HIIQ: Boiler Rooms, ‘Worthless’ Policies, and Defrauded Families

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“The reason we outperform the ACA guys [traditional health insurers] so dramatically is because we have such high levels of compliance and consumer satisfaction”

-HIIQ CEO Gavin Southwell, March 2018 Conference Call

IMPORTANT – Please read this Disclaimer in its entirety before continuing to read our research opinion.  The information set forth in this report does not constitute a recommendation to buy or sell any security. This report represents the opinion of the author as of the date of this report. This report contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This report is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this report and undertakes no duty to update its contents. The author encourages all readers to do their own due diligence.

You should assume that as of the publication date of his reports and research, Aurelius and possibly any companies affiliated with him and their members, partners, employees, consultants, clients and/or investors (the “Aurelius Affiliates”) have a short position in the stock (and/or options, swaps, and other derivatives related to the stock) and bonds of Health Insurance Innovations. They therefore stand to realize significant gains in the event that the prices of either equity or debt securities of Health Insurance Innovations decline.  Aurelius and the Aurelius Affiliates intend to continue transactions in the securities of Health Insurance Innovations for an indefinite period after his first report on a subject company at any time hereafter regardless of initial position and the views stated in Aurelius’ research.  Aurelius will not update any report or information on this website to reflect such positions or changes in such positions.

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We are short Health Insurance Innovations (NASDAQ: HIIQ) because we believe the company’s business model relies on a classic boiler room scam. Previously sealed documents gathered by the FTC directly undermine management’s claims and prove that a large boiler room operation recently shuttered by the government for a massive alleged fraud was responsible for roughly half of HIIQ’s sales. Evidence also suggests that HIIQ policies have been contaminated by insurance fraud and reveal that other HIIQ brokers prey on consumers with falsehoods. Now that multiple state and federal agencies have begun moving against HIIQ’s broker network, we believe it is now a question of when, not if, HIIQ’s business will implode.

Earlier this month, the Federal Trade Commission (“FTC”) shut down boiler rooms selling HIIQ policies run by Steve Dorfman, alleging they were “permeated by fraud” and selling “worthless plans that left tens of thousands of people uninsured”. Soon afterwards, HIIQ put out a misleading press release, suggesting that Dorfman was responsible for less than 10% of HIIQ’s business.  But previously unpublished bank records reveal that HIIQ has paid at least $145 million in cash to Dorfman’s companies, representing about half of the third party commissions paid out by HIIQ over this approximate period.  We therefore conclude that Dorfman’s alleged fraud has been responsible for as much as half of HIIQ’s revenues. (Note: a lawyer for Mr. Dorfman told the New York Times that his client “vigorously denies the allegations of misconduct”.)

Even after allegations regarding deceptive sales practices of HIIQ brokers mounted last year, HIIQ continued doing business with Dorfman, who allegedly is affiliated with a violent gang of criminals that he used to indimidate employees.  The nexus between HIIQ and Dorfman is so close that Dorfman’s company was previously considered a related party in HIIQ’s SEC filings and documents show that licensed HIIQ insurance agents, including Dorfman’s brother, were even embedded inside Dorfman’s boiler rooms.  HIIQ has made over $40 million in loans to its brokers, including a loan to Dorfman’s company that is likely now impaired because Dorfman allegedly absconded with millions to spend on luxuries and the government has frozen his company’s assets and placed them in receivership.  A material portion of HIIQ’s 377,000 policies in force may also be contaminated by insurance fraud based on allegations that Dorfman’s unlicensed marketers fraudulently recorded policies as being originated by licensed agents in HIIQ’s systems.

The deceptive sales tactics described by the FTC appear endemic across HIIQ’s broker network. Unlike traditional insurance, more than 60% of the money paid by consumers goes to HIIQ’s brokers, making HIIQ products ideal for boiler room operators to sell.  HIIQ brokers prey on people in between jobs or without group insurance who are targeted through mass robodialing and a network of websites that claim to be designed to “help” consumers navigate the complexities of health insurance.  Once on the phone, brokers use false claims and high pressure tactics to convince consumers they are purchasing comprehensive health insurance that covers pre-existing conditions.  But the policies often don’t have the benefits being promised by the brokers and instead are medical discount programs or policies that provide very limited coverage.  Families across the country have learned that they’ve been scammed only after they begin to incur medical bills and find out that their HIIQ policy doesn’t cover what the boiler room agent promised them it does. This has been disastrous for many Americans, but quite profitable for HIIQ and the boiler rooms it sponsors.

On November 2nd, the Federal Trade Commission announced it had shut down Simple Health and other Dorfman entities (collectively the “Dorfman Group”). Documents collected by the FTC state that most of the policies sold by Simple Health were HIIQ policies that, according to the FTC, are “sham health insurance plans”.  The FTC presented several thousands of pages of evidence including call transcripts showing how undercover FTC investigators were deceptively sold HIIQ policies earlier this year by Dorfman’s boiler rooms. Declarations from former Simple Health employees and defrauded consumers describe the tactics used by the Dorfman Group to allegedly dupe thousands of people into purchasing HIIQ policies.  Please see the Appendix where we have organized source documents for investors to review.

