September 17, 2006
Los Angeles Times

Sick but Insured? Think Again
Lawsuits accuse insurance companies of retroactively dumping families
that rack up large bills. Firms defend their policies, but the state
is investigating.
By Lisa Girion, Times Staff Writer

When Steve and Leslie Shaeffer's daughter, Selah, was diagnosed at age
4 with a potentially fatal tumor in her jaw, they figured their health
insurance would cover the bulk of her treatment costs.

Instead, almost two years later, the Murrieta, Calif., couple face
more than $60,000 in medical bills and fear the loss of their dream
home. They struggle to stave off creditors as they try to figure out
how Selah can keep seeing the physician they credit with saving her
life.

"We're in big trouble," Leslie said.

Shortly after Selah's medical bills hit $20,000, Blue Cross stopped
covering them and eventually canceled her coverage retroactively,
refusing to pay for treatment, including surgery the insurer had
authorized in advance.

The company accused the Shaeffers of failing to disclose in their
coverage application an undiagnosed bump on Selah's chin and physician
visits for croup. Had that been disclosed, the company said in a
letter, it would not have insured Selah.

The Shaeffers say they weren't trying to hide anything. When they
applied for coverage, Selah did not have a tumor, at least as far as
they — or any physician — knew. The doctor visits occurred after
Leslie filled out the paperwork, and they seemed routine, the
Shaeffers say. They believe Blue Cross was looking for any excuse to
dump their daughter and dodge her bills.

Cancellations such as Selah's are fueling a new backlash against
health plans. In a series of recent lawsuits, policyholders say they
were illegally terminated, causing substantial financial hardship and
jeopardizing their healthcare. State regulators are investigating and
said they were preparing to take action against Blue Cross.

Dawn Foiles says an improper cancellation forced her and her husband
to put their Riverside home up for sale. Steve Leyra says a
cancellation — based on a condition he doesn't even have — cost him
the chance to become a firefighter. George Nazaretyan and his wife are
struggling to save their Van Nuys home and get care for their disabled
twin daughters, even as their medical bills approach $1 million.

The suits accuse health plans of dumping sick policyholders without
evidence that the consumers intentionally omitted information about
their medical condition or history. They also accuse insurers of using
applications that are vague and confusing by design, trapping
consumers into making mistakes that can be used to cancel their
coverage later.

The complaints involve individual policies — the type of coverage sold
to people who work for themselves or for employers who don't offer
health benefits. Unlike many work-based plans, which are open to
qualified employees regardless of health, insurers in California and
many other states can reject applicants for individual policies based
on their conditions or health histories. After an applicant is
accepted, a state law prohibits health plans from canceling unless the
policyholder lied to obtain coverage.

Aside from appealing to the company that dumped them, subscribers'
only recourse is to complain to state regulators or sue. After an
insurer yanks coverage, it can be difficult, if not impossible, to get
a policy from another carrier.

Health plans encourage applicants they reject and policyholders they
cancel to apply to a state-subsidized insurance fund for patients with
high-cost or chronic conditions. But the wait can be long. Lacking
coverage, patients often have to pay cash upfront or go without care.

More than 2 million California residents buy their own health
policies, which some see as an increasingly important form of coverage
because many employers have dropped the benefit as costs have gone up.
Insurers, in a push for healthier and wealthier subscribers, view
individual policies as a growth opportunity.

Outside the companies, no one tracks how often insurers cancel
policies. Blue Cross, which has the biggest share of the California
market, won't say. But an employee said in a deposition last year that
a special department considers as many as 1,500 cases for cancellation
each week in California alone. A consumer lawyer who saw Blue Cross'
cancellation tally sheets described the department as a rescission
factory.

The suits also target Blue Shield, Blue Cross' rival in California.
Both companies sell individual policies in the form of insurance, as
well as provide care through health maintenance organizations, and
both types of coverage are at issue.

State regulators announced investigations in the spring, when they
learned of the suits through news reports.

Late Friday, a spokeswoman for the Department of Managed Health Care
said the agency could take action against Blue Cross as early as this
week. The agency has concluded that the company systematically
violated the law by improperly canceling policies and failing to
verify medical information on applications before issuing coverage.

Spokeswoman Lynne Randolph said the agency's action "is not a consent
agreement. It is not something we are working out with the plan to
come to a negotiated settlement on. We will be bringing a fine and
bringing an action against them for violating the law."

A spokesman for Blue Cross said the company had no comment because it
had not been officially notified of the agency's plans.

The company has denied any wrongdoing, as has Blue Shield. The
agency's investigation of complaints against Blue Shield is ongoing.

The companies won't talk about individual cases such as that of the
Shaeffers. But they say that they cancel policies upon finding
misrepresentations in applications and that such actions safeguard the
integrity of the individual insurance market.

