How Centene and Health Net’s CEO Got Rich on the Backs of California’s Out-of-Network Substance Abuse Providers and Rendered Worthless Health Net PPO Benefits

Much has been said and written in the last 20 months about the acquisition of Health Net Inc. and Health Net Life Insurance Company by Missouri-based Centene Corporation.  It is alleged that the merger took place at the expense of many hundreds of out-of-network addiction treatment facilities in California and 4 other states whose claims were not paid by Health Net for as much as ten months prior to the acquisition so that Health Net would look financially healthy enough to win regulatory approval and be bought by Centene. 

The March 24, 2016 merger saw Health Net shareholders receive 0.622 shares of Centene common stock and $28.25 in cash for each share at closing, making the total transaction value about $6.3 billion, including the assumption of debt.  Health Net CEO Jay Gellert\'s compensation package from the merger, known as a golden parachute, was valued at almost $30 million in September ($55 million if there was a “qualifying termination”).  Gellert also served as a consultant to Centene “to achieve a smooth transition” that was anything but smooth. 

Health Net has been considered a bad player in the addiction industry since the Honorable Faith S. Hochberg, a New Jersey federal judge, found the company guilty of obstruction of justice in June 2007.  The case was about Health Net’s use of Ingenix, a database owned by United Health Care and rigged to underpay out-of-network providers.  A year later the judge approved a settlement between Health Net and the plaintiffs for $250,000,000, one of the largest in ERISA history. In her opinion the judge wrote:  “The settlement ‘raises a clarion call for greater disclosure about the databases used for health care coverage.’\"

Her decision triggered investigations into Ingenix by the NY Attorney General and US Senate Commerce Committee.  The former found that NY State residents had been bilked out of millions of dollars by insurance companies using the Ingenix data base.  The latter found that millions of Americans from coast to coast had been balance billed billions of dollars they should not have had to pay.

Judge Hochberg also wrote that her decision would “have a lasting impact on Health Net\'s out-of-network reimbursement practices.”  Unfortunately, that was not to be.  It only took Health Net and Gellert 8 years to return to old ways. 

Health Net became a player in California’s the out-of-network addiction industry in January 2014, offering individual PPO policies through covered California. Health Net only paid out-of-network providers 75% of their day rate (known as UCR or a “Usual, Customary and Reasonable” rate), at a time when most plans paid 100% of UCR (after deductibles and co-pays had been met), but the benefits rivaled those enjoyed by employees of Fortune 500 companies.  Health Net case managers seemed to understand substance abuse and were generous in their authorizations for residential treatment.  Outpatient did not require authorization and to Health Net’s credit after completing residential treatment many clients could stay in outpatient treatment long enough to stabilize and are still sober today.

A Health Net insider says that the search for a partner started in 2013.  A first suitor terrified the staff working at Health Net’s Woodland Hills headquarters by stating most of their jobs would be moved offshore. 

In July 2015 Centene Corporation, a Medicaid administrator based in St. Louis, Missouri offered to merge with Health Net and create the largest Medicaid managed care organization in the country.

Concurrently with acceptance of the Centene offer, which required approval of several regulators, Health Net slowly and quietly stopped paying the majority of its out-of-network substance abuse claims in 5 states, apparently without any notice to the individuals and families holding the policies. 

On January 8, 2016, the California Department of Insurance (“CDI”) announced a January 22, 2016 hearing on the Health Net-Centene merger.  That same day, Health Net’s Special Investigations Unit (SIU) commenced a dragnet audit that would last for many months, mailing letters to a large group of California out-of- network substance abuse providers.  The SIU director Matthew Ciganek asked providers, who had not been paid for many months, to submit medical records and documentation within 14 days.

The facilities were eager to comply and get paid.  It appears that in the rush to provide reams of documentation by the deadline, no provider thought to attend the CDI hearing and red flag Health Net’s failure to have paid hundreds of millions of dollars of claims dating back to approximately August 2015. 

A second wave of letters went out on February 29, 2016 to additional out-of-network providers, who also scrambled to comply.  On March 22, 2016, Dave Jones, California’s elected Insurance Commissioner and the Department of Managed Health Care blessed the merger.  Two days later Centene acquired Health Net.

