Health plan faces fines of $1.33 billion

California regulators are expected to announce today that they are seeking as much as $1.33 billion in penalties from Cypress-based PacifiCare as a result of widespread problems stemming from its takeover two years ago by healthcare giant UnitedHealth Group Inc.

In an investigation prompted by widespread complaints, the state Department of Insurance uncovered 133,000 alleged violations of state laws and regulations regarding payments for medical care. Each violation carries a maximum penalty of $10,000 for a possible total of $1.33 billion.

Separately, the state Department of Managed Health Care alleged that 30% of the medical claims it reviewed were improperly denied. That agency is seeking an additional $3.5 million in fines.

“These were very serious violations,” said Cindy Ehnes, executive director of the Department of Managed Health Care. “The most fundamental promise of insurance is that they will pay when you are sick, and they will pay those physicians and hospitals in a fair manner.”

Insurance Commissioner Steve Poizner expressed frustration at efforts to get the company to make changes.

“After years of broken promises to California regulators, it became crystal clear that PacifiCare simply could not or would not fix the meltdown in its claims-paying process,” he said. “We’re going to put an end to that. If PacifiCare can’t understand the ABCs of basic claims payment, maybe it will understand the dollars and cents of regulatory action.”

The problems stem from the $9.2-billion purchase of PacifiCare by Minneapolis-based UnitedHealth in January 2006. The deal added more than 3 million Californians to UnitedHealth, which now has about 27 million enrollees nationwide.

The company’s regional executives acknowledged that the merger was bungled in many ways. In a meeting with Times reporters and editors Monday, David Hansen, UnitedHealth’s regional chief executive, apologized for the problems that the transition caused physicians, hospitals and patients.

Hansen said the company made a mistake in attempting to make too many changes too quickly, and also was tripped up by unforeseen problems such as the loss of a 9,000-member physicians network contract.

“Our integration issues and challenges shouldn’t affect our providers, and they shouldn’t affect our members,” he said. “We’re very regretful about that.”

At the same time, UnitedHealth executives downplayed the effect on members and patient care, characterizing the problems largely as administrative errors. Still, they said, the company was taking the allegations seriously.

“We have conducted a top-to-bottom review of PacifiCare of California’s operations, procedures and policies and are working closely with state regulators to ensure that we resolve any outstanding performance issues,” spokesman Tyler Mason said.

The potential fines are the latest black eye for UnitedHealth. Longtime Chief Executive William McGuire resigned in 2006. Last month, in the first settlement of its kind under post-Enron corporate reforms, he agreed to pay $468 million to avoid trial on charges that he secretly padded his paycheck by manipulating stock options.

The company stressed Monday that most PacifiCare members were in health maintenance organization plans, which were largely unaffected by the problems uncovered by state regulators.

Regulators said they found problems primarily in preferred-provider and point-of-service type plans, which serve about 200,000 members.

The two regulators planned to make an unprecedented joint announcement of their findings today in an effort to underscore the import they attach to the alleged problems.

UnitedHealth executives stressed their cooperation with regulators and said they expected the final amount due to be substantially less.

Physician and hospital groups praised the action. Richard Frankenstein, president of the California Medical Assn., the state’s largest physicians organization, said many doctors were still having to fight to get paid on time and what they are owed.

UnitedHealth “may claim this is an administrative issue,” he said. “But that doesn’t help someone who needs their heart surgery approved in a hurry.”

Regulators said some patients faced delays in getting in to see physicians who were supposed to be available to PacifiCare members but who were incorrectly dropped from computerized network lists maintained by the parent company.

They also said some patients were forced to pay out of pocket for all or part of such visits. And some physicians and hospitals considered dropping PacifiCare patients after the merger because it was too difficult to collect payments from UnitedHealth.

Dr. Ted Mazer, a San Diego ear, nose and throat specialist, said the time he and colleagues spend fighting for fair and timely payment from UnitedHealth had cut into the time they spent with patients.

“This really all boils down to access to care for everybody by maintaining the infrastructure of a medical delivery system, which is falling apart under government underpayment, health plan underpayment and health plan profiteering,” Mazer said.

The slow payments caused big problems for the hospitals operated by the University of California. “Our ability to care for our patients rests on our ability to be paid timely and accurately,” said Santiago Munoz, a UC associate vice president.

UnitedHealth spokesman Mason said many of the problems were identified and brought to the attention of regulators by the company. In addition, he said, the company, which announced plans to lay off more than 500 Orange County employees in late 2005 and 2006, was hiring 50 people to help correct payment problems and improve physician services.

Mason also noted that both PacifiCare and UnitedHealth continue to earn good marks from members in surveys and from a private oversight organization.

Hansen said some employers had dropped PacifiCare from their benefit offerings as a result of the payment problems. They are among a host of service problems affecting membership nationwide that UnitedHealth executives recently discussed with Wall Street analysts.

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