Calif. tells insurers to restore policies

California regulators Thursday ordered health insurers to reinstate some canceled policyholders and pay their medical bills. The fate of thousands of similar cases will be decided by a special arbiter.

The move — which the insurers could challenge in court — is the latest effort by regulators to limit an industry practice of canceling policies after they have been issued.

The practice, which applies to the 18 million people nationwide who buy their own insurance, can leave patients with unpaid medical bills and unable to obtain other insurance. It does not apply to people who get coverage through work.

Most states allow insurers to revoke an individual policy — generally within two years of granting it — if they find the policyholder lied or inadvertently omitted information on an application. California regulators say their laws require insurers to prove the person lied intentionally.

In reviewing a sample of 286 cancellations that occurred since 2004, regulators determined that 26 were so improper they should be immediately overturned. The other cases will be sent for review to a third-party arbitrator appointed by the state.

"These (26) are the most egregious cases," says Cindy Ehnes, director of the state's Department of Managed Health Care.

Insurers are reviewing the order and have not decided whether to appeal, says Chris Ohman, president and CEO of the California Association of Health Plans.

He says that insurers have taken steps to limit policy cancellations and that some will begin allowing policyholders to appeal to third-party reviewers: "We're not waiting for the government to act. We're making those changes today."

Blue Cross of California, Kaiser Permanente and Blue Shield of California were ordered to reinstate people immediately. A similar review of Health Net and PacifiCare will be completed soon, Ehnes said.

Insurers review information applicants submit about their health and can reject an applicant or limit coverage for certain medical conditions.

Insurers say they need the flexibility to cancel policies in order to prevent fraud, such as applicants failing to disclose a medical condition.

There is little nationwide data on the extent of such cancellations. Blue Cross of California has said it cancels fewer than one-half of 1% of all new policies, an average of 1,000 a year.