BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 108
A
AUTHOR: Hayashi
B
AMENDED: March 24, 2009
HEARING DATE: June 17, 2009
1
REFFERAL: Health and Judiciary
0
CONSULTANT:
8
Park/sh
SUBJECT
Individual health care coverage
SUMMARY
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 from 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.
CHANGES TO EXISTING LAW
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
Continued---
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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
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.
STAFF ANALYSIS OF ASSEMBLY BILL 108 (Hayashi) Page
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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:
This bill would prohibit 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 from 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.
The bill would also make current law related to
incontestability clauses for disability policies
inapplicable to individual health insurance policies under
the jurisdiction of CDI, and would allow the Insurance
Commissioner to make, amend, or rescind any rules and
regulations to implement this section.
FISCAL IMPACT
According to the Assembly Appropriations Committee, the
bill would result in absorbable workload to the California
Department of Managed Health Care (DMHC) and the California
