July 17 (Bloomberg) -- A U.S. congressional committee will investigate the health insurance industry's practice of revoking benefits when policyholders develop costly illnesses.

The practice, known as ``post-claims underwriting,'' can leave families without coverage and facing substantial medical bills, witnesses told the House Oversight and Government Reform Committee today. Committee Chairman Henry Waxman, a Democrat from California, said he plans to request documents from health insurers.

The cancellations occur in policies purchased by individuals, not in employer-sponsored group plans. The issue has become part of a debate over how much the U.S. should rely on individual coverage. Senator John McCain of Arizona, the presumptive Republican presidential nominee, wants to use tax incentives to help Americans buy individual policies. Senator Barack Obama of Illinois, his Democratic opponent, backs greater reliance on plans sponsored by employers and the government.

``Post-claims underwriting is a sanitized name for an exceptionally offensive practice, retroactively denying health insurance to people who get sick and when they get sick,'' Waxman said at the hearing. ``Insurers are using technicalities or trumped-up misrepresentations to rescind policies after individuals get sick and accumulate hundreds of thousands of dollars in medical bills.''

Insurers have defended the revocations as necessary when they discover that members committed fraud or misrepresented their health in applying for coverage. Abuses by customers skew the assessment of how risky and expensive it will be to cover someone, according to the insurers.

Insurer Response

Only 0.2 percent of the policies bought by individuals and families directly from health plans are canceled by insurers each year, said Stephanie Kanwit, representing the Washington-based trade group America's Health Insurance Plans. She told the panel that 18 million Americans are covered by policies purchased this way.

The cancellations protect insurers and other ratepayers from higher premiums, Kanwit told the committee. Still, she said AHIP wants to extend consumer protections.

``We know that rescissions are exceedingly rare,'' she said. ``We want to make them extinct.''

The 1,300-member organization's board proposed new policies on cancellations in December, part of a broader plan promoting a public-private effort to make coverage available to all. Asked by Waxman, Kanwit couldn't say how many AHIP member companies now comply with the standards.

The guidelines include binding independent review in disputed cases and a ban on revocations if an insurer failed to fully investigate unclear medical information on an application when it was first filed.

A Bicycle Accident

Heidi Bleazard of Logan, Utah, told the committee she ran up more than $100,000 in medical bills after suffering broken vertebrae in a bicycle accident in 2005.

Three months after telling a hospital and doctors that her care would be covered, Bleazard's insurer, Regence Blue Cross of Utah, opened a review and rescinded the policy, she testified. Regence said her husband, Keith Bleazard, a floor-covering worker, hadn't provided complete information about his 1996 back injury and surgery, according to the couple, parents of 14 children in a blended family. The $100,000 in bills remains in limbo.

Regence's actions were justified by the need to ``be good stewards of our members' health care dollars,'' said company spokesman Angela Hult in an e-mail.

`We Trust People'

``We trust people to tell the truth when they fill out an application,'' Hult said. ``This is an instance of Mr. Bleazard providing misinformation, and absolutely not a case of post- claims underwriting.''

Panel members from both parties said they were outraged about the Bleazards' cancellation and said steps should be taken to prevent such actions.

Waxman singled out the U.S. Centers for Medicare & Medicaid Services for failing to push state insurance regulators to crack down on the rescissions. The agency has yet to use its authority to enforce consumer rights under a law passed in 1996 or take action to spur more oversight, Waxman said.

Abby Block, who heads the agency's oversight of the individual health insurance market, said she and four staff members have limited authority to intervene and that she has never received complaints about rescissions. Block said she didn't consider articles in large newspapers about cancellations to be adequate notice of a possible breakdown in state regulation.

Connecticut, California

Connecticut and California have been most active in responding to cancellations.

California officials said today that they have imposed a total of $8.2 million in fines against four of the state's largest health plans for improper rescissions. The plans have agreed to pay all the medical bills incurred since the revocations and restore coverage without limitations.

Cindy Ehnes, the state's managed-care health director, said during a press briefing today that she hopes to settle with Anthem Blue Cross, a subsidiary of Indianapolis-based WellPoint Inc., the second-largest U.S. health insurer. The dispute with WellPoint concerns about 1,770 people who were removed from the rolls after getting sick.

In Connecticut, the attorney general ordered a company to pay a $2.1 million fine and $900,000 in restitution for systematic abuses, according to testimony submitted to the committee by state officials.

The cancellations are more frequent than people have suspected, Waxman said.

``We felt all alone,'' said Keith Bleazard. ``I'm surprised that there are other people experiencing the same thing. At the time you feel like it's you against the world.''

To contact the reporter on this story: Avram Goldstein in Washington at agoldstein1@bloomberg.net.

Last Updated: July 17, 2008 18:11 EDT