Woodland Hills-based Health Net Inc. avoided paying $35.5 million in medical expenses by rescinding about 1,600 policies between 2000 and 2006. During that period, it paid its senior analyst in charge of cancellations more than $20,000 in bonuses based in part on her meeting or exceeding annual targets for revoking policies, documents disclosed Thursday showed.
The revelation that the health plan had cancellation goals and bonuses comes amid a storm of controversy over the industry-wide but long-hidden practice of rescinding coverage after expensive medical treatments have been authorized.
These cancellations have been the recent focus of intense scrutiny by lawmakers, state regulators and consumer advocates. Although these "rescissions" are only a small portion of the companies' overall business, they typically leave sick patients with crushing medical bills and no way to obtain needed treatment.
Most of the state's major insurers have cancellation departments or individuals assigned to review coverage applications. They typically pull a policyholder's records after major medical claims are made to ensure that the client qualified for coverage at the outset.
The companies' internal procedures for reviewing and canceling coverage have not been publicly disclosed. Health Net's disclosures Thursday provided an unprecedented peek at a company's internal operations and marked the first time an insurer had revealed how it linked cancellations to employee performance goals and to its bottom line.
The bonuses were disclosed at an arbitration hearing in a lawsuit brought by Patsy Bates, a Gardena hairdresser whose coverage was rescinded by Health Net in the middle of chemotherapy treatments for breast cancer. She is seeking $6 million in compensation, plus damages.
Insurers maintain that cancellations are necessary to root out fraud and keep premiums affordable. Individual coverage is issued to only the healthiest applicants, who must disclose preexisting conditions.
Other suits have been settled out of court or through arbitration, out of public view. Until now, none had gone to a public trial.
Health Net had sought to keep the documents secret even after it was forced to produce them for the hearing, arguing that they contained proprietary information and could embarrass the company. But the arbitrator in the case, former Los Angeles County Superior Court Judge Sam Cianchetti, granted a motion by lawyers for The Times, opening the hearing to reporters and making public all documents produced for it.
At a hearing on the motion, the judge said, "This clearly involves very significant public interest, and my view is the arbitration proceedings should not be confidential."
The documents show that in 2002, the company's goal for Barbara Fowler, Health Net's senior analyst in charge of rescission reviews, was 15 cancellations a month. She exceeded that, rescinding 275 policies that year -- a monthly average of 22.9.
More recently, her goals were expressed in financial terms. Her supervisor described 2003 as a "banner year" for Fowler because the company avoided about "$6 million in unnecessary health care expenses" through her rescission of 301 policies -- one more than her performance goal.
In 2005, her goal was to save Health Net at least $6.5 million. Through nearly 300 rescissions, Fowler ended up saving an estimated $7 million, prompting her supervisor to write: "Barbara's successful execution of her job responsibilities have been vital to the profitability" of individual and family policies.
State law forbids insurance companies from tying any compensation for claims reviewers to their claims decisions.
But Health Net's lawyer, William Helvestine, told the arbitrator in his opening argument Thursday that the law did not apply to the insurer in the case because Fowler was an underwriter -- not a claims reviewer.
Helvestine acknowledged that the company tied some of Fowler's compensation to policy cancellations, including Bates'. But he maintained that the bonuses were based on the overall performance of Fowler and the company. He also said that meeting the cancellation target was only a small factor.
The documents showed that Fowler's annual bonuses ranged from $1,654 to $6,310. But Helvestine said that no more than $276 in any year was connected to cancellations.
He said Fowler's supervisor, Mark Ludwig, set goals that were reasonable based on the prior year's experience.