‘Junk insurance’ comes back to haunt its policyholders

April Capil has mixed feelings about the national outcry over canceled health insurance policies.

Five years free of the stage III breast cancer that nearly claimed her life, the Boulder, Colo., resident is once again healthy, but she’s still struggling to put her life back together.

Like millions of Americans, Capil thought she had solid individual health insurance. Then she got sick and found that her coverage was woefully inadequate.

The financial problems that followed would aggravate Capil’s health struggles, force her into bankruptcy and trigger a fraud lawsuit over $230,000 in unpaid medical bills against HealthMarkets Inc., the parent company of her former insurer.

The litigation is nothing new for HealthMarkets. The North Richland Hills, Texas, insurer, formerly known as UICI, has a long history of battles with state regulators trying to root out “junk insurance” in the individual market. But numerous sanctions and a host of consumer protections in the Affordable Care Act have put a financial squeeze on the company and forced it to change its business model.

Beginning in January 2014, the health care law prohibits the kind of limitations, exclusions and benefit spending caps that made Capil’s coverage so problematic.

But after falsely promising that Americans could keep their health insurance if they liked it, President Barack Obama bowed to political pressure in November and OK’d a one-year extension on 2013 individual policies – even those facing cancellation next year because they don’t meet the health law’s new minimum standards.

Now Capil, a software project manager, wonders how many Americans will use the president’s canceled-policy “fix” to unwittingly renew another year of “junk insurance” like she used to have.

“It’s sad that there are people who have this insurance who don’t know that they’re going to end up like me if they ever get sick,” she said. “I feel like people are upset that they’re losing these plans and they’re upset because they think their plans are comprehensive. But they aren’t. These insurance companies have been selling Americans coverage that will bankrupt them if they ever have a serious illness.”

It’s a concern others share as well.

“As those policies are grandfathered in, people have to be aware they may be exposed,” said Mark Rukavina, a health care consultant in Massachusetts and an expert on medical debt. “It’s something to think about as these people stay with these plans that seem like a good deal.”

Capil thought her plan was a good deal. She said her insurance agent told her it was full, comprehensive coverage and if she ever got cancer, Capil would never pay more than a deductible or co-insurance.

What she got instead was a “limited benefit plan,” which is “commonly seen as inadequate because it tends to pay for routine care and leave you without coverage fairly soon if something major costing tens of thousands of dollars kicks in,” said Ed Haislmaier, a senior research fellow for health policy at the Heritage Foundation, a conservative Washington think tank.

Donna Ledbetter, HealthMarkets’ director of external communications, declined an interview request for this story, citing Capil’s pending lawsuit. She also declined to answer questions not involving that litigation.

Capil’s experience is cautionary. Most people don’t realize their policies have coverage limitations until they actually need the coverage.

Of the 16 million Americans with individual coverage, only 725,000 people had limited benefit policies in 2012, Haislmaier said, citing industry data. Of these, he said roughly 132,000 were enrolled in HealthMarkets limited benefit plans, which are sometimes called “scheduled benefit” plans.

“They do cover a wide range of things,” Haislmaier said, “but with very low benefit levels. So they wouldn’t turn you away saying, ‘You have a heart condition. We only cover cancer.’ They turn you away saying, ‘You exceeded your $50,000’” coverage limit.

That’s what happened to Mike Adams, a 61-year-old restaurant owner and career guidance counselor in Ramona, Calif.

Only three days after complaining of chest pains in late 2011, Adams was preparing to undergo quadruple heart bypass surgery with his wife, Theresa, by his side. As she followed his gurney into the operating room area, a frantic hospital clerk came running up the hallway in hot pursuit.

“They chased down Theresa, following me into the operating room, pulled her aside, and she’s scared to death already, and then they just hollered out, ‘Mrs. Adams! Mrs. Adams! You have terrible insurance. We’re going to have to get a check from you right now.’ They wanted the entire deductible right there,” Adams said.

Unable to come up with $3,600 on the spot, Theresa Adams convinced the staff to go ahead with her husband’s surgery. She paid the deductible with a credit card the next day.

