The premise on which the assertions that Health Insurance Innovations, Inc. was an accomplice to misrepresentation of information to their clients is flawed.
The Federal Trade Commission is conducting investigations into the activities of Steven Dorfman and his companies, but these investigations are not focusing on the actions of HIIQ.
Under the guidance of Mr. Dorfman, Simple Health misrepresented their business operations and scripted messages to HIIQ during their reviews and meetings. As a result, Simple Health misstated the underlying problems which existed in their marketing of products.
Both Simple Health and Health Benefits One, LLC were in breach of most of the terms set forth by the contracts and pledges signed in their initial partnership agreement. However, the two firms intentionally failed to disclose this to HIIQ’s staff.
Disclosure: I am an individual investor who is long on HIIQ. My research indicates that prior articles about the company written by short sellers are fundamentally flawed and so have thus provided counterpoints which address their assertions. I've published this article anonymously so that the information and argument can be judged by their merits.
The narrative of misrepresentation of information by Health Insurance Innovations, Inc. (NASDAQ: HIIQ) has been making rounds, fuelled primarily by an article depicting the firm as an accomplice to the informational misrepresentations made by Steven Dorfman (and his affiliated companies) as a way to con clients into accepting unreliable health insurance options. The piece alludes to HIIQ as being partisan to the reckless behaviors exhibited by Dorfman and his associates, suggesting that their associations dig deeply into their respective financial and operational histories.
While their joint operations are not in question – given that HIIQ had actually contracted the services of Mr. Dorfman’s companies – the assertion of collusion between the two companies is erroneous. This is supported by the fact that the investigating body (Federal Trade Commission) is not looking into the activities of HIIQ. Instead, the FTC investigation is focusing solely on Mr. Dorfman, his companies, and his associates. We will further examine and review each of these assertions below.
The Underlying Mess
The events behind the investigation into Simple Health and Health Benefits One, LLC began when the two firms, while acting as telemarketers, employed deception to lure clients into purchasing insurance products which eventually led to losses. This misinformation encouraged clients to purchasing medical discounts and indemnity products by disguising them as ACA insurance products (comprehensive medical healthcare products for individuals) – something which HIIQ has never handled in the past. Due to the comprehensive nature of these products, the business and associated premiums driven to HIIQ were above historical averages.
Exhibit I: Misrepresentation in marketing
The firm, therefore, drove bonuses to its salespeople (through higher leads) while cheating clients that were paying for a product that didn’t provide comprehensive benefits. Eventually, when clients opted to utilize these insurance products, they realized that they had been duped. As this was happening, Stephen Dorfman’s telemarketing firms failed to disclose to HIIQ the problems which were building in their ongoing operations. After an extensive investigation into the legality of these practices revealed plans to mislead clients who were paying for insurance products that did not exist, HIIQ found itself caught in situation where the negative ramifications needed to be addressed.
In response, HIIQ quickly released statements outlining the details of their contractual relationship with the telemarketing agencies in question. Ultimately, the conclusion was drawn that HIIQ was indeed unaware of the unscrupulous telemarketing practices conducted by Stephen Dorfman’s companies (as as the two firms were found to have strategized and executed these plans on their own). The investigating body (FTC) found no fault with HIIQ, and has gone ahead to investigate both Simple Health and Health Benefits One (which operated as the telemarketers of HIIQ).
The piece below presents the narrative of blatant consumer fraud and information misrepresentation which took place during the client marketing process. Ultimately, this outlines the various ways each party executed its marketing programs in line with the most recent findings developed from the FTC investigation. In doing so, this offers a narrative which clarifies the absolution of liability at HIIQ and, in turn, shows which party is actually to blame for the criminal activities outlined in the FTC investigation.
Boiler Room Notion
The classic boiler room notion exists when a group of salespeople collectively plan to sell questionable investments to an unsuspecting public. The AureliusValue.com article mentioned above took this notion even further, suggesting that HIIQ intentionally colluded with Simple Health in plans exaggerating perks and convince clients to buy health insurance packages which were essentially valueless. But the bundling of HIIQ with regard to this issue is both unfounded and baseless, and the FTC has produced documents showing that legal action is already being taken against the true perpetrators of these criminal activities.
