A year later, their view changed drastically. Hospitals and doctors were dunning them for $15,000 in unpaid claims. Contacting Vanguard -- which has no connection to the mutual-fund family -- did no good. "They would say things like, 'The doctors used the wrong code' or 'The check is in the mail,'" recalls Lisa, who was pregnant again. She began to fear that her obstetrician would drop her.

GUILTY PLEA. Just before the baby was born, the West Palm Beach (Fla.) couple learned what was wrong. The Florida Insurance Dept. issued a cease-and-desist order on May 14, shutting down the Lake Success (N.Y.) company.

The order alleged that Vanguard was an illegal, unlicensed operator run by Dwayne Samuels, who pled guilty in September, 2000, in U.S. district court in Brooklyn, N.Y., to health-care fraud in connection with the embezzlement of $8 million from another insurer, Fidelity Group Inc. of Great Neck, N.Y. (The company has no tie to the Fidelity Investments fund family.)

The U.S. Labor Dept. had obtained a court judgment in Feb., 2001, barring Samuels for life from involvement with federally regulated health plans. Florida Insurance Dept. officials estimate that Vanguard bilked at least 100 policyholders in the state out of more than $500,000. The department has launched a full investigation and may seek criminal charges against Samuels, whom regulators say hasn't responded to its order. Efforts to reach Samuels by phone and letter for comment were unsuccessful.

SCAMS BY THE SCORE. Luckily, Lisa's doctors kept her on. She delivered a healthy girl on June 11. But, the family's unpaid medical bills have ballooned to $20,000. Lisa is uninsured. Dennis and the kids have only catastrophic coverage.

It's boom time for medical insurance scams that collect premiums, pay few, if any, claims, then skip town. Vanguard is the sixth unlicensed insurer Florida has shut down in the past 18 months. Colorado has issued cease-and-desist orders against 43 in the last 15 months. Oklahoma has more than 60 investigations open. Texas, California, and Georgia all report big spikes in complaints of unpaid claims, most of them suspected cases of fraud. The U.S. Labor Dept. had 84 civil and 14 criminal investigations open as of June 30. "The [operators] are the most despicable people around," says Labor Secretary Elaine L. Chao.

A BusinessWeek tally of state data shows that three of the largest -- Employers Mutual LLC (no connection with the legitimate Employers Mutual Casualty Co. of Des Moines), American Benefit Plans, and TRG Cos. -- collected more than $50 million in premiums from more than 65,000 people. None of the companies replied to requests for comment.

PLOYS AND PREMIUMS. To camouflage their scam, the chameleon-like operators all use similar tricks. With slick brochures, flyers, and local media campaigns, they pitch their services to real professional groups or sell membership in phony ones as a way to get insurance. The names mimic those of well-known companies or organizations. Vanguard Group -- the mutual-fund company -- says the bogus insurer agreed to stop using the Vanguard name last April after it filed suit.

Feeding the scams is a 25%-plus rise in premiums since 1998. Insurers are passing on the cost of restoring benefits slashed by managed care. That has become a big burden in a weak economy. Many businesses -- which pay most insurance costs -- have cut coverage or raised employee contributions. They now pay on average $221 per month for individuals and $588 for families, up from $173 and $463 in 1998, the Kaiser Family Foundation says. Scamsters particularly target freelancers -- like Dennis Huffstutler, a wedding videographer -- or small-business owners, who can't negotiate better rates with legitimate insurers.

Health-insurance fraud surges in recessions as people lose jobs and coverage. But today's scale is unprecedented. "It's much worse now than it was in the late 1980s. And it is going to go on for a number of years," says Mila Kofman, assistant research professor at Georgetown University's Institute for Health Care Research & Policy and a former Labor Dept. investigator.

OVERLAPPING JURISDICTIONS. A crazy-quilt regulatory system is great cover for scams. States regulate insurers under the 1945 McCarron-Ferguson Act. But the 1974 Employee Retirement Income Security Act exempts plans run by unions or single employers from state regulation. Plans serving multiple employers -- including those sold via trade groups such as the 4,000-member Wedding & Event Videographers Association International, which offered Huffstutler's Vanguard policy -- need state licenses. But the overlapping jurisdictions create confusion that unlicensed insurers exploit.

Shockingly light penalties add to operators' sense of impunity. In many states, selling insurance without a license is a misdemeanor. Cease-and-desist orders do little good in states like Florida where regulators lack police power to arrest suspects and seize assets. Alerted, scamsters close up shop and move on. Poor coordination between state and federal officials hampers efforts to use antifraud laws. State regulators complain that federal investigations take years to complete.

The magnitude of health-insurance fraud has finally forced state and Labor Dept. officials to act. They formed a joint task force in spring, 2001, to share data and get the word out to small businesses. This year, the Florida legislature made the sale of fraudulent insurance a third-degree felony punishable by up to five years in jail. Texas and Georgia regulators now use their police powers more aggressively. President George W. Bush has endorsed a bill setting federal authority and solvency guidelines for multi-employer health plans, but broader health-care battles have bogged it down.

FICTITIOUS ASSOCIATIONS. Employers Mutual is the biggest and most persistent health-insurance scam, regulators say. Incorporated in Carson City, Nev., two years ago, it was operated out of California by James L. Graf. The California Insurance Dept. permanently banned Graf from doing business in the state in 1998 after at least three HMOs and insurers he controlled went bankrupt.

According to a February, 2002, Labor Dept. injunction ordering the company permanently shut down, Employers Mutual sold policies via 16 fictitious associations with such names as the Association of Barristers & Legal Aids and the Association of Cosmetologists. It also took in real groups such as the National Writers Union, which represents 7,000 freelance journalists.

Albert Piantadosi, the 56-year-old owner of a direct marketing company in Deerfield Beach, Fla., bought an Employers Mutual policy through the Communications Trade Workers Union, a name that resembles the Communications Workers of America, a prominent union. The Communications Trade Workers Union was an affiliate of Employers Mutual.

VICTIM-RICH ENVIRONMENT. At the time federal regulators shut it down, Piantadosi was awaiting a $450,000 liver transplant. Miami's Jackson Memorial Hospital confirmed that it initially rejected him for the surgery after Employers Mutual went bust. Piantadosi's desperate wife, Joan, held a news conference to publicize his plight. The couple even sent a telegram to President Bush and Florida Governor Jeb Bush. The hospital later approved Piantadosi's operation and absorbed part of the cost. But he still owes $250,000.

Unfortunately, even when the culprits are caught, victims seldom get any money back. Dwayne Samuels, who pled guilty to fraud in the Fidelity Group case, only agreed in Feb., 2001, to begin paying back the money to settle a suit the Labor Dept. filed against him in December, 1998.

With premiums rising and more people losing coverage, the pool of potential victims keeps growing. As countless Web listings and flyers extolling astoundingly cheap policies attest, scamsters think they're in a growth business. Alas, they're right.