BILL ANALYSIS
AB 2
Page 1
ASSEMBLY THIRD READING
AB 2 (De La Torre)
As Amended June 2, 2009
Majority vote
HEALTH 13-6 APPROPRIATIONS 12-5
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|Ayes:|Jones, Ammiano, Block, |Ayes:|De Leon, Ammiano, Charles |
| |Carter, De La Torre, | |Calderon, Davis, Fuentes, |
| |De Leon, Hall, Hayashi, | |Hall, John A. Perez, |
| |Hernandez, Bonnie | |Price, Skinner, Solorio, |
| |Lowenthal, Nava, V. | |Torlakson, Krekorian |
| |Manuel Perez, Salas | | |
| | | | |
|-----+--------------------------+-----+---------------------------|
|Nays:|Fletcher, Adams, Conway, |Nays:|Nielsen, Duvall, Harkey, |
| |Emmerson, Gaines, Audra | |Miller, |
| |Strickland | |Audra Strickland |
| | | | |
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SUMMARY : Imposes specific requirements and standards on health
care service plans licensed by the Department of Managed Health
Care (DMHC) and health insurers subject to regulation by the
California Department of Insurance (CDI), (collectively
carriers) related to the application forms, medical
underwriting, and notice and disclosure of rights and
responsibilities for individual, non-group health plan
contracts, and health insurance policies, including the
establishment of an independent external review system, related
to carrier decisions to cancel or rescind an individual's health
care coverage. Specifically, this bill :
1)Requires DMHC and CDI to jointly establish, by regulation,
standard information and health history questions that
carriers must use in individual health care coverage
application forms, as specified, including a pool of approved
questions for use in applications, and prohibits applications
from containing any other questions except for the approved
questions.
2)Requires the standard information and health history questions
developed for applications to contain clear and unambiguous
information and questions designed to ascertain the health
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history of applicants, to be based on medical information
reasonable and necessary for medical underwriting purposes,
and to include a limitation on how far back in time from the
application date the applicant was diagnosed and treated for
the health condition.
3)Requires carriers to use only the standard pool of approved
questions within six months after adoption, and on and after
January 1, 2011, requires all individual coverage applications
to be approved by DMHC or CDI.
4)Requires carriers to complete medical underwriting prior to
issuing a health plan contract or health insurance policy,
defined as a reasonable investigation of the applicant's
health history information, which includes but is not limited
to, ensuring that information submitted on the application
form and the material submitted with the application form is
complete and accurate, and, resolving all reasonable questions
arising from the application form, materials submitted with
the application, or any information obtained by a carrier as
part of the verification of the accuracy and completeness of
the application.
5)Requires carriers to adopt and implement written medical
underwriting policies and procedures, and to file the policies
and procedures with the respective regulator on or before
January 1, 2011, to ensure that the carrier meets specified
requirements relating to application review, including among
other things, identifying and making inquiries, including
contacting the applicant about any questions raised by
omissions, ambiguities, or inconsistencies in the application.
Requires the carrier to document all information collected
during the underwriting and review process.
6)Requires carriers to send a copy of a written application to
an individual within ten days after coverage is issued, with a
notice that states all of the following:
a) The applicant should review the application carefully
and notify the carrier within 30 days of any inaccuracy and
if the applicant provides the carrier with new information
within the 30-day period, medical underwriting will apply
to the new information;
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b) Any intentional material misrepresentation or
intentional material omission in the application
information may result in cancellation or rescission of the
contract; and,
c) The applicant should retain a copy of the completed
written application for the applicant's records.
7)After an individual contract or policy is issued, prohibits
the cancellation or rescission of the contract or policy
unless all of the following apply:
a) There was a material misrepresentation or material
omission in the application prior to the issuance of the
contract or policy that would have prevented the contract
from being entered into;
b) The carrier completed medical underwriting pursuant to
4) above prior to issuing the coverage;
c) The carrier demonstrates that the applicant
intentionally misrepresented or intentionally omitted
information on the application prior to the issuance of
coverage, with the purpose of misrepresenting his or her
health history; in order to obtain health care coverage;
d) The application form was approved by DMHC or CDI; and,
e) The carrier complied with the requirement to send the
complete application to the applicant along with the
written notice as required under 6) above.
8)Specifies that, notwithstanding the prohibition in 7) above,
coverage may be canceled or not renewed for failure to pay the
premium as provided in existing law.
9)Authorizes carriers to conduct a "postcontract investigation,"
if the carrier obtains information that a covered person may
have intentionally misrepresented or intentionally omitted
information on the application, and requires carriers to send
a specified notice within five days to the covered person that
the investigation may lead to rescission or cancellation of
the covered person's coverage.
