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Proponents of reunderwriting, which is also called tier rating, say that it limits rate increases for the healthiest customers and encourages them to remain insured. In the long run, they say, this helps keep rates lower for everybody. But some insurance companies and industry observers reject reunderwriting as punishing the sick and violating the basic tenet of risk-sharing in insurance.

American Medical's rating system and the potential expansion of reunderwriting was the subject of a front-page article in The Wall Street Journal in April. (Read the article.)

Reunderwriting snared Larry and Tracy Rawls of Pflugerville, Texas, earlier this year. American Medical told the couple that the premium for them and their two children would increase 75% in May to $764 per month. Ms. Rawls, 42 years old, said the company told her the family's rates increased primarily because she was diagnosed with breast cancer in December and had to undergo chemotherapy and surgery. That accounted for more than half their increase; they also received an across-the-board rate increase.

"I shouldn't be penalized for getting cancer," said Ms. Rawls, who said she can't find other insurance because of her medical condition. She said she hopes American Medical's decision may offer some relief from further double-digit rate increases.

A spokesman for American Medical said the company still believes that reunderwriting "is an acceptable and appropriate way of rating our business." The company declined to comment on individual policyholders.

But in a statement explaining the decision Tuesday, American Medical Chairman and Chief Executive Samuel V. Miller said "we cannot risk the long-term confidence of our agents and insureds because of misperceptions about tier rating."

A spokeswoman for U.S. Sen. Bob Graham (D., Fla.) said he still plans to sponsor legislation next month that would prohibit insurers from targeting individuals for premium increases based on their health.

Last month, the Florida Department of Insurance suspended the license of American Medical for one year over its use of reunderwriting. A state appeals court has lifted the suspension pending an appeal from the company. Shortly after that decision, American Medical announced it would stop reunderwriting in Florida and switch to the more traditional method of "block rating," where insurers generally charge the same premium increases across a particular policy type. The company now will make the same change in another 20 states where it has reunderwritten individual policies.

"We are generally pleased by [American Medical's decision] because the practice of reunderwriting at renewal violates state law," said William Goodman, a special counsel for the Texas Department of Insurance. "Any company that engages in this practice will come under our scrutiny." He declined to comment on whether American Medical was the subject of any state investigation.

American Medical said Tuesday's decision isn't expected to have "any material effect on future earnings." In the past year, American Medical's share price has nearly tripled. In 4 p.m. New York Stock Exchange composite trading Tuesday, the company's shares were up 40 cents at $13.40.

Write to Chad Terhune at chad.terhune@wsj.com

Updated August 7, 2002