Health insurer tied bonuses to dropping sick policyholders
By Lisa Girion
Los Angeles Times Staff Writer

November 9, 2007

One of the state's largest health insurers set goals and paid bonuses
based in part on how many individual policyholders were dropped and how
much money was saved.

Woodland Hills-based Health Net Inc. avoided paying $35.5 million in
medical expenses by rescinding about 1,600 policies between 2000 and
2006. During that period, it paid its senior analyst in charge of
cancellations more than $20,000 in bonuses based in part on her meeting
or exceeding annual targets for revoking policies, documents disclosed
Thursday showed.

The revelation that the health plan had cancellation goals and bonuses
comes amid a storm of controversy over the industry-wide but long-hidden
practice of rescinding coverage after expensive medical treatments have
been authorized.

These cancellations have been the recent focus of intense scrutiny by
lawmakers, state regulators and consumer advocates. Although these
"rescissions" are only a small portion of the companies' overall
business, they typically leave sick patients with crushing medical bills
and no way to obtain needed treatment.

Most of the state's major insurers have cancellation departments or
individuals assigned to review coverage applications. They typically
pull a policyholder's records after major medical claims are made to
ensure that the client qualified for coverage at the outset.

The companies' internal procedures for reviewing and canceling coverage
have not been publicly disclosed. Health Net's disclosures Thursday
provided an unprecedented peek at a company's internal operations and
marked the first time an insurer had revealed how it linked
cancellations to employee performance goals and to its bottom line.

The bonuses were disclosed at an arbitration hearing in a lawsuit
brought by Patsy Bates, a Gardena hairdresser whose coverage was
rescinded by Health Net in the middle of chemotherapy treatments for
breast cancer. She is seeking $6 million in compensation, plus damages.

Insurers maintain that cancellations are necessary to root out fraud and
keep premiums affordable. Individual coverage is issued to only the
healthiest applicants, who must disclose preexisting conditions.

Other suits have been settled out of court or through arbitration, out
of public view. Until now, none had gone to a public trial.

Health Net had sought to keep the documents secret even after it was
forced to produce them for the hearing, arguing that they contained
proprietary information and could embarrass the company. But the
arbitrator in the case, former Los Angeles County Superior Court Judge
Sam Cianchetti, granted a motion by lawyers for The Times, opening the
hearing to reporters and making public all documents produced for it.

At a hearing on the motion, the judge said, "This clearly involves very
significant public interest, and my view is the arbitration proceedings
should not be confidential."

The documents show that in 2002, the company's goal for Barbara Fowler,
Health Net's senior analyst in charge of rescission reviews, was 15
cancellations a month. She exceeded that, rescinding 275 policies that
year -- a monthly average of 22.9.

More recently, her goals were expressed in financial terms. Her
supervisor described 2003 as a "banner year" for Fowler because the
company avoided about "$6 million in unnecessary health care expenses"
through her rescission of 301 policies -- one more than her performance
goal.

In 2005, her goal was to save Health Net at least $6.5 million. Through
nearly 300 rescissions, Fowler ended up saving an estimated $7 million,
prompting her supervisor to write: "Barbara's successful execution of
her job responsibilities have been vital to the profitability" of
individual and family policies.

State law forbids insurance companies from tying any compensation for
claims reviewers to their claims decisions.

But Health Net's lawyer, William Helvestine, told the arbitrator in his
opening argument Thursday that the law did not apply to the insurer in
the case because Fowler was an underwriter -- not a claims reviewer.

Helvestine acknowledged that the company tied some of Fowler's
compensation to policy cancellations, including Bates'. But he
maintained that the bonuses were based on the overall performance of
Fowler and the company. He also said that meeting the cancellation
target was only a small factor.

The documents showed that Fowler's annual bonuses ranged from $1,654 to
$6,310. But Helvestine said that no more than $276 in any year was
connected to cancellations.

He said Fowler's supervisor, Mark Ludwig, set goals that were reasonable
based on the prior year's experience.