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10)Establishes specific timelines and notice requirements
related to the investigation in 9) above, and any subsequent
cancellation or rescission that results, including specific
and detailed information that must be included in notices
provided to covered persons under the contracts or policies
that are the subject of a "postissuance investigation,"
including, among other elements:
a) An opportunity for the covered person to provide any
evidence or information within 45 business days to negate
the carrier's reasons for initiating the investigation;
b) A requirement that the carrier complete the
investigation within 90 days of the notice;
c) A written notice via regular and certified mail to the
covered person, once the investigation is complete, with
one of the following determinations:
i) The carrier has determined that the covered person
did not intentionally misrepresent or intentionally omit
material information during the application process and
that the covered person's health care coverage will not
be canceled or rescinded; or,
ii) The carrier intends to seek approval from the
director of DMHC or CDI commissioner to cancel or rescind
the covered person's coverage for intentional
misrepresentation or intentional omission of material
information during the application for coverage process.
11)Requires the written notice pursuant to 10) c) above to
include specified information including notice that any
decision to cancel or rescind the covered person's coverage
will not become effective until the independent review
organization established by this bill upholds the decision,
unless the covered person opts out of the independent review.
12)Requires carriers to continue to authorize and provide all
medically necessary services until the effective date of a
cancellation or rescission, and establishes the effective date
of cancellation or any rescission as no earlier than the date
of certified notice to the covered person that the independent
review organization established in this bill has made a
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determination upholding the decision to cancel or rescind.
13)Commencing January 1, 2011, establishes within DMHC and CDI
an independent review process (IRP) for decisions to cancel or
rescind individual health plan contracts or individual health
insurance policies and requires that all carrier decisions to
cancel or rescind be reviewed in the IRP, unless the covered
person opts-out of the process.
14)Establishes the rules for operation of the IRP, including,
among other things, that a covered person can designate an
agent to act on his or her behalf, specific disclosures health
plans must provide individuals related to their right to an
IRP, specified materials related to the IRP which carriers
must provide to DMHC and CDI, and to the covered person,
within specified timelines, and, specific timelines and
detailed requirements for DMHC and CDI to expeditiously review
IRP requests.
15)Requires DMHC and CDI to contract or otherwise arrange for
one or more independent not-for-profit organizations to
conduct IRPs, where the review organizations (organizations)
are independent of carriers doing business in California and
meet the specific conflict of interest standards established
by this bill and establishes specific timelines and process
for the conduct of the IRPs by the organizations, including
the requirement that arbitrators selected by the organizations
meet specified minimum requirements and provide the rationale
for the decision, as specified.
16)Authorizes organizations to use expert consultants as defined
but prohibits an expert consultant requested by an arbitrator
from rendering an opinion as to whether the covered person
intentionally misrepresented or intentionally omitted
information during the application process.
17)Requires DMHC and CDI to immediately adopt the IRP
determination and promptly issue a written decision to the
parties that is binding on the carrier and after removing the
names of the parties, as specified, make available to the
public IRP decisions adopted by DMHC and CDI, at cost, and
after considering applicable laws governing disclosure of
public records, confidentiality, and persons privacy.
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18)Prohibits carriers from engaging in conduct to prolong the
IRP, subject to a specific administrative penalty of $5,000
for each day the IRP is prolonged or an IRP decision is not
implemented, as specified.
19)Imposes a per case assessment on carriers to support the
costs of the IRP, but exempts carriers that do not cancel or
rescind contracts from the fees and assessments established.
20)On and after January 1, 2010, requires carriers to report the
number of individual contracts and policies issued and the
number where the carrier initiated a cancellation or
rescission, and requires DMHC and CDI to annually post the
information on the respective department Internet Web sites,
as specified.
21)Exempts from the provisions of this bill plan contracts or
health insurance policies for coverage issued under Medi-Cal,
Access for Infants and Mothers Program, the Healthy Families
Program and the federal Medicare Program.
EXISTING LAW :
1)Provides for regulation of health plans by DMHC under the
Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene)
and for regulation of health insurers by the CDI under the
Insurance Code.
2)Prohibits carriers from engaging in "post-claims
underwriting," defined as rescinding, canceling, or limiting
of a plan contract due to a carrier's failure to complete
medical underwriting and resolve all reasonable questions
arising from written information submitted on or with an
application before issuing the plan contract or policy. For
health plans regulated by DMHC, provides that the prohibition
against post-claims underwriting does not limit a plan's
remedies upon a showing of willful misrepresentation.
3)Prohibits a carrier from rescinding or modifying an
authorization for services after the service is rendered, for
any reason, including but not limited to, the carrier's
subsequent rescission, cancellation, or modification of the
enrollee or insured's contract or policy, or the carrier's
subsequent determination that the carrier did not make an
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accurate determination of the enrollee or subscriber's
eligibility.
4)Requires applications for health plan contracts and health
insurance policies to conform to certain standards for
underwriting, including clear and unambiguous questions, when
health-related questions are used to ascertain an applicant's
health, and requires questions relating to the health
condition or health history of the applicant to be based on
medical information reasonable and necessary for medical
underwriting purposes.
5)Prohibits health insurers but not health plans from voiding
(rescinding) a policy or denying a claim based on
misstatements in the application after two years, except for
fraudulent misrepresentations, sometimes referred to as an
incontestability clause for insurance purposes.
FISCAL EFFECT : According to Assembly Appropriations Committee:
1)One-time fee-supported special fund costs of $400,000 to DMHC
and CDI, combined, to establish regulations, confer on
standardized forms, and establish an IRP process for
cancellation decisions.
