Has Blue Cross and Blue Shield of Colorado secretly been nickeling-and-diming its clients so it can earn extra millions of dollars in profits? The company denies it, and in a lawsuit settlement reached last week it admitted no wrongdoing despite shelling out $3 million to consumers. Yet officials in states other than Colorado have disagreed and forced some insurance companies to stop the exact same practice that Blue Cross and Blue Shield says it will continue here.

At issue is the way the insurance company reimburses hospitals for medical charges. In most of its health plans, Blue Cross requires its clients to make a co-payment that is a percentage of the hospital bill. But that can be misleading.

Consider an example: You get sick and run up a $5,000 hospital bill. Under several of Blue Cross's insurance plans, you are responsible for covering a 20 percent "co-insurance payment" of that cost--$1,000. Which means Blue Cross agrees to pay the other $4,000, or 80 percent, right?

Wrong. The insurance company negotiates discounts with hospitals in exchange for agreeing to provide the hospital with a lot of business. So that $4,000 bill can be considerably lower--say only $3,000.

The catch is that Blue Cross negotiates discounts only on the company's 80 percent share of the payment, not your 20 percent. That can skew the percentage that you pay. Of the actual amount paid to the hospital, you could end up footing closer to half of the bill, despite what your contract with Blue Cross describes as a 20 percent co-payment.

This math was at the heart of two lawsuits filed last year, one in U.S. District Court and another in Denver District Court. Both charged Blue Cross and Blue Shield of Colorado with the same thing: cheating patients by making them pay more for their medical bills than they thought they were paying.

Individual patients insured through Blue Cross never were out more than a few hundred dollars, says F. James Donnelly, an attorney who represented the patients. But, he says, when the differences in the bills were added up, Blue Cross was earning millions of dollars that it should have been using to lower patients' medical costs.

Blue Cross and its patients reached a tentative settlement agreement on the two cases last week. The agreement is scheduled to become final in coming weeks. Although the company denied doing anything wrong, it said it would pay the $3 million "to settle the litigation to avoid further disruption of company operations and to avoid the expenses associated with a lengthy lawsuit," says Catherine Sparkman, a lawyer for Blue Cross.

The company also agreed to add new wording to its policy manuals spelling out how it negotiates discounts with hospitals and physicians for its share of medical bills.

Still, Blue Cross says it fully intends to continue trying to lower its portion of medical bills. According to Carl Miller, a company spokesman, the practice makes sense because the company passes its overall savings on to consumers and because it means that people who actually incur medical costs will pay more, thus lowering the cost of insurance for those who don't.

Despite the settlement of the two Denver lawsuits, however, not everyone thinks that insurance companies like Blue Cross are calculating their medical bills fairly. Even though Blue Cross insists that it did nothing wrong, for example, a judge who presided over one of the lawsuits apparently disagreed.

In an opinion written two months before the two sides settled, District Court Judge Lynne Hufnagel wrote that for Blue Cross to say it was splitting medical bills 80-20 with its members was misleading and unfair.

"If [Blue Cross] members are paying their co-insurance portion based on the full charge and [Blue Cross] is paying the difference between the members' payments and the discount arrangement," she concluded, "the effect is that [Blue Cross] is paying a lower percentage of the total charge than it contracted to pay and the members are paying a higher percentage."

Hufnagel isn't the only one who has seen the discounting practice as a problem. Last week's settlement notwithstanding, Blue Cross is hardly out of the woods. At last count, Blue Cross and Blue Shield insurance companies were in the process of defending themselves against 25 lawsuits in nine states, each charging that the company was treating its members unfairly by not passing on its discount savings to patients. (Iris Shaffer, a spokeswoman for the Chicago-based Blue Cross and Blue Shield Association, declines comment on the lawsuits.)

And in some areas of the country, government officials have concluded the practice is so wrong that they don't want to wait for a lawsuit to decide the issue. Several states have taken action themselves against insurance companies.

Last summer the Florida attorney general's office reached a settlement with Humana Inc. The insurance company agreed to pay $6.25 million to settle charges that Humana overcharged 37,000 of its members through negotiating discounts for the company's payments but not for the patients' payments. The state legislature also has passed a law forcing insurance companies to share their discounts with subscribers.

In Nevada, the state legislature has held hearings on whether the practice is fair. And Arizona's insurance department is finishing up an investigation into insurance companies in that state that allegedly haven't passed on their negotiated savings with hospitals and physicians to consumers.

Chris Herstam, director of Arizona's insurance department, tells Westword that he expects to announce in several weeks a restitution agreement with one insurance company "that was not appropriately passing on discounts to consumers." The department still is investigating a second company, Herstam adds.

Jake Gaffigan, a spokesman for the Colorado Division of Insurance, says state officials here closely followed the progress of the two Colorado lawsuits. But so far the agency has declined to take any action against Blue Cross or the company's practice of negotiating discounts for itself and not its members.

"We've taken a pretty hard look at the issue over the last year," Gaffigan says. But, he adds, "there was a concern that if we eliminated volume discounts for the insurance companies, that would be passed on to consumers, and their rates would rise."

Gaffigan acknowledges that other state insurance departments have been more aggressive than Colorado's in halting the dealmaking. Still, he warns, "you might want to ask them if insurance rates have risen" since they've taken action against the discounted pricing agreements.

"I don't think it had any impact whatsoever on rates," says Tim Brown, a spokesman for the Florida Insurance Department. "We haven't done a study, but in the past year I haven't seen rates go up at all."

Last week's settlement won't mean much for the 80,000 to 100,000 Colorado members who Blue Cross calculates are due a portion of the $3 million settlement payment. If the lawyers take their customary one-third, members affected by the deal will receive a check for between $20 and $25 each.

Still, critics say they hope that the company's agreement to disclose its discount arrangements will at least help consumers calculate what they're really paying for insurance. Before this, "there haven't been proper disclosures on the issue," concedes Gaffigan.

"The difference now," says attorney Donnelly, "is that people are going to read that and decide whether they want this policy.

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