Bid Rigging and Collusion in South Texas


“It’s a common practice but it’s wrong.” – Arnulfo Olivarez at his 1/24/2011 sentencing for bribery before Judge Hinojosa.

By Bill Rusteberg

Bid rigging and collusion is a common practice in bidding for group health insurance with political subdivisions in South Texas. It is so prevalent that the participants have come to believe it is “par for the course” and is “just the way things are done.”

Crime Pays

Few get caught in these schemes. Those who do suffer light sentences, or no punishment at all. (Crime Pays in South Texas). The message is clear – bid rigging and collusion is a widespread business practice in the insurance industry.  The rewards are great, and punishment is minimal or non-existent.

Participants include insurance agents, brokers and consultants, as well as third party administrators, PPO networks, and insurance companies.

Locking The Market

One of the most common methods to rig bids involves releasing underwriting data to the market before releasing specifications under a RFP process. Whoever can get to the markets first, gets the exclusive right to a proposal from those markets first approached. This practice by insurance companies of first come, first served is common.  A tell-tale sign that this has occurred is when a political subdivision goes out for bid and one insurance agent has the majority of the bids received as a result of the process.

If a regulatory agency decides to investigate this type of bid rigging, following a paper trail is easy. Underwriters date stamp all submissions and document who sent it, as well as the data received. Comparing the date stamps to the actual RFP release date is not hard to do.

We know of a South Texas school district that received 19 bids, with almost all of the bids submitted by one agent.

When an insurance agent “locks up the market”, he can control the bid process. Effectively he has  gained access to the “competition”, and can share competitive information with his favorite carrier. He can also demand higher commissions from all vendors he controls.  He gains the advantage to decide which proposals he will submit and which he will discard and never show the client.

Good Data & Bad Data

Another method to rig the bid is to release two separate sets of underwriting data. An effort to influence underwriters is effectuated by this scheme. Rating risk for health insurance plans follows certain industry standard formulas and methods. Data used by the underwriter will determine the risk and the rates to adequately cover the risk. If Carrier “A” is the carrier to be given the advantage during the RFP process, legitimate and complete underwriting data is provided while other carriers are given incomplete or manufactured data which will have the intended effect of making them less competitive.

A tell-tale sign of this scheme is when bids are received and there is a wide variation in rating basis.

Wolf Pack – Betting On Even & Odd

With the primordial instincts of a wolf pack, a group of insurance agents will agree to pool their resources and market contacts.  All divy up the market prior to the release of the RFP. Agent Smith goes to five markets, Agent Jones goes to five markets, Agent Garcia goes to five markets, etc. Thus the entire market is “locked in” with this cartel. Each agent loads high commissions in their respective proposals. Once the bid is awarded, irregardless of who the agent submitting the proposal was, all the agents of the cartel get a slice of the pie. It’s like betting on Even and Odd, you can’t lose. The agent submitting the winning bid becomes the “Agent of Record” while all the other members of the cartel become silent partners.

We have seen several lawsuits filed in South Texas by political subdivisions against their Agent of Record. The poor SOB takes the heat for the entire cartel. Honor demands silence and the cartel members skate free from the plaintiff’s net. However, during discovery, an astute attorney should be able to flush this out and additional defendants (deep pockets) added to the pleadings.

None of these schemes can work without the active participation of the carriers and third party administrators.

Political subdivisions who bid out their group health insurance must be careful to control the chain of custody of information. A well written RFP will help alleviate and even eliminate these potential abuses.

South Texas, unfortunately, suffers a poor reputation within the insurance industry. Some carriers and third party administrators have Red Lined South Texas and refuse to do business in that part of the state. Taxpayers end up paying more than they should. The system needs fixing.

NOTE: This article appeared on this blog on June 10, 2011. Little has changed.