Blue Cross of California "routinely" violated state law when it canceled individual health insurance coverage after policyholders got pregnant or sick, making no attempt to determine whether they did anything to merit such "harsh" treatment, according to a state investigation of practices that appear to be industrywide.
State regulators plan similar investigations of other health plans in California, and the findings against Blue Cross ratchet up the risk of liability for other insurers, many of whom face lawsuits from consumers who claim they were illegally dumped and subjected to substantial hardships.
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.
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.