Could Your Health Insurance Be Revoked When You Need It Most?
by Kristen Gerencher
Monday, March 10, 2008
provided by MarketWatch


A series of troubling developments in California's individual health insurance market is bringing national attention to the problem of patients having their coverage taken away when they need it most.

Last month, an arbitration judge ordered California-based health insurer Health Net Inc. to pay $9 million to a cancer patient whose individual coverage was canceled during her chemotherapy treatments in 2004. The judge ordered Health Net to repay $129,000 worth of Patsy Bates' unpaid medical bills and awarded the 52-year-old hairdresser $8.4 million in punitive damages and $750,000 for emotional distress.

It's not just Health Net that's attracting scrutiny. Blue Cross of California, a unit of WellPoint, the nation's largest private health insurer, drew fire recently for sending letters to doctors asking them to verify patients' accounts of their health histories in their applications after the company already had approved their policies. Blue Cross has since stopped the letter campaign.

California's Department of Managed Health Care, which regulates the state's HMO plans, has been investigating consumer complaints about unfair rescissions since 2006. The agency has fined both Blue Cross and Health Net and is in the process of reviewing the practices of other companies that sell individual policies in the state, spokeswoman Lynne Randolph said.

"We don't think it is only happening in California...but California's farther ahead in terms of enforcement," she said. "We had a statute in place that companies must do underwriting up front and a consumer must willfully misrepresent their health condition on an application in order for a company to rescind. We feel that means it can't just be an inadvertent omission."

Insurers say they have a responsibility to ensure applicants are truthful about any preexisting conditions they may have so companies can accurately price policies and hold down costs for all their members. But consumer groups warn that tactics such as tying financial incentives to the number of rescissions an employee makes or involving doctors in investigations after policies have been issued aren't working and may be illegal in some states.

There's growing consensus among consumer and industry groups that insurers need to set up independent third-party review boards to vet policyholders at risk of having their coverage rescinded and issue uniform, standardized application forms that make the process more transparent and fair for consumers.

Sandy Praeger, president of the National Association of Insurance Commissioners in Topeka, Kansas, said California's arbitration outcome and regulatory actions send a strong message to insurers trying to save money by digging up reasons to cancel policies retroactively.

"It's very good news for consumers," Praeger said. She condemned the practice of some insurers' offering bonuses to brokers who rescind policies. "They're making a lot of money collecting premiums. They need to honor those contracts."

Of course, businesses have to take reasonable measures to prevent fraud, which drives up the cost for all policyholders, she said. But the application forms can be ambiguous and loaded with medical jargon.

"I don't dispute [their] ability to drop someone who's intentionally lied," she said. "But to have policy language and application forms that are hard to understand and rely on a third party to explain them to you, it opens the door to people making unintentional mistakes. They shouldn't be held accountable for those."

The NAIC is devising a standard insurance application that could help reduce potential conflicts. Another idea states are examining is instituting external review processes like the one Kansas has for determining medical necessity for treatments that health plans deny, she said, noting that insurers' decisions get overturned in about half the cases.

Praeger praised the arbitration ruling as a "wake-up call" to insurers. "They could end up with more draconian rules and regulations and laws if these patterns don't reverse themselves," she said.

Aiming for solutions
Rescissions are rare, accounting for just 0.15% of individual policyholders' experiences in 2006, according to a survey from America's Health Insurance Plans (AHIP), a trade group of companies that cover 200 million Americans. About 18 million people have private, individual health insurance, the only kind subject to potential rescissions.

AHIP President Karen Ignagni said the group called for more-stringent rescission criteria and independent review panels in a December report. "We recognize the process needs to be very transparent and people need to have peace of mind that they will have an independent review.

"As states adopt this proposal, they'll have a place where they can have these cases vetted external to the health plan," she said.

Because of recent events, some lawmakers in Sacramento are considering greater consumer protections for people in the individual insurance market. Los Angeles City Attorney Rocky Delgadillo recently filed a lawsuit against Health Net alleging that it engaged in unlawful or deceptive business practices related to improperly canceling customers' policies.

Health Net is making changes and organizing an independent third-party process to review possible rescissions, spokesman David Olson said. "We're not going to rescind any policy until that process is in place."

Still, he disputes the characterization of the company's former incentive-pay program and says its business practices are sound.

"The policies that were being rescinded we believe were being rescinded appropriately," Olson said. "The fact is 140,000 people have done this application and by all appearances done it right and have gotten low-cost insurance. Their claims are being paid."

Betsy Imholz, special projects director for Consumers Union in San Francisco, said the problems emerging in California are significant. "Most of us have some preexisting condition. Even the healthiest person probably had the flu or earache as a kid. Where are the lines drawn? A good standardized process would help alleviate some of that confusion, but it's probably not going to take care of it if they're really looking to rescind people."

"I do think the idea of an independent review process -- truly independent, particularly if it's overseen by a government agency -- could be a useful solution," she said.

The effect of application omissions can vary substantially, said Dennis Barry, a partner in the health-care practice of Vinson & Elkins, a law firm in Washington. "It's one thing for a patient to say 'I was diagnosed with cancer two weeks ago' and omit that from the application and another thing to forget that his tonsils were taken out when he was seven years old. There is a materiality factor here, and that's been part of the dispute in California."

Those in need lose out
California's recent spate of rescissions reflects the conflicts that arise in the absence of universal coverage, he said.

"Patients who have the greatest need for health insurance coverage are the ones who have the most difficult time getting it," said Barry, who wasn't involved in the California cases. "We have the confounding factors of high costs, high expectations, an unwillingness in the political world to deal with the problem of uninsured patients. All these factors are coming together to cause these results."

Insurers across the nation likely are heeding the lessons of the Golden State, he said. "I would be surprised if insurers would engage in this wholesale review of coverage that appears to have occurred in California. But I think we're going to see continued problems in the health insurance market until we can come up with better ways to control costs and better ways to extend insurance to more people."

For some, California's rescission problem is especially painful because of the state's recently failed attempt to secure comprehensive health-care reform, an initiative Republican Gov. Arnold Schwarzenegger spent much of last year trying to negotiate with lawmakers and interest groups.

"His proposal would have guaranteed coverage for all regardless of health conditions...so we wouldn't have had any need for rescissions," Randolph said.

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