by the fraud.

But that doesn’t just hurt health care providers who will not get paid for their services.  Consumers who lost hundreds, if not thousands, on useless premiums will have less money to spend on regular living expenses, medical bills and other debt, Klozotsky said.

The ongoing danger, however, could be ongoing debits to consumers’ bank accounts towards premiums for useless insurance plans, or the misuse of personal information that leaves consumers vulnerable to identify theft, experts say.

“The perceived upshot will be that this will drive (collection) placements, but the collectability of those accounts will be a real challenge.  And if the dollars spent to collect goes up, profit margins go down,” Klozotsky said.

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