The California Department of Managed Health Care has imposed a $1 million fine on a managed care company in connection with allegations about policy cancellations.

Officials at the California DMHC say Health Net Inc., Woodland Hills, Calif., failed to respond adequately to department questions about bonus programs Health Net used to reward employees involved in efforts to cancel individual health insurance policies.

The DMHC has been looking into the practice of “post-claims underwriting” at individual health plans in California since late 2005, department officials say.

Canceling or rescinding individual health insurance policies is illegal, unless carriers can show that applicants “willfully misrepresented” themselves on the original health applications, officials say.

DMHC investigators held on-site interviews at Health Net on Oct. 17 and again Nov. 6, officials say.

Investigators asked Health Net officials “about the existence of any compensation or bonus programs,” DMHC officials say. “On both occasions, the answer was no.”

On Nov. 8, in response to a court order stemming from a private class-action lawsuit, Health Net “disclosed to regulators the existence of compensation based in part on rescission of health care policies paid to a company employee,” DMHC officials say.

The $1 million fine Health Net is paying will have no effect on the rescission practices investigation, and final results from that investigation should be available sometime before June 30, 2008, DMHC officials say.

DMHC officials say they also are proposing new state regulations to limit health plans’ ability to rescind policies.

The proposed regulations will “require that health plans complete medical underwriting before issuing a policy and that they fully investigate questionable responses on health history questionnaires,” officials say.

In addition to agreeing to pay a fine, Health Net has agreed to not engage in any compensation practices linked to the results of the rescission investigations, Health Net says.

Health Net already has stopped using the policy cancellation bonus program, the company says.

“We are sorry for any misunderstanding with the DMHC,” Health Net President Jay Gellert says in a statement. “It is important to note that we are currently abiding by the policy in the agreement.”