After 11 days in the hospital, Adams had racked up about $240,000 in medical bills. But his insurance from Mid-West National Life Insurance Co. of Tennessee, a subsidiary of HealthMarkets, wouldn’t cover roughly $193,000 of the charges.

Adams thought his insurance provided comprehensive catastrophic coverage with generous benefits for major medical episodes. Like Capil, he, too, said his insurance agent assured him that it did. But Adams’ plan capped payment for “miscellaneous” hospital inpatient charges at $18,000 – and most of his costly care had been lumped into that vague category.

“That’s the kind of gaming that state insurance departments exist to regulate,” Haislmaier said.

Adams’ realization that he had junk coverage was a complete shock. He said he had paid his premiums for seven years and had never filed a major claim.

“And then all of a sudden you find out, ‘Oh crud. They don’t cover any of this stuff?’” Adams said. “And to have them chase Theresa down in the hospital like that? That stuff makes me mad when I think about it. It’s not right. Full disclosure, that’s all any of us ask for.”

Ledbetter, the HealthMarkets spokeswoman, wouldn’t comment on Adams’ claims, citing his pending lawsuit against Mid-West National Life over his unpaid medical bills.

If you exclude the fly-by-night insurers that set up bank accounts, collect premiums and skip with the cash, HealthMarkets and its subsidiary insurance companies hold a rare distinction, said Capil’s attorney, Antony Stuart of Los Angeles.

“They’re the worst health insurance company that is actually trying to operate within the law,” Stuart said. “I can’t imagine that there has ever been any worse.”

Along with improperly denying benefits, Capil and Adams accuse HealthMarkets and its agents of deceptive marketing by misrepresenting the terms of their policies and obscuring the policies’ coverage limitations in confusing contract language.

“Their claim is ‘Oh, you should have read all of the fine print and understood it,’” Adams said. “I’m supposed to understand that? You have to be a doctor and an attorney to understand it. And by the way, you have to be an insurance underwriter also because you can’t understand the legalese. You can’t understand the medical terminology. And you can’t understand the insurance industry. And that’s what they expect you to do.”

Adams is not alone, said Rukavina, the Massachusetts health care consultant who spent more than 20 years in the nonprofit health sector helping people who were let down by their coverage.

“These junk policies have been crafted pretty carefully,” he said. “When I talked to people and they shared their contracts with me, the language can be very confusing, even for somebody like me.”

The complaints are a familiar refrain for HealthMarkets, which is owned by three prominent Wall Street private equity firms: Goldman Sachs Capital Partners, The Blackstone Group and Credit-Suisse-DLJ Merchant Banking Partners.

Consumer lawsuits and state insurance regulators across the country have targeted the company for years over its market conduct and sales and marketing practices.

In 2008, HealthMarkets and its subsidiary insurance companies agreed to pay $20 million to 28 states over numerous violations that state insurance regulators uncovered in a three-year, multi-state examination of the company.

Spurred by numerous consumer complaints and individual state investigations, the examination found problems with HealthMarkets’ handling of claims, their cancellation policies, their training and oversight of agents and their policy disclosures for consumers.

In 2009, the Massachusetts attorney general fined the company $17 million for unfair and deceptive marketing practices and barred HealthMarkets from selling policies in the state for five years.

Last year, state insurance regulators slapped the company with a $325,000 penalty for not meeting five of 95 performance measures that were part of the $20 million 2008 settlement agreement. The unmet measures dealt with training and oversight of agents.

In a press release from July 2012, HealthMarkets’ president and CEO, Kenneth J. Fasola, said the company is “vastly different” than it was when the multi-state examination began in 2005. Fasola said the company used the settlement agreement with the states as a “blueprint for transforming our organization.”

As part of that transformation, HealthMarkets stopped selling “scheduled benefit” plans in 2010 and stopped marketing all individually underwritten plans “in all but a limited number of states,” according to recent filings with the Securities and Exchange Commission.

