Trial Magazine
August 2009

Lawsuits, Congress chip away at health insurance rescission

By Allison Torres Burtka

Thousands of patients with individual or family health insurance policies have had their policies rescinded after they became seriously ill, and they have filed individual and class action lawsuits against their insurers, alleging bad faith and breach of contract.  Congress, state and local officials, and hospitals also have helped expose the practice of health insurance rescission, also called Postclaims underwriting.

The House Energy and Commerce Subcommittee on Oversight and Investigations held a hearing in June after an investigation into three insurers: Assurant Health, WellPoint, Inc., and UnitedHealth Group.  A committee memo notes that “the current regulatory framework governing the individual health insurance market is a haphazard collection of inconsistent state and federal laws.”

“The companies who engage in these rescission practices argue that they are entirely legal, and to a large extent they are.  But that goes against the whole point of insurance,” said subcommittee Chairman Bart Stupak (D-Mich.) in a statement.

Plaintiffs argue that insurers make their applications long and confusing so that, after policyholders need expensive treatment, the company can scrutinize their applications and find some reason to drop them.  The companies say they need to be able to rescind policies to keep consumer fraud and misrepresentations in check.

Jennifer Wittney Horton, the lead plaintiff in a class action against Blue Cross, testified that the insurers “don’t do anything to make sure you understood the question [on the application], or that you supplied all the information they need to decide whether they want to insure you or not.  They just accept you, and accept your premium checks. It’s after you see a doctor that everything changes.”

For insurance companies, rescission pays.  The three companies investigated by the House subcommittee reported saving more than $300 million by rescinding nearly 20,000 policies from 2003 to 2007. 

The subcommittee cited several examples of rescissions: a man whose agent entered his weight incorrectly on his application; family members of policyholders with omissions of misrepresentations; people whose medical records contained notes on conditions they did not know about; and people who failed to disclose conditions unrelated to what they needed treatment for.  In one of those cases, the insurer reversed its decision after the Illinois attorney general’s office intervened and wrote to the company.

In the first rescission case to go to trial, a California Superior court judge directed a verdict in favor of Blue Shield of California. (Hailey v. Cal. Phys. Serv., No. 03CC01789 (Cal., Orange Co. Super. May 28, 2009).) But it is the earlier appellate court decision in that case, which held that an insurer must make reasonable efforts to ensure that a potential policyholder’s application is accurate and complete, that “sets the rules of the road going forward,” said William Shernoff of Claremont, California.

Shernoff’s firm is working on three class actions and at least 50 individual suits, two of which are set for trial in January.  He said that, overall, progress had been steady. “I’m optimistic that we’re going to prevail on all of these,” he said.

A class action of more than 800 patients and Los Angeles City Attorney Rocky Delgadillo both settled claims against Health Net, Inc. in February.  The two settlements were contingent on each other.  Shernoff, who represents the plaintiffs, said it was a novel approach whose outcome may influence future settlements.

The joint settlement allows class members to purchase coverage; reimburses them for expenses; holds them harmless from bills; and requires Health Net to pay civil penalties, adopt a corporate compliance program, enact a moratorium on rescissions, and stop giving employees bonuses for rescinding polices. (Bet Joseph v. Health Net, Inc., No. BC388634, People v. Health Net, Inc., No. BC385816 (Cal., Los Angeles Co. Super. Feb/10, 2009).) Delgadillo’s office has also filed suits against WellPoint and Blue Shield.

Anthem Blue Cross (a subsidiary of WellPoint) agreed to reverse 2,300 rescissions and pay a fine of $15 million in February as part of a settlement with the California Department of Insurance.

The California Hospital Association reached a settlement with Health Net in May over payments the hospitals did not receive for services they provided to patients whose policies Health Net rescinded.  The association represents a class of about 200 hospitals.  It reached a similar settlement with Blue Cross of California in 2008.

Although much of the litigation is concentrated in California, the problem is nationwide, Shernoff said.  He explained that rescission has been going on for decades, but the lawsuits began to attract media attention and regulators began to fine insurers in the last few years.  “Health insurance is in the limelight now,” he said.

Some insurers use diagnostic codes for thousands of conditions and illnesses that automatically trigger an investigation when a policyholder is treated for one of them.  They include leukemia, breast cancer, diabetes, bronchitis, and pregnancy with twins. 

Rescission may have wider implications for health care policy, too.  Shernoff noted that the rescission problem is “fueling the argument for a public option” for health care insurance that is not driven by profit. The three insurance company CEOs who testified at the June House hearing noted that comprehensive health care reform legislation would eliminate the need for rescission.