February 7, 2008
INSURANCE CLAIM DENIALS
By: Gerald Barrett, Legislative Fellow
You asked us to find information concerning health insurance companies that offer compensation for denying claims. Specifically you wanted to know (1) if any states have legislation prohibiting bonuses, financial incentives, or any other type of compensation for denying claims; (2) if regulations exist in Connecticut surrounding the claims denial process; (3) if there are any lawsuits in the past five years related to providing compensation for denying claims; and (4) if there is any literature on this topic.
Based on a legal database search, we found 16 jurisdictions that have legislation regarding incentive-based claims denial. Connecticut, Minnesota, and Rhode Island specifically prohibit utilization review companies from providing incentives to their employees for denying claims. The remaining 13 prohibit health insurers from attempting to reduce the number of claims their insureds file by offering providers financial incentives for denying, reducing, or limiting patient access to covered services. In addition, California is considering legislation that would prohibit awarding bonuses to employees based on the number of policies they cancel.
Although there have been numerous lawsuits involving the denial or cancellation of health insurance claims and contracts, we found no lawsuits involving charges that a company was offering compensation to deny claims. However, in recent years, the issue of offering compensation for denying claims has become more of a concern as courts and legislators are increasingly scrutinizing claim denial practices.
News reports are the major source of literature on this topic. Authors report increasing speculation that compensation for claim denials is becoming more common within the insurance industry.
Of the 16 jurisdictions that have legislation on incentive-based claim denials, only Connecticut, Minnesota, and Rhode Island specifically prohibit utilization review companies from offering any type of incentive packages to their employees for denying claims or rescinding policies. The other 13 (Alabama, Alaska, Arizona, Arkansas, District of Columbia, Georgia, Louisiana, Maine, Michigan, Nevada, North Carolina, North Dakota, and Texas) have legislation aimed at prohibiting insurance companies from offering incentives to health care providers or physicians for any form of claim or care denial. These 13 states do not have legislation specifically targeting employees of utilization review or insurance companies.
Connecticut law specifically prohibits utilization review companies from awarding bonuses to employees based on the number of claim denials the employees make (CGS § 38a-226c(a)(11)).
In addition, Connecticut's unfair claims practices statute outlines the process an insurance company must go through to lawfully deny a claim, including not misrepresenting pertinent facts related to an individual's claim and conducting a reasonable investigation into a person's medical history when an investigation is warranted (CGS § 38a-816(6)).
Also, Connecticut law prohibits health insurers and HMOs from cancelling or rescinding policies if they have not completed a thorough medical underwriting process before issuing the policy. If the insurer has completed a full medical underwriting process, it can later submit an application to the insurance commissioner if it believes an individual knowingly lied or omitted information with regard to his or her application (PA 07-113).
Minnesota law prohibits anyone performing utilization review from receiving financial incentives based on the number of claim denials that are issued. However, this law does not apply to financial incentives established between health care companies and providers (Minn. Stat. § 62M.12).
Rhode Island law prohibits any employee of a utilization review company from receiving financial incentives based on the number of claim denials issued by that individual. The law also prohibits the company from entering into a contract with an employee whereby compensation is based on a reduction of services (R.I. Gen. Laws § 23-17.12.5(h) and (j)).
California Proposed Legislation
California Assembly Bill 1150 is currently under consideration. The legislation would prohibit insurers from linking policy cancellations with employee bonus payments. On January, 29, 2008, the Assembly unanimously passed the bill, which is now before the Senate.
While there have been countless lawsuits brought against insurance companies citing unfair claims denial, our online search found none that links monetary incentives to claim denial practices. However, a recent lawsuit lead to the discovery of a California health insurance company that gave incentives to its employees for retroactively cancelling polices.
In November 2007, Patsy Bates sued Health Net Inc., a California based health insurance company, alleging the insurer unlawfully cancelled her health insurance policy retroactively. Health Net rescinded Bates' policy after she was diagnosed with cancer, had begun chemotherapy treatment, and incurred $200,000 in medical bills. Health Net based the cancellation on its belief that Bates knowingly lied about her medical history when filling out her application. Under California law, policies can be cancelled if an individual knowingly commits fraud (Cal. Health and Safety § 1365(a)(2)).
Further investigation by a California judge revealed that Health Net reportedly paid the executive in charge of the cancellation more than $20,000 in bonuses. The California Department of Managed Health Care (DMHC) subsequently fined Health Net $1 million for failing to disclose information (when asked by DMHC investigators) about bonuses paid to employees.
With the recent discovery of Health Net's practices, the California DMHC, newspapers, and various other media sources are speculating that providing incentives to employees for denying claims is becoming common practice in the health insurance industry. With companies providing bonuses to their employees, the worry is that employees will go beyond the normal review process to find a discrepancy within a client's contract or policy, since in most cases they will not receive the bonus until a certain number of claims are denied.