The Rahm family filed a lawsuit against Kaiser Foundation Health Plan and two Kaiser health care providers.  The Rahms claimed that Kaiser improperly delayed before ordering an MRI for their daughter Anna, resulting in the eventual loss of Anna’s right leg and portions of her pelvis and spine.  Specifically, despite numerous requests by Anna’s parents that Kaiser authorize an MRI for Anna, Kaiser refused.  As a result, there was a considerable delay in discovering that Anna was suffering from a “high grade” osteosarcoma, one of the fastest growing types of osteosarcoma.  The delay significantly contributed to Anna’s poor prognosis and the need for the amputations.

The Court of Appeals indicated that “the text of the statute is unclear as to whether section 425.13 is intended to apply only to claims against health care providers, or whether it is intended to apply to claims against any type of defendant—including claims against health care service plans,” and thus turned to the legislative history.  After reviewing the legislative history, as well as Central Pathology Service Medical Clinic, Inc. v. Superior Court, 3 Cal. 4th 181 (1992) in which the California Supreme Court considered the scope of claims subject to section 425.13, the Court held that section 425.13 does not apply to claims against health care service plans.  Specifically, the Court noted that:

Defendants' argument that section 425.13 may be applied to claims against health care service plans, rather than health care providers, is also in conflict with other sections of California code. Civil Code section 3428, subdivision (c) states that “[h]ealth care service plans … are not health care providers under any provision of law, including, but not limited to … Section[] … 425.13 … of the Code of Civil Procedure.” Likewise, Health and Safety Code section 1367.01, subdivision (m) clarifies that a health care service plan's role in determining the medical necessity of a requested procedure “shall [not] cause a health care service plan to be defined as a health care provider for purposes of any provision of law, including … Section[] … 425.13 … of the Code of Civil Procedure.” The language of these statutes demonstrates a clear intent to exclude health care service plans from the procedures required under section 425.13.

Defendants have not cited a single decision that has applied section 425.13 to claims pleaded against a health care service plan or any other type of entity that was not a medical care provider.

In conclusion, the Court ruled that:

The legislative history of section 425.13 and various provisions in California code demonstrate that the procedural requirements described in the statute do not apply to claims against health care service plans. Because defendants admit that Kaiser Health Plan is a health care service plan, rather than a health care provider, the trial court did not err in refusing to strike the punitive damages allegations asserted against the Health Plan.

Based on this ruling, plaintiffs can assert punitive damage claims against health care service plan without first obtaining court approval and will therefore have an easier time holding entities such as Kaiser Foundation Health Plan or Anthem/Blue Cross liable for their actions.

"After representing Fortune 500 insurers for 25 years at a large California law firm, McKennon realized he was destined to take that expertise to the policyholders when he consistently won evaluative mock trial verdicts against his insurer clients, the last four of which resulted in $17 million, $33 million, $250 million and $500 million verdicts from the jurors.  All of them included punitive damages."

"We mount aggressive litigation against even the most powerful adversaries.  And we are not afraid to go to trial against them," Mr. McKennon says about why he and his firm are successful. 

The Forbes magazine story is the latest recognition for Mr. McKennon, who was also recently named as a 2012 Southern California super lawyer, an honor given to fewer than 5% of Southern California lawyers.

To view this article please click here.

In Fossen v. Blue Cross and Blue Shield, __ F.3d __ (9th Cir. October 18, 2011), the Court considered an appeal from a District Court ruling that entered summary judgment in favor of Blue Cross on two causes of action.  Plaintiffs – which consisted of three brothers, their corporations and a partnership of the three corporations – sued Blue Cross after the health insurer increased their premiums by over 40%.  The lawsuit, filed in state court, alleged two causes of action:  violation of Montana Code Annotated § 33-22-526(a) (also known as Montana’s “little HIPAA” statute) and violation of Montana Code Annotated § 33-18-101 (also known as Montana’s Unfair Trade Practices Act).  Plaintiffs alleged that premium increase violated little HIPAA’s prohibition against imposing a “premium or contribution that is greater than the premium or contribution for a similarly situated individual” on account of "any health status-related factor of the individual” and the Unfair Trade Practices Act’s prohibition against “unfair discrimination between individuals of the same class and of essentially the same hazard in the amount of premium, policy fees, or rates charged.”  The action, filed in state court, was removed to the District Court, which eventually granted Blue Cross’ motion for summary judgment as to all causes of action.

Because the Fossens' state HIPAA cause of action could have been brought under ERISA § 502(a), and because that cause of action is identical to and expressly dependent upon ERISA, the district court properly denied the Fossens' motion to remand and exercised jurisdiction over this case.

Next, the Ninth Circuit evaluated whether ERISA preempts the plaintiffs’ statutory unfair insurance practice claim, considering both express preemption under ERISA § 514 (29 U.S.C. § 1144) and conflict preemption under ERISA § 502 (29 U.S.C. § 1132).  With respect to express preemption, the court applied the two-part test detailed in Kentucky Association of Health Plans v. Miller, 538 U.S. 329 (2003) and determined that because statute is both “specifically directly toward entities engaged in insurance” and substantially affect[s] the risk pooling arrangement between the insurer and the insured” it is exempt from express preemption. 

As to conflict preemption, the court again applied Davila, and determined that the unfair insurance practice claim was not preempted by ERISA because it sought relief (i.e., restitution) that was consistent with ERISA’s enforcement scheme, but that no provision of ERISA expressly guarantees the same rights as the statute. 

Also, the unfair insurance practices statute creates a right that is separate from and could not possibly be remedied under ERISA.  Whereas HIPAA (both the state and federal versions) prohibits plans and their insurers from charging different premiums on account of "health status-related factor[s]," 29 U.S.C. § 1182(b)(1); Mont. Code Ann. § 33-22-526(2)(a), the unfair insurance practices statute applies more broadly to bar "any unfair discrimination" with respect to premiums, Mont. Code Ann. § 33-18-206(2) (emphasis added); see, e.g., McCarter v. Glacier Gen. Assurance Co., 546 P.2d 249, 251 (Mont. 1976).  Because these statutes are not identical in scope (as is the case with the state and federal HIPAA provisions), they are not conflict preempted.

Accordingly, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded this claim for further consideration of the plaintiffs’ allegations that Blue Cross violated Montana’s Unfair Trade Practices Act.

The California legislature enacted the Parity Act in 1999 after finding that “[m]ost private health insurance policies provide coverage for mental illness at levels far below coverage for other physical illnesses.”  1999 Cal. Legis. Serv. ch. 534 (A.B.88), § 1 (West).  The legislature further found that coverage limitations resulted in inadequate treatment of mental illnesses, causing “relapse and untold suffering” for people with treatable mental illnesses, as well as increases in homelessness, increases in crime and significant demands on the state budget.  Id.  Accordingly, plans that come within the scope of the Act – including the ERISA-governed plan established by Harlick’s employer – must cover all “medically necessary” treatment for nine listed mental illnesses (including anorexia nervosa), but can apply the same financial limits – such as yearly deductibles and lifetime benefits – that are applied to coverage for physical illnesses.

Harlick sued Blue Shield, but after the parties stipulated that Blue Shield’s decision would be reviewed under the abuse of discretion standard of review, the district court granted Blue Shield’s motion for summary judgment.

In reviewing Harlick’s case, the Ninth Circuit evaluated whether Blue Shield abused its discretion in denying Harlick’s request for coverage for her treatment at Castlewood.  In ERISA cases, if there is a conflict of interest (i.e., same entity pays benefits and makes the coverage decision), than the administrator’s review and claim decision is “tempered by skepticism,” even if it is reviewed under the abuse of discretion standard.  Here, while the Court did not find that Blue Shield abused its discretion in denying Harlick’s claim, it did find that Blue Shield was responsible for Harlick’s residential care, based upon the Parity Act.  The Ninth Circuit stated:

Harlick’s Plan does not itself require that Blue Shield pay for residential care at Castlewood for her anorexia nervosa.  However, California’s Mental Health Parity Act provides that Blue Shield “shall provide coverage for the diagnosis and medically necessary treatment” of “severe mental illness” including anorexia nervosa.  Blue Shield is foreclosed from asserting that Harlick’s residential care at Castlewood was not medically necessary.  We therefore conclude that Blue Shield is obligated under the Parity Act to pay for Harlick’s residential care at Castlewood, subject to the same financial terms and conditions it imposes on coverage for physical illness.

The Court then turned to the question of whether Harlick’s treatment was medically necessary.  Blue Shield did not dispute that treatment at Castlewood was medically necessary until supplemental briefing filed after oral argument.  Blue Shield argued that it should be allowed to reopen its administrative process in order to determine whether Harlick's residential care was medically necessary.  The Court explained an ERISA administrator’s obligations:

ERISA and its implementing regulations are undermined 'where plan administrators have available sufficient information to assert a basis for denial of benefits, but choose to hold that basis in reserve rather than communicate it to the beneficiary.'  Mitchell v. CB Richard Ellis Long Term Disability Plan, 611 F.3d 1192, 1199 n.2 (9th Cir. 2010) (quoting Glista v. Unum Life Ins. Co. of Am., 378 F.3d 113, 129 (1st Cir. 2004)). Claimants should not be 'sandbagged by a rationale the plan administrator adduces only after the suit has commenced.'  Mitchell, 611 F.3d at 1199 n.2 (quoting Jebian v. Hewlett-Packard Co. Employee Benefits Org. Income Prot. Plan, 349 F.3d 1098, 1104 (9th Cir. 2003)) (some internal quotation marks omitted).  Just as claimants should present all of their arguments for granting the claim to the insurer during the administrative process, an insurer should tell the claimant all of its reasons for denying the claim.  Cf Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995).

During the administrative process, Blue Shield never said that it was denying the claim because treatment at Castlewood was not medically necessary.

