BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 2
A
AUTHOR: De La Torre
B
AMENDED: June 2, 2009
HEARING DATE: July 8, 2009
2
REFERRAL: Judiciary
CONSULTANT:
Park/cjt
SUBJECT
Individual health care coverage
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 health plan contracts, and
health insurance policies, including the establishment of
an external independent review process to approve or deny a
carrier's decision to cancel or rescind an individual's
health care coverage. Requires carriers to demonstrate that
an applicant intentionally misrepresented or intentionally
omitted material information on the application prior to
the issuance of a contract or policy, among other
requirements, in order to rescind or cancel an individual
plan contract or policy. Requires DMHC and CDI to establish
a per-case reimbursement schedule to pay for independent
reviews, and requires the costs of the independent review
system to be paid for by the carriers, as specified.
CHANGES TO EXISTING LAW
Continued---
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
2
Existing law:
Existing law 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
CDI under the Insurance Code.
Existing law prohibits health plans and health insurers
from engaging in "post-claims underwriting" defined as
rescinding, canceling, or limiting a plan contract due to a
plan or insurer's failure to complete medical underwriting
and to 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, existing law provides that the
prohibition against post-claims underwriting does not limit
a plan's remedies upon a showing of willful
misrepresentation.
Existing law prohibits health plans and health insurers
from rescinding or modifying an authorization for services
after the service is rendered, for any reason, including,
but not limited to, the plan's subsequent rescission,
cancellation, or modification of the enrollee or insured's
contract, or the plan or insurer's subsequent determination
that the health plan or health insurer did not make an
accurate determination of the enrollee or insured's
eligibility.
Existing law requires applications for health plan
contracts and health insurance policies to conform to
certain standards for underwriting, including use of 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
that is reasonable and necessary for medical underwriting
purposes.
Existing law, under the Insurance Code, establishes a
two-year contestability period for disability insurance,
long-term care insurance, and Medicare supplement policies,
during which an insurer may rescind an insurance policy if
specified conditions are met.
Existing law provides that an enrollment in, or a
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
3
subscription to, a health plan contract may not be canceled
or refused renewal except for failure to pay the premium,
fraud or deception in the use of the services or
facilities, or for other good cause, as is agreed upon in
the contract between the plan and a group or the
subscriber. Existing law provides that an enrollee or
subscriber who alleges that an enrollment or subscription
has been canceled or refused renewal because of the
enrollee' s or subscriber's health status or requirements
for health care services, may request a review by the
director, and creates a process for that review.
Existing law establishes the Major Risk Medical Insurance
Program (MRMIP), administered by the Major Risk Medical
Insurance Board (MRMIB), to provide health coverage for
individuals unable to purchase coverage because they have
been denied health coverage by at least one private health
plan or are offered only limited coverage or coverage
significantly above standard average individual rates, as
determined by MRMIB.
This bill:
Individual coverage application forms
This bill would require 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. The bill would
require the regulation to include a pool of approved
questions for use in applications, and would prohibit
applications from containing any other questions except for
those from the pool of approved questions.
The bill would require the standard information and health
history questions developed for applications to contain
clear and unambiguous information and questions designed to
ascertain the health 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
specified in the question.
The bill would require carriers to use only the standard
pool of approved questions within six months after
adoption, and would require all individual coverage
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
4
applications to be reviewed and approved by DMHC or CDI,
prior to use, beginning January 1, 2011.
Medical underwriting
The bill would require a carrier, prior to issuing a health
plan contract or health insurance policy, to complete
medical underwriting, defined as a reasonable investigation
of the applicant's health history information, which
includes but is not limited to: a) ensuring that
information submitted on the application form and the
material submitted with the application form is complete
and accurate; and, b) resolving all reasonable questions
arising from the application form, materials submitted with
the application, or any information obtained by a health
plan or health insurer as part of the verification of the
accuracy and completeness of the application form.
