California Blues will pay Los Angeles $2 million to settle rescission lawsuit

Blue Shield of California has agreed to pay $2 million to the city and county of Los Angeles to settle claims that the company improperly rescinded coverage from hundreds of sick members before 2008.

Critics of the insurance industry, including then-City Attorney Rocky Delgadillo, accused insurers of using "post-claims underwriting" to avoid paying claims. They were accused of retroactively canceling coverage for members who became seriously ill, saving the insurer the cost of paying those members' expensive medical bills.

Rescission cases have declined in recent years, after a series of inquiries and litigation brought the issue to the public's attention as health system reform was under way.

The Patient Protection and Affordable Care Act made it illegal for insurers to rescind coverage except in cases of intentional fraud. California law, effective August 2010, required insurers to use a standard, clear application for coverage that was meant to avoid confusing questionnaires that could be used later as a reason to take away coverage.

The Los Angeles city attorney's office sued Blue Shield and other insurers in 2008 after insurers settled with state regulators over similar allegations. The Blue Shield settlement with the city attorney's office was signed Dec. 21, 2011.

Delgadillo is now chief executive officer of the Los Angeles County Medical Assn. The settlement was reached under the administration of current City Attorney Carmen Trutanich.

Blue Shield did not admit wrongdoing.

"We have agreed to settle this matter to avoid the cost and distraction of litigation," a Blue Shield corporate statement said. "We appreciate that the city attorney's office has taken a reasonable approach to putting this matter behind us. Our process meets or exceeds all legal and regulatory requirements. In every instance, we provide immediate notice, ensure multiple layers of review, involve a medical director in the decision, give members an opportunity to provide additional information before we take any action, and follow the guidance of an independent, third-party review."

The settlement acknowledges Blue Shield's new rescission procedures, calling them "industry best practices."

The $2 million settlement fund will be split between the city and county of Los Angeles.

The city attorney's office also sued Anthem Blue Cross of California and Health Net over similar alleged rescissions and coverage denials. Health Net settled with the office in 2009 without admitting wrongdoing. The city's lawsuit against Anthem is pending. Anthem has denied any wrongdoing, but was among the plans that settled with state regulators over allegations of improper rescissions and agreed to change its underwriting practices.