Michigan Personal Injury Lawyers Fighting For The Injured

Lawsuits Challenge New Health Insurer Tactics To Deny Claims And Benefits

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 in California.”

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 and hypertension.

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.”