American Medical Security Group Inc., Green Bay, Wis., says it has settled a lawsuit that charged it with using an unfair pricing system and illegally converting policyholders to new health care plans.[@@]

American Medical was preparing to present the agreement to a state court in Palm Beach County, Fla., for preliminary approval today. The outcome of the hearing was not immediately available.

The lawsuit, Addison vs. American Medical Security Inc. and United Wisconsin Life Insurance Company, names 2 American Medical subsidiaries as defendants. The suit, filed in 2002, charges that the American Medical subsidiaries improperly discontinued certain health insurance policies in 1998, tried to place policyholders in different plans and used a rating method for pricing that was not legal in Florida.

Under the settlement, American Medical will not admit guilt or liability in the matter. If the court approves the agreement, the litigation would be terminated “in exchange for consideration,” American Medical says.

American Medical says that it has set aside enough reserves to handle the settlement and that the agreement will have no material effect on its earnings.

“We believe our actions in the state of Florida have at all times been fair, lawful and in the interest of our customers,” says Samuel Miller, American Medical’s chairman. “However, this settlement allows us to remove a considerable distraction and expense from our business.”

In 2002, the Florida Department of Insurance ordered American Medical to stop doing business in the state for 1 year, ruling that the company divided groups of customers into underwriting “tiers” based on claimants’ health history, in violation of the state’s rules.

The regulators said the rules were intended to prevent price discrimination against older, less healthy customers.

American Medical said at the time it believed that it had complied with state pricing rules, but then later announced it would voluntarily stop rating customers in tiers in Florida. A few months later, the company dropped tier-based ratings in 20 other states.

A state appeals court in Tallahassee, Fla., later stayed the order, allowing the company to continue to operate while it battled state insurance regulators.

However, around the same time lawyers also filed the class-action suit, which made allegations similar to those made by the Florida regulators. It is that lawsuit that American Medical now seeks to settle.

Last week, PacifiCare Health Systems Inc., Cypress, Cal., announced an agreement to buy American Medical for around $502 million plus about $30 million in American Medical debt. The companies expect to complete the acquisition by early 2005.