Risky business: a decade of daredevil finance and other games plays a hidden role in the health insurance crisis

Risky business: a decade of daredevil finance and other games plays a hidden role in the health insurance crisis – Cover Story

Jeffrey Denny

Like many small-business proprietors, Jan and Phil Fenty of Washington, D.C., fret constantly about the cost of health insurance. Owners of Fleet Feet, a running shoe and clothing franchise, the Fentys pay dearly to cover themselves and their two full-time employees under the Washington-area Blue Cross/Blue Shield health plan. Just recently Blue Cross gave notice that Fleet Feet’s premium would be increased 28 percent, bringing their monthly payment to $1,800.

So the Fentys were outraged to read in the Washington Post that Blue Cross had raised rates partly because of some $100 million in losses from various for-profit business ventures, many unconnected to medical coverage. for example, one of its subsidiaries reportedly now owns Cape Cod beachfront property and a rock-and-roll recording studio on a 145-acre New England farm – the unintended result of having loaned $11.1 million to a student travel agency that defaulted.

“It made me angry to see those big shots wasting our money and our rates going up and up and up,” says Jan Fenty.

The Fentys are among the untold number of health insurance policyholders nationwide who may have suffered higher rates, reduced coverage, unpaid bills or cancelation because of a little explored factor in the nation’s health insurance crisis: The same kind of 1980s-style go-go investment practices, questionable business dealings, lavish spending and help-yourself ethics that brought down the savings and loan industry also have undermined the insurance industry.

Under a tattered patchwork of state laws and virtually no federal oversight, health insurance underwriters have lost billions of dollars investing in high-yield, low-grade “junk” bonds, real estate and other dubious ventures. Sporadic cases of fraud have compounded the losses.

“It’s been a well-told tale here,” says Lester Dunlap, a consumer advocate for the Louisiana Department of Insurance. “You find this in almost every state.”

Until recently, there was little concern about how health insurers invested their assets as long as they provided an efficient system for spreading out the cost of medical care. But increasingly their financial management is a matter of public policy.

“I don’t think the public is aware of what could happen to their health insurance because of some of these problems,” says a congressional aide who investigated life/health insurance company failures.

A review of insurance industry reports, ongoing congressional investigations, newspaper articles and pending lawsuits, as well as interviews with insurance regulators, financial analysts and other industry observers reveals a disturbing picture: GAMBLERS’ MENTALITY. A 1990 paper by Investors Diversified Services (IDS) named “imprudent investment management” among the “major factors” in the failure of the 48 largely health and accident insurers it studied. “Over half … had an investment portfolio significantly different from the industry norm,” the report noted.

AILING INSURERS. The number of life/health insurer insolvencies tripled during the 1980s “and this trend appears to be continuing,” the U.S. General Accounting Office (GAO) concluded in a recent report. And 14 of the 72 Blue Cross health plans nationwide, the country’s largest health insurer with 94 million policyholders, are in “weak” or “very weak” financial condition, according to an independent analysis.

POLICYHOLDERS STUCK. In addition to facing higher rates or cancelation, policyholders also may be saddled with unpaid medical claims because the system of state “guaranty funds” designed to clean up after insurance company failures is full of holes, according to the GAO. And with rare exception, the guaranty funds do not cover Blue Cross policyholders, members of health maintenance organizations (HMOs) or employees of self-insured businesses – more than 120 million policyholders.

On top of that, the rash of failures has contributed to the increase in health insurance premiums because the guaranty fund system is financed by insurance rate increases, as well as tax revenues. The cost of covering unpaid life/health insurance claims from insurers that failed between 1976 and 1991 is expected to reach $4.2 billion, according to A.M. Best, an insurance rating agency.

The health insurance industry insists that it’s financially stable on the whole, arguing that most of the 1,500 medical underwriters in business today are healthy and that fraudulent operators are rare. And executives with the nation’s largest health insurers reject the notion that investment losses have harmed policyholders. “Absolutely nothing else contributes to [the health insurance crisis] other than…the explosion in health care costs,” says John Maginn, chief investment officer at Mutual of Omaha, the nation’s premier underwriter of individual health plans.