The Court therefore concluded that by not including as a reason for denial of the claim that the treatment was not medically necessary, Blue Shield waived this reason to deny the claim:

Blue Shield has discretion to determine whether treatment is medically necessary during the administrative review process.  But Blue Shield had to tell Harlick the "specific reasons for the denial" - not just one reason, if there was more than one - and provide a "full and fair review" of the denial. 29 U.S.C. § 1133 (emphasis added). Blue Shield told both Harlick and her mother, as well as the DMHC, that medical necessity was not the reason for its denial of Harlick's claim. It cannot now bring out a reason that it has "held in reserve" and commence a new round of review.  See Mitchell, 611 F.3d at 1199 n.2.

Thus, even if it is expressly excluded from a plan, a California insurer is now obligated to ensure that coverage for certain medically necessary treatment for mental illness is on par with the coverage provided for necessary treatment for physical illnesses.  This ruling will thus have significant application to coverage for mental illnesses, especially autism.

The California Court of Appeals for the Second District has upheld a trial court finding that may effectively limit and discourage attorneys from filing class actions based on misrepresentations in the sale of insurance policies through agents.  In Fairbanks et al. v. Farmers New World Life Ins. Co. et al., __ Cal. App. 3d __ (2011), the court of appeal affirmed the trial court’s denial of class certification on the basis that common issues did not prevail, and that the issue was incapable of common proof.  The case involved Farmers’ marketing and sale of universal life insurance policies.  It was alleged that Farmers created a common marketing strategy with respect to the marketing and sale of such policies, and that Farmers instructed its agents to implement such strategy by using Farmers’ marketing materials in the agents’ sales pitch to prospective customers.  After a lengthy discussion of the types of life insurance policies at issue, the appellate court focused on the actual narrow bases on which Plaintiffs sought relief, which was based on a single unified theory relating to fraudulent misrepresentations and concealments made by agents during the marketing of the policies to the individual prospective customers.  The court determined that the bases for class certification “were not four separate bases for class relief, but part of one overarching allegedly fraudulent scheme.”  The court noted, “Plaintiffs argued that proof of this fraudulent scheme could be established by common, rather than individual, proof, based on a combination of common policy language, common language in annual policyholder statements, and a common marketing scheme.”  Plaintiffs sought to certify a class based on very broad conduct involving myriad misrepresentations made in written marketing materials as well as alleged misrepresentations by Farmers’ agents.  Farmers argued that plaintiffs’ broad theory could not sustain a certifiable class in that it would require independent proof as to each policyholder.  Specifically, it would require proof as to the individual representations made to each policyholder, and the materiality of such representations as to each policyholder.

Nonetheless, a class action cannot proceed for a fraudulent business practice under the UCL when it cannot be established that the defendant engaged in uniform conduct likely to mislead the entire class.  (Knapp v. AT&T Wireless Services, Inc. (2011) 195 Cal.App.4th 932, 942-943 petn. for review filed June 1, 2011; Kaldenbach, supra, 178 Cal.App.4th at p. 850.)  Specifically, when the class action is based on alleged misrepresentations, a class certification denial will be upheld when individual evidence will be required to determine whether the representations at issue were actually made to each member of the class.  (Knapp v. AT&T Wireless Services, Inc., supra, 195 Cal.App.4th at p. 944-945, Kaldenbach, supra, 178 Cal.App.4th at p. 850; see also Pfizer Inc. v. Superior Court, supra, 182 Cal.App.4th at p. 632.)  “ ‘[W]e do not understand the UCL to authorize an award for injunctive relief and/or restitution on behalf of a consumer who was never exposed in any way to an allegedly wrongful business practice.’ ”  (Knapp v. AT&T Wireless Services, Inc., supra, 195 Cal.App.4th at p. 945; see also Pfizer Inc. v. Superior Court, supra, 182 Cal.App.4th at p. 632.)

The court discussed at length Kaldenbach v. Mutual of Omaha Life Ins. Co., 178 Cal. App. 4th 830, 848 (2009), which was a case in which it was alleged, as in Fairbanks, that the insurer had utilized uniform marketing materials in the sale of insurance policies, and directed its agents to use those materials in their sales pitch to prospective customers.  The court in Kaldenbach found, based on evidence provided by the insurer, that there was no evidence that the sales presentations were actually common.  The Fairbanks court followed the lead of the Kaldenbach court and found similarly that there was no evidence that the sales presentations, and therefore the alleged misrepresentations made by Defendants’ agents were common to all policyholders and prospective class members.  The court held that “In the absence of a common marketing scheme, the class action fails.”  In essence, the court held that the broad scope of the alleged misrepresentations made it impossible to certify a common class based on common proof.  The Court here distinguished Massachusetts Life Insurance Company v. Superior Court, 97 Cal. App. 4th 1282, 848 (2002) on the basis that Massachusetts Mutual “involved identical misrepresentations and/or nondisclosures by the defendants to the entire class.” 

In an effort to overturn the trial court’s ruling, Plaintiffs argued in the alternative on appeal that a class could be certified based solely on the misrepresentations made in the policies themselves.  However, in dicta, the court also rejected this argument, stating, “[I]t is still impossible to consider the language of the policies without considering the information conveyed by the Farmers agents in the process of selling them. “ (citation omitted.)  The court therefore indicated that alleged misrepresentations in the policies could not be evaluated independent from the sales presentations made by the agents when evaluating whether the allegations could be established by common proof.  Such a statement brings into question the potential for certification of any class based on representations in an insurer’s marketing materials and/or policy. 

The court also noted that the issue of materiality of the representations was not subject to common proof.  The court noted that under the circumstances of this case, the possible reasons for which an individual policyholder purchased the type of insurance at issue were many, and therefore must be a matter of individual proof.  The Court left it to the trial court to determine on remand whether plaintiffs could successfully establish any other basis for class certification.

• Denying coverage on the ground that ABA isn't "medically necessary"
• Denying coverage on the ground that ABA is "experimental"
• Denying coverage on the ground it is available only for services performed by a licensed provider and ABA providers are not licensed
• Denying coverage on the ground that ABA is not a "health care service," but instead is a service for "learning disabilities or behavioral problems or social skills training/therapy"
• Not including ABA providers in its network
• Refusing to provide insureds with definitive denials of coverage within 30 days of receiving a claim, thereby preventing insureds from invoking IMR [independent medical reviews]

The Department of Insurance’s investigation of Blue Shield began after the parents of two autistic children sought the Department’s assistance after Blue Shield denied coverage for ABA therapy, despite a finding following an independent medical review that the therapy was medically necessary.  The Department of Insurance explained that its Order to Blue Shield was necessary to “ensure that insurance companies are in full compliance with California’s mental health parity law.”

Kawakita purchased her health insurance policy through Blue Shield’s alleged agent, Steven Stendal, and claimed that Stendal was responsible for any misstatements on her application.  Blue Shield rescinded Kawakita’s policy in August 2006, and she filed her lawsuit in July 2009, asserting causes of action for breach of contract, tortious breach on the implied covenant of good faith and fair dealing and declaratory relief.

Blue Shield filed a motion for summary adjudication, arguing that the bad faith claim was barred by the two-year statute of limitations imposed by California Code of Civil Procedure Section 339 and Love v. Fire Insurance Exchange, 221 Cal. App. 3d 1136, 1144 n.4 (1990).  The trial court rejected Blue Shield’s motion, and with Blue Shield of California Life & Health Insurance Company v. Superior Court (Kawakita), No. B225632, Blue Shield sought a peremptory writ of mandate directing the trial court to reverse its order.  While the California Court of Appeal did not agree with the trial court’s reasoning, it did agree with the result and allowed Kawakita to proceed with her bad faith cause of action.

Based on this provision, with its broad application to “any other matter arising out of the Plan,” the Court of Appeal ruled that Kawakita’s bad faith claim needed to be filed no later than three years after the coverage was first denied; which it was.  With this ruling, Kawakita’s attempt to impose bad faith liability of Blue Shield’s decision to rescind her coverage case can proceed.

Blue Shield, which has recently garnered attention for requesting premium rate increases of up to 59 percent for individuals in California, denied nearly two million claims last year, trailing only Anthem Blue Cross, which denied nearly six million claims.  PacifiCare had the highest percentage of denials at a whopping 44 percent.

For the first three quarters of 2010, seven of California’s largest insurers rejected 13.1 million claims, 26 percent of all claims submitted, a number only slightly below the 26.8 percent rate for 2009.  The data, new findings by the Institute of Health and Socio-Economic Policy, the CNA/NNU research arm, is based on data from the California Department of Managed Care.

PacifiCare – 43.9%
Cigna – 39.6%
Anthem Blue Cross – 27.3%
HealthNet – 24.1%
Blue Shield – 21.9%
Kaiser Permanente – 20.2%
Aetna – 5.9%

Since 2002, these seven companies, which account for more than three-fourths of all insurance enrollees in California, have rejected 67.5 million claims.  Cigna, which denied 40 percent of claims, showed the biggest increase from 2009, increasing its rejection rate by 5.3 percent.  Kaiser Permanente accounted for the biggest drop, a one year decline of 7.4 percent in denials.  Blue Shield slightly increased its denial rate by .3 percent from 2009.

“These rejection rates demonstrate one reason medical bills are a prime source of personal bankruptcies as doctors and hospitals will push patients and their families to make up what the insurer denies,” said CNA/NNU Co-President DeAnn McEwen.  The national reform law signed by President Obama last spring has, to date, had no impact on the high pace of insurance denials, she noted.

In today’s Los Angeles Times Business Section, Duke Helfand writes about an 18-month investigation by the California Department of Managed Health Care into the payment practices of Aetna Inc., Anthem Blue Cross of California, Blue Shield of California, Cigna Corp., Health Net Inc., Kaiser Foundation Health Plan and United Healthcare/PacifiCare. 

California's largest health plans are fined nearly $5 million

The seven companies failed to properly pay medical claims submitted by thousands of doctors and hospitals over the last three years, state insurance regulators say.

