Health Insurance Rescissions: How One Story Led to Insurance Reform

It started on March 20, 2006, with what I thought was a one-shot story about the health care language gap. Two and a half years later, I am still writing follow-ups (more than 40 articles in all) about the story behind the original story - the long-hidden practice of some insurers of retroactively canceling policyholders with large medical bills.

These exposes have led to outcomes I couldn't have imagined when I wrote the first story. It was about a lawsuit against Blue Cross of California that seemed to raise important questions about insurers' efforts to reach out to immigrants whose first language is not English. Since then, California lawmakers crafted no fewer than five bills. State regulators launched investigations that have led to more than $13 million in fines against insurers, as well as pledges by the companies to re-issue coverage to thousands of consumers. And consumer advocates are pushing for a law to ban retroactive cancellations – formally called rescissions - unless insurers prove that applicants lied to gain coverage.

My experience illustrates the importance of allowing a story to lead you where it will. It also demonstrates the value of paying attention to what your readers tell you after you turn up the first spadeful of dirt. And, finally, it shows the value of cultivating sources and scouring records.

The lawsuit that sparked my first story was filed in Orange County Superior Court on behalf of Raudel Rodriguez, a self-employed scrap metal hauler, and his wife Maria, who alleged that Blue Cross of California (now Anthem Blue Cross) had unlawfully rescinded his policy and refused to cover medical expenses he incurred while insured.

The couple said they had been persuaded to buy individual policies by a Blue Cross commercial on Spanish-language television. They had listened to the pitch in Spanish and called the number on the screen, which was answered by a Spanish-speaking Blue Cross agent, who filled out an application for coverage over the telephone. The agent asked a series of health history questions, and they replied honestly - all in Spanish, the couple said.

An offer of coverage came in the mail days later, along with a copy of the completed application - all in English. With limited English skills, the couple couldn't be sure the answers were correct, but they trusted that the agent had faithfully captured their words. They signed the application and returned it, along with a check of about $1,000 for two months of coverage.

A couple of weeks later, Raudel went to the doctor with chest pains. He had had similar pains almost a year earlier, but the physician he saw then attributed them to heartburn, Raudel said. The second bout of chest pains led to the discovery of clogged arteries. A cardiologist recommended a procedure to clear them out.

"I told my husband, ‘Thank God we got that policy,'" said Maria, speaking Spanish, in a 2006 interview. "At least it was going to be covered."

But that's not what happened. Months after the procedure, Blue Cross notified the couple that Raudel's coverage had been rescinded and that the $130,000 bill was their responsibility. The letter said that Raudel had failed to disclose a pre-existing condition (the earlier episode of chest pain). Blue Cross would not have covered Raudel if it had known of the earlier bout, the letter said.

The couple was devastated. They had no idea how they were going to pay their medical bills or get Raudel the care he needed. Raudel said he had answered all the agent's questions honestly and that at the time he had had no reason to believe his first bout of chest pains was anything other than heartburn.

I wrote the story as an example of the problems language barriers can cause in health care. I included the opinion of experts that health plans needed to improve their communications with immigrants, especially in cities like Los Angeles, where people use many different languages to navigate health care. And I thought that was the end of the story.

The readers respond

But the day it ran, my in-basket overflowed with emails from readers telling me the same thing had happened to them or someone they knew. They all said their insurers had accused them of lying on their applications after they incurred significant medical bills. Unlike Raudel and his wife, these were all native English speakers. So it was clear that the problem was more than a language barrier.

To gain perspective, I called several lawyers who specialize in suing health insurers on behalf of policyholders. But I only found two - one of them Raudel's lawyer - who knew much about retroactive cancellations. The other attorney, William Shernoff, was preparing to file a whole batch of rescission complaints against Blue Cross. The suits, eventually filed in courthouses around Southern California, accused the company of gaming its limited legal power to rescind by dropping people with high medical bills to save itself money.

Blue Cross steadfastly denied any wrongdoing and continues to do so. It says it follows the law and only drops people who omitted information from applications that would have caused coverage to be declined in the first place.

Every story I wrote led to more e-mails from readers. Soon, I discovered a raft of rescission suits around the state against all the major insurers - not just Blue Cross, but also Kaiser, Blue Shield and Health Net. Although rescissions had been going on for years, the problem had not surfaced because insurers had often won early dismissal of lawsuits, or quietly settled them. There had never been a trial.

The regulatory profile also was low. A few hundred consumers had complained, but regulators had almost always dismissed their grievances in favor of the insurers.

But that all began to change as the details of the insurers' rescission practices emerged.

