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.