State regulators on Thursday said they had finalized a settlement with Kaiser Permanente that will compensate 1,092 former or current members whose policies were canceled after they got sick.

Kaiser, the largest managed care organization in Southern California said Thursday it will offer affected individuals the opportunity to have their policies reinstated. The agreement is part of a settlement with state health care regulators and is the first in the state. Kaiser also will refund money it was paid for medical care and reimburse out-of-system medical costs the member might have incurred between the time the policy was canceled and reinstated.

Oakland-based Kaiser will pay a $300,000 fine, and could be liable for up to $3 million in additional fines if the Department of Managed Health Care later determines that the insurer hasn't followed through on the settlement. The settlement covers a roughly two-year period that ended in 2006 when Kaiser officials halted rescissions after discovering problems with procedures used to determine pre-existing conditions for applicants of its non-group individual policies.

"Kaiser enrollees are clearly getting a win today," said Cindy Ehnes, director of the Department of Managed Health Care. Jerry Fleming, Kaiser's national health plan manager, said the insurer had not determined the cost of the settlement.

The department has been investigating the rescission policies of the state's five largest insurers, and recently announced a pending settlement with Woodland Hills-based Health Net Inc. Talks are continuing with Anthem Blue Cross, the state's largest insurer, Blue Shield of California, and Pacificare.

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