2)Annual fee-supported special fund costs of $200,000, combined.
Between 500 and 1,500 health policies have been rescinded in
recent years.
3)One-time fee-supported special fund costs of $200,000 to DMHC
and CDI, combined, to develop and implement a standard
application form and health history questions.
COMMENTS : According to the author, news reports and lawsuits
have identified families saddled with thousands in medical debt
for treatment they believed was covered. In many cases, their
individual health coverage was rescinded by health plans on
grounds that the consumers submitted false information on their
original applications several years prior. The author points
out that further investigation of these cases often revealed
that insurers and health plans scoured the applications
searching for any omission or possible inaccuracy after the
patient submitted claims for expensive, medically necessary
treatment. The author argues that this bill protects consumers
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from open-ended and unlimited exposure to losing health coverage
going back to issues arising from the application, while giving
insurers a reasonable amount of time to review and investigate
individual applications.
Rescission is the process whereby insurers cancel health
coverage on the basis of alleged missing or incomplete
information on the part of the insured person at the time of
application. Rescission involves a determination by the plan
that the contract between the plan and the enrollee never
existed because of a misrepresentation by the enrollee at the
time of application, and that; therefore, any health care
services the enrollee received during the entire time of the
contract are to be paid for by the enrollee. Rescission is what
is known as an equitable remedy, where the remedy is meant to
put the parties back to their original status, with premiums
refunded to the enrollee, and any health care costs already paid
by the carrier are then owed by the enrollee. The practice of
waiting for a health care claim to come in and then canceling or
rescinding the policy retroactively is known as post-claims
underwriting. Post-claims underwriting is essentially using the
underwriting process after the fact instead of before coverage
is offered. In health coverage, because of the dual regulatory
frameworks of DMHC and CDI, there are different statutory
provisions that apply to health plans under DMHC and health
insurers under CDI in this area. Post-claims underwriting is
prohibited under both Knox-Keene and the Insurance Code and
health plans under both frameworks are required to complete
medical underwriting and to have answered all reasonable
questions arising from written information submitted on or with
an application prior to issuing the coverage. Under Knox-Keene,
in addition, the statute provides that the prohibition against
post-claims does not restrict a plan's ability to rescind
coverage in cases where the patient has engaged in willful
misrepresentation. The Insurance Code does not include the same
specific reference to rescissions based on willful
misrepresentation.
The California Medical Association (CMA), sponsor of this bill,
states that the time has come for an external review process to
stop health insurers from acting as "judge and jury" when they
rescind coverage. CMA argues that this bill provides protection
for patients by allowing regulators to independently review
potential rescissions and improves the process at the front end
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by requiring carriers to develop applications using only a pool
of approved questions. Consumer Watchdog supports this bill and
states that rescission of a health coverage policy following an
illness has a particularly harsh impact on the patient. A
rescinded policy is cancelled as of the day it was sold, leaving
patients in deep medical debt, uninsured and virtually
uninsurable, while facing ongoing health care costs. According
to Consumer Watchdog, this bill is uncomplicated and merely
reiterates what consumer advocates and regulators have long said
is the legal standard for health plan rescission: patients
cannot be retroactively cancelled unless they lied about a
health condition by intentionally omitting or intentionally
misrepresenting health information when applying for coverage.
Consumer Watchdog contends that this bill would end "gotcha"
cancellations against innocent patients who never knew of, or
failed to understand the significance of, a past medical
problem. Consumer Attorneys of California supports this bill to
stop carriers from rescinding coverage based on the innocent
mistakes consumers make in the initial applications.
Kaiser Permanente is opposed unless this bill is amended to
include clear statutory guidelines relating to rescission,
including requiring carriers to do medical underwriting up front
and a prohibiting rescission unless the applicant misstates or
omits relevant information on the application. Kaiser argues
that this bill is flawed because it pushes the process toward
litigation by requiring carriers to prove that an applicant
intentionally misrepresented or omitted information. Blue
Shield of California, also opposes this bill unless it is
amended and contends that this bill includes language written by
trial attorneys to gain the upper hand in their contingency fee
cases against carriers. Delta Dental writes that specialized
health plans, such as dental health plans, should be exempted
from this bill, and not be subjected to prior regulatory
approval of individual dental coverage applications.
Health plans, business groups and health underwriters write in
opposition to this bill. The California Association of Health
Plans contends that this bill overturns recent court rulings by
creating an intentional standard for every rescission case.
Health Net states that the willful standard will be difficult,
if not impossible, to prove. Health Net expresses concern that
the willful standard in this bill will take effect prior to the
process for having new applications approved by the regulators.
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The Civil Justice Association writes in opposition to this bill
that the requirement of ascertaining intent renders the IRP both
impotent and moot. California Chamber of Commerce objects to
the requirement in this bill that all rescissions be approved by
DMHC and CDI because it will significantly increase costs for
individuals and result in more uninsured.
Analysis Prepared by : Deborah Kelch / HEALTH / (916) 319-2097
FN: 0001305