Risky business: a decade of daredevil finance and other games plays a hidden role in the health insurance crisis - Cover Story

Common Cause Magazine, Spring, 1993 by Jeffrey Denny

Noting that the funds are financed by assessing insurers a percentage of their income from life and health insurance premiums, the council proclaimed, "The fact that life insurers have to help pay for the mistakes of other companies gives them a powerful incentive to maintain the financial strength of the industry."

Nice try. Insurers actually contribute little to the funds. Who really pays? We do. In all but a handful of states, insurers are permitted to recover their guaranty fund payments by raising premiums or filing for tax breaks. Eighty-six percent of the guaranty fund assessments in 1990 will be reimbursed by the public.

"The guaranty funds are used as a massive tax benefit for the companies," a Missouri state senator told the St. Louis Post-Dispatch. "People should know that they are the ones paying ... for the insolvent insurance companies."

Another problem: The guaranty system isn't as airtight as the ad implied. "The term |state guaranty fund' is a misnomer masking the system's faults," Mary Lynn Sergeant, a General Accounting Office (GAO) researcher, testified last spring.

As the GAO noted in a 1992 report, "Some policyholders of multi-state insurers may have no protection at all should their insurer fail," particularly if a policyholder moves to a state where his or her insurer is not licensed to operate. And 28 states place some limit on medical claims left by defunct health insurers; in 22 states, the cap is $100,000. In Utah, policyholders have to absorb the first $500. Guaranty funds have failed - or refused - to cover unpaid medical claims right away.

The insurance council's ad also didn't note that millions of health insurance policyholders aren't covered at all by the guaranty fund system. These include people covered by unlicensed, fly-by-night operators. Or employees of companies that insure themselves through third-party administrators, a growing but barely regulated trend in medical coverage. Most of the 94 million Blue Cross policyholders aren't covered either. And only four guaranty funds cover health maintenance organizations (HMOs), which represent some 38 million people and which the insurance industry sees as the future of health coverage in America. HMO coverage "is something the states ought to be considering," says Michael Surguine, a legal specialist with the National Association of Insurance Commissioners.

"With the rising number of failures of small insurers and the recent regulatory takeover of large life/health insurers, there is a growing likelihood that even more policyholders ... will face the prospect of, falling through the safety net and landing without the benefits promised by their insurers," the GAO reported.