Cheap insurance can cost you everything

By Matthai Chakko Kuruvila
Mercury News

Doug Christensen owned a welding and fabrication company, but he didn't have health insurance. So the Southern California man was intrigued when he was offered a plan promoted by a sales agent for the National Association for the Self-Employed, a non-profit with 200,000 members.

The agent in 2001 assured Christensen that he'd be fully covered even if his cancer, in remission for seven years, returned, according to court records.

But three months after signing up, his bone cancer came back. His policy, issued by Mega Life and Health insurance, covered only 17 percent of his medical bills. By the time Christensen died two years later, his wife was left more than $500,000 in debt.

"We thought we had a good policy,'' said Dana Christensen, 47, a self-employed court reporter who lives in Marina Del Rey. "We really did.''

What Christensen didn't know was that the policy imposed caps on nearly every type of coverage, from chemotherapy to the cost of a hospital stay, conflicting with what the agent promised. She subsequently sued Mega in Los Angeles County Superior Court, winning a $1.7 million settlement last year.

Christensen also was unaware of the National Association for the Self-Employed's close ties to Mega and its parent company, UICI of North Richland Hills, Texas. UICI agents recruit members for the association and sell insurance policies on the association's behalf. UICI also sells marketing services to the National Association for the Self-Employed while a company controlled by the children of UICI's chairman provides administrative service to the organization, according to UICI's Securities and Exchange Commission filings.

As health insurance premiums continue to soar, more small-business owners and individuals are looking for affordable plans. It's a need filled by outfits like the National Association for the Self-Employed, which touts itself as the "leading resource for the self-employed'' and businesses with fewer than 10 employees. But concerns also are on the rise.

Consumers may assume that by obtaining a health plan through an association, their pre-existing conditions are covered, as they would be in many group plans. But policies sold through associations often exclude pre-existing conditions. These "association health plans'' sold by companies such as Mega are increasingly being scrutinized by state regulators and subject to litigation from disgruntled policyholders.

Over the past two years, UICI and Mega have faced 15 lawsuits in California over their marketing and insurance practices, and relationship to the National Association for the Self-Employed and a similar organization, according to SEC filings.

Members of such associations get access to health insurance as one of their membership benefits. Some say these association health plans are merely doing what no one else will do -- offer affordable health insurance in a country where an increasing number of people have to fend for themselves.

"The notion that you get health insurance through your employer is being strained by the way the labor force is changing,'' said Merrill Matthews, director of the Council for Affordable Health Insurance, a business trade group. "The association group model is stepping up to meet a growing demand in a changing workplace.''

Matthews said the non-comprehensive policies offered by UICI are "peculiar'' to that company. Matthews said plans offered by other associations are more comprehensive.

Association health plans also often fall through the cracks between federal and state oversight.

Legislation passed this week in the U.S. House of Representatives and supported by the Bush administration would exempt association health plans from many state regulations, a move federal officials believe would allow more people access to some form of health insurance. But state insurance commissioners believe this could hurt consumers.

`Slimmed down plans'

• Policies are legal, Garamendi says

California Insurance Commissioner John Garamendi said the problem is that it's entirely legal for companies to offer limited coverage. He refers to such policies as "slimmed down plans'' and said they're a typical feature of association health plans.

"There's no requirement that it provide comprehensiveness or pay a percentage of hospital care,'' said Garamendi, who launched an investigation into association health plans two years ago. "They can write these plans any way they want as long as they are not illusory.''

The result is that if consumers don't scrutinize their policies, they won't know they could be bankrupted should they be afflicted with a catastrophic illness.

The associations that promote these plans are sometimes just fronts for the insurance companies themselves, according to Garamendi and the U.S. Government Accountability Office.

For instance, Employers Mutual, a Nevada-based insurance company -- which left more than $24 million in unpaid claims before it went out of business in 2001 -- established 16 different associations through which its policies were sold, according to a 2004 GAO report.

Mega's own ties to associations have raised eyebrows.

