Retroactively Canceling Insurance Lands Blue Cross in Flurry of Litigation

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Los Angeles Daily Journal

LOS ANGELES, CA — Imagine fighting cancer, then having to fight a collections agency over unpaid medical bills you thought were covered by insurance.

That’s the scenario faced by several clients of attorney William Shernoff after Blue Cross of California retroactively rescinded their insurance policies. Over the last 12 months, Shernoff has brought dozens of individual suits and a class action against the insurance provider.

In fact, the prominent Claremont-based insurance bad-faith litigator with Shernoff Bidart Darras has suits pending over similar situations against most of the big insurance carriers, including Blue Shield, Health Net and Nationwide Insurance.

The litigation, coupled with a recent $1 million fine levied against Blue Cross by the state Department of Managed Health Care, may be spurring the health insurance industry to re-evaluate a cancellation practice that Shernoff claims is long-standing and widespread.

The cancellations occur most often when someone with an individual health insurance policy accumulates expensive medical bills. That, in turn, triggers a review of the medical-history questionnaire the individual completed when applying for the policy.

Critics contend the questionnaire is intentionally vague and misleading. If the insurance carrier finds inconsistencies or discrepancies in the questionnaire within two years of the initial coverage, it can be called ‘intentional misrepresentation,’ which is grounds for retroactively canceling the policy. The practice is known throughout the industry as post-claim underwriting.

Post-claim underwriting is illegal in California, and Blue Cross denies it employs the practice.

But in March, the Department of Managed Health Care released a survey of 90 retroactive cancellations by Blue Cross in which all were deemed illegal because the provider failed to prove the applicant “willfully misrepresented” his or her medical history.

In half the cases, the department found Blue Cross had failed to assess properly the applicants’ health risks before it provided coverage. As a result, Blue Cross was fined for two separate violations of the Knox-Keene Act, which regulates managed care plans.

Blue Cross of California, in an e-mail to the Daily Journal, argued that the department’s survey was factually flawed.

“California law is clear that rescission generally does not require a showing of intent to deceive or willful misrepresentation,” the insurer wrote. “All that is required for misrepresentation to be ‘intentional’ is that the true facts be known to the applicant.”

The $1 million fine in March follows a $200,000 penalty levied against Blue Cross in September for an individual case of rescission. Kaiser Foundation Health Plan was also fined in September, for two illegal rescissions, though it has since settled both cases.

Blue Cross has challenged the September fine in an administrative law court. Lynne Randolph, a spokeswoman for the department, predicts Blue Cross similarly will challenge the larger fine.

But Blue Cross is taking a different approach in its negotiations with Shernoff, he said.

“They are the one [insurance] company that has recognized this is a problem,” he said.

In contrast, Blue Shield, facing a dozen suits with Shernoff, “has not been conciliatory or willing to negotiate.”

“They are fighting us tooth and nail,” he said.

Two of those cases are set to go to trial in the next two months.

“It looks to me that Blue Cross is really trying to change things,” he said, “and maybe what they come up with will be a model for the other carriers.”

The Department of Managed Health Care, which oversees HMOs and the PPOs of a few big providers, and the Department of Insurance, which oversees other insurance providers, are both party to the negotiations over Shernoff’s class action. He is optimistic negotiations will produce a settlement that changes Blue Cross‘ business practice and compensates all those who have had coverage rescinded in the last four years. Shernoff estimates that number is in the thousands.

Blue Cross has not disclosed the number of individual policies retroactively canceled but said in a statement, “The vast majority of Blue Cross‘ rescissions are unquestionably proper under any criteria. Rescissions affect a very small percentage of plan members, less than 1 percent of new policies and only one-fifth of 1 percent (.002) of the total individual policies outstanding at the end of 2006.”

Last year, Shernoff settled 63 individual cases with Blue Cross over the course of six months. None of his cases against Blue Cross has gone to trial. Blue Cross is attempting to compel arbitration on two other class actions brought by Scott Glovsky of Arkin & Glovsky.

Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights was not surprised.

“Generally, plans get caught red-handed, and they want to settle,” he said. “The last thing they want is to have this exposed publicly in the courts.”

The foundation recently petitioned the Department of Managed Health Care to draft improved regulations that provide better oversight on policy cancellations. Randolph confirmed the department is working on draft regulations but did not know when they would be announced.

Flanagan said the foundation likely will petition the Department of Insurance for the same type of regulations.

Consumer Watchdog
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