A decision by California Insurance Commissioner Dave Jones to fine UnitedHealth Group $173.6 million for violations having to do with the Unfair Business Practices Act, the Unfair Insurance Practices Act and unfair claims settlements may be a wakeup call for not just health but also life and property/casualty insurers, insurance regulation experts say.

A recent market conduct examination by the California Department of Insurance showed UnitedHealth, the nation’s largest health insurer, committed more than 900,000 violations after its $8.2 billion takeover of Cypress-based PacifiCare in 2005.

Jones based his June 9 decision on that examination, and his decision overrode a ruling last year by an administration law judge that said UnitedHealth should be fined no more than $11.5 million.

Jones rejected the ruling and imposed a penalty more than 15 times larger. Four years ago, under Insurance Commissioner Steve Poizner, California sought a penalty of nearly $10 billion against the insurer—a fine that didn’t stand.

UnitedHealth in July sued Jones to block the massive fine, which is considered unprecedented in size.

The suit, which was filed in Orange County Superior Court, alleges that Jones was abusing his power and setting a precedent by seeking such a large fine for what are essentially paperwork violations.

The insurer argues that by treating errors in standard health insurance paperwork more severely than errors that directly affect patient health or the integrity of their policies, Jones’ decision threatens to make the state’s healthcare system slower, less efficient and more expensive.

“It does have implications going forward,” said PacifiCare spokeswoman Cheryl Randolph. “It’s setting new standards.”

The insurer has acknowledged that the claims paperwork inherited from PacifiCare was bungled but said that all the claims in question were paid.

While the size of the fine is unprecedented, also unprecedented is the way in which the decision aggregates the violations and fines the insurer for each letter that wasn’t properly mailed out.

“He’s looking at a $10,000 fine per letter that we didn’t send out, which is ridiculous,” Randolph said.

The decision appears to indicate just how far Jones is willing to go to punish those he considers bad actors, and it’s an efficient way to make sure carriers dot their i’s and cross their t’s, experts say.

Experts also say Jones’ decision can be extended to other lines.

“If I was a property/casualty insurer in California, I would pay attention to this,” said Jay M. Feinman, a Rutgers School of Law professor whose areas of expertise include insurance law. “It indicates what the commissioner is willing to do.”

Because Jones oversees the entire industry and his decision sets a precedent for what is within his purview and how he can calculate and issue fines, all insurers should consider themselves subject to the aggregate fines laid out in the UnitedHealth decision, Feinman said.

“This is not just health insurers; any insurer is subject to the jurisdiction of the insurance department,” he added.

Other experts say the way Jones fined UnitedHealth is the only way to ensure companies with deep pockets act in good faith.

Having aggregate fines in which individual violations can be piled up and applied to make up one big fine means Jones feels PacifiCare knowingly acted in bad faith by farming out its claims offshore and taking other cost-cutting steps that Jones believes resulted in a convoluted claims process, said Daniel Schwarcz, associate professor of law at the University of Minnesota Law School.

“It’s obvious that the department feels that the carrier acted in bad faith,” said Schwarcz, whose research primarily focuses on consumer protection and regulation in the property/casualty and health insurance markets. “In light of that determination, I think it’s appropriate to aggregate penalties in the manner that the department did.”

The decision cites Insurance Code section 790.03, subdivision (h), which prohibits insurers from knowingly committing or performing any unfair or deceptive acts with such frequency as to indicate a general business practice.

Schwarcz’s interpretation of Jones’ decision is that he feels the insurer had “constructive knowledge” that the claims weren’t being properly handled, meaning that they were “offshoring claims activity to inflate the bottom line at the expense of reasonable claims handling.”

“When you’re talking about a corporation, a large entity, the concept of knowing takes on a different meaning than when you’re talking about an individual,” Schwarcz said.

No other insurance voice besides UnitedHealth has stepped forward to say Jones has extended his reach or to express concerns about what appears to be a precedent-setting decision.

The Property Casualty Insurers Association of America, which is typically one of the first groups to charge in when there’s even a perceived threat to insurers, has been mum on the decision.

A PCI spokesperson declined to offer comment for this article or to answer questions about whether the group knows there’s a potential impact for its members.

A person attending the Association of California Insurance Association’s General Counsel Seminar in Las Vegas last week sat in on a speech by Adam Cole, CDI’s general counsel, who told attendees the decision applies to all lines of insurers. ACIC is part of PCI.

“Adam Cole made it clear that it applied to property/casualty insurers, and not just health insurers,” said the person, who asked not to be identified.

He said attendees he spoke with afterward were previously unaware the decision applied to all lines of insurance.

