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Blue Cross of California, Inc. v. Superior Court of Los Angeles County

December 15, 2009


ORIGINAL PROCEEDING in mandate. Anthony J. Mohr, Judge. Petition denied. (Los Angeles County Super. Ct. No. BC 389110).

The opinion of the court was delivered by: Rothschild, J.


This writ proceeding arises out of a lawsuit filed by the Los Angeles city attorney against a health insurer, a managed health care service plan, and their parent corporation concerning coverage rescission practices. Defendants demurred to the complaint on multiple grounds, and the trial court overruled the demurrer. Defendants then filed the instant petition for writ of mandate, seeking reversal of the trial court's ruling on the demurrer. We deny the petition.

The principal issue presented is whether the regulatory and enforcement authority of the California Department of Managed Health Care (DMHC) over managed health care service plans, pursuant to the Knox-Keene Health Care Service Plan Act of 1975 (Health & Saf. Code, § 1340 et seq., hereafter the Knox-Keene Act), strips the city attorney of the authority to pursue the unfair competition and false advertising claims alleged in the complaint. We conclude that the DMHC's regulatory and enforcement authority does not preclude the city attorney from pursuing the unfair competition and false advertising claims.


I. The Complaint

On April 16, 2008, the city attorney filed suit on behalf of the People of the State of California against Wellpoint, Inc., Anthem Blue Cross of California, Inc. (Blue Cross), and Anthem Blue Cross Life and Health Insurance Company (Blue Cross Insurance), alleging claims under both the unfair competition law (Bus. & Prof. Code, § 17200 et seq. (hereafter the UCL)) and the false advertising law (id., § 17500 et seq. (hereafter the FAL)).*fn2 Blue Cross is a managed health care service plan subject to the Knox-Keene Act and regulated by the DMHC. Blue Cross Insurance is a life and disability insurer subject to the Insurance Code and regulated by the California Department of Insurance (DOI). Both Blue Cross and Blue Cross Insurance are subsidiaries of Wellpoint.

The city attorney's claims all relate to "postclaims underwriting," a practice prohibited by section 1389.3 of the Health and Safety Code and section 10384 of the Insurance Code: "No health care service plan shall engage in the practice of postclaims underwriting. For purposes of this section, `postclaims underwriting' means the rescinding, canceling, or limiting of a plan contract due to the plan's failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the plan contract. This section shall not limit a plan's remedies upon a showing of willful misrepresentation." (Health & Saf. Code, § 1389.3; see also Ins. Code, § 10384 [containing an identical prohibition except for substitution of the phrase "policy or certificate" for "plan contract" and elimination of the final sentence, concerning "willful misrepresentation"].) In order to "complete medical underwriting" before issuing coverage, the health plan or insurer must "make reasonable efforts to ensure a potential subscriber's application is accurate and complete." (Hailey v. California Physicians' Service (2007) 158 Cal.App.4th 452, 469.)

The complaint alleges that Blue Cross and Blue Cross Insurance have engaged in a practice of violating the statutory prohibition on postclaims underwriting with respect to their individual and family health coverage.*fn3 According to the complaint, unless an application for health coverage on its face "indicates that the applicant has a medical condition or history that may materially impact the risk of assuming coverage," Blue Cross and Blue Cross Insurance's underwriters do not contact the applicant's doctors or obtain the applicant's medical records before issuing coverage. "[N]o steps of any kind are taken to determine the accuracy of the responses provided in an application that is regular on its face and that does not itself indicate a serious underwriting risk." The complaint alleges that most applications are regular on their face and do not indicate a serious underwriting risk.

After Blue Cross or Blue Cross Insurance issues coverage, however, certain types of claims for benefits will trigger an investigation of the information provided in the application. According to the complaint, defendants have compiled a list of medical diagnoses that appear to be "associated with conditions whose treatment [is] likely to be costly." Whenever defendants receive a claim involving one of those diagnoses, "the claims processing is automatically suspended," and defendants undertake an investigation to try to identify any discrepancies between the claimant's medical records and the information provided by the claimant in the original application for coverage. If they find a discrepancy, they notify the claimant and take additional steps to rescind coverage, "irrespective of whether there is any evidence that [the discrepancies] were the result of intentional misconduct." Even if no discrepancy is found, "the suspension of processing of the claim may have caused a substantial delay in approval of the claim, resulting in postponement of needed medical care and/or delay in the payment of the patient's doctor, hospital, or other provider."

