Broken Promises: Fraud by Small Business Health Insurers

by Robert Tillman

As the costs of medical care have skyrocketed, so has the amount of money lost to fraudulent health insurance providers. These bogus operations typically victimize individuals on the lower end of the socioeconomic scale who then face staggering medical bills without coverage.

Robert Tillman shows how market conditions and weak regulatory structures have allowed these crimes to occur, and cites recent institutional and legal changes that have created both new demands for insurance and greater opportunities for fraud. He also analyzes the political and economic climate that enables these criminal practices to flourish.

Drawing on court documents, congressional hearings, and actual cases, Tillman provides numerous examples of the three most prevalent forms of scams involving multiple employer welfare arrangements, employee leasing schemes, and fictitious labor unions. He also examines recent innovations in insurance fraud such as "24-hour plans" and coverage offered by dubious religious organizations.

With the regulation of health insurance currently in chaos, Broken Promises offers a critical examination of this insidious form of white-collar crime. It is a timely book that raises important questions about the definition of insurance and consumer protection.

256 pages, Paperback

First published October 29, 1998

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[Lobstergirl · Rating 4 out of 5]

The 1974 ERISA (Employee Retirement Income Security Act) law primarily had to do with pensions, but contained buried provisions allowing noninsurance companies to create and market health insurance plans as "employee welfare benefits." These insurance plans would not be subject to state regulation, the way most health insurance plans are, and would only be subject to the most lax federal regulation under the Department of Labor. As such, they were magnets for fraudulent entrepreneurs and operators. The types of consumers who bought into these plans were generally lower middle class: they weren't able to obtain health insurance through their employer, and the individual market for health insurance was both anemic and expensive. The author covers many cases of fraud in these plans from the 70s to the 1990s. Generally they worked like Ponzi schemes. The operators would market the plans, accept premiums, rarely pay out claims, and abscond with millions of dollars of premium money. For insurance plans which are subject to state regulation, the state has pools of money (which come from fees charged to insurance companies) to pay claims if an insurance company goes bust. But since these plans weren't regulated, there was no state pool of money. Consumers not only lost all the premiums they had paid, but in many instances had thousands, or even hundreds of thousands of dollars of unpaid hospital bills. Once prosecutors realized a fraud had been committed, the plan operator had often moved on to another state and was doing the same scam there.

Another type of scam which didn't claim to be an ERISA plan but which nonetheless tempted fraudsters was when religious organizations created plans ostensibly designed for their members to help each other out with medical care, but which were, arguably, unlicensed insurance. My favorite one here is the Christian Brotherhood Newsletter, which by 1996 had 80,000 members. Members, individuals and families, subscribed to a "newsletter" for a monthly fee of between $25-$300. Subscribers had to fill out a medical history and sign a statement:

I attest that the participating adult members of my family are Christians by Biblical principles, and that all subscribing members of my family attend Church regularly (3 out of 4 weeks, weather and health permitting) and totally abstain from alcohol, tobacco, illegal drugs and a homosexual lifestyle.

Each month, the subscribers received a computer-generated postcard which described the medical needs of another subscriber. The postcard recipient was then required to pay a predetermined proportion of the listed person's medical bills. Preexisting conditions were excluded, as were routine doctor visits, prescriptions, psychological counseling, dental or eye services, and the first $200 of any medical bill. The plan operators insisted they were not an insurance company (and thus subject to no regulation), merely a group that gave "subscribers an opportunity to practice New Testament principles".

The book ends in the mid-1990s, at which point some states were suing CBN for being unlawful insurance; CBN won most of these suits. The author quotes a Delaware Dept. of Insurance official: "These guys are not bad guys, they just don't know what they are doing." (1)

Naturally I was curious about what CBN had been up to since the 1990s.

It turns out that the operator of CBN and some of his relatives had looted the plan, stealing $25 million worth of subscriber payments and leaving $24 million in claims unpaid. He raided plan accounts "for cars, a motor home, real estate, an airplane, and cash to benefit himself and family members. The lawsuit also asserts that, beginning in 1996, "defendant Hawthorn engaged in a relationship with Tabitha Ball, then a 21-year-old employee of an exotic dance club."" (2) In 2001 Ohio sued them for $16 million. Under new management, they renamed themselves Christian Healthcare Ministries and are now accredited by the Better Business Bureau's charity program.

Other organizations which act as health insurance but insist they are not are Medi-Share and Samaritan Ministries International. Not being insurance, they are exempt from the Affordable Care Act. "There’s no guarantee that their medical bills will get paid. The system is based on trust, rather than a contract." (3) What could possibly go wrong?


(1) http://www.nytimes.com/1993/06/14/us/...
(2) http://www.christianitytoday.com/ct/2...
(3) http://www.brnow.org/News/January-201...