California's seven largest health plans were fined nearly $5 million in total Monday for failing to properly pay medical claims submitted by thousands of doctors and hospitals over the last three years.

Insurance regulators said the companies also would pay "tens of millions of dollars" in restitution to medical providers whose claims were underpaid or incorrectly rejected.

The fines cap an 18-month investigation by the California Department of Managed Health Care into the payment practices of Aetna Inc., Anthem Blue Cross of California, Blue Shield of California, Cigna Corp., Health Net Inc., Kaiser Foundation Health Plan and UnitedHealthcare/PacifiCare.

"California's hospitals and physicians must be paid fairly and on time," Cindy Ehnes, the state department's director, told a Los Angeles news conference. "The incorrect payment of provider claims by plans unfortunately is a persistent issue."

Hospitals said Monday's action would send a loud message across California's multibillion-dollar insurance industry.

"In levying these fines, [the state] is addressing an ongoing, systemic issue that harms the ability of providers to care for their patients," said Jan Emerson-Shea, a spokeswoman for the California Hospital Assn.

But doctors blasted the fines, saying they were a "slap on the wrist." James Hinsdale, president of the California Medical Assn., called the penalties "chump change … for highly profitable health plans that systematically deny legitimate claims and routinely block, delay or limit physician reimbursements as one tactic to boost their bottom lines."

The state agency reviewed samples of claims after providers who serve members of health maintenance organizations complained about problems. Auditors said none of the plans met a state legal requirement to pay 95% of their claims correctly. More than 21 million Californians have HMO coverage.

The reviews also found that most of the health plans lacked adequate procedures for settling disputes with providers. In some cases, health plan workers responsible for processing claims also oversaw appeals.

The trade group for health plans said the companies would work with state regulators to improve their performance. But the California Assn. of Health Plans also seized on a piece of positive news from regulators: The fined firms generally met state requirements for paying claims on time.

"We have long recognized that the administrative side of healthcare coverage can take valuable time away from patient care, which is why plans have been working to streamline processes both at the health plan level and in doctors' offices," said Patrick Johnston, the association's president.

Only two health plans commented on the state's action.

Kaiser spokesman Won Ha said the plan, which is based in Oakland, had taken steps to improve its processing of claims in a "timely and accurate manner," although he did not provide details.

"We continue to build on our progress to meet the high standards of the Department of Managed Health Care and other regulators," Ha said. "We are committed to achieving or exceeding all regulatory and customer requirements."

Connecticut-based Aetna acknowledged problems with its payment procedures and said it took immediate action once regulators informed the company of its findings. Aetna pointed out that its penalty — $300,000 — was the lowest of those imposed on the seven health plans.

"Aetna takes our responsibilities to our members and providers very seriously, but we do sometimes make mistakes," spokeswoman Anjanette Coplin said.

Anthem Blue Cross, a unit of Indianapolis-based WellPoint Inc., and Blue Shield of California received the largest fines — $900,000 each. UnitedHealthcare/PacifiCare was penalized $800,000. Health Net and Kaiser were fined $750,000 each, and Cigna was assessed $450,000.

State regulators said the size of the fines was determined by the volume of each plan's business in California and the severity of its violations.

The health plans also must compensate providers for money they are owed, including penalties and interest, within six months. The plans must reopen their records dating back two to three years to their last financial review by the state.

Hospitals are likely to receive the largest share of the money because they submit bigger bills than doctors.

The restitution is the latest good news for some hospitals. Last month, regulators from the managed care department said that seven facilities would divvy up $1.62 million from Anthem Blue Cross to resolve unrelated allegations that the health plan improperly reimbursed the providers for patient costs that exceeded daily hospital rates. Anthem admitted no wrongdoing in the case.

By: Duke Helfand (November 30, 2010)
Copyright © 2010, Los Angeles Times

“California PPOs rank in the middle of the pack compared with the national average, and show some of the lowest overall scores that California has ever seen. HMOs began reporting on quality in 2001, and I got PPOs to join the effort beginning last year. I am grateful for their cooperation, but this report card shows they will have to do better. This should be their wake-up call,” said Commissioner Poizner. “These results show that insurers have a lot of room for improvement, particularly in the area of customer satisfaction. As I promised when I came into office, consumers now have much more information to make choices that are best for them, and to pressure insurers to do better. We all need to use this data to make that happen.”

None of the six PPOs on the report card received the highest four-star rating, but Aetna, CIGNA HealthCare of California and United Healthcare (California) each received three stars overall for delivering quality clinical care. Anthem Blue Cross, Blue Shield of California and Health Net each received two stars overall in that category. Rating criteria included asthma care, checking for cancer, diabetes care and treatment of children. The ratings are based on a set of standard measures developed by the National Committee on Quality Assurance.

In addition to grades based on clinical best practices, the report also includes grades, for the first time, on customer satisfaction. While all PPOs got the mid-range 2-3 stars for getting care easily, all insurers except Aetna received the lowest, single-star rating for plan service. This is clearly the area of greatest concern for California consumers and where there is the greatest room for improvement. The Plan Service category includes customer ratings on things like helpful customer service, getting information about your costs and paying claims.

The PPO report card is available at http://www.insurance.ca.gov. The companion report card on HMOs will be released separately early next year.

The case of Levine v. Blue Shield of California involved Michael Levine, who was an unmarried attorney with two dependants at the time he applied for health insurance.  Blue Shield issued a health plan that covered Levine and one of his dependants and a separate policy was issued to cover his other dependent.  After Levine married, he sought to add his wife on to his policy as an additional dependant.  Blue Shield complied with this request and Levine continued to pay premiums. 

At some point, Levine learned that the structure of his health insurance coverage was not ideal.  Essentially, Levine claimed that he could have achieved the exact same coverage at a much lower rate if the polices were restructured as a family plan with his wife as a primary insured.  Frustrated and understandably upset, Levine instituted a class action lawsuit against Blue Shield for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and unfair competition.  In response, Blue Shield filed a demurrer to all causes of action arguing, among other things, that it did not owe a duty to disclose information about the lowest premium charge it would accept to bind coverage.  The existence of this duty was the key issue addressed on appeal. 

Levine argued that Insurance Code Section 332 establishes a duty to disclose material facts.  Blue Shield responded that this statute is not applicable to it as a health plan.  However, the court assumed for purposes of argument that even if Section 332 applied, the Court found that it does not require the parties to an insurance contract to make available all information that may be material to the other party; rather, the Court said, it requires only that each party make available information that is “material to the contract [itself].” As a result, the court held that Blue Shield did not have a duty to disclose to Levine its best pricing.

This conclusion appears wrong.  The distinction between that which is material to the other party vs. that which is material to the contract was a distinction here without a difference.  Moreover, the court’s attempt to distinguish Pastoria v. Nationwide Insurance, 112 Cal. App. 4th 1490, 1492-1493 (2003) was not persuasive.  Policyholders will want to emphasize that this decision is very limited and should apply only to a calculations of premiums issue.  They will want to focus on the holding that confirms insurers have a duty to disclose material facts regarding coverage offered.  Anticipate Levine filing a motion for a rehearing, and, failing that, the filing of a petition for review to the California Supreme Court. 

• No pre-existing condition exclusions for children under age 19: requires insurers to cover children of insured patients. “Grandfathered health plans” established before March 23, 2010, may continue their existing policy until 2014, at which time all health insurance discrimination based on pre-existing conditions are prohibited.
• No arbitrary rescissions of health insurance: insurers cannot rescind policies except in cases of patient fraud or intentional misrepresentation. All health insurers are subject to this new rule.
• No lifetime limits on health insurance coverage: The new provision prohibits lifetime limits on any plan issued or renewed after Sept. 23.
• No annual limits on coverage: Similarly, annual limits will be gradually phased out. Initially, health insurance plans will not be able to set annual limits lower than $750,000 per year. That minimum limit rises to $1,250,000 next year on Sept. 23, 2011, and $2,000,000 the following year. Beginning Jan 1, 2014, annual limits will be prohibited for most health plans.
• Protecting choice of health care provider: Patients will have the option to select and keep a primary care doctor from among the insurance company's participating provider network.
• Adult children covered to age 26. Children will have extended access to health insurance coverage under their parents' health insurance plan until age 26, unless they qualify for health insurance through their employer.

Commissioner Poizner Offers Tips to Consumers About the Impact
of Federal Health Care Provisions Going Into Effect Today

Insurance Commissioner Poizner today shared useful tips and information with consumers about the impact of the most recent Patient Protection and Affordable Care Act (PPACA) provisions which go into effect today.

"There are many new provisions of the federally-passed health care reform bill, and they can be difficult to interpret," said Commissioner Poizner. "Here are some tips and guidelines to help consumers understand how this federal legislation will directly impact them. And if anyone has a question about their health insurance, they can call our Consumer Hotline at 800-927-HELP."

Commissioner Poizner offered the following tips to California consumers:

Coverage Changes

• Annual and Lifetime Limits - At the new plan year, plans may not contain lifetime limits on essential benefits. This provision applies to all plans. Annual limits will be phased out through 2014 for most plans. Check with your insurance company to see if this applies to your policy before you renew.
• Rescissions - Rescission is when an insurance company retroactively cancels your policy. The PPACA bans rescissions except in cases of fraud or intentional misrepresentation of material fact. You must be notified prior to the cancellation. This provision applies to all types of health insurance plans.
• Preventive Health Services - A wide range of preventive care including immunizations, well baby and child screenings, and well women exams must be covered without cost-sharing. For an exact list of what preventive services are available without cost-sharing, contact your insurance company.
• Adult Dependent Coverage - Plans that cover dependent children must extend coverage until the child's 26th birthday. This applies to all types of plans, however before 2014, group health plans will be required to cover adult children only if the adult child is not eligible for employer-sponsored coverage. Adult children cannot be charged more than any other dependent.
• Preexisting Condition Exclusions - Beginning Sept. 23, 2010, children under 19 years of age cannot be denied coverage or benefits based on medical status or past illnesses. This applies to most plans including individual plans.

