SF Gray Panthers

Facing suits, health insurers take different tacks
After Blue Cross agrees to settlement,
Blue Shield is digging in against claims

Victoria Colliver, Chronicle Staff Writer

San Francisco Chronicle, Saturday, June 2, 2007

Blue Cross of California and Blue Shield are targets of lawsuits and regulatory scrutiny for the practice of canceling individual health insurance on the grounds that enrollees misrepresented their medical histories on applications.

But the two companies have taken different legal strategies. While Blue Cross agreed last month to a class-action settlement that includes changing its policies, Blue Shield has taken a far more aggressive stance.

“We believe everything we’ve done has been within the law and, at this point, have no plans to change our practices,” Blue Shield spokesman Tom Epstein said.

Blue Shield, based in San Francisco, made that point in two state court legal victories and a settlement this week.

One of the cases involved the parents of developmentally disabled twins accused of failing to reveal reproductive problems. The second concerned a woman who withheld her history of uterine fibroids prior to surgery.

Meanwhile, Blue Shield agreed Wednesday to a settlement involving a 52-year-old Redlands woman who had her coverage revoked in 2005.

The heart of the issue is whether in order to “rescind” — or retroactively revoke — coverage, health insurers have to prove that individual members lied about their health histories when they applied.

Rescission affects people with individual rather that group or employer-sponsored coverage because each application must undergo medical underwriting to be approved. Insurers say that rescissions are rare, but necessary to ensure accurate underwriting of individual policies.

“Rescission is an unfortunate but necessary tool in ensuring that what’s in the application is accurate. Otherwise, rates would skyrocket for everyone and more people will end up uninsured,” Epstein said.

Blue Shield maintains that it doesn’t have to prove intentional misrepresentation in cases where there are grounds for suspecting deceit. That puts it at odds with the state regulator, the Department of Managed Health Care, which says inadvertent or unintentional mistakes should not be grounds for rescission.

Epstein admits to a bit of a public relations nightmare.

“Theses cases can be very sympathetic. Nobody can be more sympathetic than parents of twins,” Epstein said, referring to the Nazaretyans, a Los Angeles couple with developmentally disabled twins.

In one of its legal victories this week, a Los Angeles County Superior Court judge upheld Blue Shield’s rescission of the Nazaretyans’ policy because the mother failed to disclose she had had a miscarriage and was undergoing fertility treatments.

The family claimed they revealed that information to an insurance agent, who failed to disclose it on the application made in August 2004. Los Angeles County Superior Court Judge Robert Hess on Wednesday rejected that argument, saying the insurer bore no responsibility for the agent because the agent was independent and not an employee of Blue Shield, according to court documents.

On Tuesday, Los Angeles Superior Court Judge Ann Jones upheld Blue Shield’s rescission of coverage of Christiane Callil, the woman with fibroids, ruling she failed to disclose her history of uterine tumors in the year prior to her January 2005 application.

The attorney for both plaintiffs, William Shernoff of Claremont, said he will appeal both cases.

“Their (Blue Shield’s) position is if they find an inconsistency in the application and the medical records, they can rescind without even talking to the insured, the agent or the doctor,” Shernoff said. “We think that outrageous and so does the Department of Managed Health Care.”

The department is investigating the rescission practices of several insurers, including Blue Shield. In March, the agency fined WellPoint Inc.’s Blue Cross $1 million for failing to investigate potential application flaws prior to rescinding coverage. The Blue Shield investigation has not been completed, agency officials said Friday.

Redlands resident Patricia Abbott, also represented by Shernoff, agreed to a settle her claim against Blue Shield Wednesday, the two sides said. Terms were not disclosed.

In an interview conducted prior to the settlement, Abbott said Blue Shield claimed she had failed to disclose information that would have indicated her need for a hysterectomy. But she said omissions on her application were unintentional because they involved notes written in her medical records that were not disclosed to her.

“Insurance is supposed to make you feel safe — that when you get into a situation and need something, you know you’re covered,” Abbott said. She and her husband managed to pay off most of the $25,000 in medical bills and she has since obtained group health coverage.

Shernoff said he expects an appeal involving Blue Shield and a Cypress couple to clarify the controversy over whether health insurers must prove intentional deceit.

In that case, which will be the first to reach an appellate court in California, plaintiff Cindy Hailey has been accused of misrepresenting her husband’s weight and health history. Blue Shield officials said Hailey claimed that she did not realize the application covered her husband as well as herself, a point the insurer said was made clear numerous times.