Bribed Regulators Deceiving FBI Roil U.S. Insurance Customers

By David Dietz, Gary Cohn and Darrell Preston
Bloomberg Markets
December 27, 2007

Dec. 27 (Bloomberg) -- Zelphoe Maloney, who owns three hair salons in Albuquerque, New Mexico, knew she faced a battle when a doctor said in May 2004 she had a 50 percent chance of dying soon afterward unless she had a bone marrow transplant.

What she didn't expect was a fight with her health insurer- -and then with the state insurance department.

Lovelace Sandia Health System Inc., Maloney's insurance company, told her the transplant procedure wasn't covered against a life-threatening form of lupus, a disease in which the immune system backfires and attacks the body.

Maloney, 42, appealed Lovelace's decision to the New Mexico Insurance Division, which is supposed to help consumers get fair treatment from insurance companies. A panel appointed by then Insurance Superintendent Eric Serna recommended rejecting her appeal in September 2004, and Serna affirmed the panel's decision.

What Maloney didn't know at the time was that Serna wasn't just a state regulator: He was also a founder and president of a nonprofit corporation, Con Alma Health Foundation, which had received $60,300 in contributions from Albuquerque-based Lovelace from 2002 to 2004, according to Con Alma's tax returns.

Feeling Abandoned

"This is a conflict of interest,'' says Maloney, who eventually received a transplant paid for by anonymous donations. "These regulators are supposed to be working for us. I feel totally betrayed and powerless. I feel like a little ant.'' Maloney's experience is symptomatic of a fragmented system of regulation, created 150 years ago, that gives each state the power to regulate insurance companies.

Insurance departments license companies, examine them to protect solvency and, in 39 states, set rates. The agencies are also responsible for protecting policyholders from unfair treatment, including refusal to pay claims. They can investigate misconduct, force insurers to pay policyholders, issue fines and revoke licenses.

Each state regulates as it pleases. While departments sometimes clamp down on misconduct, regulators in Connecticut, Illinois, Mississippi and New Mexico have at times done little to help consumers or punish wrongdoing by companies, according to court files and insurance department complaint records.

State regulators also act as insurance boosters by going on industry-paid trips and promoting the trade. Fifty percent of insurance commissioners in the past two decades, or 74 of 148 regulators, came from or went to insurance jobs, blurring distinctions between government and industry.

Commissioners Jailed

Insurers spend millions of dollars a year to influence regulators and state officials who write insurance laws, sometimes leading to corrupt practices that have sent four commissioners to prison since 1991.

Insurance departments often fail to uphold their mission of protecting consumers, state and court records show.

"A lot of them are asleep at the switch or they are captives to their corporate constituency,'' says Connecticut Attorney General Richard Blumenthal, who has joined other state attorneys general in probing insurance company abuses and has testified to the U.S. Congress about weak insurance regulation. "They are often more favorable to insurance companies than to policyholders.''

Insurance companies, which had annual premium revenue of $1 trillion and assets of $6.1 trillion in 2006 in the U.S., touch families everywhere -- whether someone gets sick, buys a home or dies. The industry has never had concentrated oversight of the kind that Wall Street gets from the U.S. Securities and Exchange Commission.

State regulation of the industry was challenged in 1944, when the U.S. Supreme Court concluded that insurance was interstate commerce and therefore subject to federal oversight. In 1945, Congress passed the McCarran-Ferguson Act, which preserved state regulation, while giving Congress the power to ensure the system was working.

Congress Weighs Changes

Bills are pending in both the House and Senate to turn insurance regulation at least partly over to the federal government.

Robert Hartwig, head of the Insurance Information Institute, a New York-based trade group, says state oversight of insurers is strict.

"The industry is very stringently regulated, from the sale of a policy to the settlement of a claim,'' he says. "There is literally no end to the process.''

Mohit Ghose, spokesman for America's Health Insurance Plans, says members of the Washington-based trade group work with regulators to see that consumer complaints are resolved properly. "We are trying to do the right thing in every instance,'' he says.

States Promise Protection

The Web sites of every state insurance department say protecting the public is either a major mission or the top goal.

"We are foremost a consumer protection agency,'' the California Department of Insurance's mission statement says. "Our number one priority is to protect insurance consumers.'' Colorado's statement says, "The mission of the Division of Insurance is consumer protection.''

Morris Chavez, New Mexico's new insurance superintendent, says his job is to assist the public. Former Superintendent Serna, 58, retired in 2006 during an inquiry by the state Public Regulation Commission into a $129,000 contribution to his foundation by a Santa Fe, New Mexico-based bank.