Consumer Protection Changes

Primary Care/Preapproval -Plans must:

• Allow you the choice of any primary care provider available (if you are required to designate a primary care physician).
• Provide covered emergency services without prior approval, regardless of whether the provider is in-network.
• Limit cost-sharing on emergency services by nonparticipating providers to the same amount as that of a participating provider.
• Allow female patients to receive obstetric or gynecological care from a participating provider and treat their authorizations the same as that of a primary care provider.
• Allow children to receive care from a participating pediatrician and treat their authorizations the same as that of a primary care provider.

Effective Date

• The changes beginning Sept. 23 include expanded coverage and new consumer protections. If they are not spelled out in the documentation you receive from your insurance provider or employer, talk with your employer's plan administrator or your health insurance company about how these protections will apply to your coverage and what new options you may have.
• If you have health insurance coverage through an employer, these new benefits and protections will be added to your policy at the next policy renewal after Sept. 23.
• If you purchased an individual health insurance policy on your own, the effective date is a bit more complicated. If your insurer has specified a "policy year" for your coverage, the new provisions will become effective on that date. Otherwise, the new benefits and protections will be added on the date when annual deductibles and annual limits reset each year. If your policy does not have an annual deductible or annual limit, these changes will become effective on Jan. 1, 2011. If you have questions about when these provisions will become effective for your policy, contact your insurance company.

You can also find more information about the PPACA and how it will affect you today and in the future on the National Association of Insurance Commissioners website by going to the special health reform section at http://www.naic.org/index_health_reform_section.htm. Here you'll find the latest information on the PPACA implementation; an FAQ for consumers, employers and seniors on the health care reform; timelines for implementation and much more.

The new regulations, according to Insurance Commissioner press release, will do the following:

• Prohibit insurers from rescinding policies when they are not in compliance with specified underwriting practices regulations.
• Restrict health condition and history questions on applications to those that are necessary for medical underwriting.
• Require all questions on health insurance applications be clear, specific and understandable.
• Require use of new and improved health history questionnaires approved by the Department before an insurer can rescind.
• Allow consumers to indicate that they are unsure of or cannot remember the answer to a particular health history question.
• Require that agents attest if they help applicants with a health insurance application.
• Prohibit confusing phrasing of application questions like double-negatives and certain compound questions.
• Require that consumers be given a copy of their application to check for discrepancies.
• Require that insurers not rely solely on self-reported health history when possible.
• Prohibit insurers from conducting certain rescission-focused investigations long after becoming aware of a possible misrepresentation or omission by the applicant. Also prohibits insurers from seeking information outside the scope of such an investigation.
• Require that insurers give consumers the opportunity to respond during rescission investigations, and that insurers must listen to consumer-provided information.
• Require that insurers identify and resolve any reasonable questions arising from the application. Insurers must document their effort to resolve these issues and make those documents available to the Commissioner

The new regulations, Article 11 Standards for Health History Questionnaires in Health Insurance Applications, Pre-Issuance Medical Underwriting and Rescission of Health Insurance Section 2274.72(b), requires insurers to apply a “reasonable layperson standard” which “recognizes and takes into account the level of understanding and appreciation of words and terms in a health history questionnaire by the average individual who lacks professional training and experience.”  Health questionnaires will need to take into account the level of understanding of an individual who has no medical background or training.  In addition, the questions asked on an application must be material to the underwriting process, and the consumer will be allowed to indicate they cannot remember, or are unsure of an answer to a particular health question. 

With these new regulations, consumers should have an easier time obtaining and keeping their health insurance.

Emergency process for urgent claims, and a process for experimental or investigational treatment. 

For plans governed by ERISA or not otherwise covered by a state law external appeal process, a federal external review program will be required.  Since these are still interim rules, a framework for the federal external review process has not been established.  However, the federal review process will likely be modeled along the NAIC Model Act.

These regulations are clearly a win for consumers who have long complained that the internal appeals process is biased towards insurance companies.  Unfortunately, it will take some time for consumers to reap the benefits of these changes.  Health plans that were in effect on March 23, 2010 and have not been significantly modified since then are considered “grandfathered” and not subject to these regulations. However, over time, expect to see an external review process become a standard component of the claim review process.

[1] Source: “Fact Sheet: The Affordable Care Act: Protecting Consumers and Putting Patients Back in Charge of Their Care,” dated July 22, 2010.

NEWS RELEASE

Insurance Commissioner Steve Poizner Announces Examination of Anthem's Claims-Related Data

Full Independent Actuarial Review of Recently-Withdrawn Anthem Filing Also Released Insurance Commissioner Steve Poizner announced that the California Department of Insurance (CDI) had begun an effort to assess the validity of the claims data used by Anthem Blue Cross to justify future rate filings.

"As Anthem readies its new rate filing, I have directed auditors at the Department of Insurance to determine whether the underlying information used by Anthem to prepare these documents is fair and accurate. This review will investigate whether there are problems with their claims payments systems and data controls," said Commissioner Poizner. "I will not allow insurers to inflate their rates based on faulty systems or inaccurate data."

The examination, started in early April, is scrutinizing Anthem's accounting and claims systems in regards to the recording and documenting of premiums and claims data, and a review of the information systems and controls in place. The examination includes a review of the Company's paid claims database, premium database and information systems processes and controls.

The data analyzed in the exam is ultimately the input that goes into the calculation of the company's medical loss ratio.

Commissioner Poizner also released the full independent, outside actuarial analysis performed by Axene Health Partners, LLC. The 145 page report was conducted over a 10-week period and required 500 hours of work by four licensed actuaries. A summary of the review is below and the entire review is available at our Web site at http://www.insurance.ca.gov.

Based upon a thorough review of Anthem's calculations, Axene found numerous errors in the methodology used by Anthem to project total lifetime loss ratios. Correcting these errors resulted in lower lifetime loss ratios than initially calculated by Anthem.

The errors identified included:

Error #1: Double counting of aging in the calculation of underlying medical trend for the projection of total lifetime loss ratio.

Error #2: Anthem overstated the initial medical trend used to project claims for September 2009 for known risk factors.

Both of these errors are errors of math and not differences in actuarial opinion.

Now, after this significant criticism and facing tougher federal regulation, two of California’s largest health insurers say they will stop rescinding policies.  WellPoint Inc., the parent of Anthem Blue Cross of California, and Blue Shield of California, made the announcement yesterday.  WellPoint Chief Executive Angela Braly said in a statement that the company's "goal is to make reform work for our members and for the country."

Even before this announcement, several health insurers in California had stopped (or largely stopped) policy rescissions.  Under the new federal Healthcare Act, insurers will be limited in their ability to rescind health insurance policies.  In 2014, this legislation will require insurers to sell policies to consumers regardless of preexisting conditions.  This will effectively preclude the practice of rescissions.

The Los Angeles Times reports that last year, only four such cancellations were reported to the managed healthcare department, down from 1,552 in 2005.  Since 2004, at least 5,000 Californians had their insurance policies rescinded by the state's five largest health insurers — Anthem Blue Cross, Blue Shield, Health Net, Kaiser and PacifiCare.  That includes about 3,500 policies regulated by the Department of Managed Health Care and another 1,600 policies regulated by the Department of Insurance.

This is a wise and very practical move by Wellpoint.  Let’s see if other insurers who have not stopped the practice follow suit.

The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com All rights reserved

The complaint, which included causes of action for, among others, bad faith and fraud, alleged StarCare was obligated to oversee Jackson's treatment while at St. Edna's, but allowed its receipt of "a fixed or periodic fee" for services and its participation "in a risk sharing agreement" that gave it a portion of "any savings resulting from the denial of reasonably necessary medical care," to affect its decisions concerning his health care.  Thus, Plaintiffs alleged that StarCare breached its duties to "review requests for . . . medical service" based solely on "whether the requested service was reasonably medically necessary" and to "conduct utilization review and quality assurance activities without regard for the cost," and also failed to inform Jackson and his family of its financial conflicts of interest. 

The trial court initially dismissed the lawsuit based on federal preemption by the Medicare Act. 

The primary issue was whether Plaintiffs' numerous state law causes of action are preempted by title 42 United States Code section 1395w-26(b)(3) of the Medicare Act.  It declares that, except for laws governing licensing and solvency, "[t]he standards established under this part shall supersede any State law or regulation . . . with respect to M[edicare ]A[dvantage] plans which are offered by M[edicare ]A[advantage] organizations . . . ." PacifiCare argued that Plaintiffs' claims against it were either expressly or at least impliedly preempted by section 1395w-26(b)(3).  It further contended the statute's licensing law exception was inapplicable because that provision only applies to the acquisition of a license, not its maintenance.  Plaintiffs disputed the preemption claim and alternately contended leave to amend should have been granted because some of the causes of action could be based on state tort laws.

The Court agreed with Plaintiffs and held that the Medicare Act did not expressly or impliedly preempt their state law causes of action. The court also rejected PacifiCare's argument that Plaintiffs did not exhaust their administrative remedies.  The court rejected this argument, noting that Plaintiffs did not disputing an adverse determination concerning Medicare benefits.  Thus, the case was governed by McCall v. PacifiCare of California, Inc., 25 Cal.4th 412, 423 (2001), which rejected a failure to exhaust administrative remedies claim made under the Medicare Act "[b]ecause the [plaintiffs] may be able to prove the elements of some or all of their causes of action without regard, or only incidentally, to Medicare coverage determinations" where "none of their causes of action seeks, at bottom, payment or reimbursement of a Medicare claim or falls within the Medicare administrative review process, and because the harm they allegedly suffered thus is not remediable within that process . . . ."  Id. at p. 426, fn. omitted.  The court stated that “this case presents an even stronger basis for rejecting the failure to exhaust administrative remedies defense.” 

