LOS ANGELES (Reuters) – A California arbitrator ordered Health Net Inc to pay $9.4 million in damages and expenses for what he described as “reprehensible” conduct in canceling the policy of a cancer patient after she fell ill, according to documents made public on Friday.

The award to Patsy Bates, 51, included $8 million in punitive damages and raised concerns about the company’s practice of retroactively canceling policies of individuals who make large claims and paying bonuses to underwriters for meeting cancellation targets.

Health Net said in a statement that, while it does not agree with some of arbitration judge Sam Cianchetti’s conclusions, it will immediately adopt a review process for all policy cancellations.

The multimillion-dollar punitive damages award, the first in a so-called recision case, is sure to send a message to other large health insurers who face lawsuits over the practice, said Bates attorney William Shernoff.

“Let’s see if these other big health carriers will change their practices, then we will have done something,” Shernoff told Reuters. “Until this punitive damages award came down, nobody was doing anything.”

Shernoff has three proposed class actions over retroactive cancellations pending in California courts against Health Net, Blue Cross and Blue Shield, as well as a case involving a newborn boy whose Health Net coverage was canceled after he was born blind and with cerebral palsy.

The Bates case brought to light a bonus system in which Health Net set annual policy cancellation targets that it described in terms of numbers of canceled policies and millions of dollars in savings in medical expenses.

CHEMOTHERAPY CANCELED

Bates had health insurance with another company for several years before a Health Net broker solicited and enrolled her in an individual insurance policy in August of 2003.

Bates was diagnosed with breast cancer a month later, and began chemotherapy treatments but had just three of eight planned treatments when Health Net pulled the plug, contending she had lied about her weight and a heart problem on her application.

“Can you imagine having Stage 3 cancer and you think you have insurance and you are supposed to have eight sessions of chemo and you have three and they are stopped?” she told Reuters. “If you haven’t had to go through trauma that you may live and you may not, you may not understand.”

A cancer advocate enrolled Bates in a state-funded program to finish her chemotherapy treatments. Her cancer went into remission but she still has no health insurance and was left with about $130,000 in unpaid medical bills.

In an opinion issued on Thursday, the arbitrator found that Bates’ application had been improperly filled out by the Health Net broker, and inadequately reviewed by its underwriters.

“It is difficult to imagine a policy more reprehensible than tying bonuses to encourage the recision of health insurance that helps keep the public alive and well,” arbitrator Cianchetti wrote in his opinion.

In awarding the $8 million in punitive damages, Cianchetti observed “it is hard to imagine a situation more trying than the one Bates has had to endure.”

He also warned that Health Net ignored its own guidelines as well as “obvious errors,” including at least one error “amounting to criminal conduct.”

In response, Health Net said it would rescind no policies going forward without a binding external, third-party review process.

The company said it planned to clarify its application and underwriting processes to insure it received all necessary information before issuing policies.

Health Net also pledged to do a “comprehensive review” of its processes, including broker training and education.

“We take this very seriously and are committed to resolving these issues,” the company said in a statement.

* By Gina Keating (Feb 22, 2008/ Editing by Gary Hill)