“People were just shocked,” he said.

Asked to detail to whom the decision applies, Deputy Insurance Commissioner Byron Tucker would only confirm that Jones was sending a message to bad actors.

“If insurers follow the law, they will be fine,” Tucker said.

Tucker said the fine isn’t excessive, particularly in this case, which he called unprecedented.

“In this case PacifiCare’s conduct was so appalling that two separate elected insurance commissioners found these violations absolutely reprehensible,” Tucker said. “This is about a billion-dollar, out-of-state company that purchased a much smaller, well-functioning California insurer and systematically sucked it dry without thought for the consequences to patients or doctors.”

According to Tucker, UnitedHealth following its takeover of PacifiCare made business decisions that knowingly put consumers and doctors at risk.

“They willfully engaged in large-scale decisions to use broken and unreliable methods to process claims,” Tucker said, adding that these decisions led to nearly 1,800 improper claims denials. “The entire time they continued to collect premiums from customers.”

Jones’ 225-page decision alleged that shortly after UnitedHealth’s takeover of PacifiCare, UnitedHealth executives began a cost-savings push that called for $50-$75 million in savings during the first year of integration between the two carriers and $350 million in savings over the next two to three years.

A year after consolidation efforts began, PacifiCare announced the layoff of 600 employees and its intent to close its regional mail centers, claims, customer service, and its quality and training departments in Southern California, according to the decision.

Before the takeover, PacifiCare employees manually routed incoming correspondence, but in February 2006 PacifiCare began to outsource all mail handling to its vendor, Lason, a document provider with mail operations in Salt Lake City, Utah. Once in Salt Lake, the correspondence was separated from “keyable” claims, scanned and emailed to Lason’s facility in India.

According to the decision, employees in India coded correspondence by document type and then routed the document to the proper mail queue for additional processing. However, if the correspondence was inaccurately coded, documents would go to the wrong PacifiCare department.

Additionally, in May 2006 PacifiCare halted the practice of having mail room employees manually sort and scan all incoming paper claims to determine eligibility and coverage and began routing all scanned paper claims to Lason’s Mexico facility, where employees entered claims into a particular database depending on whether they were PPO or HMO claims.

But if employees couldn’t determine whether a claim pertained to a PPO or an HMO claim, the claim was entered into the HMO database by default or was sent back to PacifiCare’s offices. Misclassified claims “could loop between PacifiCare’s data platforms several times before landing in the correct queue,” the decision states.

The decision faults what it portrays as a convoluted process of routing claims correspondence for the violations.

“In October 2006, less than a year after the merger, CDI noticed an increase in consumer and provider complaints about PacifiCare’s claims-handling practices,” the decision states. “Between July 2006 and March 2007, CDI processed 44 justified complaints regarding PacifiCare’s practices and identified more than 188 violations of the Insurance Code and the California Code of Regulations, title 10, section 2695.1 et seq. As a comparison, CDI received only two justified complaints against PacifiCare during the entire preceding year.”

Following an investigation, CDI found that PacifiCare violated the insurance code and its applicable regulations more than 900,000 times over the course of the investigation.

CDI broke up the violations into 20 separate categories, including allegations it failed to: maintain certificates of coverage; give providers notice of their appeal rights; correctly pay claims; acknowledge receipt of claims; maintain complete claim files; timely respond to claimants; thoroughly investigate claims.

“CDI contends PacifiCare’s push for savings resulted in a total breakdown in customer service and claims administration,” the decision states. “CDI argues PacifiCare failed to properly vet and oversee outside vendors, resulting in poorly planned integration and thousands of violations. CDI further argues PacifiCare refused to invest in operational infrastructure and employee retention, causing corrupted provider data and a lack of institutional knowledge and consistency. Lastly, CDI asserts PacifiCare failed to adequately remediate the rampant corporate defects, demonstrating a callous indifference to California consumers and regulators.”

Using an “aggregate penalty,” Jones’ decision calculates that the number of violations per category and the “per-act” penalties result in the aggregate penalty of $173.6 million.

The brunt of the penalties are from failure to give medical providers notice of a right to CDI appeal ($30 million), failure to provide notice of a right to independent medical review ($22.75 million), failure to timely pay claims ($55 million) and failure to correctly pay claims ($22.2 million).

In a statement over the lawsuit it filed, PacifiCare noted that the case involved largely technical and administrative issues that the carrier had self-disclosed.

“This ruling threatens to paralyze the healthcare system in the state, resulting in more costs and bureaucracy for Californians,” Stephen Scheneman, president of PacifiCare, said in a statement.