The complaint further alleges that defendants engage in a number of other acts and practices, all related to their alleged practice of postclaims underwriting, that are unlawful, unfair, or fraudulent within the meaning of the UCL or constitute false advertising within the meaning of the FAL. For example, the complaint alleges that many of the medical history questions on defendants' application forms are "exceedingly and unnecessarily confusing and compound," "call for the [applicant] to make medical judgments," or are otherwise "ambiguous and unintelligible to the average consumer," thereby inducing applicants to provide incorrect or incomplete responses, which defendants can later use to rescind coverage if the applicant develops a medical condition requiring expensive treatment.

In a similar vein, the complaint alleges that the members of defendants' sales force "typically lack the expertise to take an accurate medical history," receive little training in that area, and are paid commissions only on applications that are accepted. "The commission payment structure, combined with the lack of training, works to incentivize agents to downplay to consumers the significance of questions in the application that might produce information that could result in the rejection of the application, or that might jeopardize the sale by causing the consumer to be put in a risk category that carries a higher premium for coverage than the agent had previously quoted. As a consequence, agents frequently `help' consumers fill out applications so that the consumer will qualify for coverage at the rate quoted."

In addition, the complaint alleges that defendants' advertising and marketing of their individual and family health coverage convey "untrue and misleading information" to consumers. Again, the allegations all relate to postclaims underwriting. For example, the complaint alleges that defendants purport to cover various medical conditions requiring expensive treatment, but defendants fail to disclose that being diagnosed with one of those conditions will trigger an investigation aimed at rescinding coverage. More broadly, defendants do not "disclose their practice of postclaims underwriting and illegal rescission" to applicants for individual and family health coverage, and defendants instead make "untrue and misleading assertions about their integrity and reliability."

Finally, the complaint alleges that defendants issued a press release on February 23, 2008, stating that they "had taken steps in 2006 `to strengthen and make more transparent [their] process for rescinding policies in order to further minimize the possibility of errors.'" The press release listed several specific steps that defendants had purportedly taken in 2006, but the complaint alleges that the claims in the press release were "false or misleading." For example, one of the measures identified in the press release was "[c]reating a new simplified application for individual benefit policies." The complaint alleges that although defendants did draft a new application form in connection with a tentative settlement of some private litigation relating to postclaims underwriting, the settlement was never finalized and the newly drafted application form "has never actually been used by [d]efendants" for any of their individual and family health coverage.

On the basis of those and related allegations, the complaint alleges claims against all defendants under the UCL and the FAL. The prayer for relief seeks the full range of remedies authorized by those statutes, including (1) injunctive relief prohibiting defendants "from engaging in the unlawful, unfair and/or fraudulent business acts and practices and deceptive advertising" described in the complaint, (2) reinstatement of all health coverage that was wrongfully rescinded as a result of the conduct alleged in the complaint, (3) disgorgement, and (4) civil penalties of $2,500 per violation of the UCL and the FAL.

II. The Demurrer

Defendants moved to strike certain allegations in the complaint and demurred to the complaint on multiple grounds, only three of which are at issue in this writ proceeding.*fn4 First, defendants argued that all of the claims against Blue Cross should be dismissed because "the power to regulate, investigate and initiate enforcement actions against [Blue Cross] has been entrusted exclusively to the DMHC" under the Knox- Keene Act. Thus, according to defendants, the city attorney's UCL and FAL claims against Blue Cross are barred by the DMHC's exclusive regulatory and enforcement powers.*fn5

Second, defendants argued that the trial court should abstain from deciding the claims in the complaint. Defendants contended that "this case would require the [c]court to assume general regulatory powers over the health care industry," but that is "a task . . . better accomplished by the DMHC and DOI, the agencies charged by the Legislature with the necessary enforcement powers to ensure compliance."

Third, defendants argued that all of the city attorney's claims should be either dismissed or stayed under the doctrine of primary jurisdiction. According to defendants, all of the relevant considerations weigh in favor of "permitting the DOI and the DMHC to exercise their primary jurisdiction in this case before the [c]ity [a]attorney should be allowed to pursue his claims, if at all."

The DMHC filed an amicus curiae brief in support of defendants' demurrer. Defendants also sought judicial notice of certain documents relating to regulatory and enforcement actions already undertaken by the DOI and the DMHC, two of which are of particular relevance to this proceeding. Both ...

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