The decision has broad implications, as it is estimated that as many as 1.6 million seniors in California are enrolled in Medicare Advantage plans.  There can be little question that with this decision, consumer attorneys will file suits focused on bringing Medicare-related complaints against HMOs and medical groups.

Eric M. Peterson from the law firm of Dorsey & Whitney LLP has done a nice job summarizing the recently enacted Patient Protection and Affordable Care Act.  Peterson’s article, ‘Health Care Reform is Here’ is set forth verbatim immediately below, followed by the Democratic Policy Committee's implementation timeline for both Acts.

Health Reform and Reconciliation Bills Passed by the House Senate to Consider Reconciliation Bill The House passed both H.R. 3590, the Patient Protection and Affordable Care Act (the Affordable Care Act), and H.R. 4872, the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) on Sunday, March 21, 2010. The President signed the Affordable Care Act on Tuesday, March 23, 2010.

This article summarizes several major topics addressed by the Affordable Care Act and highlights certain differences between the Affordable Care Act and the Reconciliation Act.

Private Insurers

The Affordable Care Act has both immediate and ongoing effects on the private insurance market.

Effective within ninety days of enactment and extending through January 1, 2014, individuals with pre-existing conditions can obtain health care coverage through a national insurance pool for high-risk persons. Access to the pool requires individuals to have been uninsured for at least six months and have a pre-existing medical condition.

Effective six months after enactment, all individual and group health plans:

• must provide dependent coverage for children through age 26;
• are prohibited from setting lifetime limits on the dollar value of coverage;
• are prohibited from rescinding coverage except in cases of fraud; and
• are prohibited from imposing pre-existing condition exclusions on children. This prohibition would be expanded to all individuals in 2014.

Of note, the Reconciliation Act would grandfather certain existing individual and group plans with respect to many new benefit standards. However, these plans will be required to extend dependent coverage to adult children up to age 26, prohibit rescissions of coverage and eliminate waiting periods for coverage of periods greater than 90 days.Beginning in 2014, grandfathered group plans must eliminate lifetime and annual limits on coverage. Grandfathered group plans must eliminate pre-existing condition exclusions for children within six months of enactment, and for adults in 2014.

Beginning in 2010, insurers must report the proportion of premium dollars spent on clinical services and quality. Beginning in 2011, if the amount of premium dollars that a particular insurance company spends on clinical services and quality falls below 85% for insurers in the large group market and 80% for insurers in the individual and small group markets, then that insurance company must provide rebates to consumers.

Beginning in 2014, additional provisions will become effective, including a prohibition on individual and group health plans placing annual limits on the dollar value of coverage.

The Affordable Care Act imposes an excise tax on high cost, so-called “Cadillac,” health plans. The Affordable Care Act and Reconciliation Act differ on the tax. According to the Affordable Care Act, effective in 2014, a 40% excise tax would be imposed on insurers of employer-sponsored health plans with values that exceed $8,500 for individual coverage and $23,000 for family coverage. The Reconciliation Act would delay the tax until 2018 and impose it on a higher threshold of coverage of $10,200 and $27,500 respectively. Regardless, the issuer of the policy is subject to the tax. If it is a self-insured plan the issuer is the administrator or employer.

Health Benefit Exchanges

Neither the Affordable Care Act nor the Reconciliation Act create a new government health insurance plan, the so-called “public option,” to compete with private insurers. However, the Affordable Care Act creates state-based health insurance marketplaces, known as “exchanges.” The exchanges go into effect in 2014 and either a governmental agency or a non-profit organization will administer them. Individuals and small employers with less than 100 employees can purchase insurance through an exchange. The exchanges will be open to employers with more than 100 employees beginning in 2017.

States may elect to create regional exchanges or to permit more than one exchange to operate in a given state if each exchange serves a distinct geographic area. For a limited time, states can obtain federal funding to establish such exchanges.

Increases in health plan premiums charged by those health plans participating in the exchanges will be subject to government review. Plans will be required to justify increases and states will report on premium increase trends. Unjustified increases could result in the removal of a plan from the exchange system.

Finally, the Affordable Care Act directs the federal Office of Personnel Management to enter into contracts with insurers to offer at a minimum two multi-state plans in each exchange in each state. At least one such plan must be offered by a non-profit insurer. Each of these multi-state plans must meet federal standards and must be licensed in each state.

Illegal immigrants will not be eligible to purchase insurance from an exchange.

Essential Benefits Package

Beginning in 2014, all qualified health benefits plans offered through the exchanges and in the individual and small group markets, with certain exceptions, must offer an “essential benefits package.” An essential benefits package consists of a minimum package of health benefits, which offer comprehensive services and cover at least 60% of the value of such benefits. The plan must limit annual cost sharing to the 2010 health savings account limits.

Employers

The Affordable Care Act does not expressly require employers to offer health care coverage. However, effective in 2014, certain employers with more than fifty employees will become subject to a penalty if they do not offer heath care coverage and if any of their workers obtain subsidized coverage through the planned health care exchanges. The Reconciliation Bill would raise the penalty from $750 to $2,000 per full time employee and exempt the first thirty employees when calculating such penalties.

Under the Affordable Care Act, employers with more than fifty employees that offer coverage but have at least one full-time employee receiving a subsidy will pay the lesser of $3,000 for each employee receiving a subsidy or $750 for each full-time employee.

Also effective in 2014, employers that offer coverage must provide a voucher equal to what the employer would have paid under the employer’s plan to employees with incomes up to 400% of the federal poverty level who choose to enroll in the planned health care exchanges. Those employers providing the vouchers will not be subject to penalties for employees that obtain coverage in the exchanges.

In addition, certain subsidies to purchase health insurance will be made available to qualifying employers. For example, Employers with fewer than 25 employees and with certain average worker annual wages that purchase health insurance for their employees will qualify for a tax credit. Between 2010 and 2013, the employer will receive a tax credit of up to 35% of the employer’s contribution toward the employee’s premium, but only if the employer contributes at least 50% of the total premium cost. Starting in 2014, the tax credit increases to 50% of the employer’s contribution. As the employer’s size and average worker annual wages increases, the tax credit would be phased out.

The Affordable Care Act also provides assistance with retirees’ medical claims. Effective ninety days after enactment and until January 1, 2014, a temporary reinsurance program for employers providing health insurance coverage to retirees over age 55 who are not eligible for Medicare will reimburse employers or insurers for 80% of retiree claims between $15,000 and $90,000.

Individuals

Beginning in 2014, with some exceptions, all United States citizens and legal residents must have a minimum level of health insurance coverage or pay a penalty. Individuals without qualifying coverage must pay a tax penalty with certain maximums. Under the Affordable Care Act, the penalty will be phased-in according to the following schedule: $95 or 0.5% of taxable income in 2014, $325 or 1.0% of taxable income in 2015 and $695 or 2.0% of taxable income in 2016, with a maximum of $2,250 for a family. The Reconciliation Act would modify the phase-in and per family maximum as follows: the greater of $95 or 1.0% of taxable income in 2014, $325 or 2.0% of taxable income in 2015 and $695 or 2.5% of taxable income in 2016, with a maximum of $2,085 for a family. After 2016, the penalty will increase annually based on the cost-of-living adjustment.

Certain categories of individuals will qualify for an exception from the penalty: American Indians, individuals with religious objections, individuals who can show financial hardship, individuals without coverage for less than three months, households with income below 100% of the federal poverty level and households that would pay greater than 8% of income on premiums for the cheapest available plan. The Reconciliation Bill would remove the federal poverty level exception in favor of an exception for households with income below the tax filing threshold.

In addition, the Affordable Care Act would provide tax credits (subsidies) to purchase health insurance through the exchange on a sliding scale to individuals and families with incomes up to 400% of the federal poverty level. Households in the lowest income group would spend approximately 2% to 4% of their income on premiums. The health plans would cover 94% of the cost of benefits. Households in the highest eligible group would pay 9.8% of their income on premiums, with health plans paying 70% of the cost of the benefits. Subsidies would increase at the same rate as the increase in premium contributions from the prior year.

Beginning in 2013, the Affordable Care Act increases Medicare payroll taxes from 1.45% to 2.35% on taxpayers earning $200,000 or more ($250,000 for joint filers). The Reconciliation Act would impose an additional 3.8% tax on “unearned income,” such as capital gains, dividends and interest earnings.

Medicare

The Affordable Care Act will reduce the projected growth of Medicare by $500 billion over 10 years, including $116 billion from private Medicare Advantage plans. The Reconciliation Act would increase the amount reduced from private Medicare Advantage plans to $132 billion by freezing Medicare Advantage payments in 2010 and reducing Medicare Advantage payment benchmarks beginning in 2012. The Reconciliation Act further seeks to reduce Medicare Advantage costs by ensuring such plans spend at least 85% of their revenue on medical costs and quality improvements to care.

Payments to providers under Medicare will be more closely tied to quality outcomes. For example, beginning in 2013, a portion of a hospital’s Medicare payment will be linked to the hospital’s performance on quality measures related to common and high-cost conditions. Similar programs will be introduced for other health care providers as well. Similarly, beginning in 2015, hospitals in the top 25th percentile of rates of hospital-acquired conditions for certain high-cost procedures will be subject to a payment penalty.

Quality measure reporting programs will also be expanded beyond acute care hospitals to include long-term care hospitals, rehabilitation hospitals, hospice programs, and prospective payment system-exempt cancer hospitals. Payments to physicians and payments for rural health care will increase. For example, the Medicare physician fee schedule will increase by 0.5 percent over 2009 rates. In addition, Medicare payments for rural health care will increase to providers in any state where at least 50% of the counties are “frontier counties.” A frontier county must have a population density of less than six people per square mile.

