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

THE ACCOUNTANTS. Recently, the Big Eight accounting firm Ernst & Young agreed to pay $400 million to settle federal lawsuits charging the firm with failing to adequately audit four large thrifts that subsequently failed (costing taxpayers $6.6 billion) and to call off any more federal suits.

Ernst & Young currently is being sued for $55 million in damages by the West Virginia Blue Cross liquidator in connection with its auditing of the local Blue Cross plan. "Ernst & Young repeatedly told the department that the plan would not fail, but that its problems were only cyclical," West Virginia Insurance Commissioner Hanley Clark testified in July. Ernst & Young says the suit is "totally unfounded and will be dismissed."

On the whole, the Nunn subcommittee investigation found, accountants "played a significant role for [the] sham deals" that resulted in insurer failures.

FLAWED OVERSIGHT. The insurance industry has fought any reform of the 1945 McCarran-Ferguson Act, which flatly outlaws federal regulation, leaving an uneven state-by-state system.

An insurance company licensed in a dozen states may be subject to a dozen different state laws and regulatory approaches. NAIC, the state regulators' association, attempts to set nationwide standards and in the last two years has recommended tougher laws and regulations to head off insurance failures - and federal regulation. But until recently the association did little about the problem because i was primarily concerned with keeping ailing insurers afloat, critics say.

"Monday morning quarterbacking in the regulation of financial interests is really quite easy," a NAIC official responds. "Look at federal regulation of banks and thrifts. We think our regulation stacks up quite well against these."

Many state insurance regulators continue to lack the legal power, political backing or resources to oversee the industry, however. "Current U.S. insurance regulations are replete with a number of significant loopholes," the Nunn subcommittee noted. Most states' investment regulations have been passive, allowing insurers "to invest in virtually any type, quality or concentration of asset without limitation," Minnesota insurance regulator Thomas Borman testified in 1990. And regulators had an average of only $250 to investigate each complaint they receive and $4,000 to examine each company they regulate, according to a 1990 study by an insurance agents' association. Until last September, the federal charter of Washington, D.C.'s Blue Cross plan actually limited the local insurance commissioner's authority to regulate the health plan; the District government has never audited its books.

The Blue Cross system has been accused of stonewalling and thwarting regulators "by either putting politically powerful individuals on their boards or by making contributions to certain campaigns," according to a Nunn subcommittee staff report. West Virginia's Blue Cross spent $102,000 between 1987 and 1990 "in lobbying and attorneys' fees ... primarily to fight the department's attempt to strengthen the state's laws and jurisdiction over" the health plan, according to state Insurance Commissioner Clark. "Not included in this figure," he added, "is the salary for current and former state legislators who were also on the plan's payroll."