The race is on to reshape the individual health insurance market, as health plans increasingly come under fire from state regulators, patient groups and the courts for revoking policies after customers fall ill.
In an effort to get ahead of a regulatory smackdown, the trade group representing insurers, America’s Health Insurance Plans, is shopping its own reform proposal to governors, insurance commissioners and lawmakers nationwide.
"This is a very serious effort of ours,” says Karen Ignagni, AHIP president and chief executive officer. "Legislators have asked a lot of questions about it. It’s very encouraging.”
Nowhere is this issue more topical than in California, which is leading the way in reforming both the underwriting practices of insurers and processes for rescinding coverage. In the Golden State, regulators are drafting new rules around individual health benefits-expected in the next few months; legislators are considering a slew of consumer-protection bills; and patients are winning lawsuits against insurers over so-called policy rescissions.
Private individual heath insurance makes up just 5% of the total health benefits market nationwide, with 18 million people getting coverage this way, according to the Kaiser Family Foundation. But many more Americans at some time
in their lives seek individual coverage on a temporary basis. Policymakers, including Democratic presidential candidates Barack Obama and Hillary Rodham Clinton, advocate overhauling the individual insurance market to bring more of
the 47 million uninsured Americans into the system. "It’s a pretty important market,” says Gary Claxton, vice president of the Kaiser Family Foundation. "It’s the only place to go if you’re in between jobs or work for a small firm that doesn’t offer coverage.”
Unlike employer-based or government-sponsored insurance, individual private coverage is not guaranteed-issue, so it involves medical underwriting, a practice that is at the heart of the consumer complaints. Today, consumers can be denied coverage based on a pre-existing condition, and their policies can be revoked if the insurer learns a consumer lied on an application.
Patient complaints have been piling up in California alleging that insurers are abusing the system by doing post-claims underwriting-illegally revoking individuals’ policies after they get sick and rack up large medical bills. The insurer refuses to pay, the patient can’t afford the bills and the providers can get stuck with the costs through bad debt or charity care.
These rescissions are "the harshest penalty for consumers,” said California state Sen. Sheila Kuehl, a Democrat who chairs the Senate Health Committee, at a hearing in January.
This seems especially true considering that consumers with individual plans are paying higher and higher premiums for less and less coverage, according to recent studies. "Individual purchasers of health insurance, especially with chronic conditions, really struggle to afford the costs,” says Marian Mulkey, senior program officer at the California HealthCare Foundation, a not-for-profit research group. A June 2007 study on California individual plans by the foundation indicated that a consumer with individual coverage pays almost three times more in out-of-pocket expenses than a consumer with small-group coverage (See chart, below). "I think the differences would be similarly large nationally,” Mulkey says.
Jerry Flanagan, a healthcare advocate at Consumer Watchdog, a Santa Monica, Calif.-based group that has been tracking this issue, says he’s received calls from regulators and consumers around the country, including Illinois and Florida. "My guess is that this year there will be more activity in other states,” he says.
Cindy Ehnes, director of the California Department of Managed Health Care, which regulates HMOs, says the agency’s "groundbreaking leadership on this issue has caught fire across the country.”
The Connecticut Insurance Department is investigating insurer Assurant for alleged post-claims underwriting, and that state passed a law, effective last October cracking down on post-claims underwriting among all insurers. Washington state’s governor signed a law renewing the insurance commissioner’s authority to set rates on the individual market. And in Michigan, a heated debate is going on in the Legislature over whether Michigan Blue Cross and Blue Shield, the state’s
largest insurer, should be allowed to levy assessments on the individual market.
Consumer criticism
In California, the DMHC has issued thousands of dollars in penalties to health plans for individual policy rescissions since the agency began looking at the issue in 2005. Soon, it plans to release the findings of its investigations into the rescission policies of several insurers.
But the agency is facing strong criticism by consumer groups and some state lawmakers for not moving quickly enough. Some say the agency is too cozy with the insurance industry and is giving insurers too much of a voice in drafting regulations. Consumer Watchdog has drafted an initiative for the 2010 ballot that would dismantle the DMHC and put all health insurance oversight under the Department of Insurance, as in other states. (Currently the two agencies split the job, with the Insurance Department regulating PPOs and the DMHC regulating HMOs.) It’s an idea the state insurance commissioner recently hinted he would support.
"New cases continue to arise, and health plans are not changing their ways,” Kuehl says.