In these documents, the FTC has made it clear that the investigation has placed its focus on Simple Health, through Mr. Dorfman, and that HIIQ should not be viewed as “guilty by association”. This fact is further supported by Excerpt II below, which doesn’t show HIIQ as a defendant against the FTC.
Excerpt II: Defendants Against the FTC
In their findings, the FTC has not only noted that Simple Health duped clients by exaggerating information but also showed that the firm intentionally asked their salespeople to ignore instructions sent by HIIQ detailing things could and couldn't be said on sales calls. Furthermore, the company's Chief Compliance Officer intentionally edited calls sent to HIIQ and redacted any information which would have highlighted the prohibitive and misleading statements used by Simple Health's salespeople when they were attempting to accumulate sales bonuses. These misrepresentations ensured that both HIIQ and their client-base remained oblivious to the criminal activity which had occurred, while maintaining Simple Health's position as a leading sales division (see Excerpt II above).
Clearly, the problems were systemic. In a bid to cover up their actions, Simple Health intentionally instructed salespeople to mischaracterize client information which was sent to HIIQ, and evidence of wrongdoing eventually became apparent at every managerial level. The number of client complaints sent to Simple Health rose once the purchased health insurance policies didn't provide adequate coverage. But since the firm instructed their staff not to discuss these events with HIIQ, the company remained unaware and client needs failed to be met. So, while the AureliusValue.com article erroneously characterizes HIIQ as being part of the conspiracy to dupe clients, the evidence points only to Simple Health as the perpetrator of these actions (giving a clean “bill of health” to HIIQ).
Excerpt III: Simple Health misrepresents information to HIIQ
One of the most important documents which needed to be signed by Simple Health was a partner certification. Therein, the partner – Simple Health – was meant to certify that they would meet all the requirements set by both HIIQ and the associated regulatory body. In doing so, Simple Health would affirm a pledge to follow a set code of conduct, therefore, ensure clients were protected.
In their last signed partner certification, Simple Health certified first that they understood the rules governing their conduct while operating as a partner with HIIQ. This partner certification also affirmed their understanding and commitment to the rules of the governing law body. This agreement was signed by Health Benefits One, LLC and Simple Health (both of which were acting under the authority of Chief Operating Officer, Mrs. C. Girouard).
Exhibit IV: Signed copy by Health Benefits One, LLC
Exhibit V: Signed copy by Simple Health
As with such contracts, the companies are taken to be agents and are therefore bound by specific agency laws. Furthermore, these documents stipulated exactly which rules needed to be followed by both companies while they were marketing products to their clients. One such rule was that the communication between the agents and their clients needed first to have been approved by HIIQ (and later to be recorded for review by HIIQ). In addition to this, regulatory approval was required for any communication between the company and their clients with regard to all information used during marketing processes. In doing so, the two agents were also bound to send any regulatory or non-regulatory communication and/or information used for marketing to HIIQ as part of their correspondence.
Another requirement pertained the scripting of messages. Due to changes in laws governing online services (especially telemarketing services), individuals or institutions using a platforms as marketing agents are bound to disclose and verify information which outlines the script used for during sales calls. These laws are designed to protect clients from unscrupulous salespeople focused on performance bonuses and to ensure liability is moved from the owners of the platform to the telemarketers.
Clearly, however, these practices were not honored by Simple Health and Health Benefits One in their work relationships with Health Insurance Innovations. First, the firms failed to follow the scripts provided. The Chief Operating Officer of both firms is noted to have allowed staff to deviate significantly from the approved scripts, which ultimately resulted in salespeople bluntly lying to clients in order to achieve higher bonuses for themselves. Moreover, while they were supposed to follow an evaluated script, both firms opted to have a different script on hand which would ensure that they used a different form of marketing at certain intervals (dubbed the “bait and switch” approach). In this manner, salespeople were able to present a more attractive picture to prospective clients (and artificially boost their sales figures).