In possible violation of HIPPA and the Mental Health Parity and Addiction Equity Act, facilities were repeatedly asked by Health Net to submit and resubmit the same medical documents.  In April of 2016 the first of an estimated tens of thousands of “denials of payment for lack of medical necessity” were sent to California facilities, either signed by SIU Director Ciganek, an accountant by profession, or Health Net Medical Director Dr. Matthew Wong.  The denials were virtually identical and did not differentiate between treatment for street drugs or prescription drugs or alcohol, between addicts and dual diagnosis patients.  Wong is a psychiatrist who specializes in anxiety phobic disorders and is allegedly affiliated with Del Amo Hospital in Torrance, CA.   The Del Amo Hospital staff stated that Dr. Wong has a full time medical practice and sees his patients daily at the hospital.  It is alleged he robo-signed (signed without reviewing) denials of payment processed overseas. 

Before its 2nd quarter earnings call on July 26, 2016 Centene found it necessary to set aside $390 million to pay previously unreported Health Net claims (not all related to substance abuse) causing its stock to fall dramatically and triggering a suit by angry investors.

The legal drums have been beating since May 2016 when based on a complaint from the Addiction Treatment Advocacy Coalition, signed by approximately 120 out-of-network California facilities, the CDI opened an investigation into the potential violation of law and insurance code by Health Net in its campaign to be approved by regulators and acquired by Centene.   It is believed that the investigation is soon to conclude; CDI officials have made clear on numerous occasions that Health Net/Centene will ultimately have to pay 75% of billed charges because this is the percentage stated in Health Net policies.  Many thousands of verifications of benefits conducted by out-of-network providers up and down the State of California with Health Net customer service representatives confirmed that benefits were not linked to Medicare fee schedules.  According to several appellate court decisions, facilities have the right to rely on the benefits quoted in such phone conversations. 

Also in May, Southern California Detox sued Health Net in Riverside County Superior Court.  A month later Sovereign Health of Orange County filed suit against Health Net in the Van Nuys Superior Court.  In July Gallagher/Kennedy, a powerful Arizona law firm, filed suit against Health Net for nonpayment in Maricopa County AZ on behalf of 8 Arizona facilities.  In August Gallagher/Kennedy filed suit on behalf of (now) 11 California facilities in the LA Superior Court.  That case has since been transferred to the court’s well-respected Complex Litigation Division.

Not surprisingly, in the spring of 2016 most California out-of-network facilities stopped taking Health Net insurance.  Families and individuals, who paid high premiums to Health Net month after month, year after year, were left with worthless PPO Health Net policies that no one wanted to honor.  Health Net did not have an adequate roster of in network addiction treatment facilities to deal with the current opioid crisis. 

By December 31, 2016, some facilities had closed citing cash flows that never recovered from Health Net’s failure to pay claims for 7-10 months, which were then paid according to Health Net/Centene’s new “Medicare” rate.  Other out-of-network facilities managed to stay open but floundering.  Centene’s revenue, on the other hand, grew by 89 percent in the fourth quarter, bolstered by its acquisition of Health Net, according to the company\'s earnings report.  For the fourth quarter of 2016, Centene’s total revenue increased to $11.9 billion from $6.3 billion for the last quarter of 2015 primarily as result of the acquisition of Health Net.  And Jay Gellert, who served as Health Net CEO from before the Ingenix scandal and allegedly masterminded the sale to Centene, is now worth approximately $66 million.

And those families and individuals who bought Health Net PPO insurance because of the excellent substance abuse benefits, and paid high premiums month after month, year after year?  The total damage to these individuals and families as well as to addiction treatment providers has yet to be tallied, but recent lawsuits and investigations against Health Net are likely to reveal the entire story soon.


Unknown Figures:  Parents and Individuals Who Paid Health Net High Monthly Premiums for Worthless Substance Abuse Benefits


James first came to treatment at Malibu Beach Recovery Center in 2013 on his dad’s out- of-state employer-funded policy.  When the family moved back to California in 2014, James’ father contacted an insurance agent who sold him the policy with the best substance abuse benefits available on the exchange.  It was a Health Net Platinum PPO

James’ father kept paying the hefty premiums $635/month, month after month, year after year, in case James needed what we euphemistically called a “tune up.”  Then in 2016 when Health Net went from being a company whose insurance seemed to provide adequate coverage to a repeat “obstructor” of justice, James needed his next “tune up.”  No out-of-network facility in California would take his PPO insurance because Health Net had not paid the out-of-network providers for 7-10 months.  Health Net’s few in network providers were at full capacity.  There was no way to switch to a more reliable provider before open enrollment.  James had to call in a favor to get his tune-up.

