Blue Shield health insurance rescission case to go to trial
The practice of canceling medical coverage after policyholders have become sick or injured has cost insurers millions of dollars in fines and settlements. Now, for the first time, a jury will weigh whether an insurer owes anything to a canceled policyholder.
The case pits a former Cypress man against the health insurer that dropped him after a disabling car accident. Steve Hailey, a former self-employed machinist, and Blue Shield of California will be directly affected by the outcome, but the case already has influenced how insurers in California handle these rescissions.
The case goes to trial this week, but long before that, an appellate court had ruled that insurers should not wait until members are sick or injured before verifying their medical history.
If an insurer does wait, the court ruled, it loses its chance to cancel coverage unless it proves applicants intentionally misrepresented medical history that would have rendered them ineligible.
The 4th District Court of Appeal in Santa Ana said there were questions on both sides for the jury to consider in deciding who is to blame for the Haileys’ loss of coverage. Did Hailey and his wife, Cindy, dupe Blue Shield into covering them? Or did the insurer act in bad faith by blindly accepting their application, conducting a secret rescission investigation and continuing to take their premiums until Steve’s medical bills got too high?
Justice Richard M. Aronson said in the appellate opinion that there was reason to believe Cindy Hailey was confused. The application, he wrote, “although understandable upon close examination and reflection, is no model of clarity, and lends credence to Cindy’s explanation of her omission of Steve’s health information.”
As for bad faith, Aronson wrote: “These facts raise the specter that Blue Shield does not immediately rescind healthcare contracts upon learning of potential grounds for rescission, but waits until after the claims submitted under that contract exceed the monthly premiums being collected.”
A health plan, the appellate judge went on, “may not adopt a ‘wait and see’ attitude after learning of facts justifying rescission.”
Blue Shield declined to comment. But, in previous interviews and in court, Blue Shield has contended that it was within its rights to cancel the Haileys’ coverage because they misrepresented Steve’s true weight and failed to list his medical history, including hypertension and headaches, on their application.
The Haileys say that Cindy was confused by the application and made an honest mistake when she filled it out, believing it was asking only about her medical history.
When the Haileys sued Blue Shield after their 2001 rescission, the practice was largely hidden. Since then, the state’s five largest insurers have been shown to have engaged in systematic efforts to rescind individual policyholders after expensive medical care.
Several insurers set up departments devoted to rescission. They pulled members’ medical records from as far back as 20 years and scoured them for details not disclosed on their applications for coverage. Those discrepancies were used to justify rescissions.
In many cases, individuals were rescinded for omissions that had nothing to do with the illness or injury that triggered the investigation. And, in many cases, the individuals contended, they were confused by the application or unaware of a notation that their insurer found in an old medical chart.
Rescinding thousands of policyholders a year enabled California insurers to save millions of dollars. Health Net Inc., for example, figured that it avoided $35 million in medical expenses over six years. The loss of coverage left individuals awash in medical bills and without healthcare when they needed it most, and it left many hospitals and physicians with uncollectable debt.
The disclosure of systematic rescissions triggered a firestorm of criticism and scrutiny. Lawmakers complained loudly, and regulators opened investigations.
In Blue Shield’s case, Insurance Commissioner Steve Poizner in 2007 accused its Life & Health Insurance Co. unit of 1,262 “serious violations” over a four-year period that, he said, “completely undermine the public’s trust in our healthcare system and are potentially devastating to patients.” Poizner proposed $12.6 million in fines but ultimately declined to impose any.
In the end, regulators dropped their investigations in favor of settlements they said would expedite restitution for victims. The California Department of Managed Health Care collected more than $13 million in fines, including $1 million from Blue Shield. And the insurers agreed to offer new coverage to canceled members and to pay back medical expenses.
Rescission, however, remains legal. And most insurers continue the practice, arguing that retaining members who lied about medical conditions drives up costs.
In the settlements, regulators sought to enhance protections for consumers who made honest attempts to obtain healthcare coverage. Insurers agreed, for instance, to develop simpler applications, to limit the look-back period for medical histories, to take steps to verify applications before issuing coverage and to promptly notify consumers of rescission investigations.
Neither state department has codified any of the promised new practices in regulations. And consumer advocates say it still may be possible for people to lose coverage through no fault of their own.
That leaves room for the courts to further define the limits of the power to rescind. In its December 2007 opinion, the Santa Ana appellate court overseeing the Hailey case ruled that Blue Shield failed to verify the information on the Haileys’ application before issuing coverage.
That ruling makes the case risky for Blue Shield to take to court, said Bryan Liang, executive director of the Institute of Health Law Studies at California Western School of Law in San Diego.
“This is the case that said: You have to show willful misrepresentation [in order to rescind], and if you don’t show it, you have to pay,” he said. “That’s the big risk on Blue Shield’s part.”
Even if Blue Shield convinces jurors that Cindy Hailey understood what the application was asking for and left out her husband’s medical history anyway, the insurer must explain why it waited so long to rescind the Haileys after obtaining medical records that showed Steve had been treated for conditions that were not disclosed on the application.
Blue Shield became suspicious in February 2001 that the Haileys had withheld information, the appellate court noted. Steve’s car accident occurred in March. But Blue Shield did not notify the couple of its rescission until June. By then, Steve had run up more than $400,000 in medical charges.
Had Blue Shield notified the couple more promptly, the Haileys argue, Cindy would have had the chance to get coverage through her employer before the accident, avoiding the dispute, financial ruin for the family and delays in his care.
The appellate court said this does “raise an inference that Blue Shield may have acted in bad faith by delaying its decision to rescind the policy.”
Only one other rescission case in California has gone to trial. Patsy Bates, a Gardena hair salon owner, accused Health Net of improperly rescinding her after a breast cancer diagnosis, stopping her chemotherapy for several months.
Noting that Health Net rewarded an employee for saving money through rescissions, the arbitration judge who decided the case called the insurer’s behavior “reprehensible” and awarded Bates $9 million.
The Hailey case is different. It will be tried before a jury in Santa Ana with Orange County Superior Court Judge Peter J. Polos presiding. Also, Blue Shield denies paying bonuses for rescissions.
Regardless of what happens at trial, the Hailey case will influence other cases for years, said William Shernoff, a Claremont-based lawyer who represents rescission victims in suits against Blue Shield.
“The appellate opinion is the law of California,” Shernoff said. “That will live on and will guide all future cases of this type.”