California Fines Two Health Plans $13 Million

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Anthem Blue Cross and Blue Shield also agree to restore coverage to patients whose coverage was canceled after they became ill.

Anthem Blue Cross and Blue Shield — two of the state’s biggest health
plans — agreed Thursday to pay a total of $13 million in fines and to
offer new health coverage to more than 2,200 Californians the companies
dropped after they became ill.

Neither company admitted to any wrongdoing in agreeing to pay the
stiffest penalties yet in efforts by state authorities to curb what
they view as an abusive practice of investigating and canceling
policies after policyholders run up big medical bills.

Blue Cross, a unit of Indianapolis-based WellPoint Inc., will pay a
$10-million fine to the state Department of Managed Health Care, and it
will offer new coverage to 1,770 former members it canceled since 2004
— no questions asked.

"The fine is a record in DMHC history and it sends the message that if
you come into California and sell health insurance, you must play by
the rules," department Director Cindy Ehnes said.

Competitor Blue Shield, a not-for-profit health plan based in San
Francisco, will pay $3 million and offer new policies to 450 people
whose coverage was rescinded over the last four years.

The insurers also agreed to establish a process for former members
to recover medical expenses they paid out of pocket after they were
dropped as well as other damages, such as homes or businesses that were
lost because unpaid medical debts ruined the former members’

The agreements bring to a close the department’s industrywide
investigation into the problems of rescission that were brought to
light in a series of articles in The Times. The problem affects
individual policies, the type of coverage consumers without access to
employer-sponsored group health benefits purchase on their own. About
14 million Americans, including 3 million Californians, rely on this
type of coverage.

Earlier this year, Kaiser Permanente, Health Net and PacifiCare all
made similar agreements but paid smaller penalties that reflected their
willingness to meet the department’s terms, which, Ehnes said, made the
restoration of coverage the highest priority.

"We’ve now restored coverage to 3,370 California enrollees who were
impacted by the unfair practice of rescission," Ehnes said. "This
concludes a long and significant enforcement action on the part of the
department that has never wavered in our conviction to get health
coverage for these Californians."

The health plans said they were glad to move on.

"Anthem Blue Cross is pleased to have reached agreement," President
Leslie Margolin said. "This resolution allows us to continue to build
stronger working relationships with the DMHC and we look forward to
coming together in a more collaborative way to address the healthcare
needs of Californians."

Blue Shield’s Tom Epstein said the company recognized that "rescission
of a health coverage agreement is a serious matter that has significant
consequences… We have treated these issues with the utmost care
and have rescinded about one-tenth of 1 percent of our individual
health plan contracts since 2004.

"As a not-for-profit health plan committed to access to coverage for
every Californian, we have always tried to do the right thing," he said.

Going forward, the companies agreed to develop new applications for
individual coverage that are easier for consumers to understand.

Ehnes said Thursday that the size of the fines for Blue Cross and Blue
Shield reflected the additional hardship on canceled consumers caused
by their reluctance to come to speedy resolutions.

"We’ve again accomplished a result that consumers could not get
otherwise — guaranteed issue coverage, a process for full monetary
losses and no back premiums owed," she said.

Gov. Arnold Schwarzenegger, who appointed Ehnes, praised the agreements.

"As I’ve said before, patients should not live in fear of unfairly
losing their healthcare coverage when they need it most — and I look
forward to working with the Legislature to ensure this egregious
practice is put to an end," Schwarzenegger said in a statement.

The settlement came the same day that a congressional committee held a
hearing on the cancellation practices of the nation’s health insurers
and the day after Los Angeles City Atty. Rocky Delgadillo contended in
a lawsuit that Blue Shield routinely flouted the law by conducting
secret and unfair investigations into members’ health histories to find
a pretext for dropping them. Delgadillo filed similar suits against
Blue Cross and Health Net this year.

"These settlement agreements add up to a raw deal for California
consumers courtesy of the DMHC," Delgadillo said. "They will not make
the victims of this insidious practice whole, they will not require
that the companies disclose their wrongdoing, and, in my opinion, they
will not adequately punish the companies for their shameful conduct."

The settlements close the department’s investigation into
rescissions. But they do not directly affect Delgadillo’s lawsuit,
which seeks sweeping remedies and penalties in excess of $1 billion.

Nor do they end a raft of suits filed by individuals seeking financial compensation from the health plans that dropped them.

Also pending are investigations by state Insurance Commissioner Steve
Poizner into the rescission practices of health plans’
preferred-provider-type coverage that involve thousands more canceled

The insurance industry has fought to retain the power to rescind the
policies of members who fail to disclose medical information on
applications that would cause a company to reject them or to charge
them higher premiums. They say that rescissions are a rarely used but
important tool in rooting out fraud.

But regulators, lawmakers and law enforcement officials have accused
the companies of abusing that tool by using confusing applications to
trick consumers into making mistakes that could later be used against
them and by failing to verify medical histories before issuing coverage.

Critics contend, the companies lie in wait, collecting premiums
until a member gets seriously ill and then subjecting them to an often
secretive and unfair investigation.

Daniel Zingale, a healthcare advisor to the governor, said the
administration was pursuing legislation that would put the burden of
proving that rescissions were fair and lawful on the health insurers.

But some legal experts and consumer advocates said they believed the law already did just that.

Jerry Flanagan, healthcare policy director for Consumer Watchdog,
criticized the deals — on the heels’ of the Los Angeles city
attorney’s scathing indictment of the companies’ practices — as

"The regulator is rushing in to find the defendants ‘not guilty’
before the trial even begins," Flanagan said. "The state’s largest
insurers are paying pennies on the dollar for a get-out-of-jail-free
card. The governor and regulators are obstructing justice by giving the
defendant a favorable review to use as a shield in court."

Flanagan said that in settling with the companies, regulators failed to
complete their investigations of their rescission practices — and
failed to publicly disclose their findings as to their legality.

"Punting to the Legislature is dereliction of duty," he said. "The
governor doesn’t need the Legislature to tell him that no innocent
patient should ever lose their health insurance again."

Contact the author at: [email protected]

Consumer Watchdog
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