The bill would require a carrier to adopt and implement
written medical underwriting policies and procedures, to
ensure that the carrier reviews: 1) information on the
application and any materials submitted with the
application form for accuracy and completeness, 2) claims
information about the applicant that is within the
carrier's own claims information, and, 3) at least one
commercially available prescription drug database for
information about the applicant; and to ensure that the
carrier identifies and makes inquiries, including
contacting the applicant about any questions raised by
omissions, ambiguities, or inconsistencies based upon the
information.
The bill would require the carrier to document all
information collected during the underwriting review
process, and require the carrier to file the policies and
procedures with the respective regulator on or before
January 1, 2011,
Application review
The bill would require health plans and health insurers to
send a copy of the completed written application to an
individual within ten days after coverage is issued, with a
notice that states all of the following:
The applicant should review the completed application
carefully and notify the health plan or health insurer
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
5
within 30 days of any inaccuracy.
Any intentional material misrepresentation or intentional
material omission in the application information may
result in cancellation or rescission of the contract;
and,
The applicant should retain a copy of the completed
written application for the applicant's records.
The bill would require any new information provided by the
applicant within the 30-day period to be subject to the
same process of medical underwriting as the information
submitted in the initial application.
Rescission and cancellation
The bill would prohibit, once an individual contract or
policy is issued, a contract or policy from being canceled
or rescinded unless all of the following apply:
There was a material misrepresentation or material
omission in the written application prior to the issuance
of the contract or policy that would have prevented the
contract from being entered into;
The carrier completed medical underwriting prior to
issuing the coverage;
The carrier demonstrates that the applicant intentionally
misrepresented or intentionally omitted the material
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;
The application form was approved by DMHC or CDI; and,
The carrier complied with the requirement to send the
completed application to the applicant along with the
contract or policy and the required written notices.
The bill would provide an exemption to the above and allow
a health plan or health insurer to cancel or non-renew
health coverage, for failure to pay the premium, pursuant
to current law.
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
6
The bill would authorize carriers to conduct a
"postcontract issuance 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.
The bill would establish specific timelines and notice
requirements related to the postcontract issuance
investigation, 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:
Full written disclosure of the allegedly intentional
material omission or misrepresentation, and a clear and
concise explanation of why the information has resulted
in the plan or insurer's initiation of an investigation
to determine whether rescission or cancellation is
warranted.
An opportunity for the covered person to provide any
evidence or information within 45 business days of the
receipt of notice that an investigation has been
initiated to negate the plan's reasons for initiating the
investigation;
A requirement that the carrier complete the investigation
within 90 days of the notice;
A written notice via regular and certified mail to the
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
7
covered person that the investigation is complete, and
which contains a determination that either: 1) 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, 2) 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.
A requirement that the written notice include full
disclosure of the nature and substance that led to the
plan or insurer's determination that the enrollee or
subscriber intentionally misrepresented or intentionally
omitted material in formation on the application form;
provide information indicating 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; provide information regarding the independent
review process and the right to opt out of that review
process within 45 days.
The bill would require carriers to continue to authorize
and provide all medically necessary services required to be
covered until the effective date of a cancellation or
rescission, and establishes the effective date of
cancellation, or the date upon which a plan or insurer may
initiate 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
determination upholding the decision to cancel or rescind.
Independent review process
The bill would, commencing January 1, 2011, establish
within DMHC and CDI an independent review process (IRP) for
review of carrier 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.
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
8
The bill would authorize a covered person to designate an
agent to act on his or her behalf; and a right to submit
relevant information 45 days from the date of the
independent review organization's (IRO) receipt of request
for an independent review.
The bill would require carrier disclosure of the rights to
an automatic IRP in member handbooks, evidence of coverage
and other related materials on or before January 1, 2011,
as specified.
The bill would require submission of specified materials by
the carrier to the independent review organization (IRO)
designated by the regulator, according to specified
timelines, including a copy of all information submitted to
the covered person and any information the covered person
submitted to the carrier, relating to the carrier's
decision to rescind or cancel coverage, while maintaining
the confidentiality of the covered person's medical
information. The bill would require the carrier to provide
a copy of all documents submitted to the IRO to the covered
person, as well as other materials.