\"Where it got really bad\" James\'s father reports, \"was contacting Health Net about what they would and would not cover. At one point, they even refused to send us the \'Explanation of Coverage,\' which they said they sent in January (they didn\'t). I complained to the California Board of Insurance, and in July they finally sent me the booklet. By that time, I found out I could download the 115-page document off their website -- something I discovered by myself as no one at Health Net offered that option. Once we looked at what they said they would cover, versus what they paid, it was clear they were not meeting their stated percentage reimbursements. Talking with them on phone got me nowhere. They wrote to me saying I could challenge the charges in writing, but given my experience with their \'customer service\' representatives, I knew that would not lead to any kind of resolution.\" 

In November, after three years as a loyal Health Net insured, James switched insurance. The premium is less than what Health Net wanted for 2017, and now he is confident that he will receive treatment if needed.


In early 2015, Patti, mother of 20-year old Chase, an addict with mental health issues, paid over $25,000 for residential treatment at Facility #1 and a sober living bed.  When Chase relapsed, she purchased a Health Net Platinum 90 PPO for him.  The monthly premium was $555.64.

Chase re-entered residential treatment at Facility #1, which had started accepting insurance, in November 2015 and remained there until January 2016.  Facility #1 was paid by Health Net at the same rate Health Net had been paying since January 2014:  75% of billed (adjusted for co-insurance of $8,000). 

He then stepped down to IOP (“Facility #2).  A few days later he was taken by ambulance to the hospital for possible alcohol poisoning and then returned to Facility #2 at the PHP level of care.  Facility #2 was not paid by Health Net for approximately 7 months, and then compensated for services rendered at the 190% of Medicare rates, which is approximately 10% of billed.   Chase told Patti that several of the other clients who were in treatment with him at Facility #2 were “getting kicked out” because Health Net was not paying and ended up overdosing and dying.

In February 2016, Chase admitted Treatment Facility #3.  Patti paid $3,000 toward the co-pay.  This facility, too, expected to be paid 75% of billed.  Instead they were not paid by Health Net for months and months and finally received 190% of “Medicare.” 

In April 2016, Chase was taken to the Hoag Hospital Emergency Room (Facility #4), which is in-network with Health Net, suffering from heroin withdrawal.  Hoag was paid per the contracted in network rate.  

Patti says she tried and tried to get Chase into an in-network facility but, as she reported to the California Department of Insurance (“CDI”) I, the list Health Net provided had nothing to offer Chase.  It was made up, she said, of eating disorder facilities, adolescent facilities and facilities that do not take Health Net and could not understand why they were on Health Net’s list.

One of Chase’s friends suggested Treatment Facility #5.  By now, virtually all California out-of-network treatment facilities knew that Health Net was no longer a good player.  They had all stopped taking Health Net clients.  Patti, who works for Farmers Insurance, knew enough about insurance to be furious.  By then she had already filed numerous complaints with the CDI against Health Net.  She demanded and got from Health Net what is known as a “Single Case Agreement” guaranteeing Facility #5 reasonable payment. 

To achieve this, Chase’s claims were processed through Multiplan, a for-profit UCR cost containment vendor best known for slashing facility day rates.  At a time when all other out-of-network facilities were struggling to stay open because Health Net had no paid anything for 5-8 months, Facility #5 was paid 61.66% of its billed rate approximately 90 days after the claims were submitted.  This was admittedly lower than the 75% facilities were used to getting from Health Net for treatment rendered, but far more than anyone else was getting at the time -- which was $0. 

Patti also insisted Health Net assign a case manager to handle Chase’s whole treatment from start to finish.  She demanded that the case manager work directly with the doctors and psychologist treating her son, and that those clinicians, and not HealthNet, decide on his progress and recommend when he was ready to step down to a lower level of care.  He ended up staying 6-1/2 weeks instead of 4 weeks.

