Health insurers to meet with state agency on rescission probe

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By Lisa Girion

Consumer advocates worry that the closed session will advance a plan that critics say could make it easier to cancel policies. Regulators say that's not on the agenda.

California's largest health insurers, facing possible fines and other penalties for the way they sometimes cancel policies after patients pile up medical bills, meet today with regulators to discuss ongoing state enforcement efforts.

The meeting was called by the Department of Managed Health Care, which oversees health maintenance organizations and other types of health plans, because it was nearing completion of investigations into the cancellation practices of Health Net Inc., Kaiser Permanente and Blue Shield of California, said spokeswoman Lynne Randolph.

The department plans to discuss the standards to which it is holding the insurers' practices, she said, as well as remedies for problems identified in the probes of policy cancellations, known as rescissions.

"This is our opportunity to move forward and conclude this phase of our investigation into rescissions," Randolph said. "Our goal is to bring a quick resolution to this problem to protect consumers today from illegal rescissions."

Randolph said the results of the remaining three investigations would be announced soon but that the process -- including today's meeting with the health plans -- was confidential until then to protect the insurers' due-process rights.

The closed meeting has alarmed consumer advocates because it comes as the insurance industry is pushing a plan that critics believe could make it easier for sick patients to lose coverage through no fault of their own. But the department said the industry's proposal was not on the agenda.

California insurers -- battered by newly aggressive regulators, a $9-million court judgment and stinging criticism from lawmakers, judges and consumer advocates -- are fighting on several fronts this spring in Sacramento and elsewhere.

Insurers are under attack in California courts and the Legislature for canceling policyholders after they have incurred significant medical expense.

The state's insurers defend their cancellation policies and performance. They say that policy reviews and cancellations affect only a small percentage of policies and that the reviews are essential to combat potential fraud.

It has been a year since the department announced the results of its first major rescission investigation. In that case, it alleged that Blue Cross systematically violated state law in the way it canceled sick policyholders for purported misstatements on applications.

The department said the insurer failed to determine whether policyholders intended to misrepresent their medical history when applying for coverage.

The department said it would seek a $1-million fine from Blue Cross, a unit of Indianapolis-based WellPoint Inc., but it has yet to collect.

Consumer advocates said they were concerned that today's meeting would stray into the industry's proposal for rescission. That proposal, among other things, would insulate insurers from the biggest threat currently posed by rescissions: punitive damages.

In the first reported verdict in a rescission lawsuit in California, a judge awarded more than $9 million last month to Patsy Bates, a Gardena hair salon owner dropped by Health Net while undergoing chemotherapy for breast cancer.

The largest portion of Bates' award was punitive damages. Evidence showed that the company paid bonuses to an employee based in part on the number and value of rescissions she carried out.

Sam Cianchetti, the private arbitration judge who decided the case, called the company's behavior "reprehensible."

Several insurance companies and America's Health Insurance Plans, a Washington-based trade group, are promoting versions of a plan to create an independent review process for rescissions in efforts to restore confidence in the affected individual insurance market.

Consumer advocates said the industry proposal actually would eliminate existing consumer protections. The proposal would require patients to submit to an insurer's internal grievance procedures and then to a third-party review before resorting to the public courts.

If the third-party reviewer found in favor of the insurer, the patient would have the burden of proving in court that the decision was wrong. The proposal, aimed at avoiding litigation, would not allow patients in such cases to pursue punitive damages.

"It seems like insurers' wish list," said William Shernoff, the Claremont lawyer who represented Patsy Bates against Health Net.

Several health plans, including Kaiser, Health Net and Blue Cross, support some type of third-party review to validate their rescission decisions. They say such reviews could offer patients peace of mind and faster results than litigation.

But critics said the industry proposal was a nonstarter.

"It is only the threat of legal review and penalty that makes the regulatory process function and deters wrongful conduct," said Jerry Flanagan, a patient advocate with Santa Monica-based Consumer Watchdog.

Whether or not the industry succeeds in getting an independent rescission review system adopted as law, at least two insurers -- Health Net and Blue Cross -- said they were moving forward on their own.

"Blue Cross is in the process of developing an outside third-party review process for all rescission," said Shannon Troughton, a spokeswoman for parent company WellPoint. "This means an independent, outside agent will help us validate whether rescission of a member's benefits is warranted," she said. "Blue Cross will be bound by the decision of the third-party reviewer."

The meeting comes on the eve of a Senate Health Committee hearing set for Thursday on the department's enforcement of existing rescission law, as well as a host of other issues. The common thread among the agenda items is whether the department has grown too cozy with the industry.

At the same time, legislators are seeking to further curtail rescissions. Assemblyman Ted Lieu (D-Torrance) is author of a bill that would prohibit insurers from paying bonuses to employees based on rescission activity. And Assemblyman Hector De La Torre (D-South Gate) is pushing a bill that would prevent health plans from rescinding patients without prior approval from regulators.

Also, the Department of Insurance is putting the final touches on its proposed rescission regulations and is expected to release a draft within a month.

"We are in the process of meeting with insurers and consumer groups," said Byron Tucker, a spokesman for Insurance Commissioner Steve Poizner. "The language we will propose will come out of those meetings."