"I think it is insulting to those individuals to make this the focal
point of this case," Helvestine said.

Bates' lawyer, William Shernoff, said Health Net's behavior was
"reprehensible."

He said the cancellation goals and financial rewards showed that the
company canceled policies in bad faith and just to save money. After
all, he told the arbitrator, canceling policies was Fowler's primary job.

"For management to set goals in advance to achieve a certain number of
rescissions and target savings in the millions of dollars at the expense
of seriously ill patients is cruel and reprehensible by any standards of
law or decency," Shernoff said.

The company declined requests to make Fowler available to discuss the
reviews.

Cianchetti, the arbitrator, earlier ruled the rescission invalid because
Health Net had mishandled the way it sent Bates the policy when it
issued coverage. At the end of the hearing, it will be up to Cianchetti
to determine whether Health Net acted in bad faith and owes Bates any
damages.

The disclosures surprised regulators. A spokesman said state Insurance
Commissioner Steve Poizner was troubled by the allegations.

"Commissioner Poizner has made it clear he will not tolerate illegal
rescissions," spokesman Byron Tucker said. "We are going to take a hard
and close look at this case."

In recent months, the state's health and insurance regulators have
teamed to develop rules aimed at curbing rescissions and to more closely
monitor the industry's cancellation policies.

Other insurers that have rescission operations, including Blue Cross of
California and Blue Shield of California, said they had no similar
policies linking employee performance reviews to rescission levels. Blue
Cross said it conducted audits to ensure that claims reviewers were not
given any "carrots" for canceling coverage.

Bates, who filed the suit against Health Net, owns a hair salon in a
Gardena mini-mall between a liquor store and a doughnut shop. She said
she was left with nearly $200,000 in medical bills and stranded in the
midst of chemotherapy when Health Net canceled her coverage in January 2004.

Bates, 51, said the first notice she had that something was awry with
her coverage came while she was in the hospital preparing for
lump-removal surgery.

She said an administrator came to her room and told her the surgery,
scheduled for early the next day, had been canceled because the hospital
learned she had insurance problems. Health Net allowed the surgery to go
forward only after Bates' daughter authorized the insurance company to
charge three months of premiums in advance to her debit card, Bates
alleged. Her coverage was canceled after she began post-surgical
chemotherapy threatments.

"I've got cancer, and I could die," she said in a recent interview.
Health Net "walked away from the agreement. They don't care."

Health Net contended that Bates failed to disclose a heart problem and
shaved about 35 pounds off her weight on her application. Had it known
her true weight or that she had been screened for a heart condition
related to her use of the diet drug combination known as fen-phen, it
would not have covered her in the first place, the company said.

"The case was rescinded based on inaccurate information on the
individual's application," Health Net spokesman Brad Kieffer said.

Bates said she already had insurance when a broker came by her shop in
the summer of 2003, and said she now regretted letting him in the door.
She agreed to apply to Health Net when the broker told her he could save
her money, Bates said.

She added that she never intended to mislead the company. Bates said the
broker filled out the application, asking questions about her medical
history as she styled a client's hair in her busy shop and he talked to
another client waiting for an appointment at the counter. She maintained
that she answered his questions as best she could and did not know
whether he asked every question on the application.

Bates' chemotherapy was delayed for four months until it was funded
through a program for charity cases. Three years later, she can't afford
the tests she needs to determine whether the cancer is gone.

So she is left to worry. She is also left with a catheter embedded in
her chest where the chemotherapy drugs were injected into her
bloodstream. Bates said she found a physician willing to remove it
without charge, but he won't do it without a clear prognosis. That
remains uncertain.

Shernoff, Bates' lawyer, claimed that the performance goals for Fowler
showed that Health Net was bent on finding any excuse to cancel the
coverage of people like Bates to save money.

"I haven't seen this kind of thing for years," Shernoff said. "It
doesn't get much worse."

lisa.girion@latimes.com

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