To keep their bottom lines growing, health insurance companies are testing
a variety of new tactics to deny claims and benefits, consumer advocates
say, including rescinding policies after claims are filed and directing
claimants to pursue other sources of benefits, such as Social Security
Disability Insurance (SSDI). Some of these methods are more effective
than others, but all keep injured consumers from receiving necessary insurance
payments, according to trial lawyers representing policyholders.
Currently in the spotlight are the policies of “dual-role insurers”—those
who both pay benefits and decide who is eligible to receive them. The
Employee Retirement Income Security Act (ERISA) permits insurance companies
to play both roles, but consumer advocates argue that these insurers have
a built-in conflict of interest. When these companies deny claims, how
much weight should that potential conflict carry in a lawsuit? Lower courts
have issued conflicting rulings.
The U.S. Supreme Court is considering that question in MetLife v. Glenn;
it heard oral arguments in April. (Metropolitan Life Ins. Co. v. Glenn,
2008 WL 1775019 (argued Apr. 23, 20008).) MetLife stopped paying Wanda
Glenn’s disability benefits after two years, when it decided her
condition had improved. Glenn sued, arguing that the company had a financial
incentive to deny her claim. The Sixth Circuit ordered her benefits reinstated
because the insurer “acted under a conflict of interest” and
made the decision without “principled and deliberative” reasoning.
In appealing to the Supreme Court, MetLife argued that without actual evidence
that a conflict of interest influenced its decision to stop paying Glenn’s
benefits, that conflict should not carry much weight in her lawsuit.
MetLife urged Glenn to apply for SSDI benefits about a month before it
stopped paying her claims. During oral argument, Justice Ruth Bader Ginsburg
questioned whether this recommendation could serve as evidence that MetLife
had acted in its own interest. A decision was pending at press time.
Removing the risk
An insurance practice coming under increasing scrutiny is so-called postclaims
underwriting. Rather than rejecting a policyholder at the time of application,
insurance companies wait until he or she files a claim and then void the
policyholder’s coverage. Also known as rescission, the practice
has taken center stage in California, where recent policyholder lawsuits
and media reports have led to regulator investigations and government suits.
Postclaims underwriting works like this: “After you make a claim
for insurance benefits, insurance company representatives review your
initial application for coverage, searching for any hint of a ‘misrepresentation’
that they could argue permitted them to cancel the policy,” according
to a description posted on the Web site of San Francisco attorney Arnold
Levinson, who handles insurance bad-faith cases. “If you make a
claim on your health insurance, they may comb through your medical file.
If they find any medical procedure or treatment that is not noted on your
application, they can try to use it as a reason to rescind your policy.”
Such practices have been challenged by policyholders for years. In 1993,
a Wyoming federal court found postclaims underwriting to be a bad-faith
insurance practice, and in 1994, the Mississippi Supreme Court ruled that
an insurer could not determine whether a claimant was eligible for coverage
after it had issued a policy. (White v. Continental Gen. Ins. Co., 831
F. Supp. 1545 (D. Wyo. 1993); Lewis v. Equity Nat. Life Ins. Co., 637
So. 2d 183 (Miss. 1994).)
“Postclaims underwriting is usually a disfavored practice anywhere
because it’s unfair,” said William Shernoff, a Claremont,
California, plaintiff attorney who’s handled about 200 rescission
cases in the last two years. “California is leading the way in stopping
this harmful practice, and maybe it will catch on in other states.”
Shernoff noted that a spate of lawsuits led to a recent series of articles
on rescission by Lisa Girion in the Los Angeles Times, and the public
attention spurred industry regulators to investigate and fine health insurers
Health Net and Blue Cross for providing misinformation about retroactive
cancellations. Los Angeles City Attorney Rocky Delgadillo filed a class
action against Health Net, accusing it of illegally canceling coverage
of about 1,600 patients and delaying the claims of thousands of others
in drawn-out investigations over whether to rescind their policies.
In April, the state Department of Managed Care, which regulates HMOs operating
in California, reinstated the insurance of 26 people whose policies had
been rescinded and ordered a review of all rescission decisions made by
the state’s five largest health plans in the last four years.
