Examining California’s ailing health insurance structure

California’s complicated health insurance regulatory framework makes it difficult for consumers to know their rights.

Over 90 percent of Californians have health insurance through either an employer-based, individual, Tricare, or Medi-Cal policy. Not only do insurance customers have to navigate these various options, but they also have to deal with California’s complex legal framework, which often leaves consumers unaware of their rights.

History of health insurance in California

Before 1946, all health insurance policies fell under the jurisdiction of the California Department of Insurance (CDI).  In 1946, the decision in California Physicians’ Service (CPS) (now Blue Shield of California) v. Garrison, established which regulator had oversight over the different types of insurances. The CDI argued that CPS needed to obtain a license that guarantees the insurance carrier will pay for a loss an insured suffers. However, the court held that CPS did not assume any of the risks incurred and therefore did not engage in the business of selling insurance. 

In other words, CPS promised to deliver health services for an annual membership fee as opposed to insuring the patient after services were rendered. Consequently, California’s Attorney General obtained jurisdiction and not the CDI. This became an important case because it established that the CDI could not regulate certain types of health plans. 

In the 1960s, after the growth of Ross-Loos Medical Group and Kaiser Foundation Health Plan, the Attorney General was ready to relinquish oversight responsibilities. So, Assemblyman John Knox came up with the idea of assigning jurisdiction to the Department of Corporations (DOC), the predecessor to theDepartment of Managed Health Care (DMHC). The Knox-Keene Health Care Service Plan Act of 1975 was passed to grant authority to the DOC.

Presently, the CDI has an elected insurance commissioner govern health policies that provide indemnity and assume risk. Generally, these policies are Preferred Provider Organizations (PPOs). The DMHC, established in 1999 as part of the California Health and Human Services, has a Governor-appointed director. Policies under the DMHC directly provide health care service under capitation arrangements, otherwise known as a Health Maintenance Organization (HMO).

If that seems confusing, you’re not alone—consumers are lost

In California, most of the health insurance policies comply with the CDI and the California Insurance Code, or the DMHC and the California Health and Safety Code. If there are any issues, California’s insurance members must determine what statute applies and what regulatory body to contact should they want to escalate their grievance. 

According to the Annual Complaint Report, several thousand calls are re-routed to the DMHC because the CDI does not have jurisdiction. In the 2016-reporting year, non-jurisdictional inquiries totaled around 6,500 calls. These calls involved claim denial, enrollment, claims handling, benefits, and billing—all were referred to the DMHC. 

It’s important to identify the distinction because an insured may be looking at the wrong statute when initiating a complaint, or, in some situations, a lawsuit. Here is an example:

ABC insurance company denies John Doe’s attempt to receive specific medical care under his HMO policy. Mr. Doe, upset with his insurance carrier, decides to research the relevant statutes applicable to his situation. Unfortunately, Mr. Doe investigates the California insurance code and submits his grievance to the California insurance commissioner. Under the California insurance code, an insurance carrier is not obligated to respond to a grievance unless associated with a claim. However, if Mr. Doe would have filed his complaint with the DMHC, the California Health and Safety Code has substantial code provisions to deal with grievances for many reasons. These code provisions would have required ABC insurance to fully explain in a timely fashion the denial of Mr. Doe’s services. 

How can attorneys help?

An attorney can help in many ways. First, they can identify the type of health policy and then locate the appropriate state legal code and regulatory body. Finally, an attorney can assist in legal actions if an insured has exhausted all administrative remedies.

An insurance company is legally obligated to ensure timely communication to its policyholders. Therefore, when an insurer makes its customers wait weeks, or even months, to validate a claim request, the company is acting in bad faith.

Under California law, in order for a plaintiff to assert a claim for bad faith, a plaintiff must suffer a loss covered under an insurance policy, properly present a claim to be compensated for the loss, and demonstrate that the insurance carrier failed to conduct a full, fair, prompt, and thorough investigation of all of the bases of the claim and that the harm caused was due to this failure (Rappaport-Scott v. Interinsurance Exch. Of the Auto. Club (2007) 146 Cal. App.4^th 831, 837).

If understanding your rights regarding your health insurance policy is giving you more headaches than the flu, don’t worry—you’re not alone. Luckily, there are people who can help and have a good understanding of the complex health regulatory structure in California. 

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