The moves have put a financial squeeze on the company, causing agent commissions, underwriting profits and premium revenue to decline. HealthMarkets’ premium revenue has fallen from $737 million in 2010 to $459 million in 2012.

Provisions of the Affordable Care Act also have affected the company’s bottom line, including the health law’s elimination of benefit caps for individual policies and a 2011 rule that requires insurers to spend at least 80 percent of premium payments on medical care or plan improvements. Companies that don’t meet that threshold have to pay rebates to consumers. The rule has forced HealthMarkets to pay $25.5 million in rebates thus far, federal filings show.

The multi-state probe of HealthMarkets found problems with the company’s financial ties to membership associations that marketed their products, which is how Capil obtained her policy.

About 3.2 million people get individual coverage through professional associations, said Haislmaier of the Heritage Foundation. Capil bought hers through the National Association for the Self-Employed, which her lawsuit alleges was little more than a marketing vehicle for HealthMarkets policies.

Health plan sales through associations have become a familiar insurance scam, where the insurer often owns or controls the association that markets its products. Capil’s lawsuit makes those very claims against HealthMarkets and the National Association for the Self-Employed.

HealthMarkets’ SEC filings show that the company’s plans “are now offered to the individual market directly and not through the associations.”

Both Adams and Capil claim their agents misled them about their HealthMarkets coverage. Although healthy when he bought his policy in 2004, Adams said he told his agent he wanted comprehensive catastrophic coverage for major medical crises. He said the agent assured him that his “California Covered America Plan” from Mid-West was just that.

Adams thought the policy provided $1 million in coverage because a plan brochure described it as “$1,000,000 basic hospital medical-surgical insurance coverage.”

That’s not surprising, said Wendell Potter, a senior health care analyst at the Center for Public Integrity, a research and investigative news organization. Potter is also a former insurance industry executive who left the business in 2008 because of concerns over junk insurance and other industry practices.

“If you look at the marketing materials for these kinds of plans, they’re pretty slick and attractive and people don’t realize, I think, in many cases what they’re buying offers inadequate coverage because it’s not in the bold print,” Potter said. “It’s often in the fine print. And it’s certainly not in the promotional material in any way that’s conspicuous, so a lot of people are just not aware.”

In Capil’s case, she told her insurance agent that she wanted a comprehensive policy that would cover treatments for cancer. Although she was cancer-free when she bought the policy from the MEGA Life and Health Insurance Co., another HealthMarkets subsidiary, in April 2008, Capil had a lump on her breast for several years that previous mammograms and sonograms found to be non-cancerous.

But in November 2008, she developed a lump in her armpit and her breast lump had changed shape. Her breast cancer diagnosis forced her to leave her home in Hawaii and live with her sister in Pleasant Hill, Calif., where she began six months of chemotherapy treatment.

About three months into her treatment, Capil realized that her hospital bills were piling up. Then her insurance company denied payment for her lumpectomy surgery, claiming it was a pre-existing condition, even though the lump was non-cancerous when she bought the policy.

After receiving a letter from Mega explaining the company’s refusal to cover her bills, Capil said the reality of her situation had finally sunk in.

“After I read it, I realized this company has no intention of paying,” she said. “I’m like, ‘Oh my God, I have this garbage insurance and they’re just waiting for me to die so they can stop arguing with me about my bills.’”

As HealthMarkets resolves lingering lawsuits over its past practices, state regulators believe the company has turned a corner. In a statement from 2012, Oklahoma Insurance Commissioner John Doak said the company has “paid attention, implemented new controls and addressed virtually every problem identified in the (multi-state) examination. This turnaround is a regulatory success.”

“We have invested thousands of ‘people hours’ diligently developing or improving, implementing, documenting and monitoring sound business processes,” Fasola, the company CEO, said in the July 2012 press statement.

Mike Kreidler, the Washington state insurance commissioner whose office led the review of HealthMarkets compliance with the 2008 settlement agreement, issued his own statement at the time.

“Even though the settlement process is over, we’ll continue to watch these companies closely,” Kreidler said.