“Health care is an election-year issue,” said Shernoff. “And
public officials in other states are picking up on what we’re doing
Shernoff represented Patsy Bates, whose insurance policy was rescinded
by Health Net while she was undergoing chemotherapy treatments for breast
cancer. The insurer said Bates had made misrepresentations on her application—such
as a weight discrepancy—but in arbitration, the administrative law
judge awarded punitive damages to Bates and accused Health Net of “pulling
the rug out from underneath” her. Internal company documents revealed
that the insurer awarded bonuses to its employees based on the number
of policy cancellations they completed. (Bates v. Health Net, Inc., No.
BC321432 (interim arbitration award Feb. 21, 2008).)
Late last year, the first case attempting to bar postclaims underwriting
reached the appellate level. In Hailey v. California Physicians’
Services, the court found that the state’s health insurance access
act bans the practice except when the insured willfully misrepresents
his or her health conditions. However, the court found, a health care
plan must do “complete medical underwriting” before issuing
a policy, which means making reasonable efforts to ensure that an application
is accurate and complete. (158 Cal. App. 4th 452 (2007).)
Cindy Hailey filled out an application for her family for health insurance
from Blue Shield but said she didn’t realize she was supposed to
provide health information for her husband and son as well as herself—and
the company’s agent who provided the application didn’t tell
her to do so. After her husband went to the hospital for stomach problems
and filed a claim, Blue Shield’s underwriting investigation unit
found that Steve Hailey weighed 285 pounds rather than the 240 his wife
had listed on the application and that he’d been treated for headaches
Later, when Steve Hailey was involved in an auto accident that left him
permanently disabled, Blue Shield retroactively rescinded the Haileys’
policy and demanded that they repay the company for health care he’d
received. When they couldn’t make payments, Blue Shield started
garnishing Cindy Hailey’s wages.
Hailey sued for breach of contract, bad faith, and intentional infliction
of emotional distress, but the trial court granted summary judgment to
Blue Shield and said the medical expenses must be repaid. The appeals
court issued a temporary hold on the garnishment of her pay, sought amicus
briefs on the law and public policy against improper insurance cancellations
and postclaims underwriting, and reversed the summary judgment.
“What the companies are doing is taking the risk out of health insurance
for themselves,” said Michael Nutter, who represents the Haileys.
“Insurers look at policies after the fact and kick those with serious
illnesses and claims out of the pool so that only healthy people are covered.
“Insurers are motivated by profit,” Nutter added. “To
get them to change their business model, the people in California are
saying, ‘You can’t do this anymore.'” The appellate
court found that the Haileys were entitled to sue for emotional distress
and breach of the duty of good faith and fair dealing.
“This case can cause a sea change in the way insurers do their underwriting,”
said Nutter. “Now they’re going to have to do it adequately.”
Passing the buck
Other plaintiffs have sued insurers under the federal False Claims Act
(FCA), asserting that insurance companies knowingly committed fraud by
forcing applicants to apply for SSDI benefits even when they clearly would
not qualify for the program. The Social Security Administration (SSA)
uses a strict definition of “disability” under which those
who can still work generally don’t qualify.
This tactic was laid out by former Cigna Corp. employee Dawn Barrett, who
filed a 2003 whistleblower suit in federal district court in Boston, alleging
that the company violated the FCA by forcing claimants to apply for SSDI
before paying their claims. (U.S. ex rel. Dawn Barrett, No. 1:03-cv-12382-MLW
(D. Mass. filed Nov. 25, 2003).)
According to attorneys who practice in the SSDI field, if the injured claimant
refuses to apply for SSDI, the company may reduce his or her benefits
by the amount it estimates SSDI would pay—or even stop paying benefits
altogether. Insurers instruct their policyholders to submit multiple appeals
after being rejected for federal assistance. The average wait for an administrative
law judge hearing is now well over a year. The insurance companies win
by delaying payments—sometimes for years—while their claimants
wade through SSA appeals.
If the claimant qualifies for SSDI, insurance companies “coordinate
benefits” and deduct that amount from what they pay the policyholder.
This allows the company to reduce its claim reserves and increase profits.
After the exposure of rescission and other methods insurers use to try
to dump policyholders and avoid paying claims, the companies are likely
to move on to new tactics, lawyers say.
“Now they’re going to look at how else they can do it,”
said Nutter. “I think they’ll look toward cancellations,”
which shut off a policy as of a specific date, but pay claims until then.
“So regulatory agencies are now going to have to review cancellations
and modifications of consumer plans.”