California Death-Spiral Lawsuit Against Health Insurer Blue Shield

October 10, 2012

California Death-Spiral Lawsuit Against Health Insurer Blue Shield

The phrase "death spiral" has sobering implications in any context. In the health-insurance world, it refers to the events set off when an insurer closes an existing insurance policy to new enrollees, then raises rates on those remaining in the policy to a largely unaffordable level. Those remaining insureds are usually forced to jump to new, more expensive policies with lower coverage levels, or to become uninsured.

California Death-Spiral Prohibition

In 1993, reportedly in reaction to the business practices of insurer Blue Shield and possibly in part because of its treatment of policyholders with HIV or AIDS, California lawmakers made the health care death spiral illegal under state law. The law requires that if an insurance company closes a block of health insurance to new members, the remaining policyholders must be offered at least one of two viable options:
-That the pool of insureds used to set health insurance rates for those left in the closed policy be expanded to bring in healthier people insured under other policies, spreading and diluting the financial impact of the likelihood that the insureds remaining in the closed block are older and sicker, and therefore more expensive to insure, or
-That those remaining in the closed block be offered other, comparable coverage

Consumer Watchdog Death-Spiral Allegations Against Blue Shield

In June 2012, attorney advocates at the Santa Monica nonprofit Consumer Watchdog, along with private health care lawyers, filed a class action lawsuit in the Superior Court of California, San Francisco County, alleging that health insurance company Blue Shield of California and its affiliates were engaging in illegal death-spiral practices.

Specifically, the suit asserts that Blue Shield's closing of a block of eight policies in 2010 sent more than 60,000 insureds into the death spiral and that closings scheduled for July 2012 would do the same for another 250,000 customers. While the lawsuit names two individuals as plaintiffs, it asks the court to certify a plaintiff class of policyholders that would expand potential court-ordered relief to these thousands of others that were allegedly similarly harmed.

Reportedly, one named plaintiff says his rates were set to go up almost 25 percent under his old closed policy. This forced him and his family to jump to another offered policy with inferior terms after which the company rescinded the threat of rate increase in the closed block, but would not allow him to return to that earlier coverage. To add insult to injury, rates on the new policy in which he was stuck were then significantly raised.

The plaintiffs claim that the alternative coverage offered to those remaining in the closed block -- already more likely to have pre-existing medical conditions more costly to cover -- was not comparable because of much higher deductibles and less generous benefits.

The complaint also alleges that the closed blocks were not pooled with appropriate open policies as required by law, which would have spread the risk among enough insureds to keep premiums reasonable.

Some of the specific claims under California state law (both statutory and under the common law) in the suit are:
-Unlawful, unfair and fraudulent business practices
-Deceptive practices under the Consumer Legal Remedies Act or CLRA
-Breach of contract
-Breach of the duty to deal in good faith and fairly
-"Illegal gaming" of the two state agencies that regulate health insurance

Legal Relief Requested

The complaint is long and complex, but the main legal remedies sought from the court include:
-Refunds of collected illegally increased premiums
-Declaratory relief under which the court would articulate policyholder rights and company responsibilities, and order the defendants to stop illegal "present, future or threatened conduct"
-Appropriate money damages
-Interest, legal fees, expert witness fees and other costs

Defendant Blue Shield's Response

Shortly after the filing, news sources reported that Blue Shield issued a statement denying the lawsuit's allegations and stating that its practices are compliant with the California death-spiral law. In August 2012, the defendant filed with the court a "demurrer" to the complaint, which basically means that Blue Shield asserts that the plaintiff policyholders do not allege facts sufficient to support their legal claims. In this document, Blue Cross essentially says that almost all of the claims are inadequately supported or are duplicative, and that the real facts will not support those remaining.

Implications

Insurance companies, medical providers and consumers could all be potentially impacted financially in the long term by the outcome of this case, which could provide guidance and detail about how insurers are to comply with the death-spiral laws. Many stakeholders will be watching as Martin v. California Physicians' Service winds its way through the court process.

In the meantime, anyone with questions about his or her treatment at the hands of an insurance company concerning health insurance rates, coverage or claims should consult an experienced health insurance attorney for guidance.

Article provided by Law Offices of Stephenson Acquisto & Colman
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