Finally, we must consider the required recording of calls. To enforce the above regulations, HIIQ required both firms to record their calls for a review. Personnel from HIIQ would either go to their agents to review the calls made, or the information would be sent to HIIQ. Unfortunately, this process encountered two key flaws. First, the firm’s COO and other staff changed information from the script and redacted any information which would be detrimental to their operations. Second, they failed to disclose that calls were recorded to the FTC. Instead, the telemarketing staff lied to the FTC as a way of covering their tracks, stating that calls made to clients were not recorded. All in all, the operations of these telemarketing firms were largely unethical and the FTC appears to be diligent in its focus to punish those who have crossed legal boundaries.
Only Telemarketing Complaints Were Made
Health Insurance Innovations is a company which has been critical in its efforts to ensure that their agents have a broad platform to use when reaching out to their client base. They have created a cloud-based platform on which authorized agents can enroll clients into programs of specialized insurance products. Looking at the FTC's findings, the complaints of misrepresentation were less about the website and more closely related to the information provided by the telemarketing agents. While this doesn't totally reconcile the fact that Simple Health and other affiliated companies conducted the onboarding using the website, it clears HIIQ of wrongdoing in scams which are currently under investigation by the FTC.
Rather, the case made by the FTC is against the telemarketers working on the platform. Simple Health is also believed to have told falsehoods to on-site investigators with regard to the recording of sales calls. Upon review of the recorded calls made available, investigators have established that telemarketers had a script used to sell which was different from the script approved by HIIQ. Moreover, while operating undercover, agents from the FTC pretended to be potential clients and witnessed this misrepresentation of insurance options first-hand.
As a result, the FTC concluded that HIIQ wasn’t complicit in this nefarious charade, conclusively writing in their report that the ongoing investigations were not focused on the actions of Health Insurance Innovations. Note 17 of the document is categorical in stating that the investigations did not extend to HIIQ, which is a strong indication of the company’s innocence in the matter (see Exhibit III below).
Excerpt VI: Telemarketing Complaints
Drawing Lessons and Making Changes
A statement by Health Insurance Innovations said it best, as the company affirmed their disappointment and shock following the allegations raised by the FTC. The company stated that they support the FTC in ensuring that the complaints of policyholders are addressed, and went on to say that Health Insurance Innovations will be working hard to enhance their controls and processes going forward. Having been cleared from this investigation by the FTC, Health Insurance Innovations maintains its presumption of innocence in these matters. The firm is committed to ensuring their clients receive the best insurance services available, and this sentiment remains crucial in reassuring clients focused on long-term health plans for the future.
Understanding Health Insurance Innovations
Health Insurance Innovations, Inc (NASDAQ: HIIQ) prides itself in bringing affordable healthcare to every household in the United States through the provision of insurance to patients across the country. The firm, through its cloud-based platform, has continued to create opportunities for people to access both insurance products as well as other supplement plans, therefore, access to affordable healthcare. This matching platform thus offers an opportunity for both individuals to seek their preferred insurance or supplementary product and for agents to promote/market these insurance products to a larger pool of clients. The firm's business model provides solutions to both insurance companies and their clients; for the former, the firm assists in the development of insurance products fit for the market while for the latter, the firm assists in matching clients with much-needed insurance products by enabling third-parties (agents) to market the different insurance products available on the platform to various clients across the United States.
During the initial phases of platform development, firms were required to market the insurance products to clients through an in-house team. However, through the company’s growth phase they on-boarded a number of agents who were meant to ensure that this platform gained traction. The agents were expected to market the insurance options available on the platform to ensure that more options were available and more people were available to market them (growing their service provision in the process).
While allowing Health Insurance Innovations to achieve a much broader reach, this brought with it a new challenge: monitoring the message used to market to clients via the platform. As a result of their ability to forego liability (given their agency role on the platform), some agents misused the platform and misrepresented information made available to clients in a bid to increase sales. It was expected to have negative ramifications for the company's brand; therefore, the firm went ahead and tightened the rules governing its agency agreement. The agreement bound agents operating on the platform to a specific code of conduct (preventing them from misrepresenting information or outright lying to their clients), thus protecting the interests of consumers using their platform.
