When Insurers Fail, Insured Lack Safety Net : Consumers: Because California does not have a health insurance guarantee fund, policyholders find themselves out in cold when companies are shut down.

Ed Frommer is an angry man.

When his daughter was born with serious health problems last summer, the medical bills came to almost $50,000. Frommer learned to his horror that his health insurance would not cover the bills because his insurance company had been taken into bankruptcy proceedings by the state.

Frommer is one of an estimated 100,000 Californians affected by the collapse of health insurance companies in the past several years, a situation that state insurance officials and consumer advocates say underscores the need for a health insurance guarantee fund.

“Someone is guilty in this thing,” said Frommer, 37, a Lancaster publicist and actor. “I want justice.”

Frommer’s plight is part of a larger problem emerging as one of the significant issues in this year’s session of the state Legislature, experts said. Several legislators have proposed a health insurance guarantee fund that would function similarly to the California Insurance Guarantee Assn., which provides emergency coverage for casualty and property insurance policyholders if their company collapses.

California is one of only six states that do not have a guarantee fund for life and health insurance, said Deputy Commissioner Ron Rosen of the state Department of Insurance.

The system varies somewhat from state to state, but the basic concept calls for insurers and policyholders to pay into a fund that enables the state to pay medical bills if a company folds. The fund also pays for temporary insurance for people who are having difficulty obtaining new coverage.

Previous efforts to implement such a system in California have failed because of disputes over funding. In exchange for contributing to the fund, the insurance industry wants tax breaks such as those that exist in other states. In 1980, voters who opposed giving insurers such tax breaks rejected a proposal to create a guarantee fund, Rosen said.

But, 10 years later, the pressure for action has grown. Frommer’s company--California Pacific Life Insurance of Petaluma--was among four companies that have been taken into insolvency proceedings by the state since 1986, Rosen said, contrasted with one in the 13 years before 1986.

There have been negotiations between the insurance industry and the insurance department in recent years on the guarantee-fund question, officials said. But this will be the first time that legislators, who have been working on other aspects of the insurance crisis, will focus on the emerging problems attributed to the lack of a guarantee fund, said Leah Cartabruno, a consultant to state Sen. Alan Robbins (D-Van Nuys). Robbins is the author of proposed guarantee fund legislation. Assemblyman Eric Seastrand (R-Salinas) has penned similar legislation in the Assembly.

The skyrocketing cost of health care has affected all insurers, particularly smaller companies that generally provide health insurance to employees of small businesses. Combined with bad investments and mismanagement, that has made it increasingly difficult for the small insurance carriers to survive, experts said. And people such as Frommer often end up bearing the brunt of the problem.

“It’s a terrible situation,” said Judith Bell, an executive board member of Health Access, a nonprofit consumer and labor coalition. “You think you are covered and the only thing that stands between you and the bill collector is the financial soundness of the company. . . . This kind of problem is indicative of a systemic problem with health insurance.”

Stephen Sirota, formerly the attorney for California Pacific, said small insurers are being forced out of an increasingly perilous market.

“If you have a savings-and-loan problem where the country has paid billions of dollars to bail out savings and loans, where the losses were to stockholders, it seems that health issues should be treated with the same kind of support and public regulation,” he said.

Consider the case of Buzz Gammel of the San Francisco Bay area, another of the about 3,500 policyholders affected by the demise of California Pacific. Gammel, 45, underwent a series of expensive operations early last year after doctors discovered a tumor the size of a tennis ball in his brain.

California Pacific responded by raising his company’s monthly premium from $1,700 to more than $10,000. Gammel complained to the company and to the Department of Insurance, but the point soon became moot: the insurance department took the company into conservatorship in May and began liquidation proceedings in August.

Gammel has filed suit against the broker who got him insurance with California Pacific, which had been taken into conservatorship once before, in 1983. The company was allowed to resume operation because regulators completed a rehabilitation that left it on sound financial footing, Rosen said.

Gammel’s unpaid medical bills exceed $100,000. The work force at his San Rafael salvage company has withered from close to 100 employees to about five. He faces foreclosure on his house. Despite the debilitating effects of the disease and of the financial nightmare, he wants to join the efforts to create a health insurance guarantee fund.

