Blue Shield of California has agreed to pay $2 million to settle a civil enforcement action filed by the Los Angeles City Attorney to resolve its past practices of improperly rescinding health insurance policies.

The settlement amount will be split between the City Attorney’s Office and Los Angeles County, and Blue Shield will agree to continue its “best practices” in underwriting and rescission determinations, City Attorney Carmen Trutanich announced in a statement.

More than three years ago, then-Los Angeles City Attorney Rocky Delgadillo filed the civil lawsuit against Blue Shield for what he called “unlawful and deceptive” business practices in denying health insurance claims and rescinding coverage to consumers.

The action against California Physicians’ Service, doing business as Blue Shield of California, and its subsidiary, Blue Shield of California Life and Health Insurance Co., alleged unlawful, unfair and fraudulent business practices and false and deceptive advertising, in violation of California law. Since 2002, Blue Shield had allegedly denied benefits to more than 850 individuals and delayed benefits to thousands more.

Blue Shield allegedly approved applications from customers using intentionally misleading forms “with little or no meaningful review of the accuracy of responses and with no informed investigation into the medical history of applicants.” The company then allegedly conducted retroactive investigations in order to find discrepancies in applications only after policyholders sought medical services for serious problems (Best’s News Service, July 7, 2008).

“We appreciate that the City Attorney’s office has taken a reasonable approach to putting this matter behind us,” Blue Shield said in a statement. “Our process meets or exceeds all legal and regulatory requirements.”

“In every instance, we provide immediate notice, ensure multiple layers of review, involve a medical director in the decision, give members an opportunity to provide additional information before we take any action, and follow the guidance of an independent third-party review,” Blue Shield said.

The City Attorney’s Office in 2008 also filed actions against WellPoint Inc., alleging violations of California’s unfair competition and false advertising laws. However, the 850-plus policy rescissions in California attributed to Blue Shield, which formed the basis of its civil enforcement action, were considerably fewer than those of WellPoint and its California subsidiaries, Anthem Blue Cross and Blue Cross Life and Health Insurance Co., Trutanich’s office said.

It also said it recognizes Blue Shield’s establishment of industry “best practices” in health insurance underwriting and policy rescission practices that exceed current regulatory standards.

The civil enforcement actions against WellPoint, Anthem Blue Cross and Blue Cross Life and Health Insurance Co. are pending.

Under the U.S. health care reform law passed in 2010, insurers were banned from rescinding a policy after a policyholder gets sick, except, for example, when someone misrepresents their health status on an application.

In February 2009, Health Net settled two lawsuits over its rescission practices, agreeing to pay more than $8.8 million in penalties, contributions and repayments to former policyholders. To end separate legal actions — one by Delgadillo and the other a class-action case — Health Net and its subsidiaries also agreed to a one-year moratorium on all rescissions and to abolish any rescission-related bonus programs.

In late 2005, the California Department of Managed Health Care started investigating several health insurers that sell individual policies allegedly with the intent of rescinding policies without proving that applicants misrepresented their health status on an application

Blue Shield of California Life & Health Insurance and California Physicians’ Service, a member of Blue Shield of California Group, each currently have a Best’s Financial Strength Rating of A (Excellent).

(c) 2011 A.M. Best Company, Inc.

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