Serna says he's done nothing improper.

"I wasn't making a decision based on any donation to the foundation,'' he says. "One thing has nothing to do with the other.''

Reassurance in New Mexico

Chavez says he's working to restore public confidence in the fallout over Serna.

"I think people want to know who's fighting for them, who's in their corner,'' Chavez says. "I think that's the job of the insurance superintendent.''

Mila Kofman, a consumer representative at the National Association of Insurance Commissioners, a policy group made up of all state regulators, says some states do a better job than others at protecting consumers.

"Some have this idea that if you are too tough on industry, you will drive insurers out of the state and therefore consumers will lose access to insurance,'' Kofman says. "If you're of that mind-set and take it too far, then consumers end up with nothing: no financial protection.''

Regulators routinely come from industry jobs or go to them when they leave office. Former Iowa Insurance Commissioner Therese Vaughan was appointed to the board of directors of Principal Financial Group Inc., which sells insurance, in 2005, after leaving her regulatory post in '04.

Revolving Door

While in office, Vaughan, 51, allowed Des Moines, Iowa- based Principal to convert from a policyholder-owned company to a publicly traded company, enabling the firm to raise $1.85 billion at a public offering. She didn't respond to telephone and e-mail requests for comment.

Kansas Commissioner Sandy Praeger, president-elect of the Kansas City, Missouri-based National Association of Insurance Commissioners, sees value, not harm, in job changes between regulator and industry.

"It helps with an understanding of how companies work, and industry is able to educate our folks,'' Praeger, 63, says. "People have to be trusted.''

Even while in office, commissioners sometimes benefit from industry favors. At least two regulators--former South Carolina Commissioner Ernst Csiszar, 57, and John Oxendine, 45, the current Georgia commissioner, have traveled to Asia since 2000 on trips paid for by the industry. Companies were looking for new customers in foreign countries, including China.

Each year, insurers spend millions of dollars supporting and entertaining officials who have control over insurance regulation, according to state records. Thirty-one percent of all the campaign money collected by Oxendine since 2002, or $473,324 of slightly more than $1.5 million, has come from the industry.

Convicted of Embezzlement

The largest percentage of insurance company money since 2002 went to former Oklahoma Commissioner Carroll Fisher, who was impeached by the Oklahoma House of Representatives and resigned in 2004. Of the $415,569 Fisher received for his campaigns, 44 percent, or $184,583, came from the industry.

Fisher, 67, was convicted by an Oklahoma County jury in 2006 of embezzling a $1,000 campaign donation from insurance company owner Johnny Morgan, president of MorganWhite Insurance Group of Jackson, Mississippi. The jury found that Fisher had illegally deposited the contribution in a personal bank account.

In September, he began serving a three-year prison sentence.

Three Go To Jail

Fisher's fall pales in comparison with what has happened in Louisiana since 1991. Three successive state commissioners -- James Brown, Doug Green and Sherman Bernard -- have gone to prison after being convicted of offenses ranging from taking bribes to lying to the Federal Bureau of Investigation about favoring insurers.

Former Mississippi Insurance Commissioner George Dale wasn't charged with corruption: Voters didn't re-elect him after 32 years in office in 2007 because they were upset that he sided with insurers after Hurricane Katrina.

Hundreds of people filed complaints with Dale's office in 2005, saying their insurers didn't pay enough to rebuild homes destroyed by the storm that year, and then sued companies after getting no help from the state's Insurance Department.

Dale, who had been the longest-serving industry regulator in the U.S., says he was unfairly criticized because Katrina was such a huge natural disaster.

"The general public would not be satisfied unless the commissioner of insurance was given czar-like responsibility,'' he says.

Industry Boosted Campaign

Dale raised about one-third, or $167,600, of $534,168 in campaign contributions for his 2006 re-election effort from the insurance industry, according to campaign finance disclosures.

"I was criticized for taking money from those I regulate, which basically is the only place you're going to get money to run for this office,'' he says.

The former commissioner became close to the insurance industry and saw their side of it, Mississippi Attorney General Jim Hood says.

"The insurance companies have grown so strong that they are invincible to regulation, '' Hood says.

Robert Hunter, former Texas insurance commissioner and now insurance director for the Consumer Federation of America, says few commissioners hand out penalties that are stiff enough to stop mistreatment of consumers. "It's always a slap on the wrist,'' he says.

No Fine For Violations

In 2005, Illinois regulators found that Safeway Insurance Co. of Westmont, Illinois, had underpaid claims or kept consumers waiting months before making payments, Insurance Division records show. The division documented 117 instances in which Safeway violated state insurance laws, the records show.

