Health insurers increasingly are under the gun in California. In the past few months we’ve seen:
– A $1 million fine against Blue Cross of California for “routinely” violating state law;
– Investigations of four other major insurers, which might produce similar fines;
– Several lawsuits against major insurers;
– A statewide campaign against the insurance industry by nurses;
– Increased scrutiny from the media; and
– A new bill in the Assembly (AB 1554) that would require health insurers to get approval from state officials for annual premium increases above 7%.
The timing for all this attention is not coincidental. As California moves slowly toward overhauling its health care system, the spotlight moves inexorably toward the industry at the heart of the health care status quo.
What’s Behind the Scrutiny?
“I think things have changed over the past three or four years,” says Jerry Flanagan, health care policy director for the Foundation for Consumer and Taxpayer Rights. “There’s a new awareness of how the insurance industry — and especially insurance profits — have an impact on health care.”
“I think people are paying attention more now than they ever have,” Flanagan says. “We’re getting closer to what might be considered a public outcry.”
Christopher Ohman — president and CEO of the California Association of Health Plans, a trade organization representing most of the major insurers in the state — agrees but says he hears a different kind of outcry.
“I think we’re reaching the boiling point with rising costs of health care. People are angry,” Ohman says. Insurers “are the ones who are the messenger of those rising costs, and I think we’re seeing some shots being taken at the messenger.”
Consumer advocates see it somewhat differently.
“Not only is a big part of the rising costs of health care directly related to insurers and insurers’ profits, the whole notion that insurers can legally deny coverage to people at the very time when they most need it is ludicrous,” says Anthony Wright, director of Health Access California.
Wright is referring to the insurance industry practice known as rescission, the act of canceling an individual health insurance policy when a claim is made. Last month, state regulators fined Blue Cross of California, the state’s largest health insurer, $1 million for systematically dropping policyholders after they became sick or pregnant.
People covered under group health insurance policies largely are exempt from the predicament because insurers cannot deny individuals coverage in group plans.
The Department of Managed Health Care investigation showed Blue Cross dedicated computer programs and a specific department within the company to systematically investigating and canceling policies of pregnant women and members with chronic illnesses regardless of whether they intentionally lied on their applications to cover up pre-existing medical conditions — a standard required by state law for canceling individual policies.
Picking from about 1,000 such Blue Cross cancellations that take place annually, regulators examined 90 randomly selected cases and found violations in each one.
In announcing the investigation and the fine, DMHC officials said they hoped the fine would prompt changes in the way insurers interpret state rules governing individual policy cancellations and the way they use the rules.
DMHC officials said four other major California insurers — Blue Shield, Kaiser Permanente, HealthNet and PacifiCare — also are undergoing surveys similar to the one that resulted in the Blue Cross fine.
DMHC spokesperson Lynn Randolph says “there quite possibly could be” more fines levied in the near future.
Consumer advocates say the $1 million fine is a financial slap on the wrist and actually might encourage rather than discourage health plans from canceling individual policies.
“Blue Cross is reaping millions in savings by not paying for care,” Flanagan says. “This $1 million fine is [a] joke. Blue Cross is saving much more than that by not insuring those people. This kind of fine reinforces their business model.”
DMHC’s Randolph disagrees with Flanagan’s assessment of the Blue Cross fine, saying, “It may not be a huge monetary amount for a company their size, but it definitely has an impact in the court of public opinion.”
Blue Cross agrees.
“It’s not about the amount,” says Peggy Hinz, spokesperson for Blue Cross of California. “It’s about the integrity of the organization. Any complaint, any criticism, we take very seriously. We will diligently pursue these criticisms, but it is our position that these findings are in error,” Hinz says.
In a statement released after the fine was announced, Blue Cross of California said that “the DMHC report is based largely on factual errors and includes exaggerated and unfounded accusations.”
At this point, it remains a “difference in legal opinions,” DMHC’s Randolph says. “We have not received a formal challenge yet, but we fully expect that to happen.”
DMHC’s unprecedented survey of individual policy cancellations was triggered by a series of circumstances including dozens of complaints filed since 2003, several class-action lawsuits against insurers and a series of articles in the Los Angeles Times.
“Blue Cross is known as a company with particularly aggressive practices in targeting their policies for healthy people,” Wright says. “It’s known as cherry picking, and Blue Cross has a longstanding reputation for it.”
“So it’s not all that surprising to hear of this fine, but what I think is even more alarming is that insurers do have the legal right to deny coverage in so many ways,” Wright says. “It fundamentally goes against the very notion of what insurance is supposed to be: These people pay premiums until they need help, then when they need help, the company can find a way to deny it. I think that’s amazing and wrong.”
Although DMHC’s investigations are not politically motivated, they carry some political cache, especially in a year when Gov. Arnold Schwarzenegger (R) is pushing for a top-down overhaul of the state health care system.
“I think it’s very fair to characterize the work we do as informing the governor’s plan,” Randolph says. “I think much of the work our department has been doing has been instrumental in helping shape the governor’s proposals for universal coverage.”
Nurses Union Enters Debate
On another front, the siege of the health insurance industry is very political.
In a series of statewide mailers, the California Nurses Association is characterizing most health care reform proposals as benefiting insurance companies, rather than Californians. The nurses support a state-run, single-payer plan that effectively would eliminate the insurance industry from the health care equation.
Schwarzenegger, in one of several sweeping reform packages in the pipeline, has proposed all Californians be required to purchase medical coverage, similar to laws requiring auto insurance for all drivers.
As a response to that proposal, FTCR is working on ways to curb the insurance industry in California. And you can bet the insurance industry is paying attention.
The foundation and its founder Harvey Rosenfield were behind Proposition 103, the 1988 ballot measure that imposed strict regulations on auto, home and other property and casualty insurers, requiring them to justify and obtain state approval for any proposed rate increases.
“This would be a sort of health care version of Prop. 103,” Flanagan says. “We’ll work on getting it into the state legislature first and then maybe as an initiative later.”
There’s plenty of time to get such an initiative on the February 2008 ballot if legislators in Sacramento don’t take action first. Earlier this month, Assembly member Dave Jones (D-Sacramento) introduced AB 1554, which would require health insurers to get permission from the state for annual premium increases above 7%.
Jones said he introduced the bill — with support from FTCR — “to make sure affordability is injected into the debate.”
Not surprisingly, California Association of Health Plans CEO Ohman opposes the idea. He said Jones’ plan would place “a whole new administrative load on the health care premium” because insurers would have to justify their rates.