But logic dictates that when an insurance company’s overall financial picture is weakened by investment losses, it leaves less room to hold back rate hikes or keep risky policyholders. “Everything that affects the bottom line” affects health policies, says a National Association of Insurance Commissioners (NAIC) official.

This is particularly true for Blue Cross plans and small health insurers operating near the margin, according to Robert Hunter, president of the National Insurance Consumers Organization (NICO), a leading industry watchdog. “If you’re already having trouble, and then your investments start to go bad, then it puts critical pressure on you to get rid of people [and] raise rates,” Hunter says.

The Party’s Over

The health insurance business is fairly straightforward. Companies take in premiums based on policyholders’ medical histories, set aside reserves to cover expected claims and “surplus” for unexpected claims, and keep a share for overhead and profit.

Surplus and reserve accounts are invested. Companies that sell several lines of insurance – most health policies are sold by life insurance companies, for example – typically sink their money into a mixture of investments of various risk, maturity and payoff.

Life/health insurance companies try to carry some low-risk, liquid investments, such as money market securities, that can be converted quickly into cash to reimburse the continuous stream of medical claims. These tend to offer low returns. They also try to carry as many high-return investments as possible, which tend to be riskier. That’s where the trouble began.

During the 1980s many insurance companies started selling financial services, competing with S&Ls, banks and brokerages to give customers top returns. This encouraged insurers to sink their assets into high-yield ventures. By the end of 1990, the average life/health insurance company had a quarter of its assets in junk bonds, real estate and mortgage loans, according to A.M. Best. Life insurance companies in fact held about 30 percent of the outstanding junk bonds, a separate 1990 analysis estimated.

By then the roof was falling in. Between 1988 and 1990 the junk bond default rate (the portion rendered worthless) tripled from 3 percent to 10 percent. The real estate market also collapsed, littering the landscape with vacant office buildings, unfinished subdivisions and unmet mortgage payments.

The collapse in 1991 of two major life insurance companies – Executive Life of California and New York (because of junk bond losses) and New Jersey’s Mutual Benefit Life (real estate losses) – focused national attention on the insurance industry’s investment woes. But little attention was paid to the impact on health insurance, even though life insurers are the largest underwriters of health policies.

For example, Travelers and CIGNA each reported reductions in health division net income because of sharply devalued real estate investments. A third of Travelers’ mortgage and real estate holdings – $5.2 billion worth – were “underperforming” as of last fall while 6.3 percent of its investment portfolio was in junk bonds. Aetna Life & Casualty posted an 18 percent decline in net income overall for 1991 largely due to commercial mortgage losses. Aetna had $1.5 billion in junk bonds and $1.6 billion in problem mortgages last fall.

Company officials deny that their health policyholders have been hurt as a result. But critics say the same investment strategies that helped to sink the S&L industry are playing an indirect role in the health insurance crisis. “First they take our money with a false promise of safety,” Martin Weiss, a Palm Beach, Fla., financial adviser who analyzes the health insurance industry, maintains. “Then they invest it in junk bonds and speculative real estate, and now they’re trying to make us, the consumers, pay for their blunders.”

E.F. Hutton Spoke

While Blue Cross health plans are non-profits, many still couldn’t resist the gogo investment game.

One eager participant was Blue Cross of West Virginia. In early 1987, Shearson Lehman Brothers, the big Manhattan brokerage house, and E.F. Hutton, the financial adviser, offered to loan the Blue Cross plan $25 million to buy 30-year U.S. Treasury bonds on credit and make futures and options trades at the Chicago commodities exchanges, according to a pending lawsuit filed in state court by the West Virginia insurance commission.

