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California orders sweeping review of HMO policy cancellations

John Leighty, for California Healthfax, April 24, 2008

SACRAMENTO— Under pressure by legislators and consumer groups, California’s HMO oversight agency is launching a review of all retroactive cancellations of individual health policies over the past four years and will order insurers to restore coverage, including payments of medical claims, for members wrongfully dropped.

The state Department of Managed Health Care ordered the immediate reinstatement of health insurance for 26 people last Thursday, and this week began a review of all rescissions going back to 2004. The investigation by an independent arbiter could potentially cost HMOs millions of dollars in penalties and medical claims payments for dropping members after they get sick and seek care.

“We are employing our full regulatory and enforcement authority to open the door to insurance once again for thousands of Californians,” says Cindy Ehnes, director of the DMHC.

Jerry Flanagan, healthcare policy director for Santa Monica-based Consumer Watchdog, praises the DMHC action but says all rescinded policies should be reinstated immediately to ease the hardships of those faced with big medical bills. The only ground for retroactive cancellations is proof of “willful misrepresentation” of a known health condition on a member application, which is rare, he says.

"Retroactively canceling patients is illegal as a matter of law if insurance companies fail to review an applicant's insurability before issuing coverage," Flanagan says. "All illegally cancelled patients must be swiftly reinstated in full, without dragging the process through months or years of review.”

Ehnes says a blanket reinstatement of all rescinded policyholders would exceed her authority under the Knox-Keene Act governing HMOs and opens the door to lengthy court battles. She says affected consumers will regain health coverage and get their medical bills paid sooner through a fair and impartial review of their individual circumstances.

The state’s action came a week after Ehnes was called before a legislative oversight committee and grilled on the agency’s slow progress in finding a solution to the ongoing rescission issue. It also came a day after Rocky Delgadillo, city attorney of Los Angeles, filed a lawsuit against WellPoint, Inc. and subsidiaries Anthem Blue Cross and Anthem BC Life on grounds the insurers illegally revoked policies of more than 6,000 members statewide.

Delgadillo’s Superior Court suit claims 500,000 Anthem members in the state are being “duped” into thinking they have individual coverage that in reality becomes worthless once they become sick. The suit seeks $2,500 per violation or $5,000 if the victim is a senior or disabled. Total fines and restitution against WellPoint/Anthem could exceed $1 billion. In February, Delgadillo filed a similar suit against Health Net, Inc., accusing the insurer of saving $35 million by illegally rescinding policies of at least 1,600 members.

Ehnes says the DMHC has completed a full investigation into the policy practices of the state’s five major HMOs that offer coverage in the individual market and will release more details in the coming weeks.

John Leighty