The state Thursday slapped a $1-million fine on Health Net Inc., the Woodland Hills-based insurer that acknowledged last week that it set goals for cancellations and paid bonuses in part based on how many policyholders were dropped and how much money was saved.
State officials said they levied the fine after finding that the company misled investigators about such bonuses on two occasions during interviews at the company's headquarters this fall.
Thursday's fine was solely related to the company's candor. Health Net's cancellation practices remained under investigation by the state. If any violations of state regulations are found, the company could face additional fines.
In a consent agreement, Health Net agreed to pay the fine -- one of the largest in the history of the Department of Managed Health Care -- and to no longer engage in compensation practices linked to coverage cancellations.
The fine comes amid a broad investigation the state began early this year into how frequently insurers cancel policyholders' health coverage after they get sick and run up large medical bills.
Although these rescissions affect only a small portion of the companies' overall business, they can leave sick patients with crushing medical bills and no way to obtain needed treatment.
Department Director Cindy Ehnes stressed the seriousness of the action. "This department regards truthfulness from insurers as essential for us to do our job and protect the public," she said. "This is a penalty for a failure to be truthful" with regulators.
Health Net offered an apology. "We are sorry for any misunderstanding with the DMHC. It is important to note that we are currently abiding by the policy in the agreement," Jay M. Gellert, the firm's chief executive, said in a statement.
Retroactive cancellations have been the focus recently of intense scrutiny by lawmakers, state regulators and consumer advocates.
The managed-care agency is reviewing the coverage policies of five health maintenance organizations: Kaiser Foundation Health Plan Inc., PacifiCare Health Systems Inc., Blue Cross of California, Blue Shield of California and Health Net.
In the agency's first report, Blue Cross was fined $1 million for routinely rescinding health insurance policies. Reviews of the four other insurers are expected over the next several months.
State law forbids insurance companies from tying compensation for claims reviewers to their decisions on those claims.
Insurers maintain that cancellations are necessary to root out fraud and keep premiums affordable. Individual coverage is issued only to the healthiest applicants, who must disclose preexisting conditions.
Last week, The Times disclosed the existence of documents Health Net submitted as part of an ongoing arbitration hearing in a lawsuit brought by Patsy Bates, a 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.
Bates, who filed the suit against Health Net, owns a hair salon in a Gardena mini-mall between a liquor store and a doughnut shop. She said she was left with nearly $200,000 in medical bills and stranded in the midst of chemotherapy when Health Net canceled her coverage in January 2004.
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 healthcare expenses" through her rescission of 301 policies -- one more than her performance goal.
During the initial arbitration hearing last week, Health Net lawyers acknowledged that the company had tied some of Fowler's compensation to policy cancellations, including Bates'. But they maintained that the bonuses were based on the overall performance of Fowler and the company. The lawyers also said that meeting the cancellation target was only a small factor in the equation. Fowler declined to comment.
The arbitrator overseeing the case earlier had ruled the rescission invalid because Health Net had mishandled the way it sent Bates the policy when it issued coverage. In the coming weeks, he is expected to determine whether Health Net acted in bad faith and owed Bates damages.
Health Net contends that Bates failed to disclose a heart problem and underreported her weight on her application by about 35 pounds. Had it known her actual weight or that she had been screened for a heart condition tied to her use of the diet drug combination fen-phen, it would not have covered her in the first place, Health Net said.
Separately, the California Department of Insurance, which regulates insurance policies along with the Department of Managed Health Care, said in an interview that it was investigating the case.
Health Net's disclosures marked the first time an insurer revealed how it linked cancellations to employee performance goals and to its bottom line.
According to the healthcare department, agency surveyors visited Health Net headquarters on Oct. 17 and Nov. 6 as part of its investigation. The agency said a "senior employee" was asked whether the company had a policy linking compensation or bonuses to the number of rescissions made each year.
The agency said the employee answered that the company had no such policy during both interviews. A Health Net spokesman said top executives were unaware of the employee's statements.
The department is expected to conduct an additional on-site review at Health Net headquarters in the next few weeks in light of the Bates case and Thursday's fine, a spokeswoman said.
Said Ehnes, the healthcare department director: "This is not the end of the story."