----

The way Steve and Leslie Shaeffer saw it, their $498 monthly premium
was the price of peace of mind. The self-employed tile installer and
stay-at-home mother wanted to make sure that they and their two
children got whatever care they needed and that the bills would never
bury them.

Two years ago, they bought a family health policy from a Blue Cross
affiliate, BC Life & Health. Only a couple of months later, Selah's
diagnosis — aggressive fibromatosis, an extremely rare and
fast-growing tumor — put that policy to the test.

Initially, Blue Cross paid for her care. But when the bills surpassed
$20,000, it stopped. Then, after collecting the Shaeffers' premiums
for most of a year, Blue Cross canceled Selah, saying her parents left
key information out of their application for coverage.

The Shaeffers say that's not so. When Leslie filled out the
application, the couple said, Selah was a healthy girl who hadn't seen
a doctor in months. After submitting the document, Leslie said, she
noticed a bump on Selah's chin, but doctors told her they didn't think
it was serious.

It was not until doctors took a biopsy of the bump — almost two months
later and weeks after the Blue Cross policy had taken effect — that
the Shaeffers said they had any idea that Selah had something
seriously wrong.

But the full scope of Selah's condition did not come into view for a
few more weeks. That's when doctors, after nearly seven hours of
surgery, told Steve and Leslie that the tumor had stealthily invaded
much of the left side of Selah's mouth and jaw. Surgeons removed
chunks of her jaw, mouth and throat wall in an effort to get it all
and guard against a recurrence.

Blue Cross ultimately refused to pay for that operation. And it
threatened to go after the couple for $19,000 it said it had paid for
Selah's treatment before canceling her.

The cancellation jeopardized the girl's care and plunged the family
into the financial turmoil they had sought to avoid when they bought
insurance.

The Shaeffers paid about $25,000 of the bills by borrowing against the
equity in their home and selling a truck Steve used for work. But
bills totaling more than double that amount remain unpaid. The
Shaeffers fear having to sell the English-style cottage Steve designed
and helped build.

"You come out of one battle and you have another one in front of you,"
Steve said. "How are we going to come up with the money? It's a
sickening feeling. It's 24 hours a day."

Health plans say such cancellations are necessary to guard against
people lying on applications. The companies rely on the information
contained in that document to determine who gets coverage and at what
price.

"The reason there is a rescission policy is to prevent fraud," said
Chris Ohman, chief executive of the California Assn. of Health Plans.

But according to the depositions of Blue Cross and Blue Shield
employees, fraud has little to do with it.

A review of depositions and company documents produced for the
lawsuits shows that the health plans routinely scrutinize medical
records, back 10 years or more, when subscribers submit claims for
certain conditions within two years of signing up for coverage.

If the health plans find information in the records that was absent
from the application, they cancel, often without finding out whether
the discrepancy was an intentional lie or an honest mistake, according
to the depositions.

Some consumer lawyers say that violates state law, which forbids
companies from canceling coverage unless a policyholder was
intentionally misleading.

Amy Dobberteen, enforcement chief for the Department of Managed Health
Care, said the law was clear. Health plans "are not supposed to be
waiting until they get a huge claim and then trying to find a way out
of it," she said. After a claim comes in, they may cancel only for "
'willful misrepresentation.' Those words are plucked right out of the
statute."

The health plans see it differently.

Blue Shield takes the position that the applicant's intent doesn't
matter. "The contracts state clearly if anything in the application is
false or incomplete, coverage may be rescinded," spokesman Tom Epstein
said.

He pointed to a 1973 California Supreme Court ruling as the foundation
for the position that intent to deceive is not necessary for
cancellation.

Blue Cross' parent, Indianapolis-based WellPoint Inc., the nation's
largest health benefits company, also cancels California subscribers
whether or not they intended to mislead, and it believes the practice
is lawful, said spokesman Robert Alaniz.

Consumer advocates said the practice makes a mockery of the purpose of
health coverage.

"You think you have insurance, and then, after you get the treatment,
you find out you really don't have insurance after all," said
Claremont lawyer William Shernoff, who represents former policyholders
in several lawsuits against Blue Cross and Blue Shield.

The law is on policyholders' side, said Bryan Liang, executive
director of the Institute of Health Law at California Western School
of Law in San Diego.

The 1993 statute barring cancellation without "willful
misrepresentation" trumps the 1973 court decision, Liang said, adding
that asserting an older ruling amounted to "trolling for anything
that's going to support" the insurers.

The companies say premiums would increase if, before issuing coverage,
they had to verify all the information applicants submitted or if they
had to investigate all policies for fraud before canceling them.

Irvine lawyer Robert Scott, who represents the Shaeffers and several
others in suits against Blue Cross and Blue Shield, said the current
practice was a misguided effort to hold down costs.

"It's all about the money," he said.

