My Experience with Association Health Plans
©Antony Stuart
On June 19, U.S. Secretary of Labor, Alexander Acosta, announced the final rules which will permit access to health plans as an alternative to those offered under the Affordable Car Act. The announcement came eight months after President Trump directed the government to find alternatives to the ACA’s insurance provisions. The new rules foster the return of “association health plans,” those that provide a type of “group health insurance” to trade associations. After the announcement, the President extolled the new rules, asserting that “You are going to save massive amounts of money and have much better health care.”
Between 2003 and 2016, I litigated numerous fraud and insurance bad-faith cases against association health plans and their providers. I learned a lot about them – enough to be concerned about their return to prominence under President Trump. I feel obligated to share what I learned so that consumers can evaluate these new plans with their eyes wide open.
My clients were ordinary people who found what they believed to be comprehensive health insurance coverage offered to them if they would join an association. For an up-front enrollment fee of between $90 and $120, and a monthly dues rate of between $8 and $36, they “qualified” for the health insurance plans offered to association members. The insurance was priced to be marginally competitive, but often it was just as expensive as real catastrophic coverage in the individual market. Then, when these people became ill and needed to use their health insurance, they discovered there really was very little coverage at all. As my clients became more ill, often with cancer or some other life-threatening condition, they found themselves trying to navigate the health care system without an insurance company or an association to help them. Many of them were driven into bankruptcy by their medical bills. When they turned to their association for help, shocked that medical providers were asking for up-front payments for hospitalization or to begin a course of chemotherapy, the association simply referred them to the insurance company. The insurance company then referred them to the arcane and incomprehensible language of its policy – language providing that the insurer would be protected from large claims.
We sued these insurance companies, and the associations who promoted their plans, for fraud. My theme in these cases was always, “If these policies were honestly presented to people, no one would buy them.” I took sworn testimony of dozens of insurance agents, association representatives, and company executives. I learned that the associations involved were really the creation of the insurance company. They were a marketing tool, not a legitimate mutual benefit association. The associations’ true beneficiaries were the insurance company, its agents, and the associations’ directors and officers who handsomely compensated themselves for their ‘work’ selling association memberships and junk insurance plans. I learned that insurance agents were trained to lie about the insurance they sold. They were taught that the policies provided coverage for “comprehensive” or “catastrophic” care, and this is what they told prospective customers so that they could earn sales commissions.
Of course, the agents didn’t realize they were lying – at least not when they first started the job. But, with the passage of time, they would eventually hear the tragic stories, maybe even receive a call from a client incredulous that his or her policy wouldn’t provide coverage for life-saving treatment.
The agents began their sales presentations by extolling the virtues of association membership, the sale of which also produced a commission. One such association, the Alliance for Affordable Services, offered a thick portfolio of membership benefits, from movie ticket discounts to one-time telephonic assistance to claim a tax deduction for medical expenses and health insurance premiums. After convincing the customer that the association was legitimate, the agents would explain the wonderful health insurance available for purchase only to association members. Some agents would say, “The association has shopped the market for the best insurance for its members and is pleased to offer the policies of this A-rated company.” Agents offering the insurance policies through the National Association for the Self-Employed would say, “Insurance companies love our members because they’re all self-employed. They can’t take time off from work for a hang nail or a common cold. Our membership is the healthiest group any insurance company can find, and they are dying for our business. That’s why we can offer good coverage at such affordable prices.”
What the agents didn’t say was that the coverage provided under their plans was significantly limited. For example, coverage for chemotherapy was subject to something called a “benefit maximum” of $1,000 a day. This meant that if you needed chemotherapy to battle cancer, the insurance company would cover the first $1,000 of a day’s treatment, and you’d be on the hook for the balance. Most people, healthy people who have never had cancer (and who therefore would pass the insurance company’s medical underwriting guidelines) have no idea that a day of chemotherapy can easily cost 20, 30 or $50,000. What’s the point of insurance that will cover $1,000? There was only one point for such absurd coverage – deception.
What the agents also didn’t say was that the association had no other health insurance to offer, had never offered a health insurance plan from any other company, had no one with an understanding of health insurance reading the policies to make sure the coverage was meaningful, or to insure that the insurance company would stand behind the agent’s promises.
These association health plans had other benefit maximums besides the absurd limit on chemotherapy coverage. Typically, they had a maximum benefit of anywhere between $12,000 and $50,000 for a category of medical care called “miscellaneous hospital inpatient charges.” One might reasonably believe such miscellaneous charges would be for things in the hospital like band aids, tubing and tape. A maximum of $12,000 for such things would seem quite adequate. But actually, the vast majority of charges for hospitalization are considered miscellaneous, so that if you had to be in for more than a couple of days, you’d be on the hook for thousands in uncovered expenses.