The bill would require DMHC and CDI to expeditiously review
IRP requests and notify covered persons related to their
rights and responsibilities in the IRP process, related to
any proposed cancellation or rescission, including the
right of the covered person to submit relevant information
within 45 days.
The bill would require DMHC and CDI to, by January 1, 2011,
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 the director
of DMHC and the commissioner of CDI through regulations,
which shall be consistent with existing conflict of
interest provisions for the Independent Medical Reviews
conducted under existing law by DMHC and CDI, to the extent
applicable.
The bill would require contract provisions between DMHC or
CDI and the IRO to include specific quality assurance
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
9
mechanisms, conflict of interest provisions, and
protections to ensure the selection of independent,
qualified arbitrators.
The bill would require the IRO to, among other things,
demonstrate that it has a quality insurance mechanism, as
specified, and ensure that arbitrators selected by the IRO
meet minimum requirements, as specified, including that the
arbitrator must hold an unrestricted license to practice
law in California.
The bill would require the arbitrator to follow specified
processes and timelines, and would allow the arbitrator to
request opinion of an expert consultant, as defined; but
prohibits the 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. The bill would
require that the IRO complete its review and make a
determination in writing within 60 days of the receipt of
the application for review and supporting documentation.
The bill would require that DMHC and CDI immediately adopt
the IRP determination and promptly issue a written decision
to the parties that is binding on the carrier.
The bill would require the regulator to provide, upon
request of any interested person, a copy of all
nonproprietary information filed with the regulator by an
IRO, at a nominal fee for photocopying; and make available
to the public, upon request and at the department's cost,
the determination of the IRO that the regulator has
adopted, redacting necessary information to comply with
privacy and confidentiality laws and those governing
disclosure of public records. The bill would require the
regulator to perform an annual audit of independent review
cases.
The bill would provide that the IRP is in addition to any
other procedures or remedies that may be available.
Fines and fees related to IRP
The bill would prohibit carriers from engaging in conduct
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
10
to prolong the IRP, and would provide for a specific
administrative penalty of $5,000 for each day the IRP is
prolonged or an IRP decision is not implemented that is
deposited in the Managed Care Fund or General Fund.
The bill would require the regulators to establish a
reasonable, per-case reimbursement schedule to pay the
costs of IRO reviews, and require the costs of the
independent review to be borne by "affected" carriers
through an assessment, as established by the regulator. The
bill would exempt carriers that do not cancel or rescind
contracts pursuant to this bill from the assessments
established.
Additional provisions
The bill would, beginning January 1, 2010, require carriers
to report the number of individual contracts and policies
issued and the number of contracts or policies the where
carrier initiated a cancellation or rescission, and require
that DMHC and CDI annually post the information carriers
report on the respective department Internet websites on or
before March 31 of each year, commencing March 31, 2010;
and,
The bill would exempt 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.
FISCAL IMPACT
According to the Assembly Appropriations Committee, the
bill would result in one-time fee-supported special fund
costs of $600,000 to DMHC and CDI, combined, to establish
regulations, develop and implement a standard application
form and health history questions, confer on standardized
forms, and establish an IRP process for cancellation
decisions. Additionally, there would be annual
fee-supported special fund costs of $200,000, combined.
Additionally, the bill would result in one-time
fee-supported special fund cost of $200,000 to DMHC and
CDI, combined.
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
11
BACKGROUND AND DISCUSSION
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,
individual health coverage was rescinded by 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 only 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 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.
Medical underwriting in the individual market
In California, health plans and insurers conduct medical
underwriting, the process of reviewing an applicant or
applicants' medical history to ascertain the financial risk
posed by the applicant or applicants, in the individual
market. Insurance carriers in the individual market may
deny an applicant health insurance, limit a benefit
package, or charge a higher premium, based on the assessed
level of risk. The plan or insurer may also use a
pre-existing condition provision, or a waivered condition
provision, to exclude coverage for up to 12 months, subject
to specified rules.
