"Rip-off" Insurance Scam Shut Down

Cheryl Clark, for HealthLeaders Media , July 8, 2009

A nationally widespread insurance scam has been shut down in California after hundreds of victims were duped into paying premiums for a Kaiser Permanente health plan through a phony labor union, state officials said. Kaiser never received a large portion of the money the enrollees paid.

The Ponzi-like scheme, operated by Raymond, Thomas and Jean Palombo of Riverside, CA under the name Contractors and Merchants Association or CMA, also has been shut down in at least six other states including Texas, Georgia, Oklahoma, Nebraska, Florida, and North Carolina in recent years.

The Palombos also operated the scam under the name "Progressive Health Alliance" in some of those states and involved other health insurance companies such as Aetna and Healthnet, according to state documents.

A previous Palombo operation was shut down by another California state agency in 1999, but personally, the Palombos were not named in that order. This time, the Palombos and CMA have been permanently barred from selling HMO or PPO plans in California.

"It is critical that we protect healthcare consumers from phony, Madoff-like scams that take their scarce dollars and leave them without insurance coverage," said a statement from Cindy Ehnes, director of the state Department of Managed Health Care, which issued the order to stop the fraudulent plan.

"We shut down this particular operation before Californians were severely harmed, and with Kaiser's support, got them into secure coverage. Our action sends the message that fraudulent health coverage rip-offs will not be tolerated by this Administration."

In California, about 200 people and another 300 of their dependents were wooed through the Internet to join CMA, says Michael McClelland, lead counsel for the DMHC.

Additionally they were required to join a phony labor union, International Union of Industrial and Independent Workers, to buy the plan, he says. Most of those recruited were older or had pre-existing conditions such as diabetes that made them ineligible for most private insurance plans, McClellan says.

Labor unions can legally purchase and organize health insurance plans for their members, however this labor union did not represent any workers or engage in collective bargaining, and thus was not legally entitled to purchase health insurance from Kaiser, he says.

"It's not lawful to use a labor union to sell health insurance to the general public without a license" McClellan says.

Across the country, McClelland says, the Palombo operations paid health plans in "spits and spurts to keep delaying the inevitable, which is to default paying the premium entirely." McClelland characterizes the operation as "a Ponzi-like" fraud.

The DMHC negotiated with Kaiser to enable CMA's victims to continue to be enrolled under a Kaiser individual rather than a Kaiser group plan without having to apply for medical underwriting, which would have disqualified most if not all of them, McClelland says. Their premiums did undergo adjustment based on their age and residence, and while some rates rose a bit, most went down or remained the same, he says.

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