Rescission Case #2

In this case, involving Blue Shield of California and Steven Hailey, a health insurance rescission was upheld by court review.  The case demonstrates the desperation of those who cannot find health coverage because of pre-existing health conditions, and the personal and societal impact that comes from allowing small group and individual health plans to exclude coverage for pre-existing conditions.  As I've written when asking "Should Health Insurance Be Sold For Profit?", the enforcement of pre-existing condition exclusions is mostly limited to the small group and individual health insurance market.  It doesn't happen in government run health plans like Medicare, Medicaid, CHAMPUS or the VA, nor does it happen in large group health plans.

In this case, Mr. Hailey, who had been covered through his wife's small group health insurance policy for nearly seven years, was badly injured in an auto accident.  While recovering at home, and facing medical and hospital bills of more than $450,000, of which Blue Shield had already paid $104,000, Blue Shield rescinded Mr. Hailey's coverage, because his wife had understated his weight on his application for insurance by some 45 pounds, and had omitted important parts of his medical history, dating to childhood, that would have been grounds for the insurer to decline coverage initially.

Eight years after the auto accident and rescission decision by Blue Shield, Orange County Superior Court Judge Peter J. Polos ruled in favor of Blue Shield on every issue, finding that the Hailey's willfully omitted and willfully mis-represented information on their application for insurance, and that Blue Shield's rescission investigation was timely and its investigation procedures were reasonable.  Mr. Hailey had many "health issues," as reported here.  These included heart problems, shortness of breath, acid reflux, obesity, swallowing difficulties and he took several prescription drugs for these problems, which would have caused Blue Shield to decline coverage for Mr. Hailey had these conditions been disclosed.  

What of the societal impact?  Mr. Hailey's problems will be covered with no questions asked by Medicare if he lives to age 65.  If the Hailey's were poor enough to quality for Medicaid, his problems would be covered.  If Mr. or Mrs. Hailey worked for a large employer, his problems would be covered.  It is only because Mr. Hailey is self-employed, and Mrs. Hailey works for a small business that underwriting of Mr. Hailey's health occurs, and an intrusive health insurance application must be completed to obtain health insurance coverage.  To its credit, Blue Shield is reported here, to have offered an alternative policy, with a different premium (likely a higher premium for less coverage) that would have provided coverage from the beginning.  There is no word as to whether Hailey purchased such coverage.  If he did not, or could not afford such coverage, or if he did buy the coverage, but it left him with large deductible, co-pay and coinsurance obligations, it is not unreasonable to expect that his medical debts will be discharged through bankruptcy, and these costs will be spread among those of us who have health insurance.  

What of the personal impact?  Blue Shield garnished the wages of Mrs. Hailey to recover the $104,000 that it had paid out, and the Hailey's were left with half a million dollars worth of health expenses.  Because of the rescission, Mr. Hailey's health was adversely affected.  Because he waited so long for surgery to repair an injured urethra, his bladder stopped working, and he had to depend on an implanted catheter to drain urine into a bag strapped to his body.

Blue Shield of California's news release, issued on May 28, 2009, concludes:

While we are very pleased with today's victory, we acknowledge that the healthcare system needs to be reformed. We will continue our longstanding advocacy of universal health coverage regardless of pre-existing conditions because we believe everyone has a right to quality health care.

Once the Patient Protection and Affordable Care Act has become fully effective, we will see the end of tragic stories like this one involving the Haileys and Blue Shield.

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.

Soaring Premiums -> Surging Underinsured

Drew Altman, Ph.D., president and CEO of the Kaiser Family Foundation, writes an excellent piece describing the serious erosion of health insurance benefits. Those who bought their own health insurance, from 2004 to 2007, still paid 52 percent of their health expenses, on average, out of their own pocket.

How is this possible? Through a clever insurance marketing tool the insurance industry refers to as a "buy-down." If insurance premiums get pushed up fast enough, the rational response of consumers is to beg for relief. Insurers commonly suggest that the increase can be mitigated or even eliminated by switching to a policy with higher deductibles or greater cost sharing, which provides less protection for the consumer. As a result, we have a surging number of Americans who are underinsured, many unknowingly. These people are a serious illness or accident away from a financial shock when they find the insurance they have been paying for provides far less protection than they need.

Imagine a family of four earning $70,000, and carrying individual coverage with a $3,500 deductible, 20 percent coinsurance to $6,000, and $40 office visit co-pay. If, in the midst of a snowstorm, their car slid into a bridge abutment, causing serious injuries to two family members, the family could be liable for two deductibles of $3,500 each, plus two out-of-pocket maximum's of $6,000 each, representing a total hit to the family budget of $19,000. How many families could come up with an amount equal to more than 27 percent of their annual income within 30 days of insurance making its payments to doctors and hospitals? And, in addition to these costs, these two individuals would be liable for $40 office visit co-pays each time they needed to see one of several physicians throughout the course of their recovery, even though they met their deductible and out-of-pocket maximum for the year. All of this is further exacerbated by the fact that the primary wage earner (or all wage earners) could be out-of-work while they recover. Not everyone has a ready supply of sick-leave that will ensure income continues uninterrupted during an extended convalescence. So, imagine having a debt of $19,000, coupled with a six week absence from work, and the pay that goes with it. Now that $19,000 debt represents almost 31 percent of the $61,923 this family would earn for 46 weeks of work.

Dear Senator Johanns

Senator Mike Johanns (R-NE) sent an email message to those who have communicated with him.  In the message, he outlined the reasons why majority rule and an up or down vote on healthcare is a dangerous thing. This was my caustic reply.

You are badly misreading the American public if you believe we have turned against healthcare reform.  Large majorities of Americans want an end to pre-existing condition exclusions and rescissions.  To do that requires all of us to be covered. Universal coverage requires subsidies for those who cannot afford coverage.  America needs the health reform bill to become law.   My friend (name redacted) needs the health reform bill to become law.  Her COBRA coverage expires in September.  She is currently being treated for thyroid cancer, and is out of work.  She has no prospects for being able to buy individual health insurance at the age of 57 with a cancer history, even though she has had health insurance for her entire life.  America can do better than leave a 57 year old woman with cancer uncovered when she is most in need of coverage.

We desperately need to slow the growth in healthcare spending, which, as Warren Buffett has pointed out clearly, is making our nation uncompetitive in the world.  All of our competitors have much lower health costs as a percentage of Gross Domestic Product (GDP).  We spend more than anyone else in the world (17% of GDP) to have the 37th best health system in the world, which is not as good as Costa Rica, and is only incrementally better than Slovenia. Meanwhile, Japan, with the 10th best health system in the world spends only 8.2% of GDP on healthcare; Germany, with the 25th best health system spends but 10.7% of GDP on healthcare, the United Kingdom, with the 18th best health system spends only 8.2% and France, with the world's best healthcare spends only 11.2% of GDP on health.   Healthcare costs are a cancer that is destroying our ability to compete in the world, and to recover from the Great Recession.

The Republican Party is standing in the way of what is best for America. So I completely disagree with your party-fed talking points that reconciliation is a bad way to pass refinements to healthcare reform. In case you have been asleep, the bill passed the Senate on December 24.  All that remains is to reconcile differences between the House and Senate versions.  Since that involves primarily financial issues, it is a completely acceptable way to deal with the intransigence of the Republican Party. 

I fully support reconciliation as an effective means to get health reform passed.