L.A. sues insurer over cancellations

One of the state’s largest insurers, Health Net Inc. of Woodland Hills, sold individual policies with the promise of medical coverage while engaging in a secret and illegal scheme to drop patients if they needed expensive treatment, the Los Angeles city attorney contended in a lawsuit filed Wednesday.

The company defrauded thousands of policyholders using “a wide range of unlawful, unfair and fraudulent acts and practices” aimed at avoiding payment for expensive treatment by canceling the policies of those who needed it, “rendering that coverage largely illusory,” the suit maintained.

Los Angeles City Atty. Rocky Delgadillo said in an interview Wednesday that he was opening a separate criminal investigation into Health Net’s practice of paying employee bonuses based in part on canceling policies of people who have submitted substantial medical claims.

The lawsuit is the latest action by state regulators, lawmakers, doctors, patients and now law enforcement officials targeting insurance company practices -- notably canceling policies when they become too expensive for the insurers. The companies, however, maintain that they do this to keep costs down by weeding out people who may have failed to disclose preexisting conditions when they applied for coverage.

Health Net has been in government investigators’ cross hairs before. In November, the company’s bonus program was made public in an arbitration hearing and sparked outrage. Within a week, Health Net was socked with a $1-million fine by state regulators for lying twice to investigators about such payments. The state is still investigating the company’s bonus and cancellation practices.

Since then, Health Net has said the bonus program was dropped some time ago.

On Wednesday, Health Net officials said they were surprised by the lawsuit and suggested that it was misguided and needlessly duplicative of other enforcement efforts. The company denied the lawsuit’s central allegation that the coverage it sells is often of little value when it is needed most.

The company paid $200 million in claims last year on individual policies that serve more than 100,000 consumers, spokesman David Olson said.

“That’s pretty substantive and pretty substantial,” he said. Health Net policyholders “are getting low-cost, high-quality coverage in our view.”

Olson said Health Net had been reviewing its cancellation practices since late 2006 and had made changes -- such as creating an internal independent review -- in an effort to “protect people’s rights in a fair and appropriate way.”

He said the company also was working with regulators to improve its practices.

“We don’t believe that duplicative litigation is the proper route to resolve these issues,” Olson said.

One of a handful of insurers that dominate the California marketplace, Health Net is the first to be tagged by a city task force investigating tactics throughout the industry that make it difficult or impossible for consumers to get the coverage for medical care they believed they were buying with their premiums.

A tipster website -- www.protectingtheinsured.org -- launched by the city attorney last week has received thousands of hits. The task force is using the information to broaden the practices and companies under scrutiny.

Dr. Richard Frankenstein, president of the California Medical Assn., applauded the effort to put an end to what he said looked like a scheme “to rapidly take people’s money and slowly tell them they won’t pay their claims.”

The detailed 48-page suit accuses Health Net of failing to clean up its act even though many of the allegedly illegal tactics were repeatedly pointed out by policyholders, regulators and appellate courts.

In all, the company’s business practices routinely violate more than 20 separate state laws, the suit alleges, including canceling policyholders for making innocent mistakes on applications.

Delgadillo said his office’s investigation discovered evidence of “wholesale violations of the law” by Health Net, including the improper cancellation of 1,600 policies over the last four years and delays in treatment for thousands of other policyholders while the company carried out illegal cancellation investigations.

“These are not just aberrations,” he said. “These are by design, and there’s a pattern and practice that needs to stop.”

Delgadillo said his goal was to get Health Net, either by agreement or by court order, to follow state laws. He carries a big stick: The suit alleges that Health Net sold at least 100,000 individuals policies over the last four years. If the city attorney proved that each policy was falsely advertised and vulnerable to an unfair cancellation -- and if the maximum penalty was assessed in each case -- the company’s liability could run into the hundreds of millions of dollars, sources close to the investigation have concluded.

The city attorney also wants Health Net and two subsidiaries named in the suit to reinstate improperly rescinded policies and to refund premiums -- even to people whose policies were not canceled.

“One of the themes here is the healthcare coverage being offered and sold by the defendant companies was largely illusory,” said Jeffrey Isaacs, chief of the city attorney’s criminal and special litigation branch.

The suit contends that the scheme begins with the applications for coverage that pose “confusing and ambiguous” questions, are loaded with jargon and ask for medical judgments “that few consumers are competent to make.” The application, it alleges, is “a trap for the unwary that maximizes the possibility that it will contain errors or omissions” that Health Net can later use to cancel consumers.

Health Net’s Olson said the company’s application had been approved by regulators and didn’t need to be changed.

“There are 110,000 Californians who figured it out and were able to fill out the application in a way that got them low-cost, high-quality coverage,” he said. “It’s fine and it’s working.”

lisa.girion@latimes.com