Convinced, the Blue Cross plan bought the Treasury bonds and over the next 10 months undertook a frenzy of high-risk commodities trades, at times making a dozen or more transactions a day. It stopped only after it had lost $2.3 million – plus $150,000 it had paid Shearson and Hutton for their financial services. Shearson Lehman (which later acquired Hutton) refused to comment for this article.

Partly because of its losing investments, West Virginia Blue Cross became the first in the Blues network to collapse, stranding 51,000 policyholders with unpaid medical claims and others with reduced or canceled coverage. Local doctors have defied court orders and ignored pleas from state officials not to dun patients. Some policyholders’ credit ratings have been ruined. One medical group with $114,000 in unpaid claims reportedly insists that patients needing non-emergency surgery pay half their bill in advance. “I lost a total of over $23,000 myself,” one policyholder told Congress. “How could a health insurance company simply go bankrupt and leave over $41 million worth of claims unpaid?”

West Virginia Blue Cross also hemorrhaged an undetermined sum of money through a number of for-profit subsidiaries and affiliates, some of which were set up for the personal gain of the health plan’s executives, a Senate investigations subcommittee chaired by Sen. Sam Nunn (D-Ga.) found in a 1992 probe. An offshoot of one subsidiary set up to invest in real estate and travel agencies sold computer equipment back to the health plan at mark-ups of 80 to 130 percent, the state insurance commissioner found later.

Nationwide many Blue Cross plans have financed the creation of for-profit ventures, some health-related and some not, in an effort to earn extra money to hold down premiums. The Blue Cross national association in Chicago defends this practice and argues that subsidiaries altogether cleared some $195 million in profits in 1991 (although a Blue Cross spokesperson could not say how it affected premiums).

But the Nunn subcommittee’s ongoing probe of the Blues has revealed a “tendency…to devote inordinate amounts of time, monies and resources on subsidiaries not directly related to their primary task of providing low cost, quality health care coverage,” a staff report notes. For example:

* Washington, D.C.’s Blue Cross plan operated 45 subsidiaries, including a group of far-flung companies that provided travel services such as evacuating ill travellers, finding lost luggage and selling trip-interruption insurance. It lost $32 million; the health plan was close to failing when a neighboring Virginia plan agreed to take it over.

* The Maryland plan is in trouble partly because of $120 million in subsidiary losses. One subsidiary did make money: In 1989 (the same year health premiums rose more than 25 percent), the health plan invested $14.7 million to set up BCBSM Finance, which bought and sold stock. Before shutting down in December, BCBSM Finance cleared $500,000 in profits – but that was far less than the $2.4 million it could have cleared had the $14.7 million been sunk into a passbook savings account paying 4 percent interest.

Brando’s Life Mask

It’s not always risky ventures that hurt health policyholders. According to industry studies, alleged internal fraud has played a noticeable role in the rash of insurance company insolvencies.

Consider allegations involving George Washington Life of West Virginia, a $40 million commercial life/health insurer that state regulators seized more than two years ago. Regulators charge that John Wilbur of Jacksonville, Fla., and other executives of the insurer and its parent company skimmed $14 million in premiums from George Washington for their private enrichment and conspired to mislead examiners about their activities.

“GW Life’s money and assets were systematically looted…from 1981 through at least 1991,” West Virginia’s insurance commissioner charged in a $45 million fraud and civil racketeering lawsuit filed in September. That, as well as “systematic fraud and breaches of fiduciary duty” by company officers, directors and lawyers, caused the company to fail, the suit charges. Wilbur did not respond to requests for comment.

That’s nothing compared to what emerged from the rubble left by the collapse of World Life and Health of Pennsylvania in 1991. It was licensed to sell health, life and accident insurance in 18 states, had 64,000 policyholders – and will cost $28 million to clean up. Here’s what Senate staff investigators and state regulators found:

Some of World Life’s policyholders actually were covered by two reinsurance companies whose principal assets were laughably bogus. Among them were so-called “treasury bills” issued by something called “Sovereign Cherokee Nation Tejas.” State regulators contacted the purported Indian tribe’s office in Atlanta, Ga., to check out the treasury bills. They wound up speaking with the treasurer, who called himself “Wise Otter” and spoke with a pronounced British accent.

