WASHINGTON -- In the face of growing insurance fraud, a Senate subcommittee urged yesterday criminal sanctions against promoters of phony group health schemes and recommended changes in the law to untangle legal loopholes that have allowed such plans to flourish.
The Permanent Subcommittee on Investigations called for state licensing of certain types of group health plans that have proved to be fertile ground for con artists.
The plans are known technically as multiple-employer welfare arrangements. They are group health insurance plans that pool employees from different companies or members of different trade and or professional groups.
Some of the plans are legitimate and can offer members discounted insurance rates. But in dozens of cases, they have turned out to be pyramid schemes run by unscrupulous entrepreneurs who collect millions in premiums, pay some claims, then steal or dissipate the remaining funds.
In 1989, for example, Cap Staffing Inc., a service company in Charlotte, N.C., that offered group health insurance, collapsed, leaving 5,000 people facing more than $1.9 million in unpaid claims. Last year, six men were indicted on federal fraud charges in connection with the scheme.
In a recent report, the General Accounting Office estimated that at least 400,000 Americans were victimized by problem group health plans between 1988 and 1990. Many people now face bankruptcy because of unpaid medical bills, and some people who developed serious illnesses while supposedly covered by plans that proved phony can no longer get insurance.
The problem plans are sold in various guises, including by unions that are created as vehicles to sell health insurance rather than to organize workers, and by some companies involved in a service known as "employee leasing." Such companies, in a paper transaction, hire the employees of small businesses and then "lease" them back with insurance and other benefits.
In its report, the subcommittee recommended that the Employee Retirement Income Security Act, or ERISA, be amended to allow state regulators greater oversight of such plans and to tighten the definition of plans that qualify for federal exemption from state laws. It also urged that entrepreneurs who promoted such fraudulent plans be criminally prosecuted.