Blue Shield of California sued over ‘death spiral’ practice

A consumer advocacy group has filed a class action lawsuit against Blue Shield of California over the insurance company’s alleged “death spiral” practices to trap consumers into paying increasingly higher health plan rates but for much less benefits.

Consumer Watchdog filed the lawsuit in the Superior Court of San Francisco on Tuesday seeking to halt Blue Shield’s “manipulation” of California’s health insurance system by “illegally decreasing policy benefits to enrollees while escalating premiums they must pay.”

The lawsuit alleged that Blue Shield, one of the largest health insurers in California, engaged in an unethical and illegal practice known as “death spiral.”

“Death spiral” occurs when an insurer closes an health plan to new members and opens up new health plans that often offer less benefits at higher prices.

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Members of the closed Blue Shield plan – particularly those who are older or have pre-existing conditions – are trapped in three costly, no-win scenarios:

1) Downgrade to the new plan offered by Blue Shield but pay more to receive fewer benefits and higher deductibles or out-of-pocket costs;

2) Stay in the closed plan but face double-digit premium increases as younger, healthier members transfer to other comparable plans that are denied to those with pre-existing conditions;

3) Eventually get priced out, leaving them uninsured, when their premium rates “spiral” up because only the unhealthy and older members remain in their closed insurance plan.

“Death Spirals are the result of insurers behaving at their worst,” said Jerry Flanagan, staff attorney for Consumer Watchdog.  “Instead of providing coverage to loyal customers who have paid their premiums, Blue Shield pushes consumers into skimpier coverage or prices them out of care altogether when they are sick and need insurance the most.”

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Consumer Watchdog – a non-profit consumer protection organization that filed the lawsuit on behalf of Blue Shield members Robert Martin of Gilroy, Calif., and Deborah Goodwin of Santa Monica, Calif. – claimed that Blue Shield has engaged in these “unlawful, unfair and fraudulent” practices since March 2010. According to the organization, Blue Shield is planning to close another 23 health plans regulated by the California Department of Insurance by July 2.

The lawsuit noted that the type of “death spiral” practices employed by Blue Shield has been outlawed in California since 1993.

In fact, AB 1743 was passed by the state legislature in response to “complaints in connection with Blue Shield of California” over by “people who have health coverage under ‘closed’ plans and find themselves subjected to spiraling rate increases.”

Under Section 1367 of the state’s Health and Safety Code, insurers who close health plans must either offer all members the ability to switch a comparable health plan with similar level of benefits at similar prices or pool the members “with the experience of enrollees in an appropriately large number of open blocks” so their premium rates do not skyrocket.

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Martin, one of the suit’s plaintiffs, his wife and son were originally enrolled in Blue Shield’s Spectrum PPO 2000 health plan back in 2009.

In November 2010, Marin was notified by Blue Shield that his family’s monthly premium rate would increase by 23%, from $1,964 per month to $2,411 per month. At the time, Martin was not informed that the huge rate increase the result of PPO 2000 being “closed” and that he was “entitled to transfer to comparable coverage without medical underwriting and that Blue Shield, in fact, had such policies available.”

In fact, Blue Shield told Martin that the only plan available without medical underwriting (for pre-existing conditions) was the Spectrum PPO 5500 plan, which carried a high deductible (or out-of-pocket costs) and provided fewer benefits and services than his original PPO 2000 plan.

“Blue Shield closed my family’s policy and then threatened us with a 23% premium increase. We had no choice but to switch to the only bare-bones policy Blue Shield offered us. When Blue Shield canceled the original rate increase, the company refused to let us transfer back into our old, higher benefit policy. Then, Blue Shield raised the rate of our bare bones policy by 14.8%!” said Martin. “It’s just plain unfair.  Blue Shield is pushing families like mine with pre-existing health conditions out of their health plans – either into higher deductible coverage or into the ranks of the uninsured.”

A Blue Shield spokesperson told ABC 7 News that “the allegations are false. We comply with all aspects with the block closure law and have since it was enacted.”


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