Blue Cross cancellations called illegal

As a result of its unprecedented investigation, the Department of Managed Health Care on Thursday said that it had fined Blue Cross $1 million -- an amount immediately criticized by canceled policyholders and consumer advocates as too small to matter to an insurer whose parent company, WellPoint Inc., earned $3.1 billion in profit last year on revenue of $57 billion.

Indianapolis-based WellPoint disputed the findings, saying it acted legally and that some rescissions are necessary to combat fraud.

"The vast majority of Blue Cross' rescissions are unquestionably proper under any criteria," WellPoint said.

At issue are individual policies, the type needed by consumers who cannot get group coverage from employers or others. Although insurers cannot deny coverage to members of group plans, state law allows insurers to deny granting individual policies to applicants with preexisting medical conditions.

The state investigation found that Blue Cross used computer programs and a dedicated department to systematically investigate and cancel the policies of pregnant women and the chronically ill regardless of whether they intentionally lied on their applications to cover up preexisting medical conditions -- a standard required by state law for canceling individual policies.

Regulators examined 90 randomly selected cases of policy cancellations -- out of about 1,000 a year in California -- and found violations in each one.

"This looks like 'Rescission Inc.,' " said Bryan Liang, director of the Institute of Health Law Studies at California Western School of Law in San Diego. "It's clear if 100% of these individuals had their policies illegally pulled, that means that there's a problem. These are just the tip of the iceberg."

The state report said the legal standard for cancellation was high because it put plan members at great risk -- financially and medically -- and because it left physicians and hospitals holding the bag for services rendered in good faith and often with prior authorization from the insurer.

"Rescission is the harshest possible punishment," Department of Managed Health Care Director Cindy Ehnes said. "It leaves providers unpaid and it leaves the enrollee uninsurable."

About 6.5 million California residents lack health insurance.

Ehnes said she hoped that the latest fine -- and a vow by the agency to review the company's progress in 18 months -- would encourage Blue Cross, the state's largest health plan, to change and set an example for others.

"They feel clobbered by this fine," she said. "It's not intended to go easy on them."

The department also plans to open similar investigations of Kaiser Permanente next month and, later, Blue Shield of California, HealthNet and PacifiCare, she said.

"We are now trying to clean up an industry practice," Ehnes said. "We insist on fair processes."

The Blue Cross investigation was fueled by Los Angeles Times stories that disclosed that the insurer, along with other health plans, routinely canceled coverage of individual policyholders after they got sick, prompting some to lose their homes and suffer other hardships.

Blue Cross disputed the state's findings in a detailed response filed with the department. Among other things, the company said that "the underpinnings of the report are based largely on factual errors by the department's reviewers."

Ehnes said the reviewers relied on documentation in the company's case files.

The company also said it had made substantial changes since January 2004 to early 2006, the period reviewed by the department.