The state didn't fine the company. It told the company to fix its practices because Safeway had a good track record in the past.

Safeway general counsel Michael Mulligan says the company argued to regulators that the accusations were unfair and assured them the company would comply with state laws.

"When you look at each individual allegation, we found that they were not justified,'' Mulligan says.

Complaints Against State Farm

California targeted State Farm Mutual Automobile Insurance Co. in 2001 when 60 consumers complained that it didn't pay on policies or sent them to auto body shops that bungled repairs, department records show. The agency found that the company's violations of state insurance laws were frequent enough to amount to "general business practice.''

Charles Hoynowski, a manager at software maker Oracle Corp. in Redwood City, California, says he had to pay $2,000 out of pocket to finish repairs on his 1995 Mitsubishi 3000GT. He says State Farm sent him to three incompetent body shops.

"When I called my State Farm agent to complain, he hung up on me,'' Hoynowski says.

California regulators didn't fine State Farm, which reported revenue of $60.5 billion in 2006, and ordered the company to pay $7,000 in administrative costs. The company didn't admit or deny insurance law violations.

Department spokeswoman Molly DeFrank says the violations were mostly technical.

`Fine Appropriate'

"The fine was appropriate to the magnitude of the violations alleged,'' she says.

State Farm spokesman Phil Supple says the company gave customers a list of repair shops and made no recommendations.

"In each instance, we took steps to correct the problem by working directly with our individual policyholders,'' he says.

Sometimes, strong state actions stand out. In Illinois, total fines were up threefold to $6 million in 2007 through September from $2 million for all of 2006, according to state records. California, under two commissioners since 2003, has issued fines of as much as $8 million.

North Dakota upstaged larger states in 2007 when it punished Farmers Insurance Group of Los Angeles for running a national program that sought to increase profits by reducing claim payouts. It fined Farmers $750,000, the state's largest fine ever.

`Bias Against Policyholders'

"Here you had an inherent bias against policyholders, and I wasn't afraid to tell the industry when it was wrong,'' former North Dakota Insurance Commissioner Jim Poolman, 37, says.

Farmers spokesman Jerry Davis says the company disagrees with the department's findings and that the company did nothing wrong.

The conflicts that hinder state insurance oversight are also apparent at the National Association of Insurance Commissioners. The association helps states write insurance laws, and its officials are often called as witnesses when Congress holds hearings on whether state regulation is working.

Association records show the organization is closely intertwined with industry. State regulators have taken trips for the association that were paid for by an insurance company or group, and commissioners discussed at association meetings the need to promote insurance overseas, records show.

"We work with the federal government to open up new markets for American companies,'' says Mike Pickens, Arkansas state insurance commissioner from 1997 to 2005, who served as association president in 2003. "Companies need to do business overseas to compete. '' He says the association doesn't represent any particular company.

Travel to Japan, China

Since 1999, state commissioners traveling on behalf of the association have made dozens of trips to help countries such as China and Egypt set up regulatory systems. In at least two cases, the insurance industry paid for the trips.

In 2000, the International Insurance Council, a defunct group that promoted the industry overseas, hosted Georgia's Oxendine at a group conference in Tokyo. He was invited through the association, which paid $6,911 for Oxendine's plane fare and was reimbursed by the council.

Association records also show that South Carolina's Csiszar, who was president of the group in 2004, went to Beijing in 2001. New York Life Insurance Co. paid for the travel with a check for $4,960 to the association's publications department.

New York Life lobbyist George Nichols accompanied Csiszar on the trip to Beijing, association meeting records show.

"Nothing inappropriate was done here,'' association spokesman Scott Holeman says, adding the trips were part of the association's mission to build a regulatory structure in foreign countries.

`Trips Improper'

"These trips are improper,'' says Kevin Hennosy, former public affairs manager of the association. "They're serving a special interest. The trips were always taken in close conjunction with either a trade association or company interested in that particular country.''

Csiszar didn't return telephone calls for comment. He stepped down as South Carolina's regulator in 2004 to become president of the Property Casualty Insurers Association of America, a trade group based in Des Plaines, Illinois.

Oxendine spokesman Glenn Allen says the association asked Oxendine to take the trip to Japan. Oxendine didn't know that the insurance council paid for the trip, Allen says.

Hair salon owner Maloney says she knew nothing of ties between regulators and the industry when she filed her appeal in 2004.

"I went over there with a lot of confidence,'' she says of her visit to the New Mexico Insurance Division. "I really thought the regulators worked for us.''