“If I were a drunk driver I could get insurance,” he said. “I have cancer and I’ll never get insurance again.”

Like Gammel, Frommer’s experience turned him into something of a crusader.

Frommer’s wife, Alisa, gave birth in June to a daughter, Hillary, who suffered neurological and physical complications that required several weeks of costly intensive care at Tarzana Regional Medical Center.

Frommer’s family had obtained health insurance from California Pacific several years earlier when Alisa worked as an office manager for a San Fernando Valley tire firm. They maintained coverage through a conversion plan when Alisa’s employer went out of business.

In late June, about two weeks after Hillary was born, an alarmed Frommer called the company and the state insurance department when he discovered that the company was having financial trouble. California Pacific officials told him the company was in good shape, Frommer said. But state insurance officials told him the company was not paying claims because it had been taken into conservatorship.

Sirota said he did not know whether Frommer’s account of his phone call is accurate, but he said company officials made no effort to conceal the conservatorship or the fact that the company was a low-rated carrier that often insured people who could not get insurance elsewhere.

State officials told Frommer the department had known that the company appeared to be having financial difficulties since late 1988, when California Pacific applied for permission to change ownership.

Since then, in a barrage of phone calls and letters, Frommer has been asking state officials, legislators and just about anyone else he can think of why policyholders were allowed to continue paying a company that was in financial trouble.

The answer, according to state officials--and even consumer advocates who have little love for bureaucracy--is that the department’s position in such case is a difficult one.

Although she did not want to comment on the specifics of this case, Judith Bell of Health Access said that, overall, the department faces “a very tricky policy question.”

“The department is in a difficult position because it is trying to protect the company and therefore protect the policyholders,” she said. “The department’s responsibility is to try to keep the company solvent and in the marketplace.”

According to court documents, officials undertook a yearly review of the company’s finances in March, 1989--well before the birth of Hillary Frommer and shortly after Buzz Gammel’s insurance problems started.

California Pacific’s liabilities far exceeded assets. An in-depth examination completed at the end of April showed a $1.5-million deficit, Rosen said, prompting an application for conservatorship granted by a Sonoma County judge in May.

The objective of a conservatorship is for the department to rehabilitate a company, Rosen said. Informing all policyholders of the company’s problems would lead to wholesale desertion of clients and certain collapse of the insurer, he said.

“Obviously you send out the billing notices,” he said. “We are attempting to rehabilitate the company. You don’t want to drive everyone away.”

The department does inform policyholders who inquire about the company’s status about the conservatorship, Rosen said, as they informed Frommer when he called in late June.

And, Rosen said, notices of non-renewal of insurance were sent out to policyholders when, after some legal wrangling, the judge granted the state’s request to begin liquidation proceedings in early August.

Frommer said that amounts to gambling with the money of unknowing policyholders to prop up a potentially doomed company. And, although a guarantee fund would put an end to the gambling, Bell said consumer advocates believe the department should do more to police insurers.

“Our studies have found that the department is not as aggressive as it should be,” she said. “They should be regularly auditing companies. That’s what’s supposed to keep companies from going to the brink of insolvency.”

Insurance officials are now examining California Pacific’s assets in an insolvency proceeding that will last at least two years and will probably provide policyholders with only a percentage of their claims, Rosen said.

“They’ll get something, but who knows how much,” he said. “It doesn’t look good.”

Policyholders who were healthy or did not have large claims were relatively untroubled by the collapse of California Pacific and have obtained new insurance, Rosen said.

Meanwhile, Gammel and Frommer have not been abandoned.

Gammel said his doctors have been very understanding about setting up a long-term payment plan.

A television producer helped Frommer find a job that enabled him to qualify for health coverage this year. And Frommer’s case moved Tarzana Regional Medical Center administrators to a highly unusual decision: They have written off Frommer’s $26,000 bill, spokeswoman Lois Green said.

“It’s not a specific hospital policy,” she said. “This is really a rather extraordinary series of events.”

Both Frommer and Gammel said they are willing to testify before insurance committees in the state Senate and Assembly when legislators take up proposals for a health insurance guarantee fund later this year.

“I hope it never happens to another family,” Gammel said. “I hope to keep my strength up and go for it.”