Certain payment demonstration programs for payment and care will also be developed. An example of such a program is an alternative care organization (ACO), which functions by integrating hospitals, physicians and other health care providers in order to provide care for a defined patient population. An ACO is partially paid based on, and generally held accountable for, the cost and quality of care furnished by the ACO provider members to the defined patient population. In turn, the ACO provider members are accountable for the total cost of care provided to such patient population. The ACO and its provider members are paid based on a pre-set formula for the care provided and they may be eligible to receive incentive payments for achieving certain cost and quality goals.

The Affordable Care Act also makes changes to Medicare Part D, the prescription drug program, including taking steps to close the “donut hole” —or coverage gap—for prescription drug coverage. Beginning July 1, 2010, drug makers will provide a 50% discount on brand-name drugs to low- and middle-income Medicare Part D beneficiaries who have to pay for the drugs themselves once the coverage gap begins. The Reconciliation Act would give a one-time $250 rebate to those beneficiaries facing the coverage gap in 2010 and begin the 50% rebate from drug manufacturers in 2011. It would offer 75% discount on brand name and generic drugs to those affected by 2020.

The Reconciliation Act makes further changes to Medicare reimbursement, refining language in the Affordable Care Act, including among other things, beginning Medicare disproportionate share hospital reimbursement cuts in 2014, earlier than the date set forth in the Affordable Care Act (but trimming the total ten-year reduction amount by $3 billion), and reducing the annual market basket update for, among others, inpatient hospital, home health, and skilled nursing facility providers.

Medicaid

The Affordable Care Act will expand access to Medicaid and the scope of services covered thereunder.

With respect to access, Medicaid will cover all individuals with incomes of less than 133% of the federal poverty level, expanding eligibility to approximately 16 million people. The new law also allows states, beginning in 2014, to expand Medicaid eligibility to nonelderly, non-pregnant individuals who are not otherwise eligible for Medicare, if they have incomes of less than 133% of the federal poverty level. To assist states with the cost of covering such newly eligible individuals, from 2014 through 2016, the federal government will pay 100% of the new cost. The Reconciliation Act would pay all costs until 2016, 95% in 2017, 93% in 2019 and 90% thereafter.

With respect to the services covered by Medicaid, they have been expanded to include, among others, preventive services, long-term care services, certain maternal and child health services, free-standing birth centers, and the option of covering personal care attendant services to disabled Medicaid beneficiaries who would otherwise need institutional care.

Further, the Reconciliation Act would increase Medicaid payment rates to primary care doctors to match Medicare rates and makes further changes to Medicaid reimbursement, including among others, reducing Medicaid disproportionate share hospital reimbursement cuts.

Similar to Medicare, the Affordable Care Act creates certain payment demonstration programs for payment and care for Medicaid beneficiaries. One demonstration program involves payment bundling, which would move medical charges away from paying providers separately for each service provided under a traditional fee-for-service system in favor of providing a single payment per patient for acute and post-acute care.

Fraud and Abuse

To address fraud and abuse of federal health care programs, the Affordable Care Act will allow provider screening and enhanced oversight periods for new providers and suppliers. It also imposes enrollment moratoria in elevated risk areas by requiring providers and suppliers to establish compliance programs. The Reconciliation Act creates a 90-day period of enhanced oversight for initial claims for reimbursement of durable medical equipment. Both laws include enhanced penalties for submitting false claims and provide funding for enhanced anti-fraud activities.

Food and Drug Administration

The Affordable Care Act authorizes the Food and Drug Administration to approve generic versions of certain biologic drugs, granting manufacturers 12 years of exclusive use before the marketing of generics.

Medical Malpractice

The Affordable Care Act will award and fund five-year demonstration programs to states to address alternatives to tort litigations in the medical malpractice area.

Health Care Sector Fees on Drug and Device Manufacturers and Insurers

Beginning in 2010, the Affordable Care Act imposes fees, allocated by market share, of:

• $2.3 billion per year on drug makers.
• $2 billion in 2011 on medical device manufacturers, increasing that amount to $10 billion in 2017.
• $2 billion in 2011 on insurance companies, increasing that amount to $10 billion in 2017, but exempting nonprofit insurers that spend a sufficient portion of their premiums on medical care rather than administrative costs.
• By comparison, the Reconciliation Act would delay all fees for up to three years, imposing them as follows:
• Drug makers would pay $2.5 billion in 2011, $3 billion from 2012 to 2016, $3.5 billion in 2017, $4.2 billion in 2018 and $2.8 billion in 2019 and thereafter.
• Medical device manufacturers would pay a 2.9% excise tax on devices sold. Insurance companies would pay $8 billion in 2014, increasing to $14.3 billion in 2018, with the amount rising annually by the rate of premium growth thereafter.

Long-Term Care Insurance

Beginning in 2011, the Affordable Care Act creates a voluntary federal program to provide long-term care insurance, paid for by payroll deductions and no federal subsidy. Lifetime benefits become available when a person becomes disabled after having paid premiums for at least five years and working for at least three of those years. The amount of benefit may not be less than $50.00 per day. The Secretary of Health and Human Services could increase premiums for the plan in the future to ensure its financial solvency.

Physician Ownership of Hospitals

The Affordable Care Act imposes certain prohibitions on physician ownership of hospitals. A physician could maintain an ownership interest in a hospital to which they self-refer only if: (i) the hospital was physician-owned on or before a certain date; and (ii) a provider agreement between Medicare and the physician-owned hospital was in effect on or before that date. Thereafter, however, a physician owner may not own a greater percentage of the hospital than was owned on the date the law was enacted. Moreover, such hospitals may not expand the number of operating rooms, procedure rooms or beds without meeting the requirements of certain exceptions, such as grandfathered hospitals that, among other things, document increases in certain Medicaid patient admissions.

Skilled Nursing Facilities

The Affordable Care Act will require skilled nursing facilities to disclose information regarding ownership, expenditures and certain other accountability requirements. This information will be disclosed to a website for Medicare and Medicaid beneficiaries to compare the facilities.

- Eric M. Peterson (March 23, 2010)

The Democratic Policy Committee has provided the following ‘Implementation Timeline‘ reflecting the Patient Protection and Affordable Care Act (H.R. 3590) and the Health Care and Education Reconciliation Act of 2010 (H.R. 4872):

Implementation Timeline

Reflecting the Patient Protection and Affordable Care Act and

the Health Care and Education Reconciliation Act

2010

Immediate Access to Insurance for Uninsured Individuals with a Pre-Existing Condition. Provides eligible individuals access to coverage that does not impose any coverage exclusions for pre-existing health conditions. This provision ends when Exchanges are operational. Effective 90 days after enactment.

Small Business Tax Credit. Initiates the first phase of the small business tax credit for qualified small employers for contributions to purchase health insurance for employees. The credit is up to 35 percent of the employer‟s contribution to provide health insurance for employees. There is also up to a 25 percent credit for small nonprofit organizations. Effective calendar year 2010. (Later, when Exchanges are operational, tax credits will be up to 50 percent of premiums.)

Eliminating Pre-Existing Condition Exclusions for Children. Bars health insurance companies from imposing pre-existing condition exclusions on children‟s coverage. Effective six months after enactment and applying to all employer plans and new plans in the individual market. (This provision will apply to all people in 2014).

Rebates for the Medicare Part D ‘Donut Hole.’ Provides a $250 rebate check for all Part D enrollees who enter the „donut hole.‟ Currently, the coverage gap falls between $2,830 and $6,440 in total drug spending. Effective calendar year 2010. (Beginning in 2011, institutes a 50 percent discount on brand-name drugs and begins generic coverage in the donut hole; fills the donut hole by 2020.)

Prohibiting Rescissions. Prohibits abusive practices whereby health insurance companies rescind existing health insurance policies when a person gets sick as a way of avoiding covering the costs of enrollees‟ health care needs. Effective six months after enactment and applying to all new and existing plans .

Eliminating Lifetime Limits. Prohibits insurers from imposing lifetime limits on benefits. Effective six months after enactment and applying to all plans.

Regulating Use of Annual Limits. Tightly regulates plans‟ use of annual limits to ensure access to needed care in all group plans and all new individual plans. These tight restrictions will be defined by the Secretary of Health and Human Services. Effective six month after enactment and applying to new plans in the individual market and all employer plans. (When the Exchanges are operational in 2014, the use of annual limits will be banned for new plans in the individual market and all employer plans.)

Covering Preventive Health Services. All new group health plans and plans in the individual market must provide first dollar coverage for preventive services. Effective six months after enactment.

Improving Prevention Health Coverage. Requires State Medicaid programs to cover tobacco cessation services for pregnant women. Effective Fiscal Year 2011.

Extending Coverage for Young Adults. Requires any group health plan or plan in the individual market that provides dependent coverage for children to continue to make that coverage available until the child turns 26 years of age. Effective six months after enactment.

Bringing Down the Cost of Health Care Coverage. Health plans, including grandfathered plans, must annually report on the share of premium dollars spent on medical care and provide consumer rebates for excessive medical loss ratios. Effective January 1, 2011

Reducing the Cost of Covering Early Retirees. Creates a new temporary reinsurance program to help companies that provide early retiree health benefits for those ages 55-64 offset the expensive cost of that coverage. Effective 90 days after enactment.

Strengthening Community Health Centers. Provides funds to build new and expand existing community health centers. Effective Fiscal Year 2011.

Strengthening the Primary Care Workforce. Expands funding for scholarships and loan repayments for primary care practitioners working in underserved areas participating in the National Health Service Corps. Effective Fiscal Year 2011.

Improving Consumer Assistance. Requires that any new group health plan or new plan in the individual market implement an effective appeals process for coverage determinations and claims. Effective six months after enactment.

Improving Consumer Information through the Web. Requires the Secretary of HHS to establish an Internet website through which residents of any State may identify affordable health insurance coverage options in that State. The website will also include information for small businesses about available coverage options, reinsurance for early retirees, small business tax credits, and other information of interest to small businesses. So-called “mini-med” or limited-benefit plans will be precluded from listing their policies on this website. Effective not later than July 1, 2010.