Wise Otter turned out to be Dallas Bessant, a British citizen and owner of the two companies. “Cherokee Nation Tejas is neither sovereign, Cherokee nor a nation,” Nunn subcommittee investigators later reported. “It is i sham, run by a group of |white’ or |Anglo’ Americans for the sole purpose of financial self-enrichment.”

And what backed the Cherokee Nation Tejas treasury bills? Items included a “life mask” of Marlon Brando the company claimed was worth $1.5 million; titles to movies such as Computer Beach Party, Distant Drums and My Girl Tisa; gold mineral leases, valued at nearly $100 million, for a site under a municipal parking lot in Central City, Colo.; and certificates of deposit from nonexistent financial institutions. The “tribe” was in such sorry financial shape that at one point its officers were denied credit to rent rooms at the Motel 6 in Dallas.

Wasting Away

The years of financial mistakes and misdeeds are playing out with a vengeance.

According to Blue Cross national association spokesperson Julie Boyle, an internal “watch list” of endangered plans includes six: Maryland, New Hampshire, New Jersey, Empire of New York, Vermont and Washington, D. C., which together cover some 15 million people. (Only the Washington, Maryland and New Jersey plans are reported to have suffered large subsidiary losses.)

But health insurance analyst Martin Weiss says that number may be too low. According to his financial rating system, which was submitted in testimony to the Nunn subcommittee, 14 Blue Cross plans were still “weak” or “very weak” as of early December. “Weak” means that policyholders could be at risk, Weiss says; “very weak” means they already are. Another 14 received only “fair” ratings.

Because the Blues are nonprofit and often required to insure people whom commercial insurers refuse as too risky, they tend to be hit harder by rising medical costs and operate close to the edge.

But many commercial, for-profit health insurance companies haven’t fared much better. The incidence of life/health insurer failures has increased sharply since the mid 1970s; more than 140 failed between 1989 and 1991. On top of the failed firms, “a significantly greater number of insurers had affiliate or overstated asset problems resulting from overexposure in low-quality assets, typically, [junk] bonds, commercial mortgages or commercial real estate projects,” A.M. Best notes.

The health segment has been hit hardest. The cost of covering unpaid medical claims left by failed insurers far exceeds that of other insurance claims – $190 million in 1989 and 1990 alone, according to the GAO.

Out In the Cold

Often health insurers that suffer investment losses play games with policyholders, challenging claims, delaying payments and refusing to cover portions of medical bills deemed beyond “usual or customary” costs, which become increasingly arbitrary, state regulators say. “The net effect on the consumer is he doesn’t get the response he expects,” says Lester Dunlap of the Louisiana state insurance department.

And while health insurers downplay any connection, investment losses have been linked to rate increases when company books are laid bare. Examining the Washington and Maryland Blue Cross plans in the wake of their financial woes, insurance regulators found that both increased their premiums to help cover subsidiary losses. “The only way you can get [the money] back is through rates. ..,” John Picciotto, the Maryland plan’s chief legal officer, told the Washington Post.

When banks fail, the federal government covers depositors’ money. When health insurers fail, the only place policyholders can take their medical bills is to the system of state-administered guaranty funds, which are designed to pay bills the failed insurance company had promised to cover. Unfortunately, the system is full of holes (see box, page 14).

And for some policyholders, there’s the ultimate nightmare if their insurance company fails: cancelation. When World Life and Health was seized by Pennsylvania insurance regulators in 1991, the firm had already spun off its 30,000 individual health and accident policies to another Pennsylvania insurer. But most group health plans were terminated. “[Policyholders] had to go find another health insurer,” says a Pennsylvania insurance commission spokesperson.

