A House panel on Tuesday issued a report concluding that the market for individuals purchasing health insurance is "fundamentally flawed," pointing to a pattern of cases in which people lost their coverage once they became ill.

The report, released by the House Energy and Commerce Oversight and Investigations Subcommittee, found several instances in which insurance companies began investigations of policyholders if they filed expensive medical claims.

Insurance companies reviewed by the subcommittee began an investigation of individual policyholders in every case in which the person had leukemia, breast cancer, or more than 1,000 other costly conditions.

The panel's chairman, Rep. Bart Stupak, D-Mich., noted the practices are generally considered to be legal, but argued they go against "the whole point of insurance."

"Some insurance companies use a technicality to justify breaking its promise, at a time when most patients are too weak to fight back," Stupak said.

Peggy M. Raddatz, an Illinois woman, testified that Fortis Insurance Co. attempted to drop her brother Otto from coverage just before he was to receive a stem cell transplant to treat his lymphoma. According to Raddatz, the company sought to cancel her brother's insurance because it said he had failed to disclose that he had previously suffered gallstones and an aneurysm when he first signed up for his insurance policy.

But, Raddatz said, her brother had never been informed of those conditions. They showed up only in a CT scan that was never revealed to him, she said.

Eventually, the company relented after they received pressure to do so from the Illinois attorney general's office. Raddatz said most policyholders who lose their insurance are not as lucky.

"When you have cancer or you're in a position where your life is shortened to a matter of months, you can't go through the court system, because you don't have time to do that," Raddatz said.

Companies examined by the House panel included Fortis, which is now known as Assurant Inc. (AIZ), as well as Wellpoint Inc. (WLP) and UnitedHealth Group Inc. (UNH). All of the companies offer individual insurance policies, which allow people who do not receive insurance coverage through an employer to purchase their own.

Don Hamm,president and chief executive of Assurant Health, said in prepared testimony that insurance "recission" is rare, occurring with only 0.5% of policyholders.

"It is one of many protections supporting the affordability and viability of individual health insurance in the United States under our current system," Hamm said.

Wellpoint executive Brian A. Sassi told the panel recission policies helped insurance companies combat fraud by ferreting out policyholders who did not reveal pre-existing condition before they signed up for coverage. Sassi pointed to statistics suggesting health-care fraud in the U.S exceeds $100 billion each year.

"If we fail to address fraud and material representation, the cost of coverage would increase, making coverage less affordable for existing and future policyholders," Sassi said.

But the committee reports alleged recission occurred in even when discrepancies in a patient's medical history were unrelated to treatments they were seeking. Company employees in some cases were evaluated on how much money they saved through recissions, according to the report.

-By Patrick Yoest, Dow Jones Newswires; 202-862-3554; patrick.yoest@dowjones.com