According to DMHC, which regulates health care service
plans, but not health insurers, a plan may deny an
individual application based on health problems for which
the individual has not seen a doctor; health problems that
a doctor cannot explain; health problems for which an
individual has not completed treatment, as well as a number
of health conditions, such as AIDS, cancer under treatment,
cirrhosis, current infertility treatment, diabetes with
complications, heart disease, hemochromatosis, hepatitis,
history of transplant, lymphedema, multiple sclerosis,
muscular dystrophy, pregnancy, planned surrogacy or
adoption in process; renal failure or kidney dialysis,
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
12
severe mental disorders, sleep apnea, or systemic Lupus
erythematous.
Rescission and post-claims underwriting
Rescission involves a determination by the health plan or
health insurer that the contract between the plan or
insurer and enrollee, subscriber, or policyholder never
existed because of a misrepresentation by the enrollee,
subscriber, or policyholder at the time of application, and
that would have had a material affect on the plan or
insurer's decision to offer coverage. The effect of
rescission is to make any health care services the
enrollee, subscriber, or policyholder received during the
entire time of the contract the responsibility of the
enrollee, subscriber, or policyholder. As a remedy,
rescission is meant to put the parties back to their
original status, with premiums refunded to the enrollee,
and any health services paid for by the plan owed by the
enrollee.
Currently, different statutory provisions apply to health
plans under DMHC and health insurers under CDI, related to
rescission. In both cases, the provisions prohibit
post-claims underwriting, defined as rescinding, canceling,
or limiting a plan contract due to a plan or insurer'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,
existing law provides that the prohibition against
post-claims underwriting does not limit a plan's remedies
upon a showing of willful misrepresentation. The Insurance
Code does not have a parallel provision regarding willful
misrepresentation.
A recent Court of Appeal opinion (see Hailey below), issued
in December 2007, interprets the post-claims underwriting
statute and a plan's right to rescission.
Hailey v. California Physicians Service (Blue Shield)
In 2000, Cindy Hailey applied to Blue Shield for herself,
her husband, Steve, and their son, even though her new
employer offered coverage, because the employer's plan did
not include the family's doctor. Cindy completed an
individual application and Blue Shield issued a policy at
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
13
its preferred rate in December 2000. In February 2001,
Steve Hailey was hospitalized, prompting Blue Shield to
investigate the application. In June 2001, Blue Shield
rescinded their coverage, based on the Haileys' failure to
disclose medical information, and later alleged that the
Haileys had willfully misrepresented information about her
husband's medical history, which Blue Shield uncovered in
an investigation it initiated when Steve Hailey incurred
significant medical bills following a serious automobile
accident. Cindy Hailey asserted that she did not realize
the application called for information about her
dependents, and thought she was only being asked to provide
information on her own medical issues. Without health
coverage, Steve Hailey experienced significant health
consequences and permanent disability.
The trial court had granted summary judgment in favor of
Blue Shield and ordered the Haileys to pay back more than
$100,000 in medical costs to Blue Shield. In December 2007,
the Court of Appeal, (Cal.App.4th), reversed the trial
court, affirmed the Knox-Keene prohibition against
post-claims underwriting, and held that health plans are
precluded from rescinding a contract for a material
misrepresentation or omission unless the plan can
demonstrate: a) the misrepresentation was willful; or, b)
the plan made reasonable efforts to ensure the subscriber's
application was accurate and complete as part of the
precontract underwriting process. The appeals court
determined that these were triable issues and sent the case
back to the trial court level to determine whether a) or b)
were true.
Blue Shield appealed to the California Supreme Court. On
March 25, 2008, the California Supreme Court refused to
hear the case, effectively making the interpretation of the
post-claims underwriting statute in the Hailey decision,
the applicable law relating to rescission under Knox-Keene.
On May 28, 2009, the Orange County Superior Court judge
ruled that Blue Shield had acted properly, after the
Haileys stipulated that they had lied about Steve Hailey's
preexisting condition to obtain coverage. The appeals
court ruling remains the applicable law for Knox-Keene
regulated plans.