State insurance liquidators often try to find another insurer to take over policyholders of failed companies. “We’ve been pretty successful at selling off these blocks,” Oklahoma Insurance Commissioner Cathy Weatherford says. Indeed, it can be relatively easy to find new carriers for healthy policyholders, especially large employee groups.

But many insurers will not assume those with poor medical histories, preexisting health conditions or contracts that limit rate hikes. And “nobody wants the little groups,” says a Pennsylvania insurance department spokesperson. When Michigan’s HMO West failed in 1988 the state liquidator had to twist arms to get other health plans to accept two women left stranded days before they expected to give birth. “Under these conditions, a significant number of individuals … may be unable to obtain new health insurance,” the GAO noted.

There is practically no protection when an insurance company decides to cancel or sell off health policies before it goes under. As California’s Great Republic Life Insurance Co. suffered financial problems that led to its liquidation in 1991, it canceled a health plan with 14,000 policyholders, including Stan Long, 38, of Los Angeles, who had been diagnosed with HIV, the AIDS virus.

Long went more than a year without coverage, but “lucked out” because his condition was stable, his doctor was a close friend and his pharmacist refused to charge him. Now Long is covered under California’s health insurance risk pool, which is financed by cigarette taxes. But he’s still angry.

“My business has more regulations than health insurance does,” says Long, a partner in an interior design firm.

Asleep at the Switch

Who let the insurance industry gamble with people’s medical security? Perhaps it’s not surprising to find many of the same players from the S&L debacle:

THE ACCOUNTANTS. Recently, the Big Eight accounting firm Ernst & Young agreed to pay $400 million to settle federal lawsuits charging the firm with failing to adequately audit four large thrifts that subsequently failed (costing taxpayers $6.6 billion) and to call off any more federal suits.

Ernst & Young currently is being sued for $55 million in damages by the West Virginia Blue Cross liquidator in connection with its auditing of the local Blue Cross plan. “Ernst & Young repeatedly told the department that the plan would not fail, but that its problems were only cyclical,” West Virginia Insurance Commissioner Hanley Clark testified in July. Ernst & Young says the suit is “totally unfounded and will be dismissed.”

On the whole, the Nunn subcommittee investigation found, accountants “played a significant role for [the] sham deals” that resulted in insurer failures.

FLAWED OVERSIGHT. The insurance industry has fought any reform of the 1945 McCarran-Ferguson Act, which flatly outlaws federal regulation, leaving an uneven state-by-state system.

An insurance company licensed in a dozen states may be subject to a dozen different state laws and regulatory approaches. NAIC, the state regulators’ association, attempts to set nationwide standards and in the last two years has recommended tougher laws and regulations to head off insurance failures – and federal regulation. But until recently the association did little about the problem because i was primarily concerned with keeping ailing insurers afloat, critics say.

“Monday morning quarterbacking in the regulation of financial interests is really quite easy,” a NAIC official responds. “Look at federal regulation of banks and thrifts. We think our regulation stacks up quite well against these.”

Many state insurance regulators continue to lack the legal power, political backing or resources to oversee the industry, however. “Current U.S. insurance regulations are replete with a number of significant loopholes,” the Nunn subcommittee noted. Most states’ investment regulations have been passive, allowing insurers “to invest in virtually any type, quality or concentration of asset without limitation,” Minnesota insurance regulator Thomas Borman testified in 1990. And regulators had an average of only $250 to investigate each complaint they receive and $4,000 to examine each company they regulate, according to a 1990 study by an insurance agents’ association. Until last September, the federal charter of Washington, D.C.’s Blue Cross plan actually limited the local insurance commissioner’s authority to regulate the health plan; the District government has never audited its books.

The Blue Cross system has been accused of stonewalling and thwarting regulators “by either putting politically powerful individuals on their boards or by making contributions to certain campaigns,” according to a Nunn subcommittee staff report. West Virginia’s Blue Cross spent $102,000 between 1987 and 1990 “in lobbying and attorneys’ fees … primarily to fight the department’s attempt to strengthen the state’s laws and jurisdiction over” the health plan, according to state Insurance Commissioner Clark. “Not included in this figure,” he added, “is the salary for current and former state legislators who were also on the plan’s payroll.”