First, there were widely acknowledged problems with the applications themselves. They include long lists of medical questions. Lawyers and consumers accused the insurers of making them purposefully complex and confusing in order to induce errors that could later be used against the applicants. Then there were more developments:

• Several insurers acknowledged that they did not verify the information on the applications before issuing coverage.

• Internal Blue Cross documents were inadvertently included in the public portion of a courthouse docket, even though they were supposed to have been sealed. The documents showed Blue Cross operated a secret unit dedicated to investigating the applications of policyholders after they submitted claims for major medical problems. The investigations consisted of gathering medical records and combing through them looking for information - symptoms, complaints, potential diagnoses, prescription medications - that could be used as evidence of a pre-existing condition. The investigations took weeks or months and often ended with the cancellation of a sick member's coverage back to the date of issue. That left patients without insurance and with expensive bills, often at a time when they needed medical care.

• Other documents showed that Health Net based bonuses to an employee, in part, on how many people she rescinded and how much money that allowed the company to avoid paying. Over six years, the documents showed, Health Net figured it avoided $35.5 million in claims.

Health Net was forced to produce the documents in connection with a rescission suit, and it wanted to keep them under seal. But lawyers for the Los Angeles Times persuaded the arbitration judge that the documents did not meet the high standard for confidentiality and were essential to understanding an issue of high public interest. The judge ordered that the documents be open to the public - along with the proceeding in which they had been disclosed.

That was the arbitration trial Patsy Bates v. Health Net. The Gardena hair salon owner sued the company for rescinding her coverage after she got breast cancer. The rescission, which Health Net contended was legal, interrupted her chemotherapy. The arbitration judge found for Bates, calling Health Net's actions reprehensible and ordering it to pay her about $9 million. As far as I know, it was the first and only rescission case to go to public trial.

After that came the news that Blue Cross had sent letters to physicians asking them to be on the lookout for symptoms in their new Blue Cross patients of pre-existing conditions. The letters instructed the physicians to report such evidence to Blue Cross for use in rescission investigations. Physicians balked, and the company dropped the practice the day the story ran.

Legislators and regulators respond

The revelations about the role that rescission plays in insurers' repertoire and the toll it takes on patients struck a chord among readers and policy makers, as evidenced by the multiple bills introduced in the Legislature.

[Editor's note: Gov. Arnold Schwarzenegger vetoed one bill (AB 1945) that would have cracked down on health insurance companies that rescind policies after expensive claims are filed, but signed another (AB 1324) that requires health plans to justify rescinding policies to the Department of Insurance or Department of Managed Health Care. That bill also bars health plans from trying to recover the costs of claims for care provided unless they can prove the policyholders deceived them when they applied for coverage. Schwarzenegger also signed a bill (AB 2569) that prohibits insurance companies from rescinding coverage of family members of individuals whose coverage has been rescinded.]

California regulators believe rescission is a nationwide problem. And it may be. A Families USA study in early 2008 of the individual market found that there are few safeguards against the practice in most states. Enforcement actions and lawsuits have been reported in Connecticut and Arizona. New Mexico adopted a law aimed at limiting rescissions. And the U.S. House Oversight and Government Reform Committee has launched an investigation to determine the scope of rescission and test the need for federal controls.

Awareness of the practice has helped shape conversations about health care reforms, particularly those that would expand the individual market, where rescissions occur. Federal law requires group coverage offered through employers to take all comers, regardless of medical condition, a mandate known as guarantee issue. A handful of states, including New York and New Jersey, have extended that consumer protection into the individual market. But in most states, individual coverage is issued or declined based on the applicant's health history.

Tackling the subject in your area

If you decide to do your own rescission story, my advice is: Don't tell your editor. What I mean is: Don't say you are looking into "rescission." His eyes will glaze over, and he will mumble something like, "Re-what?"

Instead, tell your editor you are going to look into whether health insurers in your area are dropping individual policyholders after they get sick.

There is no central repository of rescission information. Perhaps the best place to start is with the largest health plans in your area. What will they tell you about their rescission practices? How often do they rescind? Under what circumstances? Have they changed their practices recently in light of the controversy? Are they aware of any legal or regulatory investigations of their practices?

You also should check in with the state insurance department, as well as the attorney general. In Los Angeles, the City Attorney's office has filed suit against three insurers over rescission, so you might try local law enforcement agents as well.

Lawmakers are taking an interest in the issue, so talk to them. Elected officials who chair health and insurance committees seem like the best ones to start with.

Lawyers who represent insurance policyholders, often known as "bad-faith" lawyers, also should be queried about any litigation over rescission. Also check in with physician and hospital groups. In California, they joined the fray, filing suit against insurers to recover fees for care delivered to patients who were later rescinded.

Lisa Girion is a business reporter for the Los Angeles Times.