Rescission settlements
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
14
In 2007, DMHC initiated a non-routine investigation of the
five largest Knox-Keene plans related to rescissions of
health coverage. The DMHC investigation found the
following:
-------------------------
| Number of Coverage |
| Rescissions |
| Five Largest Knox-Keene |
| Plans |
-------------------------
|-----------+-------------|
|2002 |882 |
|-----------+-------------|
|2003 |743 |
|-----------+-------------|
|2004 |1,436 |
|-----------+-------------|
|2005 |1,536 |
|-----------+-------------|
|2006 |302 |
-------------------------
-------------------------
|Source: |
|DMHC |
-------------------------
In 2008, DMHC reached agreements with Anthem Blue Cross,
Blue Shield, Health Net, Kaiser, and PacifiCare requiring
them to pay fines ranging from $50,000 to $10 million, with
additional fines to be levied if corrective action plans
for rescission policies and practices going forward are not
submitted by the health plans, approved by DMHC and
properly implemented. The settlements require the plans to
offer health care coverage to former members whose policies
they rescinded or canceled over the past four years,
regardless of the former member's health condition, and to
reimburse the affected consumers for out-of-pocket costs
incurred after the policies were rescinded. DMHC ordered
the plans to use a fair outside arbiter selected by the
DMHC to review every rescission uncovered in the
investigations and determine remedies, such as payment of
medical care and premiums. Reimbursement for health care
services will be limited to those who are found by the
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
15
arbiter to have been wrongly rescinded. According to DMHC,
by the end of February 2009, of the 3,300 enrollees who
were identified as having coverage rescinded and required
to be reinstated under the settlements, all had been
offered coverage. Of those offered reinstatement, 170 had
re-started coverage (5 percent) and 293 (8 percent) have
requested reimbursement under the terms of the settlement.
DMHC is reportedly in the process of reviewing and
finalizing the health plan corrective action plans related
to rescission policies and practices going forward.
In late 2008 and early 2009, CDI reached agreements with
Anthem Blue Cross, Blue Shield, and Health Net related to
the insurers' rescission of health insurance products
subject to CDI's jurisdiction. As part of the CDI
settlements, insurers agreed to offer coverage to consumers
whose individual, family, or short-term health policies
were previously terminated without subjecting them to
medical underwriting or exclusions for pre-existing
conditions, and to pay any medical expenses that would have
been covered under the rescinded policies if those costs
had not already been covered by another source. The CDI
agreements do not allow the insurers to use the validity of
the rescission as a defense to any claim for reimbursement
of medical expenses. In the CDI settlements, insurers
agreed to an expedited independent arbitration process to
resolve any disputes regarding the reimbursements for
medical expenses, such as coverage issues or medical
necessity determinations. As part of the settlements with
CDI, insurers also agreed to make changes to the
application forms, underwriting process, agent and broker
training, notification to consumers and providers of an
investigation regarding information in the application, and
oversight of its claims handling. Insurers also agreed to
establish an independent third-party review process for
rescissions going forward.
Under the agreements with both DMHC and CDI, rescinded
patients can accept new coverage without forfeiting any
legal rights, but they must execute a release of any and
all rescission-related claims against plans or insurers in
order to receive reimbursement for out-of-pocket medical
expenses.
In addition to the settlements with regulators, the Los
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
16
Angeles City Attorney has separately sued several insurers
within the city's boundaries. There have also been
multiple individual and class action lawsuits brought
against insurers by individuals and families who argue that
their policies were improperly rescinded or canceled. As
noted above, in the case of Hailey, on May 28, 2009, the
Orange County Superior Court judge issued a directed
verdict, dismissing the case and ruling that Blue Shield
had acted properly, after the Haileys stipulated that they
had lied about Steve Hailey's preexisting condition to
obtain coverage. According to one report of court minutes,
Blue Shield reportedly dropped a countersuit against the
couple worth more than $100,000, and agreed to waive all
court costs and fees, a day after the ruling.