A year ago, the DMHC fined Anthem Blue Cross (previously known as Blue Cross of California) $1 million for 90 illegal policy rescissions but has yet to collect. An administrative judge has not yet heard the case.
Last week, the DMHC announced an agreement with Kaiser Permanente reinstating 1,092 patients whose policies were rescinded by the managed-care plan since 2004 and including a $3.3 million fine pending corrective action. Health Net will be signing a similar agreement affecting 85 enrollees, according to the department.
In April, the DMHC announced it was reinstating coverage to 26 individuals whose policies were revoked by three insurers: Kaiser, Anthem Blue Cross of California and Blue Shield of California. The agency also said it would work with an independent arbitrator to review thousands of policies revoked since 2004 in the state. "We want to find a balance between the rights of health plans to investigate for fraud but at the same time be able to protect consumers,” Ehnes said.
In the meantime, several health plans, including Health Net and Anthem Blue Cross, have pledged to no longer revoke policies without an independent third-party review. Woodland Hills, Calif.-based Health Net made the announcement in February-just after an arbitration judge ordered the company to pay $9 million to a Los Angeles-area woman whose policy was revoked after her breast cancer diagnosis. In his ruling, the judge called the insurer’s actions "reprehensible.”
And Kaiser Permanente says it halted policy rescissions in October 2006, pending state guidelines, and supports a third-party review process.
Many other legal cases against insurers on the matter are winding their way through the system. In late March, the California Supreme Court declined Blue Shield of California’s request to hear its appeal on a case involving a couple, Steve and Cindy Hailey, whose policy was revoked after Steve was hospitalized with stomach problems and then injured in a car accident. Blue Shield had argued that Cindy Hailey intentionally lied about her husband’s health status on their
application for insurance. And during the first trial, Cindy Hailey did admit to accidentally omitting some of her husband’s medical information. But the Fourth District Court of Appeal in Santa Ana, Calif., ruled that Blue Shield had failed to prove that the Haileys had lied or that underwriters had made a reasonable effort to ensure the application’s validity. The decision allows the Haileys to go back to trial court and seek multimillion-dollar damages from the insurer.
Adding clarity
Michael Nutter, the Haileys’ attorney, says the case is significant in that it clarifies that plans must do medical writing upfront and reasonably review all applications for insurance. It touches on a number of areas that have been wrongful practices by the carriers and that will lead to big changes in these practices,” Nutter says. "The horse is out of the barn.”
Indeed, the California Insurance Department, which regulates PPOs, is drafting its own regulations on rescissions. The draft, which is being made with the Hailey case in mind, is expected within the next two months, according to David Link, senior health policy adviser to the insurance department, in testimony to the state Senate Health Committee. "Our regulations are going to focus on what exactly the phrase `medical underwriting’ means,” he says.
Changes could include requiring insurers to use personal health records, pharmacy databases or other provider data sources to supplement consumer applications. "We want to solve the problem of subjectivity of the applicant,” Link says. By getting information about a person’s health from a provider as opposed to a patient, the insurer could have a much clearer picture of the applicant’s true medical history and state of health.
But comprehensive personal health records don’t yet exist for the vast majority of patients, Claxton of the Kaiser Family Foundation says. "How much burden do you put on providers to collect this information?” At the same time, today’s consumer-application process isn’t ideal either. "When I looked at a couple of these applications, there were a lot of questions I don’t think even I could answer,” Claxton says.
But such changes would be too onerous and costly, according to the insurance industry. If insurers are required to pull medical records and investigate statements made on every application, "you have to consider how much slower and
harder the process will be,” says Charles Bacchi, vice president of legislative affairs of the California Association of Health Plans.
Health plans have a solution: their own proposal. Under AHIP’s strategy, states would set up guaranteed-access plans, based loosely on today’s high-risk pools, funded by a variety of unnamed sources, to guarantee coverage to people with the highest medical costs who don’t qualify for individual insurance. Premiums would be limited to 150% of the standard market rates.
If a patient doesn’t qualify for the guaranteed-access plan, he or she could not be denied individual coverage by a health plan. All health plans would be required to take these patients up to a predetermined level of participation, for example, 0.5% of a plan’s insured population in the individual market, according to the proposal.
Consumer advocates are highly critical of the proposal, calling it an industry giveaway that offers no consumer protections. "It’s disturbing to us that AHIP is shopping this ‘reform’ that would be horrible for patients,” Flanagan says.
But AHIP says its plan offers a balance. "Our proposal offers broad coverage on the individual market and product variety,” Ignagni says. "We want to preserve choices.”
