In California Lawyer, Jeanette Borzo tells the story of how Los Angeles city attorneys and a private law firm teamed up to take on California insurance giants with allegations that the insurers are using intentionally obtuse forms to create excuses to rescind health coverage rather than pay for major claims.

Borzo reports that lawyer William Shernoff “argued that Blue Shield’s policy applications were designed to confuse, so that misstatements would provide an excuse for rescission should a policyholder ever require expensive treatment.” Shernoff wrote that “at a time when the policyholders are seriously ill, the insurance company walks away, leaving them uninsured, uninsurable and buried in debt.”

The lawsuits attracted the attention of California regulators and health providers alike. Doctors and hospitals, often stuck with the bills when coverage is rescinded for possibly bogus reasons, joined the class action against companies like Blue Cross of California.

“‘… it appears to have evolved into a cost-savings method,’ [Los Angeles Chief Assistant City Attorney Jeffrey] Isaacs says. ‘It’s a systematic, institutional process to flag and pull anything that looks costly to the company.’ Some insurers, he notes, even have a list of ‘rescission diagnostic codes’—a group of medical conditions that, when reported on claims, trigger an investigation into potential falsehoods on a policyholder’s application that might justify rescission.”

Three of California’s biggest insurers, Blue Cross, Blue Shield, and Health Net, have already been fined $18.3 million, but the attorneys and advocates continue to bring cases to court and push for legislative reforms.

Related:

• Anthem Blue Cross agrees to take back clients, pay $1-million fine (Feb. 11, 2009)
• Wall Street Journal’s Health Blog details other settlements (Feb. 11, 2009)