Kaiser's move comes as it was being fined $100,000 by state regulators for dropping a policyholder it accused of concealing his epilepsy when he applied for coverage, even though the condition had never been diagnosed by a physician.
Also, the policyholder was unaware of his seizures because they were accompanied by amnesia.
It is the second such fine of a health plan as the government steps up scrutiny of insurance cancellations.
Oakland-based Kaiser said its proposed standards would include the requirement that it consult with policyholders before deciding whether to rescind their coverage. Such a consultation would help the HMO determine whether policyholders intentionally submitted inaccurate information about their health conditions in order to obtain coverage.
With the move, Kaiser embraces a standard for cancellation pushed by consumer advocates, the first sign of a substantive split within the health plan industry on the issue.
Other health plans, including Blue Cross of California and its rival Blue Shield, are fighting regulators and former policyholders for the right to rescind coverage when medical information relevant to the policy-granting decision is left out of an application -- even if the omission is an honest mistake or the result of a foggy memory or poorly worded question.
Aggrieved former policyholders contend in a raft of recent lawsuits that rescinding their coverage, without questioning them or demonstrating they intended to deceive, violates a 1993 state law.
The controversy involves individual insurance, the type people without employer-based group coverage buy for themselves.
Unlike with group coverage, insurers in California can reject applicants for individual insurance based on their current and past health. That also makes individual policyholders susceptible to rescission after they have been accepted for coverage, if insurers find discrepancies in their applications.
Amy Dobberteen, enforcement chief for the Department of Managed Health Care, said Kaiser's plan to talk to policyholders first was a shift in the right direction.
"Other plans have pointed out to us endlessly that that's not required by law," Dobberteen said. "For goodness sake, if you are consumer-friendly, why wouldn't you contact the consumer? ... A health plan does have the moral responsibility to pursue [this information] when they are about to wipe out from under them their entire health security blanket."
The agency, as well as the state Department of Insurance, is pursuing broad investigations into the rescission practices of the state's health plans. In its first two efforts, the managed healthcare department has attempted to enforce a standard of willful or intentional misrepresentation, coming down on the side of consumers.
The controversy comes in the wake of a series of articles in The Times examining the effect of health plans' practice of canceling without regard to intent.
The Department of Managed Health Care said Kaiser agreed to pay the $100,000 fine. Kaiser admitted no wrongdoing but accepted the fine to settle the investigation into its alleged cancellation of Steven Baba after the HMO diagnosed him with epilepsy and a seizure disorder in September 2004.
The managed care agency also chastised Kaiser for threatening to report Baba, a military aircraft engineer from Northern California, to law enforcement authorities for prosecution for purported insurance fraud. After Kaiser dumped Baba, then 50, he was unable to buy insurance from another carrier in California and moved out of state to take a job with an employer that offered guaranteed health coverage.
Kaiser for some time has in its contracts told policyholders -- including Baba -- that it could rescind if it determined an applicant intentionally misrepresented information about his health.
In the Baba case, however, state regulators found that the HMO failed to live up to that standard in part because it failed to ask Baba about the purported problem with his application before rescinding his coverage.
The new protocol Kaiser is developing would require the HMO to contact policyholders and gather their input before making a rescission decision, said James Larreta-Moylan, Kaiser's business line manager for individual plans in California.