Profession
California court rules against insurer over policy cancellations
■ Doctors and lawyers involved in the issue say that if it stands, the ruling could pressure health plans to change their practices.
By Amy Lynn Sorrel — Posted Jan. 21, 2008
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A California appeals court ruling may bode well for physicians and patients in their fight against alleged illegal policy cancellations by health insurance companies.
A three-judge panel of the 2nd District Court of Appeal unanimously ruled that the practice of reviewing individuals' applications after they have submitted claims and then pulling the coverage based on alleged errors "is flatly prohibited" under state insurance laws. The Dec. 4, 2007, decision gave the green light to a patient's class-action lawsuit alleging that Blue Shield of California tried to dodge claims by looking for supposed misstatements or omissions on patients' policy forms after approving treatment.
The ruling comes amid heavy scrutiny of various health plans' cancellation practices by state insurance regulators. Also, physicians and hospitals have turned to the courts.
The California Medical Assn., along with a group of hospitals, is suing Blue Cross of California to block alleged similar tactics. Blue Cross declined to comment on the case.
Physicians and lawyers involved in the issue say the recent decision signals that the courts are paying attention and are willing to hold insurers accountable.
"This is a good sign for patients and doctors," said CMA spokeswoman Karen Nikos. "The court has spoken and said that taking insurance away from patients is wrong, and we look forward to seeing [the Blue Shield] case go forward with this sentiment."
Not only are patients left uncovered when insurers pull policies, but doctors also are left uncompensated for authorized care they had provided in good faith, Nikos said. "It's a complete breakdown of the physician-patient relationship when patients have their insurance wrongfully taken away."
Blue Shield spokesman David Seldin called the appeals court ruling a "narrow" one and just one step in the litigation process. The company asked the court to reconsider its decision, and the 2nd District on Jan. 3 granted its request. No hearing date has been scheduled.
Blue Shield has the right to cancel policies after claims are submitted if patients leave out or misstate "significant" details -- regardless of intent to defraud -- and if the accurate information would have caused the insurer to deny coverage in the first place, Seldin said.
"As a rule, we follow proper procedures and are careful with the way we conduct the very small number of rescissions that we do," he said.
The judges, however, said insurers relinquish their right to rescind coverage if they fail to attach a copy of the completed enrollment application when the policy is first issued. Blue Shield argued that it had complied with the requirement by referring to the application in its notices informing people that they had been accepted for coverage, court records show.
But without the form, "the insurer may not invoke the defense of misrepresentations in or omissions from the unattached and unendorsed application," the ruling states.
If, after claims are submitted, health plans are holding patients to statements they made in application documents as justification for cancellation based on alleged misinformation, then "such conduct ... blatantly violates" state insurance and fair business practice laws, the court said.
William M. Shernoff, a Los Angeles-area lawyer who specializes in fighting insurance practices, said "the effect [of the ruling] could be pretty widespread and may invalidate thousands of rescissions" of individual policies.
Shernoff said the decision also could spur other similar lawsuits or pressure health plans to change their cancellation practices.
"Post-claims underwriting is under real scrutiny now, not just by the courts but by various government agencies, and it looks like there are going to be some serious consequences now," said Shernoff, who represents patients in several pending class-action claims against multiple insurers.
On Dec. 13, 2007, the California Dept. of Insurance levied a $12.6 million fine against Blue Shield for a host of violations regarding improper policy cancellations and claims processing. Duncan Ross, president of Blue Shield of California Life & Health Insurance Co., contested the allegations in a statement. He called them a "radical departure from the department's longstanding interpretation of the law." The company acknowledged some "inadvertent errors" but plans to appeal what it considers an excessive fine.
The state's Dept. of Managed Health Care also has turned up the heat and continues to investigate several health plans, including Kaiser Permanente, PacifiCare, Health Net and Blue Shield, said department spokeswoman Lynne Randolph.
In the past two years, the agency fined Blue Cross of California and Kaiser Permanente a collective total of $2.5 million for wrongfully pulling patients' policies. Both companies deny wrongdoing.
This month, the managed care agency and the Dept. of Insurance plan to finalize regulations clarifying, among other requirements, that health plans may rescind policies only if patients willfully misrepresent their medical histories.
A new law, passed in October 2007, requires health insurers to pay for preauthorized treatment even if coverage is later rescinded.