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Texas company charged with defrauding Virginia Tech over student health insurance

Federal prosecutors say a health insurance administrator fleeced students and the university.

Med Beat blog

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Laurence Hammack | 981-3239

Tuesday, April 9, 2013

An outside insurance administrator that served Virginia Tech from 2003 to 2011 overstated student medical claims to inflate the premiums they and the university paid, federal authorities allege.

GM-Southwest of Frisco, Texas, is accused of racketeering, mail fraud and money laundering in an indictment unsealed Tuesday in U.S. District Court in Abingdon.

The indictment also names former company owner John Paul Gutschlag, 73, of Aubrey, Texas.

Federal prosecutors say the company’s actions led to “significantly higher premiums” for students who elected to purchase optional health insurance during their time at Tech.

The company’s actions affected both the university, which paid a share of graduate student premiums, and undergraduates, who paid their premiums in full, the indictment said.

When taking into account what both the university and students paid in premiums over eight years, “we may have been defrauded by as much as $20 million,” Mark Owczarski, a spokesman for Tech, said Tuesday.

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Officials didn’t disclose how many students they believe might have been affected. Nor was it clear just how much they paid individually in inflated premiums.

Owczarski said most students arrive on campus still covered by their parents’ insurance plans and do not buy the insurance. However, the GM-Southwest insurance option is bought by all international students and many graduate students and other non-traditional students.

The alleged scheme didn’t involve the campus health clinic, Schiffert Health Center, which furnishes basic medicine, education and referrals to doctors and hospitals, he said.

The 57-count indictment against GM-Southwest alleges that it overstated claims at Tech by more than $9 million.

As an independent, third-party administrator of student health insurance, GM-Southwest contracts with secondary school systems and universities across the county to provide student health insurance through a lineup of carriers .

During the time GM-Southwest ran the health plan at Tech, the company collected premiums from policyholders, took its commission and forwarded the rest of the money to the insurance carriers. It paid bills for health care incurred by student policyholders with money provided by the carriers and compiled various reports.

Hundreds of thousands of dollars flowed through the system monthly, according to the indictment.

But GM-Southwest only gave accurate claims-paid information to the carriers, the indictment alleges. GM-Southwest inflated the numbers it gave Virginia Tech by more than $9 million between 2003 and 2011 and then based premium increases on the false figures, the indictment alleges.

Since its commission was premium-based, each premium increase increased the company’s compensation at the expense of the school and students, prosecutors alleged.

“Because [the company] regularly created and reported false and inflated paid claims numbers and loss ratios to Virginia Tech, the university, its undergraduates and graduate students incurred significantly higher premium costs over the life of the contract,” the indictment said.

In addition, competitors of GM-Southwest were reluctant to bid for the Virginia Tech insurance business because the false data made it appear that the contract was performing poorly, according to the indictment, which said the scheme was directed by Gutschlag and designed to boost his and the company’s income.

In summer 2010, a new risk manager at Tech spotted a concern in the records and raised questions, according to the indictment. When the contract next came up for renewal, Tech cut ties with GM-Southwest. Its student health plan is now run by Aetna.

Tech sued GM-Southwest Jan. 2 in Richmond Circuit Court. The lawsuit seeks $32 million in damages from the company and $151.6 million in civil penalties, according to a report by Courthouse News Service.

Two messages left for Gutschlag at the company headquarters were not returned Tuesday afternoon.

Federal prosecutors did not seek Gutschlag’s arrest following the indictment. He will be allowed to self-report to an initial court appearance to be scheduled for later this month.

Saturday, September 14, 2013