A case study in the pitfalls of free market health insurance

Seems like it was just the other night I was writing about a certain candidate who believes the cure for the health care crisis is to give insurance companies free rein. A Thousand Flowers Will Bloom, goes the fantasy. Problem is, when you let your garden grow, you get a thousand flowers and a million weeds.

A classic example of this was (briefly) in the news earlier this month, when the Vermont Department of Financial Regulation imposed its largest-ever fine against an insurance company.

The offender, Companion Life Insurance of South Carolina, was fined for selling cartoonishly bad health care policies to Vermont college students between 2014 and 2016 without ever seeking the requisite DFR approval. If the policies had been submitted to the state, they would have been found in violation of both state and federal law.

The policies did not cover most of the medical conditions that commonly befall college students: athletic injuries, mental health coverage, substance use treatment, immunizations, preventative screenings (including for STDs) and contraceptive management.

This is the kind of thing the Meg Hansens of the world see as the bright shiny free-market future of health care. Fortunately for us, we do regulate insurance.

Still, I wondered, how is it that this outfit sold illegal policies for two full years without getting caught? And how did it take another three years to settle the case? So I had a nice chat with DFR Commissioner Michael Pieciak.

Turns out, these crap policies used to be absolutely okay under the law. That changed with the federal Affordable Care Act, which mandated that student health insurance be comprehensive. Vermont adopted a law in 2012 that did the same. According to Pieciak, Companion Life chose to sell its policies in Vermont afterward as if nothing happened.

Also, Companion’s business model was to outsource key functions, including sales, compliance and record-keeping. It was kind of a shell, rather than a traditional insurer. Their policies were sold by large brokers who assumed that CL had properly registered with the state.

The policies were bought by colleges and universities, which had an interest in making sure students had access to health care, and that made the same assumption. “The schools would have no reason to know the policies weren’t approved by the state,” Pieciak said. The schools then offered the policies to students and even billed the students on behalf of the insurer. (I might suggest that schools should ask for proof of registration, but maybe that’s just me.)

Most college students have coverage through their parents. Students in need of insurance include international students and economically disadvantaged students — those least likely to understand the system. “They don’t know how to navigate this process,” Pieciak said. “They wouldn’t know to complain. That’s why this took so long to come to light.”

When DFR started receiving complaints in 2015, its first priority was to get Companion into compliance and ensure that future policies met legal requirements. That process was finished by the summer of 2016. Then, the investigation began.

And went on far longer than it should, because Companion took a long time to furnish data and documents. “Their records were not complete,” Pieciak explained, because “many activities were done by third parties. There were disputes over getting information from third parties. Then it took a long time to analyze the information.”

And honestly, since Companion had been brought into compliance, the urgency had been removed from the situation. (Pieciak didn’t say so; that’s my interpretation.)

Finally, in November, the case was settled. DFR imposed a $950,000 fine. Companion was also required to offer restitution to affected policyholders and reimburse DFR to the tuen of $500,000 for the costs of the investigation.

DFR has identified 212 students who were victimized by CL’s crappy insurance, but Pieciak is “convinced there are others. The status of Companion’s records made it difficult to identify students with complete certainty.”

To sum up: An insurance company that outsourced its key operations was able to sell awful policies to a vulnerable population. And before the ACA, that was absolutely legal. What Meg Hansen and her allies want to do is “fix” health care by throwing the doors wide open to all the Companion Lifes of the world, and leave it to consumers to figure everything out.

They will talk about freedom and responsibility. I say I’m not equipped to exercise that responsibility, and I’m willing to cede some of my freedom in order to reduce the chances that I’ll be fleeced by a profit-hungry insurer whose policies are written to befuddle the reader. If Companion Life is an example of the free market at work, then I say “No, thanks.”


3 thoughts on “A case study in the pitfalls of free market health insurance

  1. Bad Brad

    Here’s where you’re wrong about free markets as they relate to healthcare. We’ve never had unfettered competition across state lines from health insurance companies. Of course they would be regulated so you weed out the crap policies from minor leaguers. Genuine competition would bring pricing down and the level of service up. Auto and homeowners insurance are largely stable and they work.

    Putting bureaucrats with no incentive in charge is the ultimate death spiral.

  2. walter carpenter

    “If Companion Life is an example of the free market at work, then I say “No, thanks.”

    You could say this about pretty much all of the so-called “free market.”

  3. walter carpenter

    “Genuine competition would bring pricing down”

    As someone who has had to deal with health insurance from out-of-state before and almost died from the experience, I wonder about that. Health insurance across state lines is not a panacea unless it is national across all fifty state lines, like Medicare. In fact, it’s worse, if that is possible. On this competition idea, whenever I see a cluster of gas stations, for example, every one of them has about the same price with maybe a one or two cent difference. There may be competition somewhere, but it is like they all just keep with each other and that is what the health insurance companies do to gouge us.


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