Condition Worsened

Maloney had been suffering from lupus for 12 years. The disease had caused severe arthritis and was destroying her kidneys, medical records show. She had tried every available treatment, and her condition only became worse.

"I was sick since I was 27,'' Maloney says. "Through the years, nothing was working.''

She says her doctor, Frank O'Sullivan, who specializes in treating lupus, said Maloney needed the bone marrow transplant to try to stop the disease.

O'Sullivan consulted with the University of Massachusetts Memorial Medical Center's Ann Traynor, one of the nation's top specialists in transplants for lupus patients, O'Sullivan wrote in an appeal to the insurance company.

Traynor concluded that Maloney would need the transplant to stop kidney failure after all other efforts had failed.

`Treatment Routinely Reimbursed'

"This treatment is routinely reimbursed by United Healthcare, Aetna and Blue Cross Blue Shield and is reimbursed by Medicare and Medicaid throughout the United States,'' she wrote in a letter to the insurer.

"Mrs. Maloney definitely fell into that high-risk group of lupus patients that had a significant risk of death,'' says Traynor, who's now practicing in Vassalboro, Maine. Traynor says the transplant had proven to work in severe lupus cases when all other treatments hadn't worked.

"I remember my doctor telling me, `Without it, you're going to die,' '' Maloney says.

Maloney, who has five children, and her husband, Robert, 40, who co-owns the shops with his wife, were in a state of shock, she says.

"It was depressing, like losing hope,'' Maloney says. "I just wanted to live -- for my children. At the time, my twins were 3 years old. It was heartbreaking.''

Insurer Won't Pay

Maloney's insurance policy from Lovelace covered bone marrow transplants. The insurer declined to pay the $100,000 in medical expenses, saying the procedure in Maloney's case was experimental.

"The health plan considers bone marrow transplantations to be an unproven treatment for the problem of lupus,'' Lovelace wrote to Maloney on May 17, 2004.

Maloney then appealed to the New Mexico Insurance Division. Former Superintendent Serna and his staff rejected the request, saying the transplant was experimental and not covered by the policy.

Maloney sued Lovelace and Serna in U.S. District Court in Santa Fe. She alleged bad faith on the part of the company, saying the transplant was a normal and necessary treatment. She alleged that Serna had a conflict of interest and is seeking to appeal and change the division's denial of her request. The case is pending.

Serna is no longer a defendant because he resigned; new Insurance Superintendent Chavez is now named as a defendant.

Friends Help

Maloney and her husband appealed for help through their church. An anonymous donation paid for most of the cost of the transplant.

"I was lucky,'' Maloney says. "It was pure luck and generosity of people who helped me out.'' She says her health has improved significantly since the transplant.

Susan Wilson, director of public relations for Lovelace, declined to comment on Maloney's case because of the lawsuit.

Across the country, in Litchfield, Connecticut, Maria Locker, a high school English teacher, faced a situation similar to Maloney's.

"The mission of the Connecticut Insurance Department is to serve consumers in a professional and timely manner,'' the department's Website says.

Service Unfulfilled

Locker discovered that the reality was far different after she was diagnosed with cancer in July 2005. Locker says she thought she was in excellent health as she approached her 60th birthday that year. She followed an exercise program and often spent hours working in her garden.

That July, she went to her doctor after experiencing a pain in her left buttock and some fatigue. She thought she had a pinched nerve. Her doctor ordered tests for shingles and Lyme disease. The results showed she had non-Hodgkin's lymphoma, a form of cancer.

Locker taught at Rumsey Hall School in Washington, Connecticut, which doesn't provide health insurance. She had bought medical coverage through a subsidiary of Assurant Inc. for consecutive six-month terms without interruption since December 2003.

Her insurance company, John Alden Life Insurance, rejected her claim for lymphoma treatment, saying she had the cancer symptoms before signing her then current six-month policy and should have sought diagnosis or treatment earlier.

"These expenses were not eligible for coverage since they were related to a pre-existing condition,'' Assurant wrote to Locker in a Dec. 22, 2005, letter.

Hospital Appeals

Locker was admitted to New Milford Hospital for three days in July 2005 and later was treated as an outpatient with 18 weeks of chemotherapy. When the hospital learned that Locker's insurance company wouldn't cover costs, it appealed to the state Insurance Department on her behalf.

Hilary Cooklin, New Milford Hospital's director of managed care, wrote in a Feb. 8, 2006, letter to the state agency that Locker had no indication of cancer before the 2005 diagnosis.

"The signs and symptoms that the insurance company claims were present prior to the effective date of the coverage were most definitely not,'' Cooklin wrote. She urged regulators to require Assurant to pay for all of Locker's treatment.

