The request for a sweeping injunction is the latest twist in an escalating controversy over a practice that is widespread and has left thousands of California residents with big medical bills and without coverage. As a series of recent Times articles showed, Blue Shield and its competitors routinely drop policyholders who get sick and run up medical bills.
The suit came as state Insurance Commissioner Steve Poizner disclosed for the first time that his office was reviewing Blue Shield's practices and was prepared to take action if it found problems.
"I am very concerned about the practice of post-claims underwriting," Poizner said in his first comments on the issue since taking office last month.
"The law does not permit a health insurer to agree to provide coverage and then wait until a claim comes in to decide whether to pay for the medical care a policyholder needs," he said in a written statement. "Specifically, I am concerned about insurers rescinding coverage for small, inadvertent and innocent omissions on applications for coverage."
The office, under former Commissioner John Garamendi, launched a similar investigation of the rescission practices of Blue Cross of California. That probe is pending.
Cancellations are an issue for consumers who buy their own coverage. Unlike job-based group coverage, which is guaranteed to all eligible employees regardless of health, so-called individual insurance policies are medically underwritten. That means health plans choose their customers based on the status of their health and their disclosure of preexisting conditions.
Blue Shield and Blue Cross insist that revocations are justified when policyholders leave information about preexisting conditions out of their applications for coverage.
Blue Shield, the target of the injunction bid, acknowledges that it makes no effort to determine whether omissions were intentional or inadvertent and says the law allows it to rescind in either case. What's more, Blue Shield General Counsel Seth Jacobs said, a number of judges have agreed and none has ruled against the health plan in a rescission case.
Spokesmen for Blue Shield said the Department of Insurance review was routine and would not find wrongdoing.
Still, policyholders, in a raft of suits, contend that Blue Shield and other health plans use purported application problems as pretexts to jettison costly policyholders. Such practices, they say, violate California's ban on "post-claims underwriting" -- investigating applications after bills have been submitted -- as well as other laws prohibiting bad-faith conduct by insurers.
What makes the latest suit unusual is that it seeks to force Blue Shield to stop the practice, rather than demand compensation for a policyholder who lost coverage. It could have a wide effect if it succeeds because Blue Shield alone has acknowledged canceling about 300 policies in the last two years. The outcome also could influence other insurers that collectively have revoked thousands of policies in recent years.
"They are breaking the law, and they are ruining lives in the process," said William Shernoff, the Claremont lawyer who filed the suit and represents scores of other policyholders in rescission complaints. "This could put a halt to everything and make them change their ways."
The case concerns college student Justin Sigman, who filled out a Blue Shield application online in January of last year and was approved, with his wife, two days later. In late June, while visiting relatives in Texas, Sigman became ill and vomited for a week. That led to his hospital treatment for gastroenteritis and dehydration.
The hospital bill for more than $9,000 was sent to Blue Shield, along with a medical history indicating that Sigman had suffered from bouts of diarrhea in the past, according to the suit and his lawyers. Sigman contends that he was unaware it was significant enough to include on his application for coverage. In addition to the broad injunction, Sigman is asking the court to reinstate his coverage.
Shernoff said an injunction was necessary because Blue Shield appeared to be defying the recent pronouncements of the state's top regulator of health maintenance organizations. Cindy Ehnes, director of the Department of Managed Health Care, recently underscored the agency's position that health plans may revoke coverage only if they can show that a policyholder intentionally lied on his or her application.
Her agency also is developing regulations and protocols in an effort to stop routine cancellations without evidence of an applicant's willful misrepresentation, and it has sanctioned two health plans, Kaiser Permanente and Blue Cross of California, for canceling policyholders improperly.
The department "has advised plans, including Blue Shield, what an illegal rescission is under the law and told all plans offering individual policies to not engage in these practices," agency spokeswoman Lynne Randolph said.
Jacobs of Blue Shield said several state trial court judges had agreed with the company's position that intent does not matter in rescissions. Blue Shield, he said, has won four cases on summary judgment in the last year and lost none; he declined to say how many it had settled. He also said Shernoff had dropped earlier requests for injunctions.
"Just because a trial lawyer blows smoke doesn't mean there's fire," Jacobs said.
Shernoff said those requests were abandoned for technical reasons related to the passage of a proposition limiting the scope of the state's unfair-competition law. The new suit was written with the new rules in mind. More important, he said, it must be considered in light of the new regulatory landscape.
"They are flying in the face of the law and the departments that regulate them," he said.