In a prototypic case, a person (or family) applies for and gets an individual insurance policy (i.e., not an insurance policy obtained through employment.) After the policy is obtained, the policy-holder develops a new, and very expensive medical condition. Once major bills are incurred, the insurance company cancels the policy, claiming that there were errors or omissions on the application.
For example, the Times reported this case, involving Blue Cross of California, which is owned by WellPoint Inc.,
When Steve and Leslie Shaeffer's daughter, Selah, was diagnosed at age 4 with a potentially fatal tumor in her jaw, they figured their health insurance would cover the bulk of her treatment costs.
Instead, almost two years later, the Murrieta, Calif., couple face more than $60,000 in medical bills and fear the loss of their dream home.
Shortly after Selah's medical bills hit $20,000, Blue Cross stopped covering them and eventually canceled her coverage retroactively, refusing to pay for treatment, including surgery the insurer had authorized in advance.
The company accused the Shaeffers of failing to disclose in their coverage application an undiagnosed bump on Selah's chin and physician visits for croup. Had that been disclosed, the company said in a letter, it would not have insured Selah.
The Shaeffers say they weren't trying to hide anything. When they applied for coverage, Selah did not have a tumor, at least as far as they — or any physician — knew. The doctor visits occurred after Leslie filled out the paperwork, and they seemed routine, the Shaeffers say.
The company is facing a number of lawsuits from policy-holders whose policies it retroactively canceled. "The suits accuse health plans of dumping sick policyholders without evidence that the consumers intentionally omitted information about their medical condition or history. They also accuse insurers of using applications that are vague and confusing by design, trapping consumers into making mistakes that can be used to cancel their coverage later."
The article noted that a Blue Cross "employee said in a deposition last year that a special department considers as many as 1,500 cases for cancellation each week in California alone. A consumer lawyer who saw Blue Cross' cancellation tally sheets described the department as a rescission factory."
According to other depositions,
The health plans routinely scrutinize medical records, back 10 years or more, when subscribers submit claims for certain conditions within two years of signing up for coverage.Furthermore, Blue Cross is now in trouble with regulators. "Late Friday, a spokeswoman for the Department of Managed Health Care said the agency could take action against Blue Cross as early as this week. The agency has concluded that the company systematically violated the law by improperly canceling policies and failing to verify medical information on applications before issuing coverage."
If the health plans find information in the records that was absent from the application, they cancel, often without finding out whether the discrepancy was an intentional lie or an honest mistake, according to the depositions.
Furthermore, "Amy Dobberteen, enforcement chief for the Department of Managed Health Care, said the law was clear. Health plans 'are not supposed to be waiting until they get a huge claim and then trying to find a way out of it,' she said. After a claim comes in, they may cancel only for 'willful misrepresentation. Those words are plucked right out of the statute.'"
Insurance that is liable to be canceled any time a policy-holder makes a big claim is hardly deserving of the name. So what should one call what Blue Cross of California is selling to individuals?
ADDENDUM (20 September, 2006) - The Los Angeles Times reported today that Blue Cross responded to the issues above,
Blue Cross of California said Tuesday that it would change some of its procedures for canceling individual health insurance policies, after allegations that it illegally dumped sick policyholders to avoid expensive claims.Critics were only partially mollified.
The state's largest health insurer said it would make the changes — including creating an ombudsman and revising its appeal process — but maintained that it had done nothing wrong.
'The vast majority of rescissions to date are unquestionably proper under any criteria,' said Blue Cross Chief Executive Dave Helwig. 'But we are taking these major steps to minimize the possibility of errors.'
'I'm underwhelmed,' said Bryan Liang, executive director of the Health Law Institute at California Western School of Law in San Diego. 'The fundamental issue still is that they are not addressing these policies according to California law. Once they issue the policy, unless there is actual fraud, they cannot rescind. So despite whatever window dressing they put in place, they are still violating the law.'On the other hand, William Shernoff, a lawyer representing several plaintiffs in a suit against Blue Cross, said
The major breakthrough is when you get a large corporation like this that says they are going to change their ways. But we'll see if these changes are going to be significant and real. The devil's in the details.