Governor's proposal and statements on rescission
In late summer 2008, Governor Schwarzenegger provided to
the Legislature proposed legislative language related to
rescission, which, among other things, required
standardized application questions for health plans and
insurers to use, and imposed requirements and standards
relating to the completion of medical underwriting, and
standards for rescission of a health plan contract or
health insurance policy during the first two years
following the issuance of the policy. The Governor's
proposal also would have prohibited plans and insurers from
rescinding, canceling, limiting, or raising premiums in a
contract or policy due to any omissions,
misrepresentations, or inaccuracies in the application
form, whether willful or not, or for any reason, after two
years, and did not include an exception for fraud. This
proposal was never included in legislation, but was cited
in the Governor's veto message of AB 1945 (De La Torre),
which provided more expansive prohibitions, standards, and
processes related to rescission. In his veto message, the
Governor stated:
I believe that unfair recissions [sic] are a
deplorable practice. My Department of Managed Health
Care has fought for - and won - significant
settlements with the industry that have significantly
changed the marketplace and reinstated coverage for
thousands of consumers. The Department's settlements
are unprecedented and have fundamentally changed the
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
17
way health plans operate in this state.
The individual insurance market is fragile, and we
must balance the need for strong consumer protections
with the recognition that unintended consequences can
tighten this market even more. Unfortunately, the
provisions of this bill will only increase costs and
further restrict access for over 2 million
Californians that currently obtain coverage in the
individual market?
Related legislation
AB 108 (Hayashi) prohibits health plans and health
insurers, after 18 months from the issuance of an
individual health plan contract or health insurance policy,
from rescinding the individual coverage for any reason, and
prohibits canceling, limiting, or raising premiums in a
contract or policy due to any omissions,
misrepresentations, or inaccuracies in the application
form, whether willful or not. Pending in the Senate
Judiciary Committee.
AB 730 (De La Torre) would increase the maximum civil
penalty for health insurance post-claims underwriting from
$118 per violation to $5,000 or $10,000 per violation, as
specified, for insurers under the jurisdiction of the
Commissioner of the California Department of Insurance
(CDI), and requires the penalties and civil penalties
established to be determined at a hearing conducted in
accordance with the Administrative Procedures Act (APA). To
be heard in the Senate Health Committee on July 1, 2009.
Prior legislation
AB 1150 (Lieu), Chapter 188, Statutes of 2008, prohibits a
health plan or insurer from compensating any person
retained, employed, or contracted with, to review medical
underwriting decisions based on, or related to, the number
of contracts, policies, or certificates, or on the cost of
services for a contract, policy, or certificate, that the
person has caused or recommended to be rescinded, canceled,
or limited, or the resulting cost savings to the plan or
insurer. Prohibits a plan or insurer from setting
performance goals or quotas based on the number of persons
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
18
whose health coverage is rescinded or any financial savings
to the plan or insurer associated with rescission of
coverage.
AB 1945 (De La Torre) of 2008 would have imposed
specific requirements and standards on health plans
and health insurers related to the application forms,
medical underwriting and notice and disclosure of
rights and responsibilities for individual coverage,
including the establishment of an independent external
review process related to decisions to cancel or
rescind an individual's health care coverage. Would
have required a health plan or insurer to demonstrate
intentional misrepresentation or intentional material
omission on the application in order to rescind the
plan contract or health policy. Vetoed by Governor.
AB 2549 (Hayashi) of 2008 would have prohibited health
plans and health insurers from rescinding a health plan
contract or health insurance policy after 18 months from
the time the contract is effective for any reason. Held in
the Senate Appropriations Committee.
AB 2569 (De Leon), Chapter 604, Statutes of 2008, requires
health plans and health insurers to offer new coverage, or
continue existing coverage, for any individual whose
coverage was rescinded, other than the individual whose
information led to the rescission, within 60 days, without
medical underwriting, as defined. Establishes a duty for
agents and brokers selling individual health coverage
products to assist applicants in providing answers to
health questions accurately and completely, as specified.
ABX1 1 (Nunez) of 2007 among its comprehensive health
reform provisions, would have prohibited health plans and
insurers from rescinding any individual plan contract or
policy after it is issued and would have prohibited plans
and insurers from compensating individuals employed by, or
contracted with, the plan or insurer, or from setting any
performance goals or quotas, based on the number of
persons for whom coverage is rescinded or the financial
savings to the plan or insurer associated with the
rescission of coverage. Failed passage in the Senate
Health Committee.