Improving Consumer Assistance. Requires the Secretary of Health and Human Services (HHS) to award grants to States to establish health insurance consumer assistance or ombudsman programs to receive and respond to inquiries and complaints concerning health insurance coverage. Effective upon enactment.

Cracking Down on Health Care Fraud. Requires enhanced screening procedures for health care providers to eliminate fraud and waste in the health care system. Many provisions are effective on the date of enactment.

Improving Public Health Prevention Efforts. Creates an interagency council to promote healthy policies at the federal level and establishes a prevention and public health investment fund to provide an expanded and sustained national investment in prevention and public health programs. Effective not later than July 1, 2010.

Strengthening the Quality Infrastructure. Additional resources provided to HHS to develop a national quality strategy and support quality measure development and endorsement for the Medicare, Medicaid and CHIP quality improvement programs. Strategy submitted not later than January 1, 2011.

Extending Payment Protections for Rural Providers. Extends Medicare payment protections for small rural hospitals, including hospital outpatient services, lab services, and facilities that have a low-volume of Medicare patients, but play a vital role in their communities. Effective calendar year 2010.

Establishing a Patient-Centered Outcomes Research Institute. Establish a private, non-profit institute to identify national priorities and provide for research to compare the effectiveness of health treatments and strategies. Effective date of enactment.

Ensuring Medicaid Flexibility for States. A new option allowing States to cover parents and childless adults up to 133 percent of the Federal Poverty Level (FPL) and receive current law Federal Medical Assistance Percentage (FMAP) will take effect. Effective April 1, 2010.

Non-Profit Hospitals. Establishes new requirements applicable to nonprofit hospitals beginning in 2010, including periodic community needs assessments. Effective on the date of enactment.

Expanding the Adoption Credit and Adoption Assistance Program. Increases the adoption tax credit and adoption assistance exclusion by $1,000, makes the credit refundable, and extends the credit through 2011. Effective for tax years beginning after December 31, 2009.

Encouraging Investment in New Therapies. A two‐year temporary credit subject to an overall cap of $1 billion to encourage investments in new therapies to prevent, diagnose, and treat acute and chronic diseases. Available for qualifying investments made in 2009 and 2010.

Tax Relief for Health Professionals with State Loan Repayment. Excludes from gross income payments made under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas. Effective for amounts received by an individual in taxable years beginning after December 31, 2008.

Excluding from Income Health Benefits Provided by Indian Tribal Governments. Excludes from gross income the value of specified Indian tribal health benefits. Effective for benefits and coverage provided after the date of enactment.

Establishing a National Health Care Workforce Commission. Establishes an independent National Commission to provide comprehensive, nonbiased information and recommendations to Congress and the Administration for aligning federal health care workforce resources with national needs. Effective not later than September 30, 2010.

Strengthening the Health Care Workforce. Expands and improves low-interest student loan programs, scholarships, and loan repayments for health students and professionals to increase and enhance the capacity of the workforce to meet the range of patients‟ health care needs. Effective calendar year 2010.

Special Deduction for Blue Cross Blue Shield (BCBS). Requires that non-profit BCBS organizations have a medical loss ratio of 85 percent or higher in order to take advantage of the special tax benefits provided to them under Internal Revenue Code (IRC) Section 833, including the deduction for 25 percent of claims and expenses and the 100 percent deduction for unearned premium reserves. Effective for tax years beginning after December 31, 2009.

Indoor Tanning Services Tax. Imposes a ten percent tax on amounts paid for indoor tanning services. Indoor tanning services are services that use an electronic product with one or more ultraviolet lamps to induce skin tanning. Effective for services on or after July 1, 2010.

2011

Discounts in the Part D ‘Donut Hole.’ Provides a 50 percent discount on all brand-name drugs and biologics in the donut hole and begins phasing in additional discounts on brand-name and generic drugs to completely fill the donut hole by 2020 for all Part D enrollees. Effective January 1, 2011.

Improving Preventive Health Coverage. Provides a free, annual wellness visit and personalized prevention plan services for Medicare beneficiaries and eliminates cost-sharing for preventive services. Effective January 1, 2011.

Increasing Reimbursement for Primary Care. Provides a 10 percent Medicare bonus payment for primary care physicians and general surgeons. Effective January 1, 2011.

Improving Health Care Quality and Efficiency. Establishes a new Center for Medicare & Medicaid Innovation to test innovative payment and service delivery models to reduce health care costs and enhance the quality of care provided to individuals. Effective January 1, 2011.

Providing New, Voluntary Options for Long-Term Care Insurance. Creates a long-term care insurance programs to be financed by voluntary payroll deductions to provide benefits to adults who become disabled. Effective January 1, 2011.

Improving Transitional Care for Medicare Beneficiaries. Establishes the Community Care Transitions Program to provide transition services to high-risk Medicare beneficiaries. Effective January 1, 2011

Transitioning to Reformed Payments in Medicare Advantage. Freezes 2011 Medicare Advantage payment benchmarks at 2010 levels to begin transition. Continues to reduce Medicare Advantage benchmarks in subsequent years relative to current levels. Benchmarks will vary from 95 percent of Medicare spending in high-cost areas to 115 percent of Medicare spending in low-cost areas with higher benchmarks for high-quality plans. Changes are phased-in over three, five or seven years, depending on the level of payment reductions. Effective January 1, 2011.

Increasing Training Support for Primary Care. Establishes a Graduate Medical Education policy allowing unused training slots to be re-distributed for purposes of increasing primary care training at other sites. Effective July 1, 2011.

Expanding Primary Care, Nursing, and Public Health Workforce. Increases access to primary care by adjusting the Medicare Graduate Medical Education program. Primary care and nurse training programs are also expanded to increase the size of the primary care and nursing workforce. Ensures that public health challenges are adequately addressed. Effective July 2011.

Increasing Access to Home and Community Based Services. The new Community First Choice Option, which allows States to offer home and community based services to disabled individuals through Medicaid rather than institutional care. Effective October 1, 2011 .

Reporting Health Coverage Costs on Form W-2: Requires employers to disclose the value of the benefit provided by the employer for each employee‟s health insurance coverage on the employee‟s annual Form W-2. Effective for tax years beginning after December 31, 2010.

Standardizing the Definition of Qualified Medical Expenses. Conforms the definition of qualified medical expenses for HSAs, FSAs, and HRAs to the definition used for the itemized deduction. An exception to this rule is included so that amounts paid for over-the-counter medicine with a prescription still qualify as medical expenses. Effective for tax years beginning after December 31, 2010.

Increased Additional Tax for Withdrawals from Health Savings Accounts and Archer Medical Savings Account Funds for Non-Qualified Medical Expenses. Increases the additional tax for HSA withdrawals prior to age 65 that are not used for qualified medical expenses from 10 to 20 percent. The additional tax for Archer MSA withdrawals not used for qualified medical expenses would increase from 15 to 20 percent. Effective for tax years beginning after December 31, 2010.

Cafeteria Plan Changes. Creates a Simple Cafeteria Plan to provide a vehicle through which small businesses can provide tax‐free benefits to their employees. This would ease the small employer‟s administrative burden of sponsoring a cafeteria plan. The provision also exempts employers who make contributions for employees under a simple cafeteria plan from pension plan nondiscrimination requirements applicable to highly compensated and key employees. Effective for tax years beginning after December 31, 2010.

Pharmaceutical Manufacturers Fee. Imposes an annual, non-deductible fee on the pharmaceutical manufacturing industry allocated according to market share and not applying to companies with sales of branded pharmaceuticals of $5 million or less. Effective for tax years beginning after December 31, 2010.

2012

Encouraging Integrated Health Systems. Implements physician payment reforms that enhance payment for primary care services and encourage physicians to join together to form “accountable care organizations” to gain efficiencies and improve quality.

Linking Payment to Quality Outcomes. Establishes a hospital value-based purchasing program to incentivize enhanced quality outcomes for acute care hospitals. Also, requires the Secretary to submit a plan to Congress by 2012 on how to move home health and nursing home providers into a value-based purchasing payment system.

Reducing Avoidable Hospital Readmissions. Directs CMS to track hospital readmission rates for certain high-cost conditions and implements a payment penalty for hospitals with the highest readmission rates.

2013

Improving Preventive Health Coverage. Creates incentives for State Medicaid programs to cover evidence-based preventive services with no cost-sharing.

Administrative Simplification. Health plans must adopt and implement uniform standards and business rules for the electronic exchange of health information to reduce paperwork and administrative burdens and costs.

Encouraging Provider Collaboration. Establishes a national pilot program on payment bundling to encourage hospitals, doctors, and post-acute care providers to work together to achieve savings for Medicare through increased collaboration and improved coordination of patient care.

Increasing Medicaid Payment for Primary Care. Requires states to pay primary care physicians the same rate Medicare pays, and fully federally funds any additional state costs.

Limiting Health Flexible Savings Account Contributions. Limits the amount of contributions to health FSAs to $2,500 per year, indexed by CPI for subsequent years.

Eliminating Deduction for Employer Part D Subsidy. Eliminates the deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees.

Increased Threshold for Claiming Itemized Deduction for Medical Expenses. Increases the income threshold for claiming the itemized deduction for medical expenses from 7.5 to 10 percent. Individuals over 65 would be able to claim the itemized deduction for medical expenses at 7.5 percent of adjusted gross income through 2016.

Additional Hospital Insurance Tax for High Wage Workers. Increases the hospital insurance tax rate by 0.9 percentage points on wages over $200,000 for an individual ($250,000 for married couples filing jointly). Expands the tax to include a 3.8 percent tax on net investment income in the case of taxpayers earning over $200,000 ($250,000 for joint returns).

Medical Device Excise Tax. Establishes a 2.3 percent excise tax on the first sale for use of a medical device. Excepted from the tax are eye glasses, contact lenses, hearing aids, and any device of a type that is generally purchased by the public at retail for individual use.

