The Golden Gate Bridge in San Francisco, in a fog. (AP Photo/Eric Risberg)

A California health insurer that wants to close a block of individual policies must pool it with enough open policies to hold down the average claim level and keep the rates for all policies in the pool reasonably low, state insurance regulators say.

The California Department of Insurance talks about its views on closing blocks of health insurance in an announcement of its decision to reject efforts by Blue Shield Life & Health Company to close all but 3 of 28 individual health policies regulated by the insurance department, according to Consumer Watchdog, Santa Monica, Calif., which has filed a complaint against Blue Shield in a state court in San Francisco. 

California Blue Shield also is applying for permission to increase the number of individual managed care policies it offers, which would be regulated by the California Department of Managed Health Care, to 20, from 11.

The California insurance department says it originally disapproved the California Blue Shield block closure notice March 3 and asked for more information.

California Blue Shield has provided more information, but the department still believes that the closure fails to comply with California insurance laws, department officials say.

Blue Shield Life is a unit of Blue Shield of California, San Francisco.

California Blue Shield has no connection with the Blue Cross company that serves California. Blue Cross of California is a unit of WellPoint Inc., Indianapolis (NYSE:WLP).

The plaintiffs in the Consumer Watchdog case, Martin et al. vs. California Physicians’ Service et al., contend that the only individual preferred provider organization (PPO) plan still regulated by  the insurance department would be a high-deductible PPO plan that is not comparable to the plans that are closing.

The Consumer Watchdog plaintiffs say in their complaint that a California “Death Spiral Statute” seeks to prevent insurers from isolating policyholders in small, closed blocks that are likely to experience an ever-escalating cycle of rising claims costs and sharp premium increases, with only sick enrollees who have no ability to qualify for other commercial coverage holding onto their policies.

The California Death Spiral Statute requires an insurer to combine the experience of closed blocks with the experience of “multiple appropriate open blocks,” to keep the risk pool large enough to help keep rates affordable, the plaintiffs say.

The proposed California Blue Shield block closures would pool the closed blocks with a non-comparable health maintenance organization (HMO) plans and a small, non-comparable PPO plan.

The new PPO plans overseen by the Department of Managed Health Care would not be open to enrollees in the closed block products who were unable to meet the underwriting standards for the new products, the plaintiffs say.

Representatives for California Blue Shield said Tuesday morning that they would issue a statement on the matter later in the day. At press time, LifeHealthPro had not received a copy of any statement and was unable to find a statement on the Web.

A California Blue Shield response to the Consumer Watchdog suit is not yet available on the court system website.

Insurers say they create closed blocks of business to reflect major changes in products and operations.

California Blue Shield says in a note to producers on its website that it wants to close all but 4 of its existing individual policies to make way for a new product line, Shield Complete, that will come in 4 clearly designed, distinct plan families.

“All plans in the Shield Complete portfolio offer comprehensive benefits such as brand-name prescription drugs, maternity, chiropractic and acupuncture, and rehabilitation,” the company says in the note to producers. “Your clients only have to choose between deductible, copay, coinsurance, and out-of-pocket maximum amounts when choosing a plan to apply for. Consistent plan designs make Shield Complete plans easy to understand and easy to sell.”

California insurance department officials say the remaining open block that would be pooled with the closed block is too small to do holders of closed-block policies much good.

California Insurance Commissioner Dave Jones says in a statement that he believes California Blue Shield would be “pooling the closed blocks into a tea cup.”

The result would be “that policyholders in the closed blocks get none of the safeguard that was intended by requiring pooling with open blocks,” Jones says.

In addition, California Blue Shield appears to have made no provision for 20,000 customers enrolled in one of the plans slated for closure to move to another plan without going throughan underwriting process, officials say.