Blue Cross of California agreed Thursday to stop canceling individual health coverage unless it can show policyholder deception -- a major shift by the state's largest health insurer that could lead to sweeping industrywide changes.
The move is part of an effort to settle a class-action lawsuit on behalf of as many as 6,000 people canceled since late 2001. It is an about-face for Blue Cross in what had become known as "use-it-and-lose-it" health coverage because the cancellations were often triggered by patients' claims for treatment.
The insurer's new stance is aimed at ending rescissions based on policyholders' honest mistakes, inadvertent errors and other inconsistencies about their medical histories on applications for coverage. Consumers contend that the forms are purposely confusing, increasing the odds that applicants will make mistakes.
"This is a very significant consumer health victory ... something we believe they should have been following all along," said Cindy Ehnes, director of the state Department of Managed Health Care.
The deal is expected to send shock waves through an industry that had stood together in defense of insurers' ability to retroactively rescind coverage for any application omission, even honest mistakes. Blue Cross is by far the largest insurer in California's individual market, and its corporate parent, Indianapolis-based WellPoint Inc., is the nation's largest provider of health benefits.
The practice was brought to light in a series of Los Angeles Times stories that detailed how rescissions were carried out and the hardships on canceled policyholders, including their inability to obtain needed medical care and financial woes caused by sudden debt.
Such cancellations are a potential problem for people who buy individual insurance because they do not have group benefits through an employer or other organization.
Group insurance is guaranteed to all members regardless of health, but insurers can deny individual coverage to people they deem too risky based on the applicant's medical history and answers to detailed health questions.
Individual insurance is increasingly important, covering an estimated 3 million Californians now, because rising costs are prompting employers to drop health benefits. It also is key to the proposal put forth by Gov. Arnold Schwarzenegger to expand health coverage. He has publicly condemned improper retroactive cancellations and wants to require insurers to sell to all buyers, regardless of health.
Blue Cross parent WellPoint denied any wrongdoing.
"Due to the risks and expense of protracted litigation, and to finally put to rest all of the claims involved in the lawsuit, we believe this settlement is in the best interest of the class and Blue Cross," WellPoint spokeswoman Shannon Troughton said in a statement.
She said that since January 2003, Blue Cross has rescinded less than 1% of new enrollments, on average, or about 1,000 policies out of about 260,000 new enrollments each year.
"In order to reduce costs for honest policyholders, insurers must use rescission to address any identified issues of abuse," she said.
Although rescissions are a fraction of the insurer's business, the implications are often catastrophic for the individuals who lose coverage. Also, physicians and hospitals have filed suit seeking payment for millions of dollars in treatment that Blue Cross authorized in advance but failed to cover after dropping the patients.
The consumer-friendly rescission standard puts Blue Cross ahead of efforts by regulators and lawmakers to curb rescissions.
"Blue Cross should be credited for recognizing this problem and their willingness to fix it," said William Shernoff, a Claremont lawyer who represented the two lead plaintiffs and many other canceled policyholders in the class-action suit that led to the deal. "It will be interesting to see if other health insurance companies like Blue Shield, HealthNet and others will follow suit."
The deal follows months of closed-door talks between Blue Cross and Shernoff, mediated by former California Supreme Court Justice Edward Panelli. Representatives of the Department of Managed Health Care, which oversees health maintenance organizations, and the state Department of Insurance, which governs other forms of insurance, also were involved in shaping the terms of the agreement.
Ehnes of the Department of Managed Health Care said changes at other health plans might take some time because they adamantly maintained that broad leeway to rescind was essential to fighting fraud.
Also, she warned, Blue Cross could undermine its new stance by failing to follow through on improvements to its procedures, such as vetting applications upfront. For some time, she noted, the insurer has included in contracts a provision that the policy could be canceled for willful misrepresentation.
Yet a broad review of Blue Cross rescissions by Ehnes' department determined in March that the insurer failed to live up to that provision because it never asked the policyholders about application flaws before rescinding. Her department hit Blue Cross with a $1-million fine as a result.
"What we have tried to say to the plans is the process that you use to make those determinations is very flawed," Ehnes said. "First you go back way too far in someone's medical history. Most of us can't remember what we ate for dinner last night, much less what the doctor told us 20 years ago."
Among other changes, Blue Cross agreed to consult policyholders about application problems in deciding whether a rescission was justified.
Jerry Flanagan, an advocate with the Santa Monica-based Foundation for Consumer and Taxpayer Rights, said the deal was a step in the right direction. But, he said, the problem won't go away unless regulators require health plans to prove to them that an applicant intentionally lied before any rescission is final. The proposed settlement maintains policyholders' current right to appeal to regulators only after a cancellation.
"The burden should be on the insurers to prove a patient lied, not on the sick patients who don't have insurance anymore to have to work their way through the regulatory process," Flanagan said.
Blue Cross also agreed to use a new application that Shernoff said was "designed to minimize mistakes."
Lawyers were scheduled to present the proposed settlement to Los Angeles County Superior Court Judge Anthony Mohr today. Pending court review, canceled policyholders would be notified by mail of their options.
Those include dropping a rescission claim in exchange for $1,000 and having a cancellation examined anew under the willfulness standard. If the rescission is reversed, Blue Cross would pay medical bills incurred by the patient that would have been covered under the policy.
The cost of the settlement won't be known for some time and could rise because canceled policyholders may opt out of the settlement and pursue individual suits against Blue Cross. In October, the insurer made financial settlements for an undisclosed amount with more than 70 individual policyholders.