Poizner goes too easy on insurers

Government regulators ambitious for higher office face an interesting quandary: how to come down hard on the wrongdoers in their jurisdiction so they look tough to the public, but not so hard that they risk really shaking up the establishment.

Today’s case study in walking this knife edge involves state Insurance Commissioner Steve Poizner and his case against Blue Shield of California.

In 2007, Poizner accused Blue Shield of illegally rescinding health insurance policies. In this practice, an insurer waits until a customer needs expensive treatment, then scrutinizes the original application to find flaws in his or her medical disclosures it can cite to justify canceling the coverage -- retroactively, of course.

Poizner said Blue Shield did this to some 700 holders of individual and family policies. (Group policies provided by employers can’t be rescinded the same way.) He said the company’s “alarming” violations of the law would “completely undermine the public trust in our healthcare delivery system” and promised to seek $12.6 million in fines and penalties.

Yet Poizner’s final settlement with Blue Shield, announced Jan. 6, didn’t look much like the preview. There was no provision for multi-million-dollar fines. Blue Shield agreed to restore the customers’ insurance, waiving the usual exclusions for pre-existing conditions. It agreed to reimburse them for medical procedures performed that would have been covered if their policies hadn’t been canceled, although to get the money the customers would have to give up their right to sue.

Blue Shield denies having illegally rescinded policies -- a spokesman maintains that all the rescissions were justified -- but says it will set up internal rules to ensure that it can’t happen in the future.

Poizner, a millionaire businessman with an eye on the Republican nomination for governor next year, contends that he achieved the best result for the affected parties.

“My top priority was to help the people who lost their insurance,” he told me. “My second priority was to have Blue Shield change its procedures.” He maintained that forcing Blue Shield to reinstate the policies would have strained his statutory authority beyond the limit. “That’s not something I can order,” he said. “The fact that I got it is amazingly good news for those 700 people.”

He said he chose to negotiate in part because if he took the company to court there was no guarantee he’d win.

But that’s the way the insurers like to work with regulators -- by jawboning in offices, rather than litigating in open court, because it allows them to avoid months of harsh publicity.

It also feeds into the GOP’s pro-business, anti-regulation mind-set, to which Poizner may need to appeal in the next election year. And it has made some consumer advocates wonder whether Poizner’s style is ideal for a regulator.

“In that realm, you have to be willing to be the bad guy,” observes Amy Bach, executive director of the consumer group United Policyholders.

Blue Shield may not have behaved as badly as some other insurers. There’s no evidence, for example, that it paid a staff member a bonus partially for rescinding policies. That distinction goes to Health Net, whose practices were uncovered via a private lawsuit. Poizner hit Health Net with a $3.6-million penalty a few months ago for its rescission shenanigans.

Let’s put the practice of rescission in context. As my colleague Lisa Girion has documented in a string of shocking articles over the last couple of years, it’s the most poisonously opportunistic trick an insurer can pull on a customer.

Rescission hits people at the moment of their maximum vulnerability, often sticking them with medical bills of five or six figures. By reserving the right, secretly, to revoke a customer’s policy whenever they want, insurers eliminate risk from their business. As for the customers, they’re led to believe they’ve bought a financial umbrella, not a ticking time bomb. They learn the truth only when it detonates.

Rescission is an artifact of our imperfect system of health insurance; if the U.S. had universal coverage like most other self-respecting industrial nations, there would be no way for commercial insurers to cut people off -- they would either be legislated out of existence or required to serve all applicants.

Short of that, the Blue Shield settlement shows that for the insurer there’s almost no downside to rescission. Blue Shield’s settlement just restores the status quo -- 700 restored policyholders are now presenting claims the company should have paid all along. Even Health Net’s $3.6-million penalty was hardly enough to make the company sit up and take notice: In 2007, the last year for which figures are public, it collected nearly 10 times that sum in premiums, on average, every single day.

But for customers there’s no turning the clock back. They’ve spent months or years without insurance, possibly going into debt or forgoing treatments their doctors have recommended. When I asked a Blue Shield spokesman how to compensate people for such losses, he said, “I don’t think there would be any way to account for that” since the losses would be “impossible to determine.”

Poizner may be right in saying that as commissioner he couldn’t merely order Blue Shield to reinstate 700 policies. But he’s underestimating his authority, which includes the right to revoke a company’s license to do business in California. That’s a pretty big bargaining chip in any settlement negotiation.

The model for the uncompromising regulator (some might say too uncompromising) was Eliot Spitzer, the former attorney general and governor of New York. Lord knows nobody would cast Spitzer as Simon Pure, but while in office he forced Wall Street firms to abandon numerous abusive practices, some of which were arguably legal, by threatening to drag them through the courts until they broke.

Spitzer is the rare example of a regulator who rose to bigger things by sticking it to powerful interests. Poizner has made much of his refusal to accept political contributions from insurance companies, which makes him look independent. But going easy on them -- by pledging to extract big fines, but settling for less -- makes it seem as if he doesn’t really want to shake them up, either.

It may be too cynical to assume that Poizner’s approach is designed to win insurers’ support and the GOP’s for his gubernatorial bid. But the interests of California’s millions of health insurance customers would be better served if he really got tough.

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Michael Hiltzik’s column appears every Monday and Thursday. You can reach him at michael.hiltzik@latimes

.com and read his previous columns at www.latimes.com

/hiltzik.