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Governor Schwarzenegger has repeatedly vowed to crack down on health insurance companies that dump policyholders who get sick. But this week, he vetoed legislation to strengthen state laws against cancellations. KPCC’s Julie Small reports the governor is relying on state agencies to enforce the laws.

Julie Small: It started with a New Year’s resolution to get healthy. Orange County resident Karen Knee decided to have a minor surgery.

Karen Knee: A couple little cysts on my head that kind
of bothered me, so I thought, you know, I should get those removed. And
the little minor surgery, I mean, you just walk into a hospital, and
you’re in the double digits.

Small: Knee’s bill came to $30,000. She expected she’d
pay a bit of that, and Blue Cross would pay the rest. But Blue Cross
cancelled her policy.

Knee: Because I had not disclosed a pre-existing
condition which had been a back spasm that had happened, you know, two,
three years prior to that. And I just hadn’t put it on my application
that I’d been to a doctor because of that.

Small: Knee challenged the cancellation, but got
nowhere. She paid the $30,000 bill herself. Cases like Karen’s Knee’s
keep Jerry Flanagan up at night. Flanagan is with the L.A. group
Consumer Watchdog.

Jerry Flanagan: The patient’s responsibility is to
fill out an application as honestly as possible and to report health
conditions, not to write down every bump and bruise they ever had,
because if that was the requirement, none of us would have health care.

Small: Flanagan says state laws against policy cancellations are clear. Insurers must investigate a customer’s medical history before
they issue a policy, not after the customer files a claim. It’s illegal
to cancel a policy unless the customer commits a "willful omission" of
a pertinent medical fact on their application for insurance.

Flanagan: Insurance companies claim, though, that we
just don’t know what that "willful" means. "Willful" is a tricky legal
word, and it’s confusing to us. It’s kind of a ridiculous argument
because both the governor and many courts have said that willful
misrepresentation means that unless a patient lied on their
application, you can’t cancel them.

Small: Flanagan backed Assembly Bill 1945. It would
have reinforced and clarified the law. But Governor Schwarzenegger
vetoed it. The governor’s health care advisor Daniel Zingale says the
bill would have hurt more than it would have helped.

Daniel Zingale: If we make it so impossible for anyone
to ever be dropped from their insurance – in other words if the bill
says that somebody who deliberately lied in order to get insurance
still has to be carried – then insurers might turn around and deny
someone else coverage just because they’re afraid of getting in that
situation again. So we have to make sure we’re protecting the market
overall, and all policy holders.

Small: But the bill didn’t prevent insurance companies
from dropping a customer who lied on an application. It just required
the company to prove it. Is that the same as making it impossible for
"anyone ever to be dropped" from coverage? Nichole Kasabian Evans
thinks it is. She’s with the California Association of Health Care
Plans.

Nichole Kasabian Evans: This bill created a standard
in law that would be nearly impossible to prove, and would really open
the door for people to be dishonest on their applications, because it
would be virtually impossible for a health plan to prove that a person
hadn’t been telling the truth.

Small: Kasabian says insurance companies are willing
to make applications clearer so no one makes a mistake that’ll get a
policy cancelled later on. She says insurers also favor an independent
review of cancellation decisions. The governor’s health care advisor
Daniel Zingale think the law should also be clarified, but he says for
now, the state is aggressively protecting consumers. He says Anthem
Blue Cross, Blue Shield, HealthNet, and other insurers that cancelled
polices illegally got fined millions of dollars by state regulators.

Zingale: They were able to get every single patient we
could identify their coverage back, their medical expenses paid, no
questions asked. So we’re confident that whatever regulations they put
forward will continue to put the patients first.

Small: But the state didn’t resolve every case. Karen
Knee’s claim is still pending in court. Earlier this year, the
Department of Managed Health Care and Department of Insurance drafted
regulations to clarify laws banning the cancellation of policies. Their
language was almost identical to the bill the governor vetoed. But a
spokeswoman for Managed Health Care said the department isn’t likely to
issue formal regulations any time soon.