Through the above laws, Health Insurance Innovations stipulated that it would not only review information used to market to clients – the scripts containing the sales pitch – but also conduct audits on the phone calls made by their agents in order to confirm that they followed the firm set of company policies. Initially, the clients were reviewed on a consistent basis by HIIQ. As the number of agents operating on the platform grew, however, so did the review of agents. As a result, the corresponding audit job became more difficult as some agents continued to come up with new ways of lying to the company and deceiving clients in the process.
Customer Swindling and The Telemarketer Con Game
The recent report by the United States Federal Trade Commission (FTC) brought to light the con game which had continuously been executed by agents, and one agent (Simple Health) was primarily responsible. The regulator's review brought out a series of criminal activities affected by the firm on different clients, all which were both illegal and misaligned with the agreement signed with Health Insurance Innovations.
Through the firm’s CEO, Stephen Dorfman, the firm carried out a number of illegal activities, which included knowingly misrepresenting information to clients so as to increase their sales, using different scripts to market products to clients, intentionally deceiving HIIQ investigators by redacting illegal information from marketing scripts to cover their tracks, and deliberately lying to investigative bodies when requested for information on their marketing scripts.
The driving force for all this was the continued impetus by agents to earn commissions and bonuses (which might best be portrayed by the poster below). The firm continuously promised their agents cash and performance bonuses with the latter mainly being driven by how much money they made. This, tied with the fact that their COO and other managers had allowed for the firm to conduct their business illegally by marketing to clients using information outside the set HIIQ-approved script), allowed their sales personnel to cheat clients -- all in a bid to make a quick buck.
Exhibit I: Simple Health Poster Marketing Financial Gains to Agents
The above swindling culminated in regulatory bodies looking into the firm and its agents. Eventually, the FTC announced that they had narrowed down to Simple Health and Health Benefits – both owned and run by Mr. Dorfman – as the two firms which had conned clients of their health insurance policies and cash through misrepresentation of information. In their findings, they also stated that they found that while the above happened on HIIQ's platform, the firm was oblivious to the above allegations. Therefore, HIIQ was not named as a defendant in the case presented by the FTC.
Exhibit II: No Case Against HIIQ
The Consequent Cleanse
As with any criminal activity, the consequences of the actions were necessary -- and needed to be swift. This was the case for Health Insurance Innovations, which terminated their dealings with Simple Health. Health Insurance Innovations quickly announced that upon receiving news of the ongoings at Simple Health, it had concluded their arrangement with the firm. The firm would also offer support to the FTC by providing any necessary information to expedite this investigation. Furthermore, Health Insurance Innovations promised to beef up their monitoring and assessment wing to avoid the recurrence of such activities in the future.
While the above doesn't alleviate the relations between Health Insurance Innovations and Simple Health, it goes to show the steps taken by the firm to ensure that the wrongs are made right. It is in keeping with the vision of Health Insurance Innovations and confirms their allegiance to the rule of law. Going forward, the firm will continue to strengthen their internal compliance team and work closely with agents to ensure that they remove the influence of all criminal agents.
Taking Action: Defining the Agent On-Boarding Process
Recent executive interviews conducted at the Health Insurance Innovations analyst day event revealed insights into the process which the company follows when onboarding their agents. Chief Financial Officer, Michael D. Hershberger, explained that the process is very strict in nature – one which the company calls a ‘non-negotiable' – where companies seeking to act as agents are mandated to take part in educational courses and extensive training. These practices are designed to ensure that the processes followed by agents are standardized and that agents do not exploit consumers in a bid to achieve higher targets in portfolio sales.
In the following sections, we will review the onboarding process and expound on the checks and balances which have been designed by Health Insurance Innovations to protect consumers from unscrupulous agents. Furthermore, we will assess the accuracy of claims that HIIQ cheated their clients and engaged in criminal activity to improve their sales. We will conclude this section with a look at the monitoring system which has been established by HIIQ to continuously review the agents on their system.
While Health Insurance Innovations is a firm whose growth has been driven by onboarding agents – and the aggressive marketing of products by these agents – it must be understood that the firm itself doesn't take part in the regulation of these agents. During a question and answer session at the company’s recent analyst day event, CFO Michael D. Hershberger made it clear that each state is responsible for regulating these agents. Furthermore, there is also a national system which is used to check into the different agents working on the platform and to evaluate the legalities involved when in serving in different states.
