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California appeals court rules against insurer's rescission practices

Meanwhile, doctors, patients and insurance regulators are challenging other health plans.

By Amy Lynn Sorrel — Posted Feb. 11, 2008

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A California appeals court dealt another blow to health plans over their policy cancellation tactics.

The 4th District Court of Appeal unanimously said insurers have a responsibility to make sure patients' policy applications are complete and accurate before issuing coverage -- not after expensive claims come in the door. Judges said plans cannot revoke patients' policies unless they fully investigate pre-enrollment forms up front or insurers show patients intentionally misled them.

The Dec. 24, 2007, ruling allows a family to sue Blue Shield of California for dropping its coverage after approving more than $450,000 in medical care. Blue Shield denies any wrongdoing and is asking the court to reconsider.

The decision comes at a time when state insurance regulators, physicians and patients are casting a wary eye on health plans' rescission practices. It also could pave the way for similar lawsuits filed on behalf of doctors and patients affected by alleged illegal policy terminations.

The ruling closely followed a similar one against Blue Shield on Dec. 4, 2007. The 2nd District Court of Appeal unanimously ruled that the practice of reviewing individuals' applications after claims are submitted and then pulling the coverage based on alleged errors is prohibited unless insurers follow specific pre-enrollment criteria. That case is being reheard.

Doctors and lawyers involved in the issue are encouraged the courts are willing to take insurers to task.

"It's a good victory but a long battle ... and the courts are not looking favorably on insurers who play these games," said California Medical Assn. attorney Daron L. Tooch. The CMA filed a friend-of-the-court brief in the Blue Shield case and is a plaintiff in a similar class-action suit pending against Blue Cross of California. Blue Cross declined to comment.

Tooch said doctors have a right to know insurers' authorization is meaningful, but health plans are failing to do their homework on the front end. Companies are not properly checking patients' medical histories when first issuing policies, nor are they verifying that any alleged errors are deliberate before pulling coverage. When companies wrongfully take that away, not only are patients left uncovered, doctors are left unpaid.

"It's putting patients in the middle and forcing [doctors] to bill the patients, when in many instances, patients ... don't have the money to pay," Tooch said. "This hits patients at their worst point and they can't get new insurance because they are being tagged as a fraudster, when in fact they have legitimate reasons for not putting information on an application."

William M. Shernoff, a Los-Angeles-area lawyer who specializes in fighting bad-faith insurance practices, said the decision could pressure health plans to change.

"If this holds up, it's going to go a long way towards doing away with postclaims underwriting," said Shernoff, who represents patients in class-action lawsuits against several insurers and also filed a brief in the latest Blue Shield case.

Insurer's application form questioned

Plans insist they are doing their due diligence under the law. They, too, found some good in the decision.

Blue Shield spokesman Tom Epstein said in a statement, "We're pleased the court ruled in our favor on the important legal question before it -- that the law does not require proof of intentional misrepresentation before a policy can be rescinded if the plan completed initial underwriting before the policy was issued."

While the company rarely drops members, "we never rescind a policy unless the misrepresentations made by an applicant about his health history were significant," Epstein said.

In the precontract evaluation process, insurers are entitled to rely on answers patients put down on their applications, said Nicole K. Evans, spokeswoman for the California Assn. of Health Plans, which joined the case in a friend-of-the-court brief. But if plans are required to analyze patients' medical histories or use prerequisites, such as blood tests or health screenings, "it becomes a significantly more time-consuming and costly process," Evans said, which would drive up premiums and delay coverage.

But the appeals court in its Dec. 24 ruling suggested that plans cannot adequately do their job by "blindly" accepting patients' responses without ensuring they are thorough and valid.

Blue Shield argued that policyholder Cindy Hailey "misrepresented numerous facts" by failing to disclose her husband's preexisting conditions and prior hospital visits, and incorrectly listing his weight when she filled out the family's policy form. Hailey believed the document applied only to her health history, not that of her husband or son, and no one from Blue Shield told her otherwise, court records show.

Though the Haileys authorized Blue Shield to access their medical records and prior coverage information, judges said the company failed to investigate the husband's medical history until after it received a claim for hospitalization in February 2001.

The court said Blue Shield's application form was "no model of clarity," so any potential omissions of the husband's health information were not likely to be considered fraudulent. Judges also said the health plan may have acted in bad faith by delaying its decision until June 2001, even though Blue Shield first learned of potential deficiencies four months earlier.

California's Dept. of Insurance in a court brief said the case underscores public policy concerns raised by insurers' "use it and lose it" cancellation methods. The agency said statutes outlawing the practice were meant to "send a message to health care companies to do your underwriting homework before offering coverage or be barred from rescinding the contract."

Meanwhile, insurance regulators continue to investigate multiple health plans for cancellation tactics, including Kaiser Permanente, PacifiCare, Health Net and BlueCross BlueShield, some of which have faced hefty fines.

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ADDITIONAL INFORMATION

Case at a glance

Can health plans revoke patients' policies after approving medical care?

An appeals court said such rescission practices are illegal if insurers fail to properly investigate a patient's medical history before issuing a policy, or if they fail to show that the patient was fraudulent. The decision allowed a patient's lawsuit to go forward against Blue Shield of California.

Impact: Physicians and lawyers involved in the issue say the decision could force insurers to change their cancellation practices. Health plans say the ruling could lead to more rigorous standards on insurers that could drive up premiums and delay coverage.

Cindy Hailey v. California Physicians' Service, DBA Blue Shield of California, California Court of Appeal, 4th District, 3rd Division

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