As legislators and White House representatives alike question the role of employee benefit professionals in the future of health care, accusations that a Massachusetts benefits firm used a life insurance offer to carve sick employees out of an employer's plan shine a harsh light on the industry.

In mid April, the New Hampshire Insurance Department announced it would pursue legal action against HMA Direct Benefits Consulting Group, seeking to permanently revoke HMA Direct's third party administrator and producer licenses in the state, as well as to suspend their MGU HM Life Insurance Company's license to write insurance in New Hampshire for one year.

"It creates a tough perception for folks," says David Shore, vice president, underwriting practice leader for Protector Group in Worcester, Mass. "These are the kind of stories that you hear about. You don't hear about all the good things we do."

What went wrong

New Hampshire alleges that when HMA Direct offered a small employer a self-funded insurance plan that included employee life insurance as a "bonus," the employer was told that in order to get the life insurance, employees would need to fill out information forms. "They didn't need those questions to determine whether or not to issue the life insurance," says Richard McCaffrey, compliance and enforcement council for the New Hampshire Insurance Department.

Leslie Ludtke, health policy analyst for the department, says HMA Direct used the information to carve three employees out of the employer's plan. She says the employer, a label company, was told HMA Direct would put those removed individuals on individual fully-insured plans, but New Hampshire does not have a guarantee issue requirement in the individual market and the high-risk pool is not available to those eligible for employer-sponsored insurance.

The result was that some carved out employees were left with no insurance when they were subsequently turned down for individual policies with a fully-insured carrier, says Ludtke.

The fact that HMA Direct is based in Massachusetts, which has instituted an insurance connector in an effort to achieve universal coverage, does not make this a case of confusing another state's regulations, says Ludtke. "I don't think it was a mistake. It was definitely a business expansion thing. They came in and they were very aggressive on the marketing," she says. "I think they didn't know what they were getting into because they don't pay much attention to the law."

Licensed in 13 different states, New Hampshire broker Tom Harte, president of Landmark Benefits, says he talks to many brokers around the country and he's "never come across this situation before."

It's not an honest way to conduct business, adds Shore. "It's not a great way of doing it. You hate to say it, it's not a very honest way of going about it," he says.

Reflection on brokers

Former HMA Direct producers have shared internal marketing information with the New Hampshire Insurance Department that shows an effort to draw in the small group market, Ludtke says.

The broker who sold the policy to the label company had only recently acquired a producer license, then quit once he realized what had happened with the plan, says Ludtke. "What they really want is people with sales experience who know very little about insurance," she says.

People who identify themselves as a sales person rather than a true consultant can be found in any industry, including employee benefits, says Shore.

"I think that's part of the debate that goes on in D.C. The broker or the agent or the producer isn't helping the process. It's a naive approach. I think that's the minority. The things that we do for our clients there's no question that they would say, 'Yeah, it's incredibly valuable for me,'" he says. "It's a problem and it's a hard mix for some agencies to balance. You want your sales to be high, but at the same time we want our retention to be high. We're trying to serve the market as a consultant. I think some folks like to look at it and say, 'Well, we need to sell stuff.'"

Still, Harte says the broker who is driven purely by sales is in the minority. "The first barrier to entry is that you can't just walk into the employee benefit business overnight and expect to make an awful lot of money," he says. "You really have to grow a business. So in order for you to grow a business you really have to build a reputation within the marketplace, and should you enter the marketplace under questionable trade practices, you'll never ... build your business."

No matter what their background, any benefits professional should know that carving unhealthy employees out of a company's health plan is "absolutely, without question" illegal, says Harte.

"There's no way you don't know that. It's not something that an honest broker or agent would do," adds Shore. "You're deliberately subverting the market. You're underpinning an insurance carrier, adversely selecting against them."

Shore competes with HMA Direct for business and hasn't seen such a tactic used by any other TPA or broker. "It poisons the community to what we do," he says. "It hurts us in the sense that it isn't a fair comparison. When you start to look at what an employer should and shouldn't be considering, it's not a fair comparison. It might serve a short-term need, but it doesn't really fix the long-term problem the employer's going to have. It doesn't address the things that are really pertinent to helping a business put in the insurance and then sustain that program."

Vulnerable employers

Judging from internal HMA Direct literature, Ludtke says businesses in states that don't allow health status underwriting in the small group market are its target.

HMA Direct declined to comment. A Q&A on the company's Web site with CEO Jed Brettschneider reads in part: "A common but mistaken impression is that partial self-funding is only for larger employers. In fact, self-funded health plans can work extremely well for smaller employers as well, providing them with the very best benefits for their employees while driving down costs."

The companies that are listening to such a pitch aren't the penny pinchers, says McCaffrey. They are companies that have been providing health insurance for their employees for years and have seen their premiums rise and coverage shrink. "If you were Ebenezer Scrooge and you didn't care about [Tiny Tim] out front, HMA Direct wouldn't have a hook into you because you're not required in New Hampshire to have health insurance ...," he says. "It's these companies that have been trying to retain employees, [they] view it as an employer's responsibility; they're the ones who were prey to this pitch."

The issue is about more than whether or not HMA Direct was out of compliance with the law, says Ludtke, it's a fundamental question of whether self funding is the way a small employer should be providing benefits. "The whole business model itself raises a number of issues," she says.

Problems can arise if an employer tries to bring an employee into their self-insured plan after they're rejected for individual insurance, says Shore. A reinsurer will make the late applicant employee wait until open enrollment, potentially leaving them uninsured. "If I had a claim and I was eligible under the terms of the plan and I wasn't offered insurance and I had a massive claim, I'd go after the employer," Shore says.

As HMA Direct has regional offices across the country, Ludtke believes their story is worth following. Because very few small businesses self insure, "[T]hey see it as a huge business opportunity," she says. "And I think the financial stress just makes it all that more appealing to businesses because they get quotes from carriers and they're looking at a 25% increase and they can't afford it anymore."

What's next

At press time, a hearing was set for June 24, but McCaffrey believes it will likely be continued until the fall. Meanwhile, the insurance division of the Rhode Island Department of Business Regulation issued two complaints against HMA Direct in late May. The first alleges insufficient licensing against HMA Administrators, a branch of HMA Direct, and seeks revocation of their limited TPA license. The second addresses complaints against a producer similar to those filed in New Hampshire. HMA Direct has agreed to cease and desist activity in the state until a hearing is set, says John Cogan, executive council for the office.