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
19
AB 1324 (De La Torre), Chapter 602, Statutes of 2007,
clarifies and makes specific provisions of law that
currently prohibit health plans and health insurers, where
the plan or insurer authorizes a specific type of treatment
by a health care provider, from rescinding or modifying the
authorization after the provider renders the health care
service in good faith and pursuant to the authorization.
AB 1100 (Willie Brown), Chapter 1210, Statutes of 1993,
enacts the Health Insurance Access and Equity Act which
requires applications for health plan contracts or 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 prohibits post-claims underwriting.
Arguments in support
The California Medical Association (CMA), the sponsor of
this bill, states that the time has come for an external
review process to stop insurance plans from acting as
"judge and jury" when they rescind coverage. CMA states
that this bill provides protection for patients by allowing
regulators to independently review potential rescissions
and improves the process at the front end by requiring
carriers to develop applications using only a pool of
approved questions.
Consumer Watchdog (CW) writes that rescission of a health
coverage policy following an illness has a particularly
harsh impact on the patient. CW states that 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. CW
believes that patients left without health coverage suffer
great personal hardship or bankruptcy and must often rely
on overstretched public health programs for ongoing medical
treatment. CW states that the bill 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. CW believes that this bill would end "gotcha"
cancellations against innocent patients who never knew of,
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
20
or failed to understand the significance of, a past medical
problem.
Health Access writes that, while a small number of
consumers are affected by the problem of post-claims
underwriting, it is a real one. Health Access California
supports this bill, in part, because it includes a
standardized questionnaire that all health insurers and
health plans must use for underwriting of individual
insurance. Health Access states that current law allows
each health insurer or health plan to decide what to ask
about and how to ask it, and that the resulting forms are
confusing, sometimes misleading and are often not in plain
language, and are often not translated in the language
spoken by limited English speakers. Health Access also
believes that the standard for rescission under the bill
provides consumers greater protection from rescission than
the standard in existing law.
The California Nurses Association writes that it requests
the Legislature to send this measure back to the Governor
in hopes that he will keep a promise to protect
Californians from unlawful rescissions. Consumer Attorneys
of California write in support that this is a historic bill
that will help stop carriers from rescinding contracts
based on the innocent mistakes consumers make.
Arguments in opposition
Health plans, business groups and health underwriters
oppose this bill and state that the bill creates a near
impossible burden-of-proof to demonstrate and may force
insurers to decline more applicants. The California
Association of Health Plans (CAHP) states that rescission
is an important tool based on contract law that ensures
that, if applicants misrepresent their health status at the
signing of the contract for coverage, the health plan has
recourse to rescind their coverage due to a "lack of the
meeting of the minds," which is a requirement for a
contract. CAHP believes that, by creating an intentional
standard for every rescission case, this bill will overturn
the Hailey decision, and result in increased litigation.
CAHP also believes that, by requiring an intentional
standard, the bill will create a disincentive for plans and
insurers to enroll customers, since the legal standard for
rescinding coverage has been raised, and will have
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
21
devastating effects on the individual market. CAHP and
other groups point out that only one tenth of one percent
of individual policies are rescinded, yet it only takes a
few people misrepresenting their health status to increase
costs for everyone, as just 5 percent of beneficiaries
account for more than half of health care costs.
In addition to the objections stated above, 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. Anthem Blue Cross
states that the bill creates a standard for underwriting
that has no clear endpoint.
California Association of Health Underwriters (CAHU) argues
that the bill will lead to age discrimination, because
individuals over 50 years of age have higher medical costs,
and carriers will not be willing to issue coverage to them
if they cannot understand the risk they are assuming. CAHU
continues that this bill rewards those who lie or withhold
information on the application by enabling individuals to
have up to five months before coverage can be rescinded,
making it worthwhile to wait until you are sick, and get
coverage for your recently diagnosed illness.
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
an increase in the number of uninsured.
