Merritt Personal Lines Manual: A Case of Problematic Health Insurance Mechanics
Fred and Carolyn Mountford were part owners of a Monterey, California, fishing boat charter business. After watching their group health insurance premiums rise steadily for several years, the Mountfords decided to shop for new insurance. Their agent recommended a so-called "third-party policy" underwritten by Boston Mutual Life Insurance Co. and administered by Brennco Benefits Administrators Inc.
Third-party policies have become fairly common in the rapidly-changing health insurance industry. But few consumers understand how the things work. They sell largely on the reputation of the underwriter, such as Boston Mutual; but the administrator makes the critical decisions affecting policyholders -- notably, whom to enroll and when to pay claims.
An administrator recruits customers and then persuades an insurance company to fund a group health plan. The more people the administrator signs up, the more money it earns.
In March 1989, Carolyn Mountford had had a normal gynecological exam. In May, the Mountfords applied for a Brennco-Boston Mutual policy. The application asked:
Within the past two years, have you... seen or consulted with, or received or been recommended to receive treatment from a physician...or other practitioner of the healing arts; or taken medication or been recommended to take medication?
The Mountfords answered that Carolyn had been to the doctor and received a clean bill of health. Their policy took effect July 1.
One night early in September, Carolyn felt a lump the size of a quarter on her left breast. Within the next few weeks, she underwent tests, saw specialists, had surgery, took drugs and submitted bills to her insurance company.
But Brennco didn't pay those bills. Instead, it ordered her gynecologist to send her file. It was looking for reasons to drop her from the policy -- which it shortly did.
In cancelling Carolyn's coverage, Brennco cited three problems:
- "History of fibroid uterus."
- "Urinary incontinence."
- "Severe dysmenorrhea" (pain during menstruation).
The fibroids, benign growths, had been detected years earlier; they eventually disappeared without treatment. The incontinence had occurred only a few times, during coughing fits she'd had during a series of respiratory infections. Her only enduring complaint was monthly cramps -- and neither they nor fibroids nor an inconsequential loss of bladder control had anything to do with breast cancer.
The Mountfords appealed Brennco's rejection. Carolyn's gynecologist explained in a letter that her March exam had been "entirely within normal limits" and showed "no chronic problems and certainly no preexisting conditions."
The couple's insurance agent called the cancellation "irresponsible and unjust." He pulled other customers out of the plan and stopped selling third-party policies.
Brennco didn't budge.
In March 1990, the Mountfords sued Brennco and Boston Mutual. Lawyers for the companies did what defense attorneys always do in these cases: They argued that the policy was an employee benefit and therefore governed by ERISA.
They lost on a technicality, which allowed the Mountfords to press for their unpaid benefits plus damages. The case settled eight months later for $90,000, roughly twice the medical bills. Brennco agreed to reinstate Carolyn.
But the company's outrageous behavior continued.
When the Mountfords first bought the Brennco policy, they'd paid a monthly premium of $164. After Carolyn was dropped, Fred's premium was $103. As the fight dragged on, his premiums soared -- to $398 in a year and a half. "Current premium levels are inadequate to support the level of claim payments," explained the company that had yet to pay a Mountford claim.
In December 1991, when Carolyn returned to the plan, the premiums jumped to $753. In early 1992, they rose again -- to $956 a month.
By early 1993, after a year on the waiting list, Carolyn got into the California Major Risk Medical Insurance Program, the state's health plan for the uninsurable.
