Date: Wed, 23 Aug 2000 19:04:32 -0700 (PDT)

Wall Street Journal

August 23, 2000

State Alleges Insurer Sifted Sick Clients

By Chad Terhune

Capping a six-month investigation, Florida regulators say they will charge one of the state's largest individual health insurers with discriminating against sicker policyholders.

In an administrative order to be filed today in Tallahassee, the Florida Department of Insurance has given American Medical Security Group Inc., Green Bay, Wis., 21 days to comply with state law or face sanctions ranging from fines to license revocation. The company hadn't seen the order and couldn't comment. It can challenge the state's action before an administrative law judge.

When the state launched its investigation into American Medical Security in February, company officials said they were confident no laws had been broken and that the insurance department had full knowledge of its practices and had never questioned them before.

"We are absolutely convinced we are operating within the letter of the law," says company spokesman Cliff Bowers.

Insurance-department officials say American Medical Security and its subsidiary, United Wisconsin Life Insurance Co., violated a 1997 state law that spells out the rights a canceled policyholder has to new coverage.

The law says an insurer must offer all canceled policyholders "any other individual health insurance" it currently sells and that offer must be made "uniformly without regard to any health-status-related factor."

Starting in 1998, American Medical began canceling an entire policy line and offering new health coverage to many of its Florida customers at higher rates. Dan Sumner, the insurance department's general counsel, says American Medical violated state law by limiting customers' choice of new coverage based on their health status.

"The purpose of this order is to make sure consumers get the option they are entitled to," says Mr. Sumner. "We intend to enforce the statute on AMS."

American Medical Security is battling these same charges on another front. Earlier this month, a Palm Beach County circuit judge denied the company's motion to dismiss a potential class-action suit filed on behalf of hundreds of Florida customers in February. The judge will hold a hearing Sept. 22 on whether to certify the case as a class action. American Medical has an estimated 30,000 policyholders in Florida, one of its largest markets, and 560,000 members nationwide.

Plaintiffs' attorneys say American Medical Security started canceling existing coverage in 1998 in order to separate healthy customers from sicker ones who posed a bigger claims risk. The lawsuit alleges that the company then nearly doubled the premiums for the sicker policyholders while imposing smaller rate increases on the healthier customers.

Plaintiffs' attorneys say the company didn't want to give policyholders a choice of "any" health coverage as state law requires. Instead, they say, American Medical Security selected the policy it wanted for these sicker policyholders in order to create what's called a "death spiral." That scenario typically involves consolidating higher claims risks into one policy line where rates continually climb, forcing people to either leave the insurer or pay exorbitant premiums.

In recent months, Florida customers affected by the 1998 cancellation notice have started receiving their second significant rate increase in as many years. Based on consumer complaints received, state officials say many of the new rate increases are as high as 60%. And many American Medical Security customers feel obliged to pay up because their medical history makes them virtually uninsurable elsewhere. Unlike in employers' group-health plans, individuals seeking policies for themselves aren't guaranteed coverage regardless of their health.

Earlier this month, American Medical Security notified Tom and Shaneen Wahl, Port Charlotte retirees, that their monthly premium would increase to $1,881 from $1,175 effective Sept. 1. Their current premium is more than double what it was the year earlier. Mr. Wahl, 60, and Mrs. Wahl, 51, are both several years away from Medicare eligibility at age 65 and say they can't risk going without insurance. Mrs. Wahl survived breast cancer three years ago. "I have every reason to believe I'm OK, but the chances I'm not could be devastating," she says. "We would lose everything" without health insurance.

Mrs. Wahl says she and her husband can't afford the $1,881 premium on their retirement income. They drove to American Medical Security's headquarters in Wisconsin last week to protest the latest rate increase and to seek some relief. "I am not just a block of business, I am a real person," she says. Company officials say they don't comment on individual policyholders.

State regulators can't challenge any of American Medical Security's rate increases because they have no authority over what it charges. American Medical Security and about 10 other insurers in Florida sell their individual policies through out-of-state associations that are exempt from most Florida regulation.

Torre Grissom, an insurance-department lobbyist and consumer advocate, says, "It is fairly transparent what they have done to get around state regulation. They are a law unto themselves."

Florida insurance officials have tried repeatedly to eliminate that out-of-state loophole in the Legislature to no avail. But the 1997 law at issue in the current state investigation and civil suit involves how insurance coverage is offered -- and specifically includes coverage offered by out-of-state associations.

Some states have won concessions from the insurer over its rating practices. Alabama insurance regulators investigated American Medical Security last year and found that some of the company's rating practices weren't in compliance with state law. American Medical Security said it didn't violate any laws in Alabama but agreed in October 1999 to issue premium credits or cash refunds to its MedOne policyholders who received a rate increase greater than 45% in any one-year period dating back to Jan. 1, 1994.

American Medical Security says that the company abides by the laws where it operates and that it hasn't sought to circumvent regulation. The company sells insurance in Florida and many other states through the Taxpayers Network Inc., a Cedarburg, Wis., association anyone can join for $5 a month. Tim Moore, general counsel for American Medical Security, serves as one of three board members for the Taxpayers Network. The association is based in Wisconsin, but it was incorporated in Ohio, which doesn't regulate associations' group health-insurance rates.

Premium increases have bolstered American Medical Security's bottom line after a lackluster 1999. Net income for the first six months of 2000 was $3.9 million, compared with a loss of $500,000 in the year-earlier period, the company reported this month. One factor behind the turnaround, the company says, was its MedOne product line, which was offered in 1998 to the Florida customers who had their existing policies canceled.

In its second-quarter results for this year, the company said MedOne revenue was up 27% and enrollment in those policies was up 24% since the second quarter of last year. "During the past several months, we have been raising rates pretty much across the board to accommodate increasing medical-claims costs," says Mr. Bowers, the company spokesman.

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