Insurers feel backlash over policy cancellations

Health plans are facing even more legal, regulatory and legislative challenges to their practice of canceling enrollees' coverage after approving treatment. In reaction to the mounting pressure, some insurers are changing their rescission policies.

Last month, Health Net became the latest target in California. A state arbitrator on Feb. 21 levied a $9 million award, largely in punitive damages, against the insurer for canceling a breast cancer patient's policy after authorizing $129,000 in medical care. The plan dropped the woman for supposedly misrepresenting her weight and a heart condition on a pre-enrollment form.

The company acted in bad faith and "was primarily concerned with and considered its own financial interests and gave little, if any, consideration and concern for the interests of the insured," the arbitrator's opinion states.

The ruling -- believed to be the first of its kind against a health insurer -- came just one day after Los Angeles City Attorney Rocky Delgadillo sued Health Net over similar issues. The city's lawsuit accuses the company of defrauding patients by selling what the insurer purports to be health care coverage, while behind the scenes finding ways to delay or revoke patients' benefits to avoid paying for costly treatment.

"[Patients] who believe they have insurance actually have policies that aren't worth the paper they're printed on," Delgadillo said in a statement announcing the case. He also launched a separate criminal investigation into Health Net's now-defunct program that paid bonuses to employees who canceled individual policies.

Health Net spokeswoman Margita Thompson criticized the Los Angeles investigation and lawsuit as steps backward.

The company discontinued its bonus program after getting hit last November with a $1 million fine for not fully disclosing details to insurance regulators.

In an earlier statement, the insurer called it a misunderstanding.

"We are focused on solutions, not blame, and we are concentrating on moving forward," Thompson said.

Legal actions send message

The arbitration decision and the lawsuit add to widespread complaints over health plans' practices. Concerns center around confusing policy application questionnaires and insurers' failure to review patients' medical histories properly when issuing or pulling coverage.

The legal actions against Health Net come on the heels of two appeals court rulings against Blue Shield of California last December over policy cancellations. Blue Shield denies any wrongdoing and is contesting both decisions. Also in the courts is a class-action lawsuit that doctors and hospitals filed against BlueCross of California for allegedly failing to pay for authorized services after revoking patients' policies. BlueCross did not return calls for comment on the case.

Doctors and lawyers close to the issue praised the recent actions against Health Net.

"What every doctor sees on a continuing basis is insurance companies trying to avoid paying for patients' appropriate medical expenses, and they take it to the extreme by canceling their coverage," said David H. Aizuss, MD, president of the Los Angeles County Medical Assn., which, along with the California Medical Assn., supports the Los Angeles lawsuit. "This puts [health plans] on notice."

William M. Shernoff, the plaintiff attorney in the arbitration case, said the opinion appears to be having the intended effect of deterring future abuses.

"This sends a message to the insurance industry that this practice of canceling patients' policies after they become sick ... is unlawful and won't be tolerated," said Shernoff, who also represents patients in other class-action lawsuits against several insurers. "Doctors and hospitals should be encouraged because they are the ones who suffer the financial brunt of these [rescission] decisions."

Insurers respond with changes

Health plans maintain that they've complied with state laws. They say rooting out enrollees' insurance application errors, even inadvertent ones, helps keep health care costs down and policies affordable.

Insurers say rescissions are rare. Still, Health Net's Thompson said the arbitration decision raised concerns.

In response, the company proposed a system in which an independent third party would review proposed cancellations and issue a binding opinion. The standard would apply nationwide to its individual policies. Until the system is developed, Health Net promised not to revoke any policies and to revamp its medical underwriting processes.

BlueCross of California announced similar initiatives in February after a fury over its failed attempt to have doctors review patients' policy applications for evidence of undisclosed preexisting conditions. The American Medical Association and the CMA had denounced the tactic.

America's Health Insurance Plans, the industry's trade group, is developing a state-level model for a third-party review system as part of a broader health system reform proposal.

"We are working to ensure that we are providing an absolutely clear picture of how the [underwriting] process works ... and that we get Americans covered and nobody falls through the cracks," said AHIP spokesman Mohit Ghose.

Lawsuits spark legislative action

Lawmakers in several states also are taking action. A California bill introduced in February with the support of the CMA would require health insurers to get approval from insurance regulators before canceling a patient's policy.

A similar law took effect in Connecticut last October. It was prompted by a probe that Attorney General Richard Blumenthal launched into Assurant Health in January 2007. Assurant said it is cooperating with the ongoing investigation.

In New Mexico, Insurance Superintendent Morris J. Chavez said the California court rulings helped New Mexico lawmakers pass a bill requiring health plans to prove that any mistakes on patients' policy applications were deliberate or fraudulent before pulling coverage.

The measure awaits Gov. Bill Richardson's signature. He has not indicated his position. Current state law allows health plans to cancel policies retroactively even if a mistake is unintentional.

The New Mexico Medical Society supports the bill. NMMS Executive Director G. Randy Marshall said the measure does not completely relieve doctors from the financial burden they bear when they provide services in good faith and their patients' coverage is suddenly revoked. But he said it would help both to protect the doctor-patient relationship and to improve relations between doctors and health plans.