Before becoming an agent, each entity must first clear approval with their state regulatory bodies. Each applicant must first take part in state-wise agency courses which are designed to introduce the regulatory intricacies of each state's insurance practices, agency laws, and regulations. Each applicant must then pass an exam to prove sufficient understanding of these laws.
Following this, each applicant must undergo a background check by both Health Insurance Innovations and the state regulatory body. Here, the two entities carry out criminal background checks on the firm's directors (and other management) to investigate for potential involvement in any past criminal activities. Once this is complete, the firm must receive approval from the state through receipt of a residency license (which is specific to each state). Should the agent wish to operate in a different state, they must apply for a non-residency license in each new state requested.
As previously mentioned, each state regulates the agents operating within it. Once all of the information on each agent is collected, it is sent to the National Insurance Producer Registrar (NIPR) which then makes its own legal assessments. This information details whether each agent is operational in a specific state or has misconduct issues leading to their dismissal, suspension or termination. The information is then uploaded onto the HIIQ platform and updated on a daily basis. Health Insurance Innovations, therefore, acts on this information – state-provided information – and bars agents who have legal issues from operating on their platform.
This section of the review process is carried out on the Health Insurance Innovations website.
Agents come to the site and complete the company’s questionnaires and documentation via its online contracting system. Most of these documents are used for further review and verification, and include:
Credit background check: provide credit certificates.
Insurance verification: fill in information on their Arizona admission insurance to ensure they’re covered.
History and experience: a general questionnaire on their experience in sales of insurance products.
State(s) of operation: the agent provides a list for verification.
Using the above requirements, Health Insurance Innovations can review credibility and the ability of each agent to provide the appropriate services. This information is then verified with NIPR and with other regulatory bodies.
This section requires that each agent agrees to HIIQ terms, and understands they are non-negotiable. These are forms detailing the proper sales practices (do’s and don’ts), and outlines terms which they can and cannot use during this process. The non-negotiable framework is presented to agents with a documented a list of prohibited sales practices (which is signed). The process requires agents to study carrier and product-specific manuals in order to ensure that they fully understand each product and the regulations governing each state.
This highly detailed process shows that Health Insurance Innovations has developed a robust system to ensure that each agent understand the applicable laws in each state of operation, and that this knowledge is confirmed through a testing procedure which follows state-specific queries to the NIPR. The system also ensures that these agents are appointed by specific carriers to sell their insurance products. For the various products involved, agents must show that they have completed extensive studies before they are granted the ability to engage in sales practices. Health Insurance Innovations has built a system with strict and automated controls – which are regularly updated – meant to ensure that checks and balances are maintained for all agents operating within their system.
Monitoring takes place after the onboarding process has completed and HIIQ ensures that their agents comply with all relevant regulations. The process involves the following:
Calls and Quality Team
This team reviews the calls made by agents to different clients, and establishes the quality of these calls. Additionally, the Calls and Quality Team goes to agent premises to ensure that sales calls follow the required script and to confirm that licensed agents are, in fact, carrying out these calls.
Third Party Services
Third Party Services allow HIIQ and other carrier providers to reviewing agents through alternative approaches. These include methods such as secret shopping (where either HIIQ or the carriers call the different agents and assess the quality and tone of the calls) and site visits (which are used to evaluate training practices and quality assurance personnel within the agencies). Through these services, Health Insurance Innovations can receive immediate feedback on how their agents are performing and, in appropriate cases, reward well-performing agents with added incentives.
Scorecards have many factors which are used to assess the performance of a specific agency or agent. Factors such as persistence, escalation, and cancellation are evaluated and used when grading different entities. Through the entire process, it is clear that there are numerous checks and balances meant to ensure that ‘rogue agents' do not end up on the Health Insurance Innovations platform. As stated by the firm, many players review and evaluate different agents to ensure that they are operating within the confines of the law and that they obey the contracts signed with the company.