Limiting Executive Compensation. Limits the deductibility of executive compensation under Section 162(m) for insurance providers if at least 25 percent of the insurance provider‟s gross premium income from health business is derived from health insurance plans that meet the minimum creditable coverage requirements. The deduction is limited to $500,000 per taxable year and applies to all officers, employees, directors, and other workers or service providers performing services, for or on behalf of, a covered health insurance provider. This provision is effective beginning in 2013 with respect to services performed after 2009.

Fee for patient-centered outcomes research. Annual fee becomes effective on insured and self-insured plans to fund the patient centered outcomes research trust fund.

2014

Reforming Health Insurance Regulations. Implements strong health insurance reforms that prohibit insurance companies from engaging in discriminatory practices that enable them to refuse to sell or renew policies due to an individual‟s health status. Insurers can no longer exclude coverage for treatments based on pre-existing health conditions. It also limits the ability of insurance companies to charge higher rates due to heath status, gender, or other factors. Premiums can vary only on age (no more than 3:1), geography, family size, and tobacco use.

Eliminating Annual Limits. Prohibits insurers from imposing annual limits on the amount of coverage an individual may receive.

Ensuring Coverage for Individuals Participating in Clinical Trials. Prohibits insurers from dropping coverage because an individual chooses to participate in a clinical trial and from denying coverage for routine care that they would otherwise provide just because an individual is enrolled in a clinical trial. Applies to all clinical trials that treat cancer or other life-threatening diseases.

Establishing Health Insurance Exchanges. Opens health insurance Exchanges in each State to the individual and small group markets. This new venue will enable people to comparison shop for standardized health packages. It facilitates enrollment and administers tax credits so that people of all incomes can obtain affordable coverage.

Ensuring Choice through a Multi-State Option. Provides a choice of coverage through a multi-State plan, available nationwide, and offered by private insurance carriers under the supervision of the Office of Personnel Management.

Providing Health Care Tax Credits. Makes premium tax credits available through the Exchange to ensure people can obtain affordable coverage. Credits are available for people with incomes above Medicaid eligibility and below 400 percent of poverty who are not eligible for or offered other acceptable coverage. They apply to both premiums and cost-sharing to ensure that no family faces bankruptcy due to medical expenses again.

Ensuring Choice through Free Choice Vouchers. Workers who qualify for an affordability exemption to the individual responsibility policy but do not qualify for tax credits can take their employer contribution and join an Exchange plan.

Promoting Individual Responsibility. Requires most individuals to obtain acceptable health insurance coverage or pay a penalty of $95 for 2014, $325 for 2015, $695 for 2016 (or, up to 2.5 percent of income in 2016), up to a cap of the national average bronze plan premium. Families will pay half the amount for children, up to a cap of up to a cap of $2,250 per family. After 2016, dollar amounts are indexed. If affordable coverage is not available to an individual, they will not be penalized.

Promoting Employer Responsibility. Requires employers with 50 or more employees who do not offer coverage to their employees to pay $2,000 annually for each full-time employee over the first 30 as long as one of their employees receives a tax credit. Precludes waiting periods over 90 days. Requires employers who offer coverage but whose employees receive tax credits to pay $3,000 for each worker receiving a tax credit up to an aggregate cap of $2,000 per full-time employee.

Increasing Access to Medicaid. Medicaid eligibility will increase to 133 percent of poverty for all non-elderly individuals to ensure that people obtain affordable health care in the most efficient and appropriate manner. States will receive 100 percent federal funding for the first three years of this coverage expansion.

Small Business Tax Credit. Implements the second phase of the small business tax credit for qualified small employers.

Quality Reporting for Certain Providers. Places certain providers – including ambulatory surgical centers, long-term care hospitals, inpatient rehabilitation facilities, inpatient psychiatric facilities, PPS-exempt cancer hospitals and hospice providers – on a path toward value-based purchasing by requiring the Secretary to implement quality measure reporting programs in these areas and also pilot test value-based purchasing for each of these providers in subsequent years.

Health Insurance Provider Fee. Imposes an annual, non-deductible fee on the health insurance sector allocated across the industry according to market share. The fee does not apply to companies whose net premiums written are $25 million or less.

2015

Continuing Innovation and Lower Health Costs. Establishes an Independent Payment Advisory Board to develop and submit proposals to Congress and the private sector aimed at extending the solvency of Medicare, lowering health care costs, improving health outcomes for patients, promoting quality and efficiency, and expanding access to evidence-based care.

Paying Physicians Based on Value Not Volume. Creates a physician value-based payment program to promote increased quality of care for Medicare beneficiaries.

2018

High-Cost Plan Excise Tax. Imposes an excise tax of 40 percent on insurance companies and plan administrators for any health insurance plan that is above the threshold of $10,200 for self-only coverage and $27,500 for family plans. The tax would apply to the amount of the premium in excess of the threshold. The threshold would be indexed at CPI-U plus one percentage point for 2019 and CPI for years thereafter. An additional threshold amount of $1,650 for singles and $3,450 for families is available for retired individuals over the age of 55 and for plans that cover employees engaged in high risk professions. Employers with higher costs on account of the age or gender demographics of their employees when compared to the age and gender demographics nationally my adjust their thresholds even higher.

The California Supreme Court has long held this doctrine sacred. Helfend v. Southern California Rapid Transit District, 2 Cal. 3d. 1 (1970). In the 1980s, the California Legislature authorized and encouraged doctors, hospitals and health plans to negotiate and enter into contracts for their mutual benefit.  Thus was born managed care which encouraged health providers to lower costs in exchange for a ready source of patients covered by insurance.  Thus, if a patient is a health plan member, and chooses doctors and hospitals that have a contract with their health plan, despite the fact that the patient incurs a certain regular, non-discounted charge to their medical providers, those providers will receive a lesser negotiated by their insurance companies.  This model has worked somewhat successfully in holding down health care costs.

Very often, plaintiffs will incur detriment in the form of personal financial liability when they execute written agreements in which they agree to be financially responsible for all charges for the medical services provided to them. For example, written contracts with healthcare providers state that they agree that, in consideration for all services received, they are obligated to pay the provider's “usual and customary charges for such services.” These written contracts often provide that it is “[plaintiff’s] responsibility to pay any balance not paid for by [plaintiff’s] insurance.”

Recently, the California court of appeals handed down Howell v. Hamilton Meats & Provisions, Inc., 179 Cal. App. 4th 686 (2009), the first case to analyze these negotiated rate differentials under California's collateral source rule.  The Court held that the amount of damages to which a plaintiff is entitled is the non-discounted value of the health provider’s services, not merely the discounted amount the insurer actually paid. The court explained it reasoning as follows:

We conclude that the extinguishment of a portion of Howell's debt to Scripps and CORE in the amount of the negotiated rate differential ($130,286.90) was a benefit to Howell because she was no longer personally liable for that portion of the debt she personally incurred in obtaining medical treatment for her injuries. We also conclude that this benefit to Howell was a collateral source benefit within the meaning of the collateral source rule because it was conferred upon her as a direct result of her own thrift and foresight in procuring private health care insurance through PacifiCare, a source wholly independent of Hamilton as the defendant in this case. Under California's collateral source rule (paraphrasing Helfend, supra, 2 Cal.3d at pp. 9-10, 84 Cal.Rptr. 173, 465 P.2d 61), Howell, as a person who has invested insurance premiums to assure her medical care, should receive the benefits of her thrift; and Hamilton, as the party liable for Howell's injuries, should not garner the benefits of Howell's providence. The law allows Howell to keep this collateral source benefit for herself because (paraphrasing the Restatement Second of Torts) she was responsible for the benefit by maintaining her own insurance. (Rest.2d Torts, § 920A, com. (b).)

The California Supreme Court granted review in Howell on March 11. Given the Supreme Court's decision in Parnell v. Adventist Health System/West, 35 Cal. 4th 595 (2005) (Hospital could not assert lien under Hospital Lien Act against any judgment or settlement accruing to patient in underlying action to recover the difference between provider's discounted payment and the hospital's “usual and customary” charges; under the agreement with provider hospital that agreed to accept discounted amount as “payment in full”) and its decisions in City and County of San Francisco v. Sweet, 12 Cal. 4th 105, 117 (1995), and Mercy Hospital and Medical Center v. Farmers Insurance Group of Companies, 15 Cal. 4th 213 (1997)(where the Supreme Court confirmed that a medical provider and patient have a creditor-debtor relationship for the provider's usual rates), the Supreme Court will have ample related precedent to affirm.  

Anthem could face fines of up to $7 million stemming from the alleged violations from 2006 to 2009. Poizner said that Anthem repeatedly failed to respond to state regulators in a "reasonable time" as they investigated complaints over the last year.

"We believe there is evidence to suggest there are serious issues with how Anthem Blue Cross pays claims," Poizner said at a Sacramento news conference. "Most disturbing to us is that they don't even respond" to the Department of Insurance "in a timely way."

Anthem's parent company, WellPoint Inc., said that it had not seen the enforcement action but would cooperate fully with Poizner to resolve the matter "in the best interests" of its policyholders.

"We take the issues raised by Commissioner Poizner very seriously," Anthem said in a statement. "As the largest insurer in California, our responsibility is to pay the many millions of claims on behalf of our members each year fairly, fully and promptly."

As reported in this blog, WellPoint and Anthem have faced intense criticism from consumers, regulators, members of Congress and the Obama administration over rate hike proposals of as much as 39% for customers with individual policies in California. Lawmakers in Sacramento and Washington are holding hearings this week on the increases, which have been postponed until May 1 amid the outcry.

The rate hikes would affect many of the 800,000 individual policyholders in California.

According to Poizner, nearly 40% of the violations in the Anthem case, 277, stem from allegations that the company failed to pay patient claims within 30 days as required by state law, officials said.

Poizner's office filed the enforcement action against Anthem on Monday with the Office of Administrative Hearings. An administrative law judge will hear the matter. Each violation carries a maximum penalty of $10,000.