The city of Los Angeles sued the insurer in 2008, claiming it dropped people after they became ill and committed other unfair business practices.
Blue Shield says it agreed to settle to avoid the ongoing costs of the lawsuit and does not accept blame.
The lawsuit was filed by former City Attorney Rocky Delgadillo, seeking up to $1 billion in fines and restitution for Californians who allegedly lost insurance coverage after becoming ill.
The settlement will be split by the city and the county.
The Associated Press contributed to this report.