Cheaper Health Plans Promoted by Trump Have a History of Fraud

In signing a recent executive order, President Trump promised that millions of Americans could soon obtain “great, great health care” through inexpensive plans that offer consumers options they had been denied under the Affordable Care Act.

But these health plans, created for small businesses, have a darker side: They have a long history of fraud and abuse that have left employers and employees with hundreds of millions of dollars in unpaid medical bills.

The problems are described in dozens of court cases and enforcement actions taken over more than a decade by federal and state officials who regulate the type of plans Mr. Trump is encouraging, known as association health plans.

In many cases, the Labor Department said, it has targeted “unscrupulous promoters who sell the promise of inexpensive health benefit insurance, but default on their obligations.” In several cases, it has found that people managing these health plans diverted premiums to their personal use.

The department filed suit this year against an association health plan for 300 small employers in Washington State, asserting that its officers had mismanaged the plan’s assets and charged employers more than $3 million in excessive “administrative fees.” Operators of the health plan violated their fiduciary duty by using its assets “in their own interest,” rather than for the benefit of workers, the government said.

Marc I. Machiz, who investigated insurance fraud as a Labor Department lawyer for more than 20 years, said the executive order was “summoning back demons from the deep.”

“Fraudulent association health plans have left hundreds of thousands of people with unpaid claims,” he said. “They operate in a regulatory never-never land between the Department of Labor and state insurance regulators.”

Association health plans, properly operated, can provide a legitimate option to small employers seeking affordable coverage, and Mr. Trump and other Republicans see the plans as an important part of any replacement for the Affordable Care Act.

In the executive order, issued on Oct. 12, Mr. Trump directed the Labor Department to expand access to the plans by making it easier for small businesses to band together and insure themselves or buy insurance as a large group.

Large group plans and self-insured plans are subject to fewer federal and state requirements than individual or small group insurance. They are, for example, not required to provide “essential health benefits” like mental health care and prescription drugs.

But Mila Kofman, a former insurance superintendent in Maine who has done extensive research on association health plans, said they also often falsely claimed to be exempt from state insurance laws, as a way to explain how they could offer premiums lower than those charged by licensed insurance companies.

When small businesses having no connection with one another buy health insurance through an association today, they are still generally treated as small businesses under the law, and coverage sold to them must comply with state consumer protection laws. But that could change under the executive order.

Mr. Trump’s proposals could overturn longstanding interpretations of federal law. In numerous advisory opinions, the Labor Department has set forth an elaborate test for association health plans, saying they can be established only by a “bona fide group or association” of employers who are tied together by genuine economic interests other than just providing insurance to their employees.

The White House has suggested that the Labor Department could loosen these requirements, allowing employers anywhere in the country to join together “for the express purpose of offering group insurance.” Mr. Trump would then be taking a first step to achieve an overarching political goal. As a candidate, he often said he wanted to let Americans buy health insurance across state lines, at lower cost with fewer rules.

But history shows the risks of an expansion of association health plans. If a plan becomes insolvent, the impact on consumers can be devastating.

Robert Loiseau, who represented fraud victims in Texas, recalled their shock when they tried to receive care.

“People bought insurance coverage because it was cheap and seemed to provide them with coverage they needed,” he said. “It had a veneer of legitimacy. But when they went to the doctor, they found out all of a sudden that their insurance company, their perceived insurance company, was in receivership and that they had no coverage.”

The Labor Department filed suit last year against a Florida woman and her company to recover $1.2 million that it said had been improperly diverted from a health plan serving dozens of employers. The defendants concealed the plan’s financial problems from plan participants and left more than $3.6 million in unpaid claims, the department said in court papers.

In another case, a federal appeals court found that a health plan for small businesses in New Jersey was “aggressively marketed but inadequately funded.” The plan collapsed with more than $7 million in unpaid claims.

Labor Department investigations sometimes turn into criminal cases.

A Florida man was sentenced to 57 months in prison after he pleaded guilty to embezzling about $700,000 in premiums from a health plan that he had marketed to small businesses. The Labor Department and the Justice Department said he had used some of the plan premiums to build a home for himself.

A South Carolina man pleaded guilty after the government found that he had diverted more than $970,000 in insurance premiums from a health plan for churches and small businesses. “His embezzlement and the plan’s consequent failure left behind approximately $1.7 million in unpaid medical claims,” the Labor Department said.

And in Louisiana, two people pleaded guilty to conspiracy charges after the government found that they had taken money from the medical benefit fund of a trade association and used it to pay for spa treatments, diamond cuff links, evening gowns, foreign travel and other personal expenses.

The House passed a bill in March to clear the way for an expansion of association health plans. Mr. Trump supported the bill, but only four Democrats voted for it. A similar proposal, championed by Senator Rand Paul, Republican of Kentucky, was included in a Senate bill to dismantle the Affordable Care Act, but Democrats blocked that bill after a long battle with Republicans.