      Source: FTC Press Release, Capture of FTC Document with HIIQ policy sold by Simple Health to an undercover investigator

FTC Documents reveal that HIIQ’s subsidiary, Health Plan Intermediaries Holding (“HPIH”), paid the Dorfman Group $145 million in cash from January 2016 to April 2018. This amounts to 49% of the $294.2 million in third-party commissions that HIIQ’s SEC filings state it paid out during this approximate timeframe. We therefore believe that Dorfman’s alleged fraud was responsible for as much as half of HIIQ’s total revenues.

Source: Declaration of Emil George

Documents compiled by the FTC indicate that HIIQ policies sold by Simple Health may also be contaminated by insurance fraud. A former Simple Health employee told the FTC that “hundreds, if not thousands” of policies in HIIQ’s system [captioned below] fraudulently identify her as the agent of record even though she had no interaction with the customers.  This confirmed rumors she heard that Simple Health “sold policies under the licenses of employees who had no involvement in the underlying sales”, presumably enabling unlicensed boiler room operators to sell policies.

Source: Declaration of Lovely Seraphin

HIIQ has already disclosed that it is the subject of an ongoing investigation by 42 States into its sales practices. Last year, short selling research outlet The Friendly Bear warned about the deceptive tactics of HIIQ brokers in a detailed report that specifically highlighted serious problems involving the Dorfman Group. HIIQ’s management subsequently claimed the company has “high levels of compliance and consumer satisfaction” and suggested they had cleared the bad apples from their broker network.

Yet HIIQ continued doing business with Dorfman, who we have learned is allegedly “associated with known violent gang members and provided them cash when they needed it; in turn, Dorfman used his affiliation with those gang members to threaten [employees]” (below).

Source: Broward County Case Number CACE-18-025733. (part 1, part 2), a lawsuit filed in October 2018 by a Simple Health co-founder that also names HIIQ as a defendant.

The nexus between HIIQ and Dorfman is so close that up until March 2015, HIIQ considered Dorfman Group entities related parties in its SEC filings. Before later selling its stake, HIIQ entered into a Joint Venture with Dorfman to form Simple Insurance Leads (“SIL”), a lead generation company run by Dorfman that was also shut down by the FTC for allegedly defrauding consumers.

HIIQ also makes loans to its distributors to help them build out boiler rooms and hire marketers in the form of advanced commissions, which totaled approximately $40 million as of September 2018. A 2015 disclosure states that Health Benefits One, a company owned by Dorfman named in the FTC’s complaint, represented 63% of this balance. HIIQ’s 10-K states that the company’s loans are concentrated amongst three distributors, with the largest single outstanding loan having a balance $14.2 million as of December 2017. Considering that the FTC stated that Dorfman personally absconded with millions in cash proceeds to spend on luxuries and that the assets of his companies have been frozen and placed in receivership, HIIQ’s loan to Dorfman likely is now impaired.

We believe many HIIQ investors have not yet recognized the significance of the FTC’s action because HIIQ issued a highly misleading press release on November 2nd that attempted to downplay HIIQ’s relationship with Dorfman by claiming:

“For 2018 to date, Simple Health was the agency of record for less than 10% of HIIQ’s submitted policies”. 

This statement leads investors to believe that the Dorfman Group is immaterial to HIIQ’s business and caused Sell Side analysts to quickly declare that “there will be no financial impact on the company” from the government’s action.

But as explained below, our research indicates that Dorfman established a large “downline” of sub-brokers that sold HIIQ policies under his organizational umbrella and lead generation network. We obtained contracts between HIIQ and the Dorfman Group that reveal an undisclosed arrangement whereby HIIQ entered into an “Independent Broker’s Contract” with Dorfman’s various sub-brokers individually. HIIQ paid commissions earned by sub-brokers to the Dorfman Group directly, with those profits then presumably being split between Dorfman and the sub-brokers. Importantly, A UCC filing shows that the sub-brokers themselves (and not the Dorfman Group) are the “Broker of Record” for the HIIQ policies they originate. HIIQ’s press release appears highly misleading—of course Simple Health is not the agent of record because its sub-brokers are.  

Source: Florida UCC Filing.

Based on the scale of the operation described by the FTC, which states that Simple Health’s “boiler rooms handled over 62 million calls with consumers”, we assume the FTC’s complaint encompasses the activities of Dorfman’s sub-agents. After all, the Dorfman Group “trained, launched, and managed sub-agency sales teams”, according to the Linkedin profile of Steve Dorfman’s brother, Richard, who was a manager at Simple Health.  We also note that the court’s Temporary Restraining Order in the FTC Action specifically references “agents” and “all other persons in active concert” with Dorfman, which we interpret to mean that Dorfman’s downline of sub-brokers are included in the order’s prohibitions.  We therefore believe that, at minimum, HIIQ’s ability to generate revenue from Dorfman’s downline is now impaired. We also believe that the FTC moving against Dorfman signals that regulators have an increasing appetite to shut down other boiler rooms who are misleading consumers, which we find likely to create a chilling effect across HIIQ’s broker network including operators that have no ties to Dorfman.

