UnitedHealth’s $173M Fine May Be Warning to P/C Insurers
By: Don Jergler (Insurance Journal) July 2014
A decision by California Insurance Commissioner Dave Jones to fine UnitedHealth Group $173.6 million for violations having to do with the Unfair Business Practices Act, the Unfair Insurance Practice Act and unfair claims settlements may be a wakeup call for not just health, but life and property/casualty insurers, insurance regulation experts say.
A recent market conduct examination by the California Department of Insurance showed UnitedHealth, the nation’s largest health insurer, committed more than 900,000 violations after its $8.2 billion takeover of Cypress-based PacifiCare in 2005.
Jones’ June 9 decision is based on that examination, and his decision overrode a ruling last year by an administration law judge that said UnitedHealth should be fined no more than $11.5 million.
Jones rejected the ruling and imposed a penalty more than 15 times larger. Although, under Insurance Commissioner Steve Poizner four years ago California sought a penalty of nearly $10 billion against the insurer, a fine that didn’t stand.
UnitedHealth in July sued Jones to block the massive fine, which is considered
The suit, which was filed in Orange County Superior Court, alleges that Jones was abusing his power and setting a precedent by seeking such a large fine for what are essentially paperwork violations.
The insurer argues that by treating errors in standard health insurance paperwork more severely than errors that directly affect patient health or the integrity of their policies, Jones’ decision threatens to make the state’s healthcare system slower, less efficient and more expensive.
“It does have implications going forward,” said PacifiCare spokeswoman Cheryl Randolph. “It’s setting new standards.”
The insurer has acknowledged that the claims paperwork inherited from PacifiCare was bungled, but that all the claims in question were paid.
While the size of the fine is unprecedented, also unprecedented is the way in which the decision aggregates the violations and fines the insurer for each letter that wasn’t properly mailed out.
“He’s looking at a $10,000 fine per letter that we didn’t send out, which is ridiculous,” Randolph said.
The decision appears to indicate just how far Jones is willing to go to punish those he considers bad actors, and it’s an efficient way to make sure carriers dot their “i”s and “t”s, experts say.
Experts also say Jones’ decision can be extended to other lines.
“If I was a property/casualty insurer in California, I would pay attention to this,” said Jay M. Feinman, a Rutgers School of Law professor whose areas of expertise include insurance law. “It indicates what the commissioner is willing to do.”
Because Jones oversees the entire industry and his decision sets a precedent for what is within his purview and how he can calculate and issue fines, all insurers should consider themselves subject to the aggregate fines laid out in the UnitedHealth decision, Feinman
“This is not just health insurers, any insurer is subject to the jurisdiction of the insurance department,” he added.
Other experts say the way Jones fined UnitedHealth is the only way to ensure companies with deep pockets act in good faith.
Having aggregate fines in which individual violations can be plied up and applied to make up one big fine means Jones feels PacifiCare knowingly acted in bad faith by farming out its claims offshore and taking other cost cutting steps that Jones believes resulted in a convoluted claims process, said Daniel Schwarcz, associate professor of law at the University of Minnesota Law School.
“It’s obvious that the department feels that that the carrier acted in bad faith,” said Schwarcz, whose research primarily focuses on consumer protection and regulation in the property/casualty and health insurance markets. “In light of that determination, I think it’s appropriate to aggregate penalties in the manner that the department did.”
The decision cites Insurance Code section 790.03, subdivision (h), which prohibits insurers from knowingly committing or performing any unfair or deceptive acts with such frequency as to indicate a general business practice.
Schwarcz’s interpretation of Jones’ decision is that he feels the insurer had “constructive knowledge” that the claims weren’t being properly handled, meaning that they were “offshoring claims activity to inflate the bottom-line at the expense of reasonable claims handling.”
“When you’re talking about a corporation, a large entity, the concept of knowing takes on a different meaning than when you’re talking about an individual,” Schwarcz said.
No other insurance voice beside UnitedHealth has stepped forward to say Jones has extended his reach, or express concerns about what appears to be a precedent-setting decision.
The Property Casualty Insurers Association of America, which is typically one of the first groups to charge in when there’s even a perceived threat to insurers, has been mum on the decision.
A PCI spokesperson declined to offer comment for this article, and declined to answer questions about whether the group knows there’s a potential impact for its members.
A person attending the Association of California Insurance Association’s General Counsel Seminar in Las Vegas last week sat in on a speech by Adam Cole, CDI’s general Counsel, who told attendees the decision applies to all lines of insurers. ACIC is part of PCI.
“Adam Cole made it clear that it applied to property/casualty insurers, and not just health insurers,” said the person, who asked not to be identified.
He said attendees he spoke with afterward were previously unaware the decision applied to all lines of insurance.
“People were just shocked,” he said.
Asked to detail to whom the decision applies Deputy Insurance Commissioner Byron Tucker would only confirm that Jones was sending a message to bad actors.
“If insurers follow the law they will be fine,” Tucker said.
Tucker said the fine isn’t excessive, particularly in this case, which he called unprecedented.
“In this case PacifiCare’s conduct was so appalling that two separate elected insurance commissioners found these violations absolutely reprehensible,” Tucker said. “This is about a billion-dollar out-of-state company that purchased a much smaller well-functioning California insurer and systematically sucked it dry without thought for the consequences to patients or doctors.”
According to Tucker, UnitedHealth following its takeover of PacifiCare made business decisions that knowingly put consumers and doctors at risk.
“They willfully engaged in large-scale decisions to use broken and unreliable methods to process claims,” Tucker said, adding that these decisions led to nearly 1,800 improper claims denials. “The entire time they continued to collect premiums from customers.”
Jones’ 225-page decision alleged that shortly after UnitedHealth’s takeover of PacifiCare, UnitedHeatlth executives began a cost-savings push that called for $50 million to $75 million in savings during the first year of integration between the two carriers and $350 million in savings over the next two to three years.