CO-OPTED REGULATORS. Some regulators are too close to the industry. Many are former industry employees and vice versa. According to another study by the insurance agents’ group in 1990, 49 percent of the insurance commissioners who left office between 1984 and 1989 went on – some immediately – to positions in insurance companies or provided legal, accounting or consulting services to the industry. In 1976, for example, West Virginia insurance department examiner Michael Davoli was assigned to audit George Washington Life. Three years later Davoli was hired by the insurer’s parent company as assistant to the chairman of the board, according to the West Virginia insurance commission suit.

Insurance companies often pick up the tab for food, drinks and entertainment at regulators’ quarterly meetings, sometimes because regulators ask them to, according to published reports.

A Question of


Sensing that change is inevitable, the insurance industry recently softened its opposition to any major reform of the health care system. The Health Insurance Association of America has endorsed a plan in which the government would require employers to buy a standard employee health insurance package and tax more generous health benefits. “[F]orcing some employers to buy your product seems a helluva lot better than having your industry shut down by the government,” a National Journal columnist noted.

But given the industry’s stewardship of scarce medical resources, many people have a gut-level distrust of any health care reform plan that leaves insurance companies in control.

“If they decide to change and not concentrate on profits but on people’s health, then it’s possible I could trust them,” says small-business owner Jan Fenty of Washington, D.C. “But for the past 12 years everybody had license to go crazy and forget the average person.”

Crisis? What Crisis?

John Wilbur of Jacksonville, Fla., sure knew how to live. For years Wilbur charged his firm for several annual trips to Europe, dropping some $100,000 on travel and entertainment in one year alone, a state official who reviewed company documents confirms. At one point Wilbur spent 12 weeks at the Marriott Marquis hotel in Manhattan, which wasn’t itemized but would cost about $12,000 today. Wilbur also charged virtually all his personal expenses to his firm – including laundry bills. All that on top of a $350,000 annual salary.

Generous perks aren’t unusual in many blue-chip corporate suites. But Wilbur was chair of George Washington Life Insurance Co., a relatively small life and health underwriter chartered in West Virginia and headquartered in Florida. Until September 1990, that is, when George Washington folded – in part, state insurance examiners say, because of Wilbur’s lavish spending habits.

The crisis in affordable medical coverage makes it hard to stomach the way some insurers spend money.

Take salaries, for instance. In 1991, CIGNA chair and CEO Wilson Taylor received $1.3 million in compensation, then-Aetna board chair James Lynn received $1 million and Travelers CEO Edward Budd got $923,000. Or political contributions: In 1991-92, Aetna made $46,000 in corporate contributions to various Republican committees.

And for a nonprofit entity, the Blue Cross network seems to have a lot of money to throw around, according to an ongoing probe by the Senate investigations subcommittee.

To begin with, Bernard Tresnowski, president of the Blue Cross and Blue Shield Association, which represents the nation’s locally based Blue Cross health plans, drew $622,000 in salary, benefits and allowances in 1991. Tresnowski in fact was the second-highest paid executive of all 37 medical trade groups tallied by National Journal, besting even the affluent American Medical Association.

At policyholder expense, executives of the Washington, D.C.-area Blue Cross plan, which is in deep financial trouble, flew to exclusive international resorts to investigate restaurants, beaches and accommodations for future business meetings. Top executive Joseph Gamble spent $447,000 on travel from 1987 through 1992, including 22 trips to Europe aboard the Concorde. During a 1989 jaunt to London, Paris and Zimbabwe, which cost $7,900, Gamble attended a conference to give a speech on fraud in the insurance industry. When he retired last fall, Gamble was presented with a three-dimensional collage commissioned from a local artist. Cost: $29,000.

