Rescission Case #1

Health reform is now the law of the land.  One of the most despised practices of the health insurance industry will no longer be legal as this law is implemented:  rescission.  Rescission is the insurance industry practice of cancelling coverage when a beneficiary files a significant claim, if the insurer can find an error or omission in the insured's application, even when it is unrelated to the problem for which the beneficiary needs health services.  Having health insurance to cover significant claims is why we pay for insurance coverage in the first place.

Every individual and small group health insurer has its underwriting department review applications for insurance before granting coverage.  They look for reasons to deny coverage.  Pre-existing conditions, like heart disease, diabetes or cancer are immediate red flags.  But, if an insurance policy is issued, rescission gives the insurer another chance to avoid paying a significant claim.  When a beneficiary presents a significant claim, or is diagnosed with a condition that will generate significant claims over time, many carriers ask their rescission departments to review applications to see if there were any errors or omissions, previously overlooked by underwriting, that could be the basis for rescinding the policy, and avoiding a large claim payout.  These departments will compare the application against medical records which applicant's are often required to provide as part of the insurance application process, looking for a lab result, a physician's note, test result or physical finding that differs from the application.

Health Net, Inc., one of our nation's largest health insurers, cancelled Patsy Bates' policy after she began treatment for breast cancer.

Bates, 51, said the first notice she had that something was awry with her coverage came while she was in the hospital preparing for lump-removal surgery. She said an administrator came to her room and told her the surgery, scheduled for early the next day, had been canceled because the hospital learned she had insurance problems. Health Net allowed the surgery to go forward only after Bates' daughter authorized the insurance company to charge three months of premiums in advance to her debit card, Bates alleged. Her coverage was canceled after she began post-surgical chemotherapy threatments.

The reason for the rescission?  Health Net alleged that her application for health insurance indicated her weight was 35 pounds less than it actually was, and that she had been screened for heart damage due to taking the diet drug combination known as fen-phen.  Nothing in the story indicates the fen-phen drug combination caused any heart damage, only that she was screened for it.  There is no allegation on the part of Health Net that either her weight or heart screening in any way contributed to or caused her breast cancer, although obesity is a known risk factor for breast cancer.

Her application for insurance was completed by the insurance agent who stopped by her beauty salon, and promised her he could saver her money on health insurance.  He asked her questions while she styled a customer's hair.  She is not certain that he asked her every question on the application, and given that the insurance agent earns a commission of as much as 10 percent of premium, it is in the agent's interest to complete applications in a way that will pass underwriting, so it's not impossible to believe that an unscrupulous agent would have shaved a few pounds off her stated weight, or decided that since her heart screening may have been negative, there was no need to report it.  Over my years of working with the health industry, the underwriting department is known by the sales and marketing staff as the "business prevention unit," because underwriting turns down applications the agent thought were solid.  When underwriting declines an application, the agent earns no commission. 

This case is made more egregious by the finding that Health Net set goals for the rescission unit for the number of policies they cancelled, and provided bonuses to underwriters who exceeded their goals.  The Los Angeles Times found this:

Woodland Hills-based Health Net Inc. avoided paying $35.5 million in medical expenses by rescinding about 1,600 policies between 2000 and 2006. During that period, it paid its senior analyst in charge of cancellations more than $20,000 in bonuses based in part on her meeting or exceeding annual targets for revoking policies, documents disclosed Thursday showed.

And what of the beneficiary/patient?  Ms. Bates chemotherapy was delayed for four months because Health Net had terminated her coverage.  Eventually a program for charity care covered her treatment -- a program which collected no insurance premiums from her.  Meanwhile, the company which had collected health premiums for at least six months, declined coverage when the patient desperately needed it.  Three years later, Ms. Bates was still uninsured, now with a pre-existing condition -- a breast cancer diagnosis -- far worse than being overweight. 

The Patient Protection and Affordable Care Act will help Americans like Patsy Bates.  It will also help the rest of us who know not when we would have been in a situation like that of Ms. Bates.

The rest of the story can be found here.  Health Net was ordered by a private arbitration judge to pay Ms. Bates $9 million.

Calling Health Net's actions "egregious," Judge Sam Cianchetti, a retired Los Angeles County Superior Court judge, ruled that the company broke state laws and acted in bad faith.

"Health Net was primarily concerned with and considered its own financial interests and gave little, if any, consideration and concern for the interests of the insured," Cianchetti wrote in a 21-page ruling.

Sadly, Health Net will undoubtedly pass the cost of this judgement, less any reimbursement they may have received from their own errors and omissions insurance policy, along to policy holders in the form of higher health insurance premiums. Policyholders will pay for the outrageous behavior of their health insurer.