United's alleged violations balloon to nearly 1 million

The California Dept. of Insurance says it uncovered additional offenses as the company was fighting an earlier batch of allegations.

By Emily Berry — Posted Sept. 20, 2010

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A long list of problems has gotten much longer for UnitedHealth Group in California regarding its 2005 purchase of health plan PacifiCare. The original allegations of more than 130,000 violations of state regulations has climbed to more than 992,000, authorities said.

The violations could cost United as much as $9.9 billion, or $700 million more than the $9.2 billion it paid for PacifiCare. But analysts say the maximum fine would be unlikely.

The state's Dept. of Insurance said it discovered the additional violations as United was fighting the department in front of an administrative law judge over the earlier batch of allegations.

Cross-examination of PacifiCare witnesses revealed a large group of violations, while a complaint from the California Medical Assn. uncovered another batch.

"We had just an unbelievable amount of complaints from doctors," CMA spokesman Andrew LaMar said.

United says the problems are overstated and that the violations were mostly "administrative."

Of the thousands of violations, United spokeswoman Cheryl Randolph wrote in a statement, "the vast majority relate to a failure to include certain language in standard claims correspondence during a four-month period in 2007."

According to court documents, 442,860 violations were for failing to advise members of their right to appeal a denied claim to the Dept. of Insurance.

But LaMar said those "administrative" mistakes hurt physicians and patients. "All health care is just paperwork, but when you get to patients, it's about whether they can get treated for serious medical conditions," he said. "Many doctors and many, many patients were affected."

In January 2008, the California Dept. of Managed Health Care, which regulates HMOs, and the Dept. of Insurance, which regulates PPOs, jointly announced "enforcement actions" against PacifiCare.

The Dept. of Insurance had examined claims that were processed between July 1, 2005, and May 31, 2007, and found that PacifiCare failed to pay claims correctly and broke state rules on about 130,000 occasions.

At a maximum fine of $10,000 per instance, the penalty for the violations that the Dept. of Insurance uncovered would have been at most $1.3 billion.

That is 100 times higher than the largest fine ever issued to any plan nationwide: $12.6 million, ordered by the Dept. of Insurance against Blue Shield of California in 2007.

The DMHC found similar violations and fined United $3.5 million. Its fines aren't calculated on a per-violation basis but are levied by degree as set out by state law.

The Dept. of Insurance case went to an administrative law judge who would decide on a recommended fine. During the hearings, however, the insurance department uncovered even more violations -- a lot more.

At a maximum, which assumes a "willful," or intentional, violation of state regulations, United would be on the hook for fines totaling $9.9 billion.

"The inflated figure has no basis in reality," Randolph said in her statement. "We will continue to defend ourselves in the legal proceedings with the CDI."

Big payment unlikely

Industry experts and investment analysts said United is likely to pay something far less than $9.9 billion.

"The actual liability here is likely to be modest or even immaterial to [United]," Goldman Sachs investment analyst Matthew Borsch wrote in a Sept. 8 note reassuring investors.

It's unclear when the administrative law judge will decide how much to fine United.

Department spokesman Ioannis Kazanis said the company has refused to say how many witnesses it plans to call, or when it might rest.

Once the administrative law judge makes his recommendation, the insurance commissioner may accept, revise or reject it, Kazanis said. Any fine levied would go to the state's general fund.

United, without formally admitting to any violations, has acknowledged that there were some bumps in integrating PacifiCare into its operations. However, it said any bumps have been smoothed over.

The state has yet to decide whether that is the case.

The initial 130,000 violations were uncovered during a market conduct examination of PacifiCare, and the department is doing another examination, Kazanis said. "It's premature to say if things have improved."

Randolph said PacifiCare and United are highly regarded health plans and have plenty of awards and accreditations, including United's No. 1 ranking in the J.D. Power and Associates National Health Insurance Plan Study released earlier in 2010.

"Overall, Californians are highly satisfied with PacifiCare, and we have been recognized externally for the high-quality service we provide to our members and participating providers," Randolph said in a statement.

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