There's no insurance against a bad health-insurance company

The company that took away Jennifer Latham's health insurance has had many names in the past 118 years. It began operations in Wisconsin as the LaCrosse Mutual Aid Association. By 1905 it had moved its headquarters to Milwaukee and evolved into Time Indemnity.

Over the years, Time has absorbed other companies, attracted Dutch and Belgian investors and been known as Fortis, John Alden and Union Security. Today the company markets a wide array of specialized products — including service contracts, funeral insurance and group dental — under the name Assurant, a publicly traded company with a reported $25 billion in assets, $8 billion in annual revenues and 15,000 employees.

Individual health coverage is one of the company's strongest niches. In contrast to group policies, in which the risk of costly claims is spread among a large pool of people, issuing individual policies requires what Assurant calls "disciplined risk management." It can be a highly profitable niche — more than 17 million Americans rely on individual policies — provided you know how to trim the risk pool.

There are, of course, many approaches to managing risk. One way is to conduct a detailed review of an applicant's medical history before issuing a policy in order to rule out pre-existing conditions. But that involves a fair amount of delay and up-front cost to the company; at the Latham trial, Time officials testified that post-claim underwriting was a more efficient process. Since most states allow a one- or two-year contestability period after a policy is issued, the company can simply wait until a big claim is submitted, then conduct an investigation in search of "material misrepresentations" that would warrant claim denial or policy rescission.

Still, post-claim underwriting has its own risks. It can turn up not just fraud but inadvertent omissions. Time rescinded coverage for Otto Raddatz of Illinois in the middle of chemotherapy treatments because prior records showed he had gallstones; the decision was reversed only after the state attorney general got involved and Raddatz's physician admitted that he'd never told him about the gallstones. The case received mention in a speech last fall by President Barack Obama, pushing for health care reform.

Another Time customer, diagnosed with Hodgkin's lymphoma a month after getting her policy, was told she wouldn't be covered because she once told a doctor she'd experienced shortness of breath after exercising. The company claimed the episode should have prompted her to seek treatment for a possibly more serious illness. Two years ago, that case and dozens of others led to a $2.1 million fine against Time and scorn from Connecticut Attorney General Richard Blumenthal, who declared that the company's post-claim underwriting "is designed to enrich itself by denying legitimate claims."

In Colorado, Time Insurance and its subsidiaries have been fined twice in six years by state regulators. A 2003 audit by the Colorado Division of Insurance found 44 alleged violations of state law, including failure to adequately disclose its rescission appeal procedures, and resulted in a $38,000 fine. Last July the company was fined another $90,000 over improper recordkeeping and claims processes.

In South Carolina, a jury awarded $15 million to a Time customer who'd discovered at age seventeen that he was HIV-positive when he tried to donate blood. Time rescinded his policy, based on a misstatement in one nurse's notes, which wrongly suggested that he'd been aware of the condition before he applied for insurance. At Time headquarters, a "rescission panel" meets once a week to decide whose coverage to revoke. Testimony indicated that the young man's case was one of 45 rescissions done in a single two-hour meeting. The South Carolina Supreme Court upheld the verdict last fall but reduced the amount to $10 million.

The bad press and occasional jury award hasn't gone unnoticed in Milwaukee. Last June, Assurant Health CEO Donald Hamm appeared before a House subcommittee investigating rescission and tried to put a positive spin on the practice. His company, Hamm said, provided a vital service to "a growing number of people who do not receive employer-sponsored health coverage."

Assurant's application forms "are written in simple, easy-to-understand, straightforward language," Hamm insisted. "The vast majority of people fill out the enrollment form completely and accurately.... That is why we do not, as a matter of course, request medical records on each applicant who applies."

If conflicting information is later discovered, he explained, an underwriter decides whether to refer the matter to the high-ranking rescission panel. The panel doesn't even know the amount of the claim at issue. And consumers have "multiple opportunities for appeal, which now include the option to request a medical review by an independent, third-party company."

It all sounded peachy, but the committee wasn't satisfied. How, Oregon representative Greg Walden wondered, does Assurant know that the applicant is even aware of what's in the medical records?

"We have a very fair and thorough process," Hamm replied. "We would not rescind a policy if the applicant was not aware of the condition."

Hamm was asked about the Raddatz case; he said he couldn't talk about it. Committee chairman Bart Stupak, a Democrat from Michigan, pressed him about the thousands of conditions that can trigger a post-claim review, including cancer. Hamm replied that there's a "high probability" that cancer is a pre-existing condition.

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