To the editor:
Thank you for the Dec. 26 article that a California appeals court has put limits on health insurance companies’ right to retroactively cancel policies and deny claims of its sick or injured customers.
Blue Shield, who was cited in over half of last year’s complaints to the State over denied claims, responded that insurance companies must have the right to retroactive cancellations. They say the administrative cost of fully investigating applicants’ health records, in order to deny coverage to all potentially sick or injured applicants, would make the insurance unaffordable.
In other words, the only way insurance companies can make their products affordable is to make them worthless if you really need them. Advocates for Single-Payer healthcare financing, and SB 840, which eliminates insurance companies, have known this for years, but it is refreshing to have our beliefs confirmed by Blue Shield.
SF Chronicle, December 26, 2007
Bob Egelko, Chronicle Staff Writer
Wednesday, December 26, 2007
Health insurers can’t wait until a policyholder is sick or injured to investigate the person’s medical history and then abruptly cancel the policy on the grounds that important information was left out of the original application, a state appeals court has ruled.
On Monday, the Fourth District Court of Appeal in Santa Ana called a halt to a practice that lawyers for policyholders claim is widespread. Known as “post-claims underwriting,” it has led to numerous lawsuits – mostly unsuccessful so far – and state enforcement actions against insurers.
The court stopped short of a strict pro-consumer standard advocated by state regulators and plaintiffs’ lawyers. But the justices said health insurers can rescind policies after the fact, because of misinformation on the application, only by showing that they conducted a reasonable investigation before issuing the policy, or that the applicant deliberately lied.
California law requires insurers to verify applicants’ health information before issuing a policy, rather than waiting until they file a claim, the court said. The purpose is “to prevent the unexpected cancellation of health care coverage at a time coverage is needed most,” said Justice Richard Aronson in the 3-0 ruling.
The ruling, the first by an appellate court on the issue, sets a precedent for other cases around the state. It applies only to health plans and insurance policies issued to individuals and their families and not to employer-based coverage, which does not require individual applications.
“The court is saying that the standard (that) insurance companies have used in investigating and rescinding after claims are made is wrong,” Michael Nutter, lawyer for an Orange County couple whose coverage was canceled after the husband was seriously injured, said Tuesday.
The ruling allows the couple, Cindy and Steve Hailey, to go to trial in their suit against Blue Shield of California and seek the costs of the withdrawn coverage, additional damages for emotional distress, and punitive damages if they can show that the company acted in bad faith. While those damages will not be available in every case, the court’s standard would send many cases to trial that are now being dismissed.
Insurers also have gotten in trouble with state regulators. In March, the Department of Managed Health Care fined Blue Cross of California $1 million for wrongly rescinding coverage of ill or pregnant policyholders, an allegation the company denied. The department fined the same company $200,000 last year and has also fined Kaiser $325,000 for improper rescissions.
In response to the ruling, Blue Shield said it was pleased that the court allowed companies to show they had conducted a reasonable underwriting investigation before issuing a policy, rather than allowing rescission only if the applicant lied – the standard urged by plaintiff groups and state agencies.
“We look forward to proving at trial that our underwriting was appropriate and that the Haileys misrepresented numerous important facts on their applications,” Blue Shield spokesman Tom Epstein said.
On the other hand, he said, “requiring health plans to disbelieve all applicants by verifying the truth of every answer is inappropriate and unnecessary.” Making insurers check out the responses on millions of applications would lengthen the application process, raise costs and increase the number of uninsured, Epstein said.
The Haileys, who lived in Los Alamitos, applied to Blue Shield in 2000, when Cindy Hailey was starting a new job and wanted better coverage. She said she was confused by the application form and omitted any health information about her husband or their son, and also mistakenly listed her husband’s weight at 240 pounds instead of 285 pounds.
According to the lawsuit, the company issued the policy but did nothing to investigate the information until February 2001, when Steve Hailey was hospitalized with stomach problems and submitted a claim for coverage. Blue Shield obtained his medical records, which revealed obesity, hypertension and other health problems. Six weeks later, he was seriously injured in an auto accident and spent more than two months in the hospital.
The day after he was released, Blue Shield retroactively canceled the insurance policy because of the failure to disclose medical information on the application. The company, which had approved surgery for Steve Hailey after his accident, billed the couple for medical costs it had paid before the cancellation.
Faced with other medical bills, the Haileys could no longer afford nursing care or physical therapy and were unable to arrange another operation until Steve Hailey’s condition became life-threatening, the court said, quoting allegations in the lawsuit. He suffered increased pain and permanent bladder damage, and is unable to work.
A Superior Court judge dismissed the Haileys’ suit against Blue Shield and ordered them to pay $104,000 in reimbursement to the company. The appeals court overturned the ruling and said a jury should decide whether Blue Shield acted legally.
Aronson, in Monday’s ruling, cited a 1993 state law that banned “post-claims underwriting,” the rescission of a health plan because of the insurer’s failure to resolve all reasonable questions on an application before issuing the policy.
A jury could decide that Blue Shield violated that law, Aronson said, because the company apparently conducted little or no investigation until after Steve Hailey was hospitalized, even though it had access to his health records. He said a jury should also decide whether Cindy Hailey’s omissions on the application were deliberate misrepresentations.
The law prohibits rescission unless the insurer, before approving the policy, made “reasonable efforts to ensure a potential subscriber’s application is accurate and complete,” Aronson said. He said it would usually be up to the jury to decide whether the company’s investigation was reasonable.
E-mail Bob Egelko at firstname.lastname@example.org.
Online resources To read the ruling: http://www.courtinfo.ca.gov/opinions/documents/G035579.PDF
E-mail Bob Egelko at email@example.com.