Health Net to reinstate 926 dropped policyholders in California

In a continuing state crackdown on health insurers, Health Net Inc. of Woodland Hills has agreed to offer new coverage -- no questions asked -- to 926 people whose policies it canceled after they got sick.

One of the state’s largest insurers, Health Net signed a first-of-its-kind agreement with the California Department of Insurance, agreeing to pay $3.6 million in penalties, plus as much as about $14 million in reimbursements for medical charges that the insurer had refused to pay. The company, however, did not admit to any wrongdoing.

This was the first such action by the Department of Insurance but only the most recent in a string of similar insurer fines and penalties imposed mainly by the state Department of Managed Health Care. The two agencies together regulate health insurance in California.

“These practices damage the trust of consumers who pay their premiums and believe they are protected,” said Insurance Commissioner Steve Poizner. “Moreover, stripping away someone’s coverage can have devastating medical, emotional and financial effects.”

Poizner’s agency said it would continue to oversee Health Net’s compliance at the same time it investigates rescission activities at other insurance companies.

The Health Net agreement came under immediate fire from critics, who called it a partial solution at best. They suggested that the deal announced Thursday might short-circuit plans to sue the insurer and eliminate the potential for more lucrative court damage awards.

Health Net has been zapped by fines, penalties and court judgments in the last year. Most prominent was a $9.4-million judgment awarded in February to Patsy Bates, a Gardena hair salon owner. Her coverage was dropped by Health Net while she was undergoing chemotherapy to treat breast cancer.

The company also was fined $1 million in November for misleading state investigators about bonuses paid to employees based in part on how many policyholders were dropped. In February, Los Angeles City Atty. Rocky Delgadillo sued the company, alleging fraudulent practices, and Health Net is fighting the complaint. And in May, Health Net agreed to reinstate 85 former enrollees and pay a $300,000 administrative fine to the state Department of Managed Health Care.

Health Net Chief Executive Jay Gellert said his company did “not necessarily agree with the California Department of Insurance” on the latest allegations. Nevertheless, he called the settlement an opportunity “to move forward and make sure these affected individuals can obtain coverage.”

Gellert said his firm was committed to helping the governor and the Legislature overhaul the healthcare system to provide coverage for all Californians.

Reports by the Los Angeles Times over the last two years helped prompt state and local investigations, lawsuits and legislation dealing with the insurance industry’s cancellation and rescission practices.

Critics charge that Health Net and its competitors have long gamed the system in order to dump policyholders who buy coverage for individuals and families. Federal law prohibits canceling policies of people who get coverage as members of an employee group.

The critics contend that the insurers ask detailed and often complicated questions about past conditions on confusing applications designed to elicit mistakes; they then issue coverage without verifying the accuracy of the information on the applications.

Only after a policyholder submits a claim for a serious illness do insurers dig into the medical history, using any purported omission of a symptom or condition as an excuse to drop coverage, critics say.

In its agreement with Poizner, Health Net will pay $3.6 million in fines and work with the Insurance Department to improve its practices and reduce rescissions. An additional penalty of as much as $3.6 million could be levied on Health Net if a follow-up examination finds that it did not correct all deficiencies.

The agreement allows Health Net to avoid being targeted for more enforcement action relating to potential legal violations uncovered by auditors.

The department has yet to release a formal report of its investigation. But officials said investigators found evidence that Health Net failed to follow state laws intended to guarantee that policyholders are treated fairly. The insurer halted rescissions this year after a private arbitration judge in the Bates case called its actions reprehensible.

During that trial, Health Net was forced to disclose documents that showed that the company paid bonuses to an employee based in part on how many policies she rescinded. The insurer in court documents credited rescissions with helping it avoid $35 million in medical claims over six years.

Health Net now has agreed to repay expenses for reasonable, medically necessary care that would have been covered by the policies had they not been canceled. The company values those expenses at more than $14 million.

Health Net’s agreement with the Department of Insurance is similar to those that the company and other big insurers struck with the Department of Managed Health Care this year.

In August, California lawmakers passed a bill that would extend protections to individual policyholders by barring insurers from dropping people who make innocent mistakes on their policy applications.

On Thursday a group of rescinded policyholders carried a letter to Gov. Arnold Schwarzenegger’s Los Angeles office urging him to sign the bill into law.

New legislation is needed to allow cancellations only in cases in which people intentionally lied on their insurance applications, said Jerry Flanagan, healthcare policy director for Consumer Watchdog, a Santa Monica advocacy group.

Health Net’s agreement to reinstate policyholders who had been unfairly dropped is a positive step, said William Shernoff, a Claremont attorney who represents rescinded policyholders in a class-action suit in Los Angeles County Superior Court. But Shernoff fears that the deal could give insurers a way to quietly contact plaintiffs and persuade them to give up their rights to seek damages for economic losses and emotional distress.

“This is woefully inadequate and misleading,” he said, “and I think that once it’s brought to the attention of the court, it will not be allowed to stand.”

lisa.girion@latimes.com

marc.lifsher@latimes.com