Why Discount Medical Cards Are a Rip-Off

Many consumers who turn to medical discount cards to reduce their health care costs claim to be getting bilked by errant discount medical-plan organizations.

In response, some dozen states have registration or licensing requirements for medical discount cards, or DMPOs, according to the National Conference of State Legislatures.

Most of these were adopted in the past couple of years, but a handful of states, including Montana, Florida, Nevada and Oklahoma, adopted the registration regulation as early as 2005. And early-enactor state agencies say they are seeing a marked decline in DMPO-related complaints.

In theory, medical discount cards have the potential to save consumers out-of-pocket medical expenses. Unable to negotiate in scale, individuals sometimes pay more for their medical bills than they would if they could negotiate as a group. DMPOs present a market solution to the problem: for a fee, they negotiate on behalf of their many clients, bringing prices down, and channeling new patients to doctors.

But the reality is far different in many cases.

Take the experience of Carl Mitchell, who was searching for a way to reduce his medical costs after contracting lung cancer. Mr. Mitchell, who stopped working as an electronic technician in 2004, took out an insurance policy for his wife. But she lost the coverage in 2006 because of pre-existing conditions.

Mr. Mitchell, surviving off of Social Security disability and a small pension, had health insurance through the Veteran's Administration, but was unable to afford coverage for his wife. So Mitchell turned to medical discount cards. His payments exceeded $100 monthly, and though the Lincoln Park, Mich., resident tried two different cards, he never received a discount on medical expenses.

Unlike the heavily regulated insurance industry, in many states DMPOs operate in a legal no man's land: left to their own devices, many cards cost unwary consumers far more in fees than they saved them in medical expenses.

A 2005 study of five health cards available in the Washington, D.C., area conducted by Georgetown University researchers found only one case where the card's discounts exceeded its costs. And across the country, consumers are claiming that the advertisements misled them into thinking they had insurance; that they could find few providers in their area that accept the plans; that they had problems canceling; and that call centers are unresponsive.

Even with the risks, the cards remain popular. The Consumer Health Alliance (CHA), the national trade association of the discount health care industry, claims to represent companies that serve more than 28 million US consumers, and that no more than 5% to 10% of these cards include physician or hospital services.

"The industry continues to grow because health care continues to become more expensive," says Allen Erenbaum, Counsel for the Consumer Health Alliance. "For broader reasons than our industry has anything to do with, there are more and more people who need access to more affordable healthcare products and services."

And as the industry grows, problems with the cards remain. Though no agency keeps national statistics on the issue, James Quiggle, spokesperson for the Coalition Against Insurance Fraud, says that anecdotal evidence suggests it's a pervasive problem. "These cards remain a persistent problem around the country, because many of the issues of fraud and deception still exist from year to year," he says.

But states that began implementing registration and licensing legislation say they've seen a marked decrease in consumer complaints. Since Florida enacted its licensing law in early 2005, medical discount plan complaints to the Florida Office of Insurance Regulation have dropped by 90%, says Tom Zutell, spokesperson for the office.

And though Oklahoma and Montana weren't able to quantify the decrease in complaints, spokespeople for the Oklahoma Insurance Department and Montana State Auditor's Office both said complaints had fallen markedly since they implemented the registration requirements in 2005.

A spokesperson for the Nevada Division of Insurance said it wasn't clear whether the number of complaints related to DMPOs was changing, but that current complaints involved unregistered discount medical card providers. Utah was another early enactor of licensing regulation, but no one was available for comment at Utah's Department of Insurance.

Registration and licensing requirements aren't the only way states can regulate DMPOs, but they can be among the most rigorous. Almost half of U.S. states have enacted some laws regulating DMPOs, according to the NCSL memo. Many put in place specific advertising standards, mandatory disclosures, or mandatory trial periods. And other states have issued cease and desist orders, or brought actions against individual DMPOs, who they say are running afoul of the law.

Industry trade group CHA says regulation that prevents fraud is necessary, but that in some states, regulation is overly rigorous. "State regulation has worked to chase some of the bad actors out of the industry, and to help protect both consumers and legitimate discount companies," says Erenbaum, the CHA counsel. "What we've found is that those benefits and protections accrue to consumers whether the regulation is streamlined and targeted, or whether it's onerous and heavy-handed."

And onerous regulation, says Erenbaum, could lead to less consumer access. But DMPOs don't seem to be fleeing from Florida, the state with arguably the most stringent licensing requirements. "In a big state like Florida a company might make the decision to absorb the costs of operating," says Erenbaum. "But in a smaller market, the regulation may be too much, so it wouldn't make sense to continue operating."

Not all registration and licensing laws are created equal, even among the states reporting a decrease in complaints. Less than 70 percent of DMPO applicants were licensed in Florida, according to a 2006 report to Florida's OIR conducted by researchers at Georgetown University's Health Policy Institute. But in Oklahoma, there have been no application denials or enforcement actions. And registration and licensing requirements vary wildly. Montana, for instance, requires discount card providers to provide a $50,000 surety bond to pay for damages or legal violations.

This type of requirement could have helped save Mitchell, the retired electronic technician, from losing his money.

When the Michigan State Attorney General's office looked into Mr. Mitchell's complaint, the company replied that Design Savers Plan had been sold and dissolved, without assets, in the state of Colorado. Mr. Mitchell later contacted the company which had bought Design Savers, to no avail.

And his experience with unscrupulous DMPOs has turned him off of the industry altogether. "Any medical savings plan, from what I understand, you're better off not doing."