SPREADING THE NEWS: Attorney Jerry Flanagan (center) describes a settlement agreement that will allow victims Donna and Randy Freed (left) to get affordable health coverage through Anthem Blue Cross on Tuesday. Consumer Watchdog founder Harvey Rosenfield looks on. photo by Ashley Archibald.

OCEAN PARK BLVD — Santa Monica-based advocacy group Consumer Watchdog declared victory Tuesday in a class action lawsuit alleging insurer Anthem Blue Cross used rate hikes as a means of pushing patients into lower-benefit and higher deductible health plans.

A California Superior Court Judge in Ventura County gave preliminary approval to a settlement agreement reached between the insurer and approximately 122,000 members of the class action lawsuit.

Each of the members of the lawsuit held one of four preferred provider organization medical plans, more commonly known as PPOs, that Anthem Blue Cross had closed to new customers.

That practice of closing policies is a money maker for insurance agencies, because as young, healthy consumers leave the plan to save on insurance, older or sick customers are stuck with higher costs, said Consumer Watchdog attorney Jerry Flanagan.

Because the plans are closed, new customers can't come in to help relieve some of the rate burden and spread out the risk, and the remaining insured either pony up the extra money or find themselves chased out of the system.

"The insurance industry calls it the 'death spiral,'" Flanagan said at a news conference Tuesday in Sunset Park. "The policy pool shrinks, and those with health conditions are trapped."

They're trapped because if they try to switch to a different plan, they can easily be rejected for almost any kind of preexisting conditions, he said.

Flanagan noted that things as common as asthma and minor as toenail fungus have been used to reject clients from new health insurance plans.

Consumer Watchdog and law firms Whatley, Drake & Kallas, the Consumer Law Group and the Stuart Law Firm filed a lawsuit on March 1, 2010 alleging that the practice of closing plans without giving clients the opportunity to switch to a different plan violated a 1993 law ensuring that those clients would either get a cap put on their premiums or the ability to move to a comparable plan.

"Blue Cross didn't do either," Flanagan said.

Two Anthem clients, Randy and Donna Freed, of Santa Barbara, found themselves at the raw end of the deal in 2009 when they received notice that their coverage plan, a PPO with a $1,500 deductible, would no longer be sold.

As rates increased, the couple decided to move to a different plan, but the only ones offered had a much higher deductible.

Eventually, after trying to add their recently graduated daughter, Abbey, onto the plan, the Freeds switched to a different plan with less comprehensive coverage with a $5,000 deductible.

"We were looking for an opportunity to change to something more comprehensive," Freed said, but they couldn't because of preexisting conditions in the family.

The settlement will allow families like the Freeds to stay with their current medical coverage if they choose, with caps placed on rate increases to keep the coverage affordable.

Clients may also switch over to comparable plans without going through the medical underwriting process, which is essentially when an insurance company looks at the medical history of an applicant to determine whether or not they want to insure them.

They have the ability to choose any open policy regulated by the California Department of Managed Care, which oversees the four policies named in the settlement, and any of 12 other policies regulated by the Department of Insurance.

Those two agencies regulate all insurance plans in the state of California. The Department of Managed Care oversees a mix of health maintenance organization, or HMO, and PPO plans, while the Department of Insurance only covers PPO plans, according to Lynne Randolph, the deputy director of communications for the Department of Managed Care.

Another key difference between the two departments is that the Department of Managed Care is made up of appointees, while the Department of Insurance has an elected commissioner, Dave Jones.

Some of the appointees in the Department of Managed Care are holdovers from former governors Pete Wilson and Arnold Schwarzenegger's administrations, and are "cozy" with insurers, Flanagan said.

"When the closure (of the plans) happened, Anthem was required to file a closure notice," Flanagan said. "This was regulator approved."

Randolph took issue with the accusation, saying that the Department of Managed Care followed the law when it approved Anthem's proposal for notifying consumers of the closures and submitting letters telling clients their options.

However, it's Anthem's job to send out the letters, and the department has no way of knowing what message reached clients until a complaint rolls in.

"The way we're able to ensure that a plan followed through would be through receiving consumer complaints," Randolph said. "We do not have any substantial numbers of consumer complaints from closed books of business from Anthem."

Anthem admits no wrongdoing in the settlement, wrote spokesperson Leslie Porras in an e-mail.

To participate in the settlement, the consumers had to have held onto their insurance coverage through Anthem until May 25, 2011.

The settlement will go up before a judge for final approval in August.

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