Fraudulent practices involving the underwriting of group health plans.

• Author: Aspinwall, David C.
• Position: Health Care and the Law

AMERICANS spend $750 billion per year on health care, according to the Health Insurance Association of America. Employers pay billions a year in premiums and self-funded claims. Small employers, overwhelmed by cost and red tape and untrained in the technical legalities of providing medical benefits to their employees, are easy targets for fraud. Seeking cost savings, expertise and reduced red tape, they turn to organizations that will administer their medical plans. In turn, these administering entities may pool the medical plans of several employers, a procedure which, under the Employee Retirement Security Act of 1974 (ERISA), makes them known as "multiple employer welfare arrangements"--MEW As, for short.

Many of these operations are legitimate, but others organize in ways intended to avoid state requirements regarding licensing and the posting of reserves that protect the financial integrity of the plans. Because of the lack of oversight, disreputable persons use these arrangements as the basis of creating what amount to Ponzi schemes.

Secretary of Labor Robert Reich has pointed out that a General Accounting Office report released in March 1992 showed that fraudulent MEW As left at least 398,000 health plan participants with more than $123 million in unpaid claims between January 1988 and June 1991. "We have every reason to believe that problem has gotten worse since then," Reich said a year ago.(1)

These fraudulent practices create serious problems. Employees who believe they are covered face financial devastation from the non-payment of medical claims. Employers who have paid premiums to MEW As loose their money and then must face their employees when the fraud is exposed. They also may be subjected to additional liability. Insurance companies, third-party administrators and insurance agents also may face liability under ERISA or under state insurance laws.

THE SCHEMES

Schemes involving this sort of fraud take advantage of small employers' dilemmas in providing health benefits. The purveyors of fraud will attempt to pool the health benefit plans of many employers by forming MEW As, with promises of lower costs and less red tape. Sometimes unwitting insurance companies or third-party administrators are involved as claims processors and stop-loss carriers, but they do not insure the benefits. Only the organization that pools the employers' premium money insures the benefits.

In the worst of these situations, the persons running the MEWA will withdraw more money than the MEWA can afford. As long as the MEWA is growing fast enough, they can cover the claims. But eventually they cannot sustain the growth necessary to raise sufficient money to pay claims as they come due. The MEWA will collapse, leaving unpaid medical claims in its wake.

Current common techniques involve employee leasing companies and labor organizations. Obviously, not all these organizations are involved in fraud, and they are difficult to police. There also is confusion remains over whether the states or the federal government has jurisdiction over these cases.

The fraudulent organizations, however denominated, will attempt to avoid state regulation through the self-insured plans. In most situations, ERISA preempts state regulation of self-insured employee welfare benefit plans. Even where preemption of state law is absent, state insurance commissioners often have been slow or reluctant to act because of the breadth of ERISA's preemption.

THE METHOD

Section 514(a) of ERISA, 29 U.S.C. [sections] 1144(a), contains a sweeping provision that preempts state insurance regulation of an employee welfare benefit plan--EWBP, for short. But Section 514(b)(2)(A), saves from preemption state laws that regulate insurance, banking and securities. ERISA preculudes state regulation of self-insured plans by providing that a self-insured plan shall not "be deemed to be an insurance company or other insurer ... or to be engaged in the business of insurance ... for the purposes of any law of any state purporting to regulate insurance companies [or] insurance contracts."

The broad preemption prohibits any state regulation of self-insured plans. Under state law, insurance companies must provide reserves to assure their ability to meet obligations as they become due. Where ERISA preempts state law, there is no requirement to post reserves, and ERISA does not contain a funding requirement for self-insured EWBPs. Since there is no state regulation of self-insured EWBPs, self-insured employers do not have to comply with state insurance regulation.

Self-insuring does provide benefits to employers and employees. Employees receive benefits, and employers pay only actual claims. Self-funding also enhances cash flow, since employers need not fund claims before they are due. It also places the obligation to pay claims squarely on the shoulders of the self-insured plan. But payment of claims is only as secure as the underlying financial integrity of the employer.

While employees do face some risk when their employers self-insure their medical benefits, they also receive advantages such as reduced costs. Employees also are generally financially dependent on their employers, so the employers' self-insuring of benefits does not radically change this relationship. Employers are motivated to assure prompt payment of employees' claims, since the financial failure of the health benefit plan would be seriously disruptive of their operations.

The normal safeguards of an employer self-insurance plan may be lacking where the self-insurer actually is a commercially marketed entrepreneurial arrangement that involves the pooling of many employers' benefit plans. Mismanagement or fraudulent activities by such an arrangement may result in the ultimate downfall of the organization providing the medical benefits, but not before its principals have reaped substantial financial rewards. In many situations, the principals have simply moved on to another state and start over.

AVOIDING STATE REGULATION

In order for these schemes to work, the plan must take advantage of ERISA's preemption of state law. To do this, the plan must first qualify as an EWBP. Section 3(1) of ERISA, 29 U.S.C. [sections] 1002(1), provides:

The terms "employee welfare benefit plan" and "welfare plan" mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment...

There are essentially five requirements to become an EWBP. There must be (1) a "plan, fund or program" (2) established or maintained (3) by an employer or by an employee organization, or by both, (4) for the purpose of to providing medical, surgical or hospital care benefits (5) to participants or their beneficiaries.(2)

The requirements of establishing a "plan, fund or program" are minimal. "'A plan, fund, or program' under ERISA is established if from the surrounding circumstances a reasonable person can ascertain the intended benefits, a class of beneficiaries, the source of financing, and procedures for receiving benefits."(3) As the purpose of the "plan, fund or programs" is to provide medical benefits, the fourth element is not difficult to establish.

In the cases involving fraudulent MEWAs, the issues generally relate to whether an "employer or employee organization" has "established or maintained" a plan.

MEWAs

Section 40(a) of ERISA, 29 U.S.C. [sections] 1002(40)(A), defines a "multiple employer welfare arrangement" as "an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan), which is established or maintained for the purpose of offering or providing any benefit described in paragraph (1) [29 U.S.C. [sections] 1002(1)] to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries."

MEWAs can help employers reduce their medical benefit costs because of the size of the group and the administrative burdens of maintaining a benefit plan. But, as stated above, they also can serve as a basis for Ponzi schemes that often include self-insured medical benefit plans. The MEWA will contend that its medical benefits are immune from state regulation and not comply with state insurance law, including the posting of reserves. The security of the medical benefits therefore is no better than the financial integrity of the MEWA.

As originally enacted, ERISA prohibited state regulation of self-insured MEWAs just as any other self-insured EWBP. The preemption provision was amended in 1983, to give states more authority over this type of self-insured benefit plan. Under a 1983 amendment to ERISA, 29 U.S.C. [sections] 1144(b)(6)(A)(ii), the states now have authority to regulate self-insured...