Salary and compensation for former Maryland Blue Cross president Carl Sardegna increased 284 percent between 1986 and 1991. And while the Maryland plan was seeking rate hikes and its “financial picture was dark,” state insurance commissioner John Donaho testified, the health plan annually pitched hospitality tents at the Preakness horse race – at a cost of more than $65,000 in 1992 alone – “under the guise of being a good corporate citizen,” Donaho said. To entertain guests, the Maryland Blue signed a $300,000, four-year lease for a 14-seat exclusive luxury sky-box suite at the Baltimore Orioles baseball stadium, complete with private elevator and bathrooms, wet bar, two color TVs and an internal telephone to order refreshments. Food and drink wasn’t included – that came to an extra $588 per game, on average.

Before it collapsed in 1990, stranding 51,000 policyholders, the West Virginia Blue spent at least $102,000 in lobbying and attorneys’ fees, mostly to fight regulators’ attempts to strengthen state laws and oversight of Blue Cross. Policyholders paid $340,000 in settlement costs and attorneys’ fees in connection with two cases of sexual harassment filed against two officers. They kept their jobs.

West Virginia policyholders also unknowingly bought the health plan’s president a new Lincoln Continental. But when other executives decided it would look bad – after all, the health plan was in the middle of a financial crisis – the car was traded for a cheaper Pontiac. The president ended up “not really liking the Pontiac,” however, so the plan re-purchased the Lincoln.

No Guarantee

About a year ago, the American Council of Life Insurance placed a large advertisement in the Wall Street Journal proudly announcing that all 50 states had established life and health insurance guaranty funds, which are designed to protect policyholders from getting stuck with unpaid medical bills or death claims should their insurer fail.

Noting that the funds are financed by assessing insurers a percentage of their income from life and health insurance premiums, the council proclaimed, “The fact that life insurers have to help pay for the mistakes of other companies gives them a powerful incentive to maintain the financial strength of the industry.”

Nice try. Insurers actually contribute little to the funds. Who really pays? We do. In all but a handful of states, insurers are permitted to recover their guaranty fund payments by raising premiums or filing for tax breaks. Eighty-six percent of the guaranty fund assessments in 1990 will be reimbursed by the public.

“The guaranty funds are used as a massive tax benefit for the companies,” a Missouri state senator told the St. Louis Post-Dispatch. “People should know that they are the ones paying … for the insolvent insurance companies.”

Another problem: The guaranty system isn’t as airtight as the ad implied. “The term |state guaranty fund’ is a misnomer masking the system’s faults,” Mary Lynn Sergeant, a General Accounting Office (GAO) researcher, testified last spring.

As the GAO noted in a 1992 report, “Some policyholders of multi-state insurers may have no protection at all should their insurer fail,” particularly if a policyholder moves to a state where his or her insurer is not licensed to operate. And 28 states place some limit on medical claims left by defunct health insurers; in 22 states, the cap is $100,000. In Utah, policyholders have to absorb the first $500. Guaranty funds have failed – or refused – to cover unpaid medical claims right away.

The insurance council’s ad also didn’t note that millions of health insurance policyholders aren’t covered at all by the guaranty fund system. These include people covered by unlicensed, fly-by-night operators. Or employees of companies that insure themselves through third-party administrators, a growing but barely regulated trend in medical coverage. Most of the 94 million Blue Cross policyholders aren’t covered either. And only four guaranty funds cover health maintenance organizations (HMOs), which represent some 38 million people and which the insurance industry sees as the future of health coverage in America. HMO coverage “is something the states ought to be considering,” says Michael Surguine, a legal specialist with the National Association of Insurance Commissioners.

“With the rising number of failures of small insurers and the recent regulatory takeover of large life/health insurers, there is a growing likelihood that even more policyholders … will face the prospect of, falling through the safety net and landing without the benefits promised by their insurers,” the GAO reported.

COPYRIGHT 1993 Common Cause Magazine

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