Judge Awards $9.36 Million in Health Suit

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HEALTHCARE/HOSPITAL LAW • Feb. 25, 2008

First of Dozens Of Pending Cases Against Insurers

By Gabe Friedman
Daily Journal Staff Writer
This article appears on Page 1.

LOS ANGELES - In a closely watched case, a retired judge in the Inland Empire awarded $9.36 million Friday to a woman whose health insurance company canceled her coverage when she was diagnosed with breast cancer.

It marks the first award among dozens of pending lawsuits, including several class actions, against California health insurers who rescinded coverage to their enrollees.

Patsy Bates, a 52-year-old beauty shop owner in Gardena, had sued Woodland Hills-based Health Net Inc. in 2004 when it refused to pay $129,000 in medical bills she accrued during cancer treatment.

'Criminal Conduct'

Health Net's lawyers argued in court papers that Bates was dropped from coverage because her application contained errors about her heart and weight conditions.

But after a seven-day arbitration, retired judge Sam Cianchetti roundly rejected those arguments. Cianchetti's acerbic 21-page decision, released Friday, attacks the Health Net policy that ties employee bonuses to specific cancellation targets. Calling the company's conduct "reprehensible," Cianchetti suggested one of its decisions rose to the level of "criminal conduct."

"It's difficult to imagine a policy more reprehensible than tying bonuses to encourage the rescission of health insurance that keeps the public well and alive," Cianchetti wrote.

Future Announcements

The award includes compensation for Bates' unpaid medical expenses plus interest, $750,000 for emotional distress and $8.4 million in putative damages. The judge noted that Bates' attorneys also can apply for their attorney fees and costs.

Health Net attorneys William Helvestine and Damian Capozzola, of Epstein, Becker & Green in San Francisco and Los Angeles, respectively, were not available for comment.

David Olson, a Health Net spokesman, issued a statement that the company did not agree with all of Cianchetti's conclusions and that it had already addressed some of his concerns. The statement said there would be future announcements in coming weeks and the company would work on passing legislation to address the matter.

In the meantime, Health Net promised several immediate changes, including a binding third-party review before cancelling any individuals' policy.

Health Net is an insurance provider for Daily Journal Corporation employees.

Bates' attorney William Shernoff, of Shernoff, Bidart & Darras in Claremont, said he hoped the arbitration award would send a message that health insurance companies should "clean up their act."

He added that he is litigating 100 similar cases in state court that accuse health insurance companies of breaching their contracts and unfairly dropping coverage to enrollees. One such case against Health Net that will go to arbitration in April involves a newborn baby that lost its coverage, Shernoff said.

He also has filed three class actions against Health Net, Blue Cross and Blue Shield claiming unfair business practices. Those suits are not eligible for punitive damages, but seek injunctions and compensation to individuals who lost coverage.

The cases were buoyed Thursday when the Los Angeles City Attorney's Office filed a civil action in Los Angeles Superior Court against Health Net that targets similar conduct. City Attorney Rocky Delgadillo also announced a criminal investigation into individuals associated with a Health Net bonus payment program.

According to Cianchetti's decision, Bates was in the middle of cutting a client's hair at her Gardena salon, Praise Hair, when a Health Net salesman arrived in 2003. She already had health coverage, but he persuaded her to switch enrollment to a Health Net insurance policy.

While she worked on the client's hair, he filled out her application. She signed it and he left within 30 minutes. Later, he called her and told her she would be charged a higher rate if her weight was 185 pounds, as her driver's license indicated. She then gave a different weight, all according to the description of events given by Cianchetti.

The salesman, who changed the weight and initialed it, also filled out the application, even though the applicant was supposed to do that. Nevertheless, the application was approved by Health Net, Cianchetti wrote.

But later, in 2004, the application was flagged by other executives at the company. By that time, Bates had been diagnosed with breast cancer. Health Net sent her a clarification letter asking for more information about her weight, though it never contacted the salesman with its questions. Because it was not satisfied with her response, the company cancelled her coverage in 2004.

Cianchetti criticized Health Net for its policy of setting a number of annual rescission targets as a cost-saving method. Also, he lambasted the company for tying monetary bonuses to how close employees came to reaching rescission targets.

"From the initial review of the application to the rescission, the evidence supports a finding [that] Health Net's primary concern was its own financial well-being," Cianchetti wrote.

Shernoff predicted the decision could ultimately pave the way for a widespread reform of the health insurance industry. He declined to say how much he would ask for in attorney fees. But Shernoff said, "We're in this fight with both feet."