Time, once again, to defend the indefensible…..
Health Net is reeling from a one-two punch. Last Wednesday, Rocky Delgadillo, the Los Angeles City Attorney filed civil suit against the for-profit health insurer, alleging unfair business practices and false advertising. Then, last Thursday, an arbitrator gave over $9 million to a woman whose individual health insurance policy was rescinded by Health Net. The woman was diagnosed with breast cancer one month after her Health Net coverage started. Upon hearing the decision, the media whooped with joy – as, presumably, did all people of generous spirit. But, there is another perspective:
In California’s individual health insurance market, insurers can underwrite, i.e., they can charge premiums commensurate with the health risk of the beneficiary. So, they inquire about an applicant’s health history and status before issuing a policy.
Unfortunately, it appears now that the applicant bears no responsibility whatsoever for disclosing accurate information, to the best of her ability. I have written about Thursday’s $9 million award winner before she won her bounty. The arbitrator’s 28-page decision describes how she applied for health insurance:
- She did not fill out the application, but let the agent do it for her, while she was styling hair at her salon.
- She told the agent that the weight on her driver’s license was 185 lbs.
- She did not read the application before signing it.
- When the agent returned to his office to process the application, he saw that her weight (as written) would have increased her premium, so he called to inform her.
- She told him that she actually weighed less than stated on her driver’s license.
- He scratched out the “official” weight, and wrote in the lesser weight, before mailing the application.
Call me old-fashioned, but this does not strike me as responsible behaviour. Nevertheless, California insurers cannot rescind a policy unless a false statement in an application “was made with actual intent to deceive or unless it materially affected either the acceptance of the risk or the hazard assumed by the insurer” (California Insurance Code Section 10380).
Let’s be generous and conditionally accept that changing her weight on the application was not “actual intent to deceive” (although if it isn’t, I don’t know what is). If I were the arbitrator, do you know the first thing I’d do? Get a bathroom scale and weigh her.
There’s no indication that the real arbitrator did so. However, he did conclude that Health Net’s behavior was “egregious”, and dinged the company $9 million.
Health Net’s behavior, as related in the arbitrator’s decision, is a specific case of its apparently usual way of doing business, as described in Mr. Delgadillo’s civil suit. Although individual health insurers are allowed to “medically underwrite” before accepting an application, they are not allowed to “post-claims underwrite” (California Insurance Code Section 10384, California Health & Safety Code Section 1389.3).
This is because the insurer is tempted to motivate its agents to sell! sell! sell!, and to accept all applications as submitted, in order to immediately collect premiums and avoid the costs of actually examining the medical records or giving the applicant a check-up. It then waits to see if a large claim comes in, and only then does actual underwriting, looking for whatever it can call fraud. According to the arbitrator’s decision, this is exactly what Health Net did. It flagged certain claims if they came in within ten months of the policy being issued, investigated the beneficiary, and rescinded the policy upon finding anything fishy (like changing the weight on the application).
So, there is little doubt that Health Net violated the law. But we have to ask ourselves: is the law causing some of the troubles here? Perhaps all reasonable people (and even some unreasonable ones) agree that there must come a time, once an insurer writes a policy and deposits your premium check, that you are covered – no more ifs, ands, or buts.
So, why do Health Net, and, apparently, a lot of other insurers in the individual market, insist on demonstrating to the world that they can only conduct business in a sleazy way? (I’m sure it didn’t help, in the arbitration case, that Health Net’s lawyers seem to have acted like a bunch of jerks. I also feel a little shadenfreude in this case, as I did with Blue Shield, because both insurers were cheerleaders for Governor Schwarzenegger’s disastrous Health Care Deforminator, Model ABX1 1, which would have outlawed all health underwriting.)
Well, let’s look at a couple of examples of current government intervention that might be making things worse.
First, Mr. Delgadillo alleges that Health Net’s application forms are confusing and deceitful, making it quite impossible for applicants to answer the health questions in good faith. (How this applies to one’s weight, a pretty straightforward measurement, I have no idea.) For example, Mr. Delgadillo points out that the application requires “yes” or “no” answers: one cannot choose “I don’t know”.
However, what Mr. Delgadillo ignores is that the application forms have already been approved by the Insurance Commissioner (California Insurance Code Section 10291.5) or the Department of Managed Health Care (California Health & Safety Code Section 1389.1). Furthermore, their regulations demand “clear and unambiguous questions”. So, it’s likely that “I don’t know” would not be a choice satisfactory to regulators.
Second, if the regulators, arbitrators, and courts now hold that the insurer’s reviewing the application itself is not adequate “medical underwriting”, then the insurer must either collect applicants’ health records or pay for a check-up for each applicant.
Have you ever tried to get your own health information from a doctor? ( I recently had the experience of one doctor in San Francisco sending my chest X-ray to another doctor in San Francisco. It never got there, but disappeared into a “black hole”. So, he just asked me to come in for another one.) Imagine how difficult and costly it must be for an insurer to get this information when medical underwriting!
Do you want to wait a year to get your policy issued?
Auto insurers, on the other hand, don’t have this problem: through the federal McCarran-Ferguson Act’s anti-trust exemption, they can pool their claims data. Auto insurers sell their data to the Insurance Services Office, and subscribe to ISO’s A-Plus Auto Database, which has individualized claims data from over 900 insurers.
I can’t even begin to think what kind of a HIPAA (Health Insurance Portability & Accountability Act) headache it would cause health insurers to even start talking about such a database! (HIPAA is the federal law whose privacy provisions are so onerous and confusing that it has generated a vast industry of compliance consultants.)
So, if we believe in an America of personal responsibility, where citizens voluntarily buy health insurance, in good faith, in anticipation of the risk of future catastrophic costs, we cannot just join the pack howling for the blood of the evil health insurers who strip people of their coverage when they most need it. We need to carefully examine the costs and benefits of the entire complex of rules and regulations that government imposes on them.