April 2008

California takes action against PacifiCare

Multi-million dollar penalties possible for wrongful denial of claims

The California Department of Insurance (CDI) and the California Department of Managed Health Care (DMHC) have taken joint action against PacifiCare companies, owned by UnitedHealth Group, in response to more than 130,000 alleged claims handling violations.

This joint endeavor is an historic step in the efforts of both agencies to put an end to the practice of unfair claims handling in the health insurance industry, announced Insurance Commissioner Steve Poizner and DMHC Director Cindy Ehnes. The collaborative effort is the first action ever by both agencies against a single health plan or insurer.

In 2007, after receiving hundreds of consumer and provider complaints about claims payment problems by PacifiCare, particularly after it was acquired by United Healthcare in late 2005, CDI and DMHC launched a joint investigation into PacifiCare's alleged unfair practices.

California law specifies that CDI generally regulates PPO (provider-preferred organization) health products and DMHC regulates HMO (health-maintenance organization) products.

"When they're injured or ill, consumers rely on their insurers to pay legitimate claims," said Poizner. "This promise is essential to our health care system, so after years of broken promises to Californians, it is crystal clear that PacifiCare simply cannot or will not fix the meltdown in its claims paying process. We're going to put an end to that. If PacifiCare can't carry out the ABCs of basic claims payment, today's regulatory action will help spell it out."

Added Ehnes: "The most fundamental purpose of insurance is the promise to pay claims fairly and on time and PacifiCare has broken this promise. We're taking strong action today to make sure patients and providers are treated fairly so that they are able to continue to take care of California's health care needs."

PacifiCare's alleged violations cited by CDI and DMHC include:

*** Wrongful denials of covered claims

*** Incorrect payment of claims

*** Lost documents including certificates of creditable coverage and medical records

*** Failure to timely acknowledge receipt of claims

*** Multiple requests for documentation that was previously provided

*** Failure to address all issues and respond timely to member appeals and provider disputes

*** Failure to manage provider network contracts and resolve provider disputes

CDI also directed a self-audit of PacifiCare's unfair pre-existing condition denials, resulting in $765,157 in claims and recoveries for consumers and providers. As a result of this CDI investigation, more than $1 million has already been recovered for California consumers and health providers who were impacted by PacifiCare's alleged violations.

CDI market conduct examinations revealed that PacifiCare allegedly made large scale and willful decisions to use broken systems to process claims and respond to providers, while continually and effectively collecting premiums. CDI discovered PacifiCare's alleged unlawful conduct last year while investigating consumer complaints and then confirmed PacifiCare's failure to fix its systems during a targeted market conduct examination which revealed the full extent of alleged misconduct. CDI's investigation exposed PacifiCare's alleged decision to improperly handle claims, which resulted in thousands of infractions and grossly unfair treatment of policyholders and providers.

CDI's market conduct examinations reviewed PacifiCare files processed between July 1, 2005 and May 31, 2007, and have identified 130,000 violations of law by PacifiCare in its claims handling practices and handling of provider data including tracking of provider disputes and maintaining network lists.

Statutory penalties are provided for up to $5,000 for each non-willful violation of law and up to $10,000 for each willful violation of law. The enforcement action Poizner has brought against PacifiCare thus potentially implicates up to $650 million if all violations are proven and shown to be non-willful and up to $1.3 billion if all violations are proven and shown to be willful. The company has admitted that it expects to lose at least 400,000 customers nationally due to poor customer service.

Similar provider claims payment violations have been established by the DMHC and the plan has been assessed a penalty of $3.5 million, the largest fine imposed by the DMHC. The DMHC fine differs from the CDI amount because it is calculated based on a set of standards set by law, not on a per violation formula. In addition, the DMHC has set out certain steps the company must take to correct the claims payment problems, including an independent monitor to oversee changes and additional staff to handle the workload.