The department's report noted that the company had taken steps to improve its process for reviewing applications for individual policies, to determine whether applicants are truthful about their medical conditions. But it concluded that the company had not yet adequately addressed its failure to show willful misrepresentation on the part of the policyholders targeted for rescission.
Blue Cross parent WellPoint said in a statement Thursday that it continued to disagree about what the law requires.
"California law is clear that rescission generally does not require a showing of intent to deceive or willful misrepresentation," WellPoint spokeswoman Shannon Troughton said. "All that is required for misrepresentation to be 'intentional' is that the true facts be known to the applicant. If the applicant had no present knowledge of the facts sought or failed to appreciate the significance of information, an incorrect or incomplete response would not constitute grounds for rescission."
The company reiterated its assertion that rescissions affected a small portion of its business.
Troughton said the state agency notified the company Thursday of its intent to file the accusation and impose the fine. The notice also said that before filing the accusation, Blue Cross would have an opportunity to show why it was not in violation of the law, she said.
The Department of Managed Health Care also is reviewing a number of individual complaints of allegedly improper rescissions involving Blue Cross and other insurers. Those cases also could result in fines and coverage reinstatement.
Blue Cross is appealing a $200,000 fine imposed in September, the first in an individual rescission case. In that matter, the department accused the health plan of illegally canceling a woman's medical policy because she did not disclose corrective surgery she had undergone 23 years earlier.
After that accusation, the company said it would make a series of revisions, including the development of new application language; new written policies and procedures; the creation of a rescission review panel, including at least one physician; and the appointment of a consumer ombudsman for rescissions.
WellPoint said Blue Cross would continue trying to resolve its differences with regulators. But, it maintained, "Blue Cross has a rigorous and thoughtful process it follows in every case where rescission review occurs because health insurance is so critically important to each and every one of our members."
Jerry Flanagan, a patient advocate with the Foundation for Taxpayer and Consumer Rights, said the investigation's findings should help the department move forward in its effort to develop regulations to clarify the law and toughen sanctions for rescission scofflaws.
"Patients do not go to medical school and rarely know of or understand the information in their medical records," he said. "That's why the law requires plans to check medical records ahead of time and bars them from rescinding coverage unless they can show the patient lied on their application."
William Shernoff, a Claremont lawyer who is representing former policyholders in a class-action suit against Blue Cross, said the department's report corroborated what he found through depositions of company employees and documents obtained through discovery.
"They basically don't attempt to prove willful misrepresentation, and their medical underwriting is lax in most cases," he said.