San Francisco, CA — When Blue Shield of California raised the rates for Robert Jeffrey Martin's family insurance policy by 23 percent, the health insurer offered him two options: Stay in his expensive old plan or switch to a new policy that offered his family skimpier benefits with a higher deductible.

Martin, 59, knew finding a new insurer would be tough and felt like he had no choice. The Gilroy farmer, who grows olives trees and bottles his own olive oil, switched to the new policy.

But then Blue Shield backed off on the proposed hike on his previous policy. When Martin tried to switch back, the insurer told him that was no longer possible because his old plan was closed to new members.

"I feel like I was being culled from the herd. It was like, 'Let's get rid of these people,' " said Martin, who believes he is part of scheme by the insurer to force policyholders out of older, more comprehensive individual plans into newer options that offer less coverage with higher out-of-pocket costs.

Martin is a named plaintiff is a lawsuit filed Tuesday in San Francisco Superior Court against Blue Shield, which is based in San Francisco.

The lawsuit, filed by an advocacy group called Consumer Watchdog, accuses the insurer of a pattern in which it stops selling a policy and then raises rates for those who are left in the plan. Those who stay tend to have more health problems because they don't have many other options for coverage.

Blue Shield officials said they could not comment because they had not yet seen the lawsuit.

The lawsuit accuses Blue Shield of violating a 1993 state law that requires health insurers that intend to stop selling a type of policy to "pool" the health history of the members in the closed bloc of business with other enrollees to minimize rates increases for those left in the old policy.

The 1993 law also requires insurers to offer members the option to switch to a comparable policy that is accepting new members. But the consumer group's attorney, Jerry Flanagan, said offering members like Martin another policy with a deductible more than twice as high as the old policy and fewer benefits isn't "comparable."

"You can't close out older policies for the purposes of kicking out sick people," Flanagan said. "You buy insurance when you're healthy, you pay into it, and eventually people are going to get sick and are going to use their health insurance. That's how it works."

Martin said he felt trapped in his policy because his son, who is now an adult but remains on the family policy, suffered a sports injury as a teenager and, for many years, what appeared to be a lesion on his brain needed to be monitored. He said the company raised rates on his new policy by 14.8 percent.

The lawsuit accuses Blue Shield of broader scheme of trying to manipulate the business under California's unusual health regulatory system.

Two agencies regulate health insurance in California: the state Department of Insurance and the Department of Managed Health Care. When consumers switch from an individual policy regulated by one department to one handled by the other, insurers can screen them based on their health history. That allows insurers to reject some people for potentially costly medical reasons.

Janice Rocco, deputy commissioner of the California Department of Insurance, said Blue Shield has applied to close 25 individual plans in July, leaving three policies open for enrollees. At the same time, she said, Blue Shield is applying to increase the number of individual policies regulated by the Department of Managed Health Care from nine to 20.

Meanwhile, Blue Shield has also filed for a rate increase averaging 5.3 percent for its individual policies regulated by the Department of Insurance.

"We're looking at the issues carefully because we're not clear what all the ramifications for policyholders will be," she said, adding that the regulator planned to complete its review in 10 days.

The lawsuit also names as a plaintiff Deborah Goodwin, of Santa Monica, a Blue Shield customer with a serious eye condition who said she was pushed out of an old policy into a bare-bones plan that did not provide the coverage she needed. The filers of the lawsuit are seeking certification as a class.

Victoria Colliver is a San Francisco Chronicle staff writer. E-mail: [email protected]