Of course, no process is foolproof. But this strict approach has shown significant progress in preventing illegal activities from taking place on the Health Insurance Innovations platform. With the security processes consistently under review and required updates regularly undertaken, the recurrence of practices like those conducted by Simple Health will not be encountered in the future.
Market Outlook: HIIQ
In the early parts of 2018, the market valuation of Health Insurance Innovations (NASDAQ: HIIQ) were caught in a strongly bullish rally. Opening the year at $24.95 per share, the stock had experienced incredible gains of more than 147% by the end of September. Of course, this rally was partially supported by macroeconomic factors at the global level, as the NASDAQ Composite was in the process of making new all-time highs. But gains in the underlying index amounted to less than 16%, which is a drastic underperformance relative to the rallies shown in HIIQ.
However, the late reversals in the broader market would place additional pressure on HIIQ and the news of fraudulent selling practices at Simple Health acted in combination to send share prices lower. The FTC clampdown on Simple Health created conditions whereby Health Insurance Innovations was essentially given a verdict of ‘guilty by association’ and a series of unfair (and inaccurate) financial articles placed additional weight on market sentiment. The bearish article published by Aurelius Value, erroneously claimed that Health Insurance Innovations played a part in Steven Dorfman’s boiler room scams. But will Simple Health’s fraudulent activity have a sustainable impact on HIIQ’s position in the market? Or have these combined negative scenarios created an excellent buying opportunity for those interested in the stock?
Since October, the market valuation of Health Insurance Innovations has fallen by nearly 55%. This is an incredible change in the market’s underlying trend because the longer-term trends in the stock still show gains of more than 622% since July 2016. With momentum clearly on the side of the bulls, it would not be surprising to see a resumption of the uptrend now that the facts show Health Insurance Innovations was not responsible (or even aware of) the fraudulent activities conducted by Steven Dorfman and his companies. In other words, investors have essentially no reason to worry about their holdings in HIIQ stock.
UPDATE: a recent article posted here on Seeking Alpha provides further insights on HIIQ and why it's a good time to buy.
HIIQ: Competitive Strengths
As of 2017, roughly 3.2 million Americans (representing approximately 12.2% of the population) were identified as uninsured. This untapped potential in consumer growth is the major focus of the sales team at Health Insurance Innovations. Additionally, the company also targets potential consumers that are not covered by employer-sponsored insurance programs (i.e. self-employed people and those who cannot afford expensive premiums). As a result, we are talking about a $14 billion market that is largely untapped, and this creates tremendous opportunities for the company. Health Insurance Innovations, Inc. is a company that is better-positioned relative to its competitors, and this creates significant advantages for long-term shareholders.
In the third-quarter of 2018, the overall business performances of Health Insurance Innovations were incredibly positive for HIIQ shareholders, as the produced revenue of $74 million. This performance indicates a revenue increase of 17% when we compare the quarterly revenues to the third-quarter of 2017.
Collections in terms of members premium ($114.5 million) increased by 15% compared to 2017 (when the company produced figures equal to $99.7 million). The company’s adjusted EPS increased by 32.6%, while the EBITDA rose by 8.5%. Due to these strong performances in the early parts of 2018, Health Insurance Innovations was able to raise its guidance for 2018 (to a range of $294 million to $304 million). However, on December 20, 2018, Health Insurance Innovations announced that in the wake of the new Accounting Standards Codification (ASC) 606, guidance figures were further revised (to $315 million to $330 million). Despite the loss of 8% distributorship (due to the disruptions cause by its relationship with Simple Health), the company achieved a period of peak open enrolment as consumers continued buying insurance policies through non-owned third-party distributors.
For all of these reasons, it is important for shareholders to look past the headlines and to make an accurate assessment of Health Insurance Innovations. In the last three months, volatile stock activity has been seen in every sector of the market and declines in HIIQ have likely been artificially influenced by the corrupt actions of external parties. As long as Health Insurance Innovations is able to maintain its corrective restructuring, there is little evidence which suggests similar events will be able to occur again in the future. Once the dust settles, shareholders may be left with an undervalued stock which is prepared to resume its prior bullish trends as a true innovator in what is still an untapped and underdeveloped market sector in healthcare.