Angry California fines UNH $3.5 million

California slapped record sanctions on UnitedHealth Group Tuesday for problems handling insurance claims, even though the giant health insurer protested that it had taken major steps in the past few months to clean up its act.

The California Department of Managed Health Care said it will fine a subsidiary of Minnetonka-based UnitedHealth $3.5 million, the department's largest fine ever.

More alarmingly, the California Department of Insurance, which also regulates health insurers, said it found more than 130,000 violations of state rules on health claims that could result in fines as high as $1.3 billion.

They included wrongful denials of claims, incorrect payments, failure to acknowledge receipts of claims and repeated requests for documentation.

The problems were at PacifiCare, a large California insurer that UnitedHealth bought two years ago for $9.2 billion. The purchase added 3 million members to its rolls, now at 27.5 million members.

UnitedHealth has admitted to problems with the merger and said it was working to fix claims systems and repair frayed ties with doctors. But that clearly wasn't enough for the California agencies.

"After years of broken promises to Californians, it is crystal clear that PacifiCare simply cannot or will not fix the meltdown in its claims paying processes," Insurance Commissioner Steve Poizner said in a statement. "If PacifiCare can't carry out the ABCs of basic claims payment, today's regulatory action will help spell it out."

"UnitedHealth has bought up little and big health plans all over the country," Frankenstein said. "If they weren't prepared to manage the business from day one, they shouldn't have done it."

UnitedHealth officials said many violations did not directly affect health plan members.

"We believe the commissioner will take into consideration the fact that the vast majority of the violations were administrative in nature and did not result in harm to our members," said David Hansen, chief executive of UnitedHealthcare, Pacific Region.

For example, Hansen said, 80,000 of the violations cited were related to not sending doctors an acknowledgement letter for claims received.

Stock is down

Market analysts say they don't expect final fines will be close to the $1.3 billion figure, which the insurance commissioner reached by multiplying the violations by the maximum fine of $10,000 each.

"We suspect the actual penalty will be far less ... but could still be material," Matthew Borsch of Goldman Sachs in New York wrote in a note to investors. "More important for us will be the extent to which regulators view that UnitedHealth has addressed the underlying problems or if they view material problems as ongoing."

To collect the maximum fines, regulators must show willful intent in coming administrative hearings. Without willful intent, the maximum fine for each violation is $5,000, bringing the highest possible fine to $650 million.

"I can't believe the intention was not to pay doctors. Rather they were clearly confused, clearly overwhelmed," said Sheryl Skolnick, an analyst at CRT Capital Group in Stamford, Conn. Citing the insurer's apparent inability to fix its problems, Skolnick said UnitedHealth stock is overvalued and should be trading at around $48.

UnitedHealth has been sanctioned by regulators in multiple states since 2000 for poor claims handling. One of the largest fines so far was imposed by Texas -- $4.4 million last November -- for repeated delays in paying providers.

A December Star Tribune report on UnitedHealth's payment problems found they often were rooted in automated claims-payment computers. They fouled up payments to doctors, patients and hospitals, and turned appeals into voice-mail and paperwork ordeals, even as the company's profits rose fivefold during the decade, to $4.7 billion in 2007.

At its investor conference in December, the company said missteps from too-rapid growth would cost it half a million members in the first quarter of 2008. Officials stressed Tuesday aggressive steps aimed to fix problems, including the addition of 50 employees in California to handle claims and creation of a vice president of transactions oversight.

A doctor's struggle

Dr. Ted Mazer, an ear, nose and throat specialist in San Diego, is one of those who tussled with the insurer.

Last March, Mazer found out PacifiCare had been paying him based on a 1993 contract, instead of one negotiated in 2003. He said he was underpaid by 30 percent for medical services for more than a year. Many phone calls and a threat to terminate his contract finally resulted in a better deal.

"This is not unique to United," he said.