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Florida customers hit with big rate increases are often surprised to learn of the arrangement. Larry Smith of North Port, Fla., complained to Florida regulators after his premiums more than quadrupled in three years. "How can you not be regulated by Florida if you sell insurance here?" he asks.

Florida regulators have wondered that for years and have long sought to close the loophole. But lobbyists have convinced state lawmakers that doing so would drive some insurers away and leave fewer options for Florida consumers, including early retirees who flock to the state.

Thirteen of the 21 companies that sell individual health insurance in Florida do so through out-of-state groups. This sales practice is common in other states, too.

The idea of buying insurance through out-of-state groups arose as a way for them to look out for members' interests by offering health coverage. Advocates say the groups' ability to avoid costly state mandates on coverage and rates lets them make health insurance affordable to more people, at a time when an estimated 38 million Americans lack coverage.

Critics say it's just a way for insurance companies to get around state rules, and point to the close ties many of the nonprofit groups have with a particular insurance company. For instance, Taxpayers Network's three-member board includes one current and one former executive of American Medical. And it doesn't put its insurance contract out for bid by others.

Taxpayers Network says it is much more than a vehicle for American Medical Security to sell policies. It describes itself as a public-policy group with 90,000 members nationwide that promotes a "common sense, free-enterprise system with economic opportunity and limited government." Amy Polasky, the group's external-affairs director and a former lobbyist at American Medical, says, "It's an unfair characterization to say we operate in lockstep with American Medical Security."

But insurance is clearly the association's financial lifeblood. Its revenue was only $65,590 in 1997, as its deal with American Medical was just starting. In 2000 Taxpayers Network took in $3.4 million, mostly in insurance customers' membership fees. It distributed $1.3 million of that to the insurer, sent another $1.3 million to a benefits administrator and kept the rest.

American Medical says one reason it uses Taxpayers Network to sell insurance to Floridians is that Florida has a record of unfairly rejecting needed rate increases. The state now is trying to bar American Medical from insuring its residents, accusing the company of discriminating against those who get sick.

Taxpayers Network is based in Cedarburg, Wis., but regulated by Ohio, where it is incorporated. A spokesman for the Ohio insurance department, asked why the state doesn't regulate health insurers' premiums, says, "We find the competitive marketplace actually helps us keep rates low." The spokesman, John Charlton, adds, "Florida needs to change their law if they're unhappy with the situation."

Write to Chad Terhune at chad.terhune@wsj.com 

Updated April 9, 2002

Companion Article: Health Insurer's Premium Practices Add to Profit Surge, Roil Customers

Contact Shaneen Wahl at TSWahl@aol.com or 941-235-1520

Shaneen's Florida Health Insurance Battle History