The agency notified Locker in a letter on March 15, 2006, that it couldn't help.

"Your complaint is one involving conflicting medical opinions. The State of Connecticut Insurance Department, in its administrative capacity, does not have the authority to overrule the company's decision,'' the department wrote. The letter doesn't explain why the department has no such jurisdiction.

Sought Attorney General's Help

Locker then complained to state Attorney General Blumenthal.

"I don't understand why the Connecticut Insurance Department does not have regulations over insurance companies that take your money with the intent of never paying out any monies if you get seriously sick,'' Locker wrote to Blumenthal in a letter on April 24, 2006.

She wasn't the only policyholder to complain to Blumenthal that Assurant subsidiaries were failing to pay claims or that the state Insurance Department wasn't helping. Blumenthal's office had received 20 complaints from policyholders about Assurant, 15 dealing with denial of claims on grounds of pre- existing conditions.

On Sept. 1, 2006, Blumenthal sent a letter to then state Insurance Commissioner Susan Cogswell calling on the department to conduct an immediate investigation and audit into the practices of Assurant.

"It troubles me that virtually all of these complaints have come to our attention following dismissals by your consumer affairs unit,'' Blumenthal wrote.

Fixes Promised

In March 2007, the Insurance Department signed a consent agreement with three subsidiaries of Assurant that required the insurer to come up with a corrective plan. The department didn't fine the company, and Assurant didn't admit or deny wrongdoing.

Commissioner Cogswell, a Republican appointee, had been with Travelers Indemnity Co. of Connecticut and a subsidiary of Covenant Mutual Insurance Co. before she joined the Insurance Department in 1995 and was named the state's regulator in 2000.

Department spokeswoman Debra Korta says the department is now working with Blumenthal and says Cogswell is unavailable to comment.

In April 2007, Governor Jodi Rell, a Republican, appointed Thomas Sullivan, a Republican, to succeed Cogswell, who is now deputy commissioner. Sullivan has ordered an investigation of all Assurant claim denials.

"Any request that was improperly rejected will be paid, with interest,'' Sullivan says. The department could eventually decide to fine Assurant once its investigation is complete, he says.

All Claims Under Scrutiny

"We don't want any consumer left at the curb,'' Sullivan says.

The department says it received 278 complaints about Assurant from January 2003 to November 2007. Sullivan says he's instructed a consulting firm that specializes in insurance practices to examine every claim rejected by Assurant on the grounds of pre-existing conditions.

John Euwema, senior vice president of regulation and compliance at Assurant, says the company works to provide good service to its customers and comply with state regulations.

"We operate in a highly regulated industry and always work closely with regulators to ensure that our processes are consistent with state requirements and to ensure consistency for all customers,'' Euwema says. He declined to elaborate.

In October, Commissioner Sullivan called Locker at home to say her insurer would pay her claims in full, Locker says. She says the company paid all $250,000 of her medical bills.

Enduring Distress

Locker, whose cancer has recurred twice, says she's glad the insurance battle is over -- but it's already taken a toll on her. "This has been extremely hard for me,'' she says. "`It weighed heavily on me while trying to do what everyone says: Just think about getting better.''

Darryl McMiller, an assistant professor of political science at the University of Hartford, says the state Insurance Department should have been more diligent.

"From a public policy standpoint, the department is there to regulate the industry,'' he says. "It's silly to think they wouldn't even look at it. You try to make sure this resident is being treated fairly. If they close this door, it sends a message to everyone that you can be screwed.''

For the past two decades, a handful of U.S. senators and congressmen have proposed legislation either to federalize insurance regulation or beef up federal oversight. Former Senator Ernest Hollings, a South Carolina Democrat, sponsored a bill in 2003 to create a federal insurance commission; the proposal died in committee.

Enforcement Bill Pending

Republican Senator Arlen Specter of Pennsylvania co-wrote a bill in 2007 to give the Justice Department and the Federal Trade Commission authority to investigate insurers for possible collusion on raising rates or withdrawing altogether from regions; the legislation is pending.

Sue Kelly, a Republican U.S. congresswoman from New York who served from 1995 to 2007 and headed a House of Representatives subcommittee with oversight of the industry, says regulators are shirking their top responsibility when they rebuff the public.

"Consumers are harmed by the patchwork of regulation,'' she says. "It's a terrible thing when you have a state regulator ignoring consumers. Where are people going to go?''

For now, people like Maloney and Locker have little choice but to file lawsuits or seek help from attorneys general -- and hope that their health holds up better than the regulatory system that was supposed to help them.

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