So far, the regulatory record is on the health plans' side, however.
Over the last two years, 289 policyholders complained to the
Department of Managed Health Care that they had been improperly
canceled. The agency ruled against policyholders in all but 10 to 20
cases. Those cases, which include some of the plaintiffs suing Blue
Cross or Blue Shield, remain under investigation.

Agency spokeswoman Randolph could not say whether any of the old cases
would be reopened, but she said pending complaints would be resolved.
In addition, she said, the agency planned to give such complaints a
higher level of scrutiny in the future.

----

Dawn and Steve Foiles were left with $100,000 in bills when Blue Cross
terminated Dawn's coverage after authorizing back and neck operations.
It accused her of failing to disclose a 1997 back surgery and refused
to reconsider after the Foileses told the company that it had made a
mistake.

A copy of her application supports her contention that she disclosed
the operation, including the date and name, location and telephone
number of the hospital where it was performed.

But the company's apparent error didn't stop physicians from demanding
payment. The couple used almost all of an $8,000 home equity credit
line to pay some of them.

But, when one physician's collection agent threatened to file a report
with credit agencies over a $7,000 bill, the Riverside couple thought
they had to sell their home and move in with Steve's mother in Idaho.

"I've never been that stressed out in all my life," Dawn said.

----

In a suit set for trial in November, Blue Shield is accused of
canceling Steve Leyra almost two years ago for failing to disclose
diabetes, a condition the Fullerton man doesn't even have.

In correspondence with Leyra and in depositions, Blue Shield employees
said they came to that conclusion based on a doctor's note in a chart
and a prescription for a drug used for diabetes. They acknowledged
that they made the decision without discussing the medication or
Leyra's condition with him or his physician.

Leyra contested the decision, and his physician wrote a letter saying
he had never diagnosed diabetes. "I told them, you guys are making a
mistake," Leyra said.

Blue Shield stood its ground.

The cancellation scuttled a planned operation to correct a minor leg
problem that prevented Leyra from running long distances.

Without it, he had to abandon plans to enroll in a firefighters'
academy. Now, even if he wins his case, Leyra said, at age 40 he is
too old to resurrect his dream of being a firefighter.

----

Both Blues say they cancel only a small fraction of individual
policies. But that may be all it takes to save big because only a
small portion of policies produce high claims, said attorney Gerry
Goldsholle, a former executive with Metropolitan Life in New York.

"Undoubtedly," Goldsholle said, "they had a consultant come in and
say, 'You don't get killed by the little stuff; it's the big stuff
that kills us. Let's go over the big claims with a fine-tooth comb.' "

Blue Cross parent WellPoint is among the most profitable health
insurers. The company, which operates in 14 states, reported $751
million in net income in the second quarter, a 34% year-over-year
increase. Overall enrollment rose slightly to 34 million, the result
in part of the sale of nearly 200,000 individual policies in the first
half of the year.

Companies selling individual coverage in California can, and do,
reject applicants for everything from asthma to athlete's foot. These
so-called underwriting guidelines allow the companies to pass up a
significant portion of the population — the people most likely to use
medical services — or charge them higher premiums. As a result,
compared with group plan members, individual policyholders tend to be
younger, healthier and cheaper to cover.

For others, consumer advocates say, the only way to ensure that they
have health coverage is to get it through an employer.

In the individual market, "the deck is really stacked in favor of the
companies," said Jerry Flanagan, a healthcare advocate with the
Foundation for Taxpayer and Consumer Rights. "They are cash cows."

Indeed. At Blue Cross, the profit margins on its BC Life & Health
individual policies were nearly twice that of its group business,
according to state Insurance Department figures from 2004.

Blue Shield — a nonprofit led by an executive who advocates universal
coverage regardless of medical history — says it can't afford to break
ranks with the industry practice of selecting the healthiest
customers.

Otherwise, "we will end up with all the high-risk people," said Blue
Shield spokesman Epstein.

----

High-risk is one way to describe Ariana and Natalie Nazaretyan, twins
born almost three months prematurely. The girls, who are
developmentally disabled, spend most of their playtime in therapy.

Blue Shield dumped them this year, before their first birthday,
leaving their parents with bills approaching $1 million. It said
George and Narine Nazaretyan failed to report a miscarriage and plans
to seek fertility treatment.

The Nazaretyans say the Blue Shield agent was fully aware of all of
that.

Without insurance, Narine can't get an operation to remove thyroid
cysts that make breathing difficult. George fears losing his furniture
restoration business and the ability to pay for the girls' care on
credit because Blue Shield hired a collection agent to recover more
than $98,000 it paid out before terminating coverage.

"Everything we've worked for, everything we have, can just go down the
drain," he said.

After an inquiry by The Times, Blue Shield's Epstein said the company
halted the collection effort.

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