Ronald Jensen is chairman of UICI, a holding company whose health insurance subsidiaries include Mega and Mid-West National Life Insurance of Tennessee. Those insurance policies are sold through the National Association of the Self-Employed and the Alliance for Affordable Services. Jensen's children control a company that provides administrative services to the associations.

UICI General Counsel Glen Reed rejected allegations that those relationships pose any potential conflict of interest.

"UICI has never, does not, and will not ever control in any respect the associations through which we offer health insurance,'' Reed said.

Nevertheless, in 2004 Mega and Mid-West settled a nationwide class action suit in Texas by agreeing to "include enhanced disclosures in their marketing and sales materials with respect to the contractual relationship between UICI and the insurance companies, on the one hand, and the associations, on the other hand,'' according to an SEC filing made by UICI.

`Not for everyone'

• Customers know limits, insurer says

Reed said the majority of policies UICI offers through its subsidiaries are not comprehensive -- something he claims is made clear to all consumers when they sign the policy.

"Our coverage is not for everyone,'' he said. "If folks could afford major medical coverage, they should get major medical. We think there's a place for us. We think we're part of the solution, not part of the problem.''

But a number of states have identified problems with Mega and Mid-West.

In California, Garamendi's office cited the companies in September 2004 for failing to settle claims fairly and promptly and for misrepresenting policies. Each company was ordered to stop those practices, fined $100,000 and forced to review tens of thousands of back claims to make sure those were in compliance with the law and their policies.

The Massachusetts insurance commissioner is investigating whether agents for Mega and Mid-West misrepresent policies and whether claims were inappropriately denied, according to insurance department spokesman Chris Goetchus.

Two former Mega agents who sold policies in the Bay Area told the Mercury News they believe they were trained to mislead consumers about what coverage the policy would offer.

"I absolutely believed that I was saving lives,'' said Jim Helton, a San Jose insurance broker, who now sells policies for a number of competing companies, and who provided a deposition on behalf of Christensen in suit against Mega.

"What I found out later was I was being deceived into misrepresenting the product, deceiving the public and selling them junk policies,'' said Helton, who added he thinks his clients didn't understand they weren't getting comprehensive policies.

`Misrepresenting'

• Agent says he didn't know he was wrong

Walnut Creek agent Thomas Barlow said he would routinely tell clients that once they paid a $3,000 deductible, 100 percent of their future costs would be covered, though he says he didn't know it was wrong at the time.

"We were misrepresenting the program,'' said Barlow, who now works with Helton selling other insurance policies. Barlow said he offered to give a deposition in the Christensen case.

"When they were agents, neither complained to us about the nature or extent of their training,'' Reed wrote in an e-mail to the Mercury News. "In fact, in correspondence to the company in November 2001, Mr. Helton was effusive in his praise of the training that he had received with respect to the products that he was asked to sell.''

He noted that both Helton and Barlow now sell products for rival insurance companies.

Reed said consumers are always told of all the limitations of their policies. He noted agents are trained to be truthful, and that since July 2003 all agents have been enrolled in a rigorous training program.

Mila Kofman, a national expert on health insurance fraud and a professor at Georgetown University, said the sometimes lower premiums of association health plans can lure consumers. "With the better associations, their coverage is not cheaper'' than individual insurance, Kofman said. "It's just as expensive. When it's substantially cheaper than individual insurance, in many cases you'll find that it's not comparable'' coverage.

Tony Stuart, the attorney for Christensen, believes Mega is successful only because consumers are in the dark when it comes to the elaborate maze of rules and regulations in the company's policies.

"If this insurance policy were honestly presented to people, nobody would ever buy it,'' Stuart said.

Dana Christensen said she and her husband only understood the limitations of their plan once the bills started piling up.

The spiraling debt left the dying Doug Christensen despondent.

"He asked me to divorce him so I wouldn't be responsible for his debt,'' she recalled. "I wouldn't do that. It was very, very difficult to see Doug so stressed out.''

Contact Matthai Chakko Kuruvila at mkuruvila@mercury news.com or (408) 920-2722.