Sacramento Union, December 14, 2007

I have scribbled with increasing anxiety about California regulators' war against insurers' responsible policing of fraud.  Incredibly, a court has just decided that because Blue Shield did not staple a copy of a beneficiary's application to his policy, the insurer lost the right to rescind it for misrepresentation!

This opens the way to a host of class action lawsuits against Blue Shield and many other insurers in the Golden State, according the LA Times.  Although this case is about the absurd technicality of stapling papers together, the substantive issue is whether the law permits an insurer to audit an individual health insurance policy for fraud after the beneficiary submits high claims, or has to detect the fraud during the application process and deny coverage initially.

This is a big deal: insurers are allowed to price risk in California's individual market, which makes it more affordable than the over-regulated small-group market for many people.  To price risk effectively, they have to be confident that applicants' disclose their health status accurately.

However, it would be very expensive for an insurer to fully investigate every application when it comes in.  The law does not apply this standard to any other enterprise.  Imagine if a department store had to determine which of its customers were shoplifters when they entered the store, instead of when a few actually shoplifted.  Imagine if the law would not prosecute, because it was the department store's responsibility not to let shoplifters in the door!

Absurd? Of course, but that is what individual health insurance will be like in California.  Expensive? You bet.

John R. Graham is Director of Health Care Studies at the Pacific Research Institute. He is the author of the US. Index of Health Ownership, the only project to rank all 50 states' health laws and regulations according to free-market principles.