My first case, filed in 2003, arose from the cancer treatment of Doug Christensen, a 46 year-old boat customizer from Marina Del Rey, California. He and his wife Dana had been sold a membership in the National Association for the Self-Employed so they could “access” the purchase of a health insurance policy from the Mega Life and Health Insurance Company. The Christensens specifically asked their agent if the policy would protect them in the event Doug’s bone cancer, in remission for seven years, ever returned. The agent advised that the policy provided “more than enough coverage” for cancer treatment. Doug’s cancer did return, and after surgeries and several courses of chemotherapy, the Christensens were left with nearly half a million dollars in uncovered medical bills. As Doug lay on his death bed, he asked Dana to divorce him so that she wouldn’t be saddled with his debt. She refused, and after Doug passed she filed a fraud case against Mega, its agent, and the association.
The case was litigated for two years and settled for $1,071,000. That might sound like a fair amount of money, but after attorneys’ fees, costs of prosecution of the case (mostly the cost of expert witnesses), federal and state tax, and paying off Doug’s medical providers (the principal provider refused to reduce the highest rates it could charge), only a small fraction was left for Dana. Dana and Doug’s story became the subject of newspaper articles and an episode of the Public Broadcasting Service’s news series “Now,” in 2006, when Republicans in Congress were attempting to pass their version of health insurance reform, Senate Bill 1955 (Enzi). The Enzi bill relied heavily on association health plans to provide insurance for people without employer-provided plans. Enzi’s bill failed to pass as a result of a filibuster by Senate Democrats led by Edward Kennedy.
I litigated more than fifteen cases like the Christensen case against phony associations involved in marketing junk health insurance plans over more than a dozen years. Some of these cases were dismissed by judges who couldn’t believe that a publicly traded health insurance company would engage in such reprehensible conduct. Other cases crumbled after clients succumbed to their cancer before their case could come to trial.
The principal company offering association health plans across the country in the twenty year period before passage of the Affordable Care Act was UICI, now known as HealthMarkets. Publicly traded for fifteen years, UICI was purchased in 2006 for $1.7 billion and taken private by a consortium of investors led by the Blackstone Group. How did companies like UICI, which rested upon a business model of selling junk policies, manage to have so much success for so long?
The answer to this question is simple: failure of regulation. Association health plans are treated under the law of almost all fifty states in much the same way as employer-provided group plans. The premise is that because a bona fide mutual benefit association offers the plan to its members, it has, like an employer who provides insurance as a benefit to its employees, the best interests of its members at heart. Because of this incentive – a fiduciary duty in the case of an association holding a policy in trust for its members – there is a presumption against the need for careful government oversight. Association health plans are regulation-lite.
One of the few state regulations applicable to such plans is a requirement that the association offering them must be a bona fide beneficial association formed and maintained for a purpose other than the distribution of insurance. This sensible rule would need to be enforced in order for the premise of minimal regulation to make sense. But the rule is an insurance regulation, enforced by state insurance regulators. Insurance regulators can issue orders and levy fines against insurance companies, but they have no authority to regulate associations. Who does? No one. There are no government agencies for associations, no licenses required, no regulations to follow. An association can masquerade as being bona fide when it’s really a shill for an insurance scheme, and no government agency is tasked to prevent it. In 2007, I took the deposition of a longstanding director of the National Association for the Self-Employed, a retired Texas travel agent named John Wright. Mr. Wright slipped-up in his testimony when I asked him to describe what the NASE is: “It’s benefits provided to our members that gives them access to health insurance,” he said. That’s precisely what the state regulations forbid! Apparently, Mr. Wright didn’t know that.
Group health plans are held in trust for the benefit of plan enrollees. The associations often designated a bank to act as trustee. In the case of the NASE, the trustee-bank was, for a time, located in Alabama. When disgruntled Californians complained to the California Department of Insurance about their insurance company refusing to cover large medical expenses, a department officer advised that because the policy was issued in the state of Alabama, the individuals needed to contact the Alabama Department of Insurance. Californians getting justice from the Alabama agency? They didn’t even get a reply.
These junk association plans came to an end after the Affordable Care Act took effect in 2010. The ACA required reasonable levels of coverage in order for a plan to be “qualified” under the Act, and junk plans didn’t pass muster. Under the original ACA rules, a health plan that wasn’t “qualified” wasn’t a true health plan in the eyes of the law, and a person insured by one was required to pay the ACA’s $600 tax as if he/she had no insurance at all. These rules have now been withdrawn by the Trump administration. HealthMarkets stopped selling association health plans when the ACA took effect, and changed its business model completely, converting from a health insurance company to a national insurance brokerage selling only other companies’ policies. With the Trump administration’s allowance of junk association plans, HealthMarkets may be poised to return to its profitable, if ignoble past.
© Antony Stuart, 2018
Antony Stuart is the principal of Stuart Law Firm in Los Angeles, specializing in consumer protection, legal malpractice, class actions and insurance litigation. In 1998, California Lawyer magazine named him one of California’s top 20 lawyers, and in 2000, Editor and Publisher magazine named him one of the nation’s “Three Kings of Privacy” in media litigation. He was President of Consumer Attorneys of Los Angeles in 2004, and served as Secretary of Consumer Attorneys of California in 2011.