The California Association of Dental Plans (CADP) writes
that dental plans do not rescind dental coverage nor
underwrite medical risk, and their inclusion in the bill
will force them to participate in a new regulatory process,
which will increase dental insurance premiums without
providing an additional benefit to the dental plan
enrollee.
PRIOR ACTIONS
Assembly Floor: 45-26
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
22
Assembly Appropriations:12-5
Assembly Health: 13-6
COMMENTS
1. Double-referral.
This bill has been double-referred. Should this bill
pass out of this committee, it will be referred to the
Senate Judiciary Committee. Any amendments agreed to in
this committee should be processed by Judiciary
Committee.
2. Author's proposed exemption of dental plans.
The author proposes to exempt dental plans from this bill
in the next committee, based on negotiations with
the California Association of Dental Plans.
3. Deposit of fines.
The bill requires the fines established by the bill, for
health plans regulated by DMHC, to be deposited into the
Managed Care Fund. Pursuant to actions related to SB 1379
(Ducheny), Chapter 607 of 2008, staff recommends that
fines should be deposited in the Managed Care
Administrative Fines and Penalties Fund under DMHC.
Because post-claims underwriting and rescission practices
have a direct impact on the increasing the medically
uninsurable population, staff also recommends that
parallel fines collected pursuant to CDI be deposited
into the Managed Risk Medical Insurance Fund, for use by
the Major Risk Medical Insurance Program, which serves
individuals who cannot obtain health insurance coverage
in the private market. A parallel amendment, outlined
below, is recommended for AB 730 (De La Torre) of 2009.
a) Page 14, lines 1-12:
1389.19. (a) A health care service plan shall not
engage in any
conduct that has the effect of prolonging the
independent review
process. Engaging in that conduct or the failure of
the plan to
promptly implement an independent review process
decision is a
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
23
violation of this chapter and, in addition to any
other fines,
penalties, and other remedies available to the
director under this
chapter, the plan shall be subject to an
administrative penalty of
not less than five thousand dollars ($5,000) for each
day the
independent review process is prolonged or the
decision is not
implemented. Administrative penalties shall be
deposited in the
Managed Care Fund Managed Care Administrative Fines
and
Penalties Fund, and shall not be used to lower health
care
service plans' assessments used to fund the
department.
b) Page 32, lines 28-37:
10384.29. (a) A health insurer shall not engage in any
conduct
that has the effect of prolonging the independent
review process.
Engaging in that conduct or the failure of the insurer
to promptly
implement an independent review process decision is a
violation
of this chapter and, in addition to any other fines,
penalties, and
other remedies available to the director under this
chapter, the
insurer shall be subject to an administrative penalty
of not less
than five thousand dollars ($5,000) for each day the
independent
review process is prolonged or the decision is not
implemented.
Administrative penalties shall be deposited in
the General Fund.
the Major Risk Medical Insurance Fund created pursuant
to Section 12739 of the Insurance Code, to be used,
upon appropriation by the Legislature, for the Major
Risk Medical Insurance Program for the purposes
STAFF ANALYSIS OF ASSEMBLY BILL 2 (De La Torre) Page
24
specified in Section 12739.1 of the Insurance Code.
POSITIONS
Support: California Medical Association (sponsor)
American Cancer Society
American Federation of State, County and Municipal
Employees
California Alliance for Retired Americans
California Chiropractic Association
California Academy of Family Physicians
California Academy of Physician Assistants
California Alliance for Retired Americans
California Communities United Institute
California Nurses Association/National Nurses
Organizing Committee
California School Employees Association
California Society of Anesthesiologists
California Teachers Association
Congress of California Seniors
Consumer Attorneys of California
Consumer Watchdog
Health Access California
Latino Coalition for a Healthy California
Office of the Los Angeles City Attorney
Oppose: Association of California Life and Health
Insurance Companies
Anthem Blue Cross (unless amended)
Blue Shield
California Association of Dental Plans (unless
amended)
California Association of Health Plans
California Association of Health Underwriters
California Chamber of Commerce
Civil Justice Association of California
Health Net
-- END --