One of California's largest for-profit insurers stopped a controversial practice of canceling sick policyholders Friday after a judge ordered Health Net Inc. to pay more than $9 million to a breast cancer patient it dropped in the middle of chemotherapy.
The ruling by a private arbitration judge was the first of its kind and the most powerful rebuke to the state's major insurers whose cancellation practices are under fire from the courts, state regulators and elected officials.
Calling Woodland Hills-based Health Net's actions "egregious," Judge Sam Cianchetti, a retired Los Angeles County Superior Court judge, ruled that the company broke state laws and acted in bad faith.
"Health Net was primarily concerned with and considered its own financial interests and gave little, if any, consideration and concern for the interests of the insured," Cianchetti wrote in a 21-page ruling.
Patsy Bates, a 52-year-old grandmother, was at work at the Gardena hair salon she owns when her lawyer William Shernoff called with the news. Bates said she screamed and thanked the lawyer.
Then, "I thanked God," she said. "I praised the Lord."
Bates called the arbitration judge "an angel . . . a real stand-up kind of judge."
When Health Net dropped her in January 2004, Bates was stuck with more than $129,000 in medical bills and was forced to stop chemotherapy for several months until she found a charity to pay for it.
Health Net Chief Executive Jay Gellert ordered an immediate halt to cancellations and told The Times that the company would be changing its coverage applications and retraining its sales force.
"I felt bad about what happened to her," he said. "I feel bad about the whole situation."
Gellert said he would move quickly to "give people the confidence that they can count on their policy." Specifically, he pledged to stop all cancellations until an external review process could be established to approve all cancellations.
Other insurers were considering changing their own practices. A spokeswoman for WellPoint Inc., which operates Blue Cross of California, the state's largest for-profit insurer, said the company was in favor of such an idea. Blue Shield of California declined to comment.
Until Friday, the companies had uniformly defended cancellations, saying they were necessary to hold down costs by weeding out people who may have failed to disclose pre-existing conditions on applications for coverage. They say cancellations happen infrequently.
The judge's strong denunciation of the way Health Net carried out Bates' cancellation and big money award stunned and pleased regulators and patient advocates.
State Insurance Commissioner Steve Poizner applauded the judge, saying "health insurers simply cannot hold out the promise of insurance for their consumers and then snatch it away just when people need it most. That is illegal, immoral and will not be tolerated."
Earlier, Health Net had defended its actions, saying it never would have issued Bates a policy in the first place if she had disclosed her true weight and a preexisting heart condition on her application.
Bates said a broker filled out the application while she was styling a client's hair on a busy day in her shop. She said she answered his questions as best she could.
Bates said she already had insurance and wasn't in the market until the broker came by and told her that he thought he could get her a lower monthly premium if she switched to Health Net.
At the arbitration hearing, internal company documents were disclosed showing that Health Net had paid employee bonuses for meeting a cancellation quota and for the amount of money saved.
"It's difficult to imagine a policy more reprehensible than tying bonuses to encourage the rescission of health insurance that keeps the public well and alive," the judge wrote.
The majority of the award -- $8.4 million -- was punitive damages, which are designed to teach the defendant a lesson. Such awards are highly unusual in private arbitration, the forum chosen by insurers and other companies to settle disputes.
Health Net's lawyers had argued that Bates' suffering was minimal, a position that infuriated the judge.
"It's hard to imagine a situation more trying than the one Bates had to endure," Cianchetti wrote. "She had valid health insurance, thinks she's making a change when the rug was pulled from underneath and that occurred at a time when she is diagnosed with breast cancer, one of the leading causes of death for women."
The case was heard by a private judge, rather than a jury, because Health Net required Bates to agree to binding arbitration, a practice common among insurers.
"That's the point," said Carl Tobias, a law professor at the University of Richmond in Virginia. "Those kind of agreements that mandate arbitration tend to favor the bigger party or the interest with more economic clout."
The size of the award will require other insurers to take notice, he said.
"It sounds like he was just outraged," Tobias said of the judge. "He is sending a message."
Cindy Ehnes, director of the state Department of Managed Health Care, which oversees health maintenance organizations, said she was "pleased the courts are joining us, along with the public, the media, other regulators and elected officials in demanding the industry clean up its act."
Shernoff, Bates' lawyer, said Gellert's pledge to change showed that a "punitive damage award will do more than anything else to stop the shameful practice of canceling health insurance after people become seriously ill."
Health Net's legal woes are far from over. The company has three other cancellation lawsuits pending in California, including a proposed class action mounted by Shernoff. That case seeks damages on behalf of 1,600 people whose policies were allegedly illegally canceled over the last four years.
Los Angeles City Atty. Rocky Delgadillo on Wednesday sued Health Net over its cancellation practices.
"We intend to vigorously pursue the lawsuit we filed and to pursue our criminal investigation into the company's bonuses scheme, to ensure that Health Net's unlawful, unfair, and fraudulent practices are fully and permanently enjoined, and that restitution is provided to all its past victims," Delgadillo said Friday.
For her part, Bates said she hoped that Health Net followed through on its pledge to change the way it treats sick policyholders so that no one has to go through what she endured.
Bates said she wanted to buy a house with part of the award. She also said she was considering taking a day off work today.
After spending Friday afternoon in her lawyer's Beverly Hills office answering reporters' questions and posing for photographs, Bates planned to go home and make a birthday dinner for her daughter.
"I have to celebrate -- her birthday," she said.