Small Businesses Ripe for Insurance Fraud: What Your Company Needs to Know

Health insurance scams are a real threat for small business employers and employees. Insurance failures hurt real people – workers and their families – who are seldom equipped to absorb large dollar losses. Small-business owners are often the targets of such scams, which resulted in at least $252 million in unpaid medical claims from 2000 through 2002, says the GAO, an investigative arm of Congress.

Health insurance scam artists steal from the most vulnerable consumers," Assistant Secretary of Labor, Ann Combs testified. "These illegal operations threaten the financial security of millions of Americans and their employers who depend on the integrity of our health benefit system. The department works aggressively to recover victims' losses and to shut down fraudulent operations."

Small businesses are especially vulnerable to health insurance scams because of cost and adverse market conditions, such as:

  • High Costs – First and foremost, their costs are higher. Small firms must pay as much as 20 to 30 percent more than large firms for comparable coverage. And their costs are more volatile, rising 17 percent on average in 2003 among firms with 3 to 9 employees, compared with 13 percent among those with 200 or more.

  • Low Coverage – Small businesses’ difficulty affording insurance translates into uninsured workers and families – and disadvantages small firms in recruiting and retaining qualified employees. Firms with fewer than 50 employees offer insurance at just 46 percent of their work sites, compared with 97 percent among larger firms. It is therefore troubling (but not surprising) that employees of firms with fewer than 100 employees and their families make up about one-half of all Americans without health insurance.

  • Few Options – In most States five or fewer insurers control at least three-quarters of the small-group market. State mandated benefits further add to the cost and limit choice. Large firms can elect to self-insure – by doing so they escape state benefit mandates and other potentially costly state regulations. But small businesses are ill equipped to self-insure, lacking sufficiently large populations to pool risk and insufficient capital to assume the risk. As a result, few do.

  • Little Stability – Small businesses’ struggle to obtain and maintain insurance for their employees is also evident in the large number that begin, drop, or change coverage each year. Forty-one percent of firms with fewer than 10 employees dropped or added coverage during a recent two-year period, compared to only about 10 percent of firms with more than 100 employees. Thirty-three percent of small firms changed carriers in the past year.

  • The Cost of Shopping – On top of all this, small business owners face the daunting challenge of finding and comparing whatever insurance products might be available. Large companies devote human resources personnel and benefits specialists or retain expert consultants to accomplish this. A small business owner typically must rely on insurance agents and devote his or her own time to the effort. In practice owners have neither sufficient time nor expertise to fully protect their interests.

How to Protect Your Employees When Purchasing Health Insurance

  • Compare insurance coverage and costs. Always compare the benefits and costs of multiple insurance products. If one product appears to offer similar benefits at a dramatically lower cost, ask questions.

  • Confirm that the person offering the product is a licensed insurance agent with a proven record of reliability. Promoters of insurance scams often engage unlicensed insurance agents to market their product as a cheaper alternative to traditional insurance. Check out unknown agents with your state insurance department.
  • Verify that any unfamiliar company, organization or product is approved by your state insurance department.

  • Examine the policy to determine the actual coverage and whether the promised benefits are fully insured by a licensed insurance company. Do not confuse representations about stop-loss coverage with a guarantee of group health benefits. Stop-loss coverage often protects only the issuer, not the insured individuals.

  • Request references of employers enrolled with the provider and get information from employers about benefit payment history and claim turn around time.

  • Ask about the allocation of premiums charged for commissions, fees and administrative expenses. Allocation of a high percentage of the premiums to commissions, fees and administrative expenses may indicate a problem with the product or insurer.

There are several other helpful suggestions, and all of them can be found on the attached copy of US Labor Secretary Elaine L. Chao’s guidance, and on EBSA’s Web site at

In addition, DOL has also published technical assistance materials for employers and service providers, including a booklet explaining federal and state regulation of MEWAs and guidance on what to do when health coverage can no longer pay benefits. Both the booklet and additional guidance are attached, and are available on EBSA’s Web site under Publications or through EBSA’s toll-free number at 1.866.444.EBSA (3272).

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