California fines plan for failing to reveal policy cancellation incentive

California regulators are investigating other insurers and tightening regulations to limit individual insurance rescission. Meanwhile, a new law gives doctors protection.

By Emily Berry — Posted Dec. 10, 2007

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Health Net has agreed to pay the state of California $1 million for failing to tell the whole truth to regulators about how it rewarded its employees who cancelled individuals' health insurance. The company -- and others -- could face more fines in the future as the California Dept. of Managed Health Care continues to investigate insurance rescission practices.

Still in the courts is a lawsuit by physicians and hospitals over insurers not paying for care authorized for a patient whose policy is later pulled, although a new law mandates that an insurer pay for care even if it is determined after the fact that an individual policy should be rescinded.

The Dept. of Managed Health Care on two occasions asked Health Net officials whether they offered incentives to employees to cancel policies and was told incorrectly that there were no such programs, department spokeswoman Lynne Randolph said. California law does not allow insurance companies to compensate claims reviewers for decisions they make on claims.

"We expect that in any investigation the health plans are going to be truthful in their answers to us," Randolph said. "It was crucial for us to come out early and so quickly with the fine. We didn't want to wait to even assess the validity or existence of the bonus program."

The Woodland Hills, Calif.-based company referred to the matter as a "misunderstanding."

"We are sorry for any misunderstanding with the DMHC," Health Net CEO Jay M. Gellert said in a prepared statement.

"It is important to note that we are currently abiding by the policy in the agreement," he said.

Health Net spokeswoman Margita Thompson said one employee's incentive pay depended in part on the number of policies she found to rescind. That woman's job was to root out fraudulent applications and "look for cases that fell outside the norm."

She said the company did tell the state reviewers about the employee's incentive before the review was complete, but that wasn't soon enough for them. "We're willing to take responsibility for it," Thompson said.

"We agreed to take the penalty because we recognize what an important issue it is."

The California Dept. of Managed Health Care is investigating various health plans over their rescission of individuals' health coverage. The plans say they are cancelling policies because the patients failed to disclose preexisting conditions.

However, the department fined Blue Cross of California, a WellPoint plan, $1 million in March and $200,000 in September 2006 for illegally canceling individual insurance policies. The department said Blue Cross failed to prove the applicants were intentionally deceptive -- the only legal means by which a health plan may rescind coverage. Plans have argued that any misrepresentation is legal grounds for rescission.

Blue Cross earlier this year settled lawsuits involving 6,000 patients whose policies had been rescinded. While the company denied any wrongdoing, in the settlement it promised to rescind coverage only if applicants "intentionally misrepresented" information.

Kaiser Foundation Health Plan has paid a total of $325,000 in fines over rescissions, though it has denied wrongdoing.

Meanwhile, the Dept. of Managed Health Care said that sometime next year it expects to wrap up its inquiries into more rescission allegations at Kaiser and at Blue Shield of California, PacifiCare and Health Net. The DMHC and California's Dept. of Insurance in late October issued proposed regulations to clarify that rescissions could happen only if an applicant willfully misrepresented himself or herself and that any rescissions are subject to review by regulators. The regulations also would put other limits on when a plan could rescind coverage. For example, a plan could not cancel a policy during an investigation of an application.

Large fines send a message

California Medical Assn. spokeswoman Karen Nikos said if Health Net is found guilty of giving employees incentives to cancel policies of members who had proven expensive, it should be fined $35 million, based on estimates of how much the company saved by canceling those policies.

"Anything less than $35 million would send a clear message for insurers that breaking the law and leaving policyholders without health care is a great business decision," she said.

The CMA, as well as the California Hospital Assn., in April joined class-action litigation against Blue Cross of California seeking payment to physicians and hospitals for care they provided to individuals whose policies were later rescinded. The lawsuit is pending.

In January 2008, a new law will take effect in California requiring health plans to pay physicians and hospitals for authorized care even if the insurers later revoke coverage.

Randolph said that before the end of the year, the Dept. of Managed Health Care would formally propose new regulations governing applications for individual policies and when a plan is allowed to cancel a policy.

If approved, those new rules would take effect in 2008, she said.

As they prepare for those changes, other companies, including PacifiCare's parent UnitedHealth Group, are still awaiting the state's findings as to their own policy cancellations.

"Accurate medical underwriting helps consumers by holding down health care inflation across the individual health insurance market," United spokesman Tyler Mason wrote in an e-mailed statement. "We want to write as many policies as possible with the most current and accurate information obtained in the initial application process."

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