California regulators shut down alleged health insurance scheme

California regulators said they had shut down a labor union health insurance scheme that put hundreds of consumers at risk of losing coverage.

The Department of Managed Health Care said Tuesday that it had obtained an order from an administrative judge barring Raymond and Jean Palombo of Riverside from selling health maintenance organization and preferred provider organization policies in California.

The department said the Palombos signed people up as members of the Contractors and Merchants Assn. and sold them health insurance coverage through an affiliated labor union.

The department contended that the Palombos conspired with a union to collect premiums from members but then failed to pay the premiums in full to Kaiser Permanente, the contracted health plan. That, the department said, put nearly 500 people in jeopardy of losing their health coverage.

Acting on a consumer complaint from 2007, the department said it discovered that the Palombos had been barred from insurance sales in six states, including Texas, Oklahoma and Florida.

The department said that as a result, consumers across the country were left with large unpaid medical bills and without health coverage. In addition, California regulators had shut down a business operated by Raymond Palombo in 1999.

In the latest case, department Director Cindy Ehnes said the alleged scheme was uncovered before consumers actually lost coverage, and Kaiser agreed to offer all of the alleged victims new, individual policies.

“It is critical that we protect healthcare consumers from phony, Madoff-like scams that take their scarce dollars and leave them without insurance coverage,” Ehnes said. “We shut down this particular operation before Californians were severely harmed, and with Kaiser’s support, got them into secure coverage.”

Raymond Palombo denied the allegations and called the enforcement action a “witch hunt.”

Reached at his Riverside home by telephone, Palombo laughed out loud at the comparison to Bernard Madoff, the New York investment manager recently sentenced to 150 years in federal prison after pleading guilty to stealing billions of dollars in a long-running Ponzi scheme.

“That’s hilarious,” Palombo said. “That is so stupid.”

He said that out of the premiums members paid, $60 a month was taken out for union dues and sales commission. But he said the premiums were always paid to Kaiser in full and on time.

“Kaiser got every penny,” Palombo said. Members “were getting the insurance. They were getting everything from Kaiser with no problems whatsoever.”

Kaiser spokesman Jim Anderson said that “many payments were late at best.”

Palombo disputed the contention of the department and Kaiser that there were nearly 500 consumers involved. He said the plan never had more than 50 members. Palombo said he did nothing to put members’ coverage at risk and put the blame for that on the department.

“They lost coverage because the Department of Managed Health Care issued a cease-and-desist order,” he said. “That’s why they lost coverage.”

Palombo declined to comment on the enforcement actions in other states. He said he continues to sell health insurance on an active broker’s license issued by the California Department of Insurance, a separate agency.

The Department of Managed Health Care oversees companies covering more than 21 million people primarily through health maintenance organization plans.

To avoid getting caught up in such a problem, consumers should be on guard against labor unions that offer to sell them health insurance without performing any other traditional services, such as collective bargaining for wages and other benefits, said Michael McClelland, an enforcement lawyer for the department.

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lisa.girion@latimes.com