“I told them, I don’t care what Health Net Life Insurance Company decides from their office desks, by reading their medical books for recommended time frames of treatment and recovery.” 

In July, Chase was given a Naltrexone Implant that Health Net/Centene also did not pay for (claiming lack of medical necessity), and began IOP at Facility #6.  He stayed there for four months.  Facility #6 which was ultimately paid 190% of Medicare and went out of business.     

Chase now has 10 months clean and sober.  He is no longer insured by Health Net/Centene.  Patti bought him a PPO plan that costs less but has better out-of-network benefits and is hopefully more honest and reliable. 


John (not his real name) is a 51-year-old executive at a publicly traded Silicon Valley biotech firm.  Sometime at the beginning of 2016, when the addiction industry still thought that Health Net’s failure to pay was just a “glitch,” it was recommended he buy a Health Net PPO policy.  He chose the Platinum plan.  The premium was $1,380/month.

His drinking progressed and in September he decided to enter treatment.  He walked in the door of a Silicon Valley treatment facility, suitcase and Health Net insurance card in hand.  To his surprise, he was told to write a check for $36,000 because the facility no longer took Health Net insurance.  He did and remained in treatment for 28 days. 

“I am sober.  I feel great about myself and the treatment I got,” said John.  “But I need to be reimbursed.  Just because I had enough money to write that size a check doesn’t mean I should be paying for treatment.  I have insurance.  Let them pay.” 

When he asked for a superbill to submit to Health Net for reimbursement, the treatment facility was surprised.  Although it was clear to John that he wanted reimbursement from his insurance company, it was not clear to the facility.  It took several weeks for the superbill to be readied.

Health Net promptly rejected the superbill and asked for a claim to be filed on a UB-04, although a Health Net supervisor insisted that as with all other insurance companies, a superbill is adequate for patient reimbursement.  The facility then submitted a UB-04, based as required by law on the same established day rate it bills all insurance companies.

John is hoping the facility will quickly reimburse him and then look to Health Net for recoupment. 

Here is the math: The claim will initially be paid at Medicare rates, about 10% of billed, much less that what John paid in cash.  Should the CDI’s investigation conclude as predicted, requiring Health Net to pay 75% of billed for all 2016-16 claims after deducting the $8,000 co-pay for treatment at an out-of-network facility, the facility will be able to repay John in full and have a few thousand dollars left over to cover the cost of having staff fight Health Net for months and file appeals through the CDI. 

John still has his Health Net Platinum PPO.  However, the 2017 substance abuse benefits are now so poor (think Medicaid rates after a $12,500 deductible and $12,500 of co-insurance) it is doubtful any residential treatment facility based on the legislated “California Model” of no more than 6 beds in a residential home would accept him.  It would take 88 days of treatment at various levels of care before the facility John attended would earn $18,000 from Health Net/Centene -- not enough for the treatment center owner to pay the mortgage or rent, not to mention doctors, clinical staff, food or transportation.  There are still not enough facilities in network with Health Net/Centene to meet the demand, given the current opioid epidemic, and most of the recent additions to Health Net/Centene’s roster also service Anthem, Blue Shield, Aetna, United Health Care and Cigna. 

About Joan Borsten, Vice-President Addiction Treatment Advocacy Coalition, co-founder and former CEO Malibu Beach Recovery Center:

A native of Southern California, Joan graduated UC Berkeley, served as a Peace Corps volunteer in Panama and got her Masters degree from USC. She then became a journalist, based first in Tel Aviv and then in Rome, working both the Jerusalem Post and the Calendar Section of the Los Angeles Times. With her husband, Russian film star Oleg Vidov, she owned and operated a successful film and television production/distribution company.

In 2007 they co-founded Malibu Beach Recovery Center, an alcohol and drug treatment facility based on neuroscience. She served as CEO from 2007, eventually expanding operations to include a women’s only facility in West Los Angeles. Both treatment centers and an affiliated Intensive Outpatient Program were acquired by RiverMend Health in June 2014.

Since then Joan has continued the advocacy work she began in 2009 for California’s proud network of addiction treatment facilities. In 2016 she co-founded the Addiction Treatment Advocacy Coalition

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