HIIQ insurance policies are an ideal product for boiler rooms to sell because, unlike traditional insurance, more than 60% of the money from consumers is paid out as commissions to the brokers. This product is therefore extremely lucrative for fast-talking “producers” skilled in deceptive telemarketing. Simple Health, for instance, ran cartoonish help-wanted ads like the below, claiming “YOU WILL HAVE MONEY THROWN AT YOU” (below)

The fundamental problem for HIIQ is that many customers who purchased HIIQ products have been scammed. The FTC states that Dorfman’s fraud “has left tens of thousands of consumers who thought they had purchased comprehensive health insurance without such coverage”.  For example, the FTC evidence includes a declaration from a consumer who was told by Simple Health that the HIIQ policy would provide extensive medical coverage.  But after her husband was hospitalized, she “learned that my policy does not require HII [Health Insurance Innovations] to pay medical expenses on my behalf”, leaving her and her husband stuck with tens of thousands in medical bills.

So many customers have allegedly been swindled that a Dorfman Group manager who provided testimony to the FTC estimated in a court document that:

“approximately 95% of the two to three thousand customer service calls received by defendants [Dorman Group] each day consisted of ‘complaints from consumers who had been misled about the benefits they would receive’. 

But we believe this understates the total size of the scam since other boiler rooms and marketers affiliated with HIIQ have also likely deceived customers.  HIIQ’s own Better Business Bureau (“BBB”) profile comes with an “F” rating, hundreds of complaints from angry customers, and a bright red warning label.

The BBB site explains that “BBB has received a pattern of complaints from customers of Health Insurance Innovations involving alleged misrepresentation during the sale of insurance products they purchased”. It says HIIQ “is adamant it is not the business responsible” because it is “not the insurance agency that made the sales presentation to the customers”.  Instead, HIIQ claims it is “a technology platform” and suggests that “the complaints should be filed against either 1) the agency that sold the policy or 2) the insurance carrier involved with the claims”.

HIIQ’s effort to duck responsibility strikes us as absurd. First, HIIQ Documents show that individuals embedded inside the boiler rooms and call centers are licensed as agents of HIIQ through HPIH. For example, Richard Dorfman, is licensed as an agent of HPIH.  We also found 48 other HPIH agents registered to Simple Health’s headquarters address.

Source: California Insurance License Database

The deceptive sales tactics described by the FTC appear endemic across HIIQ’s broker network. In fact, HPIH and its agents have previously been penalized by State Insurance regulators for misconduct. For example, the California Department of Insurance penalized HPIH in August 2018, alleging it “is participating in deceptive sales practices by misrepresenting health policies to consumers”.  Similarly, in 2016 Arkansas issued a cease and desist order against HPIH alleging “the company has used fraudulent and dishonest practices in attempting to sell short-term health care plans”.

Agents of HPIH are also registered to addresses of other call centers accused of misleading customers. In particular, a concentration of agents are registered to a Pompano Beach address matching that of a call center associated with Nationwide Health Advisors.  Our research indicates that Nationwide is another large HIIQ distributor that also has a “downline” of sub-brokers.

 A class action lawsuit filed against both HIIQ and Nationwide in 2017 levies similar allegations as those made by the FTC against the Dorfman Group.  The plaintiffs allege that HIIQ (referred to as “HII” in the lawsuit text) “is the principal orchestrator of the illegal calls and boiler room junk insurance sales scheme”.   We found over a dozen other lawsuits that naming HIIQ that levy similar allegations of either robodialing or deceptive sale practices.  (Note: you should assume that HIIQ and co-defendants deny all allegations).

Source: Moser v. Health Insurance Innovations Case 3:17-cv-01127-WQH-KSC.  HIIQ and Nationwide deny all allegations.

Conclusion

HIIQ has been promoted to investors as a beneficiary of demand for non-Obamacare policies.  But misleading statements from company management have disguised the reality that the business appears to depend on boiler rooms that scam Americans using deceptive sales tactics. We believe the government’s action against the Dorfman Group, which the FTC depicted as a giant fraud selling “worthless” HIIQ policies, speaks volumes about the sustainability of HIIQ’s business model. Now that multiple state and federal agencies have begun moving against HIIQ’s broker network, we believe it is now a question of when, not if, HIIQ’s business will implode.

We therefore see enormous downside potential in HIIQ shares.

All investors are encouraged to conduct their own due diligence

Appendix

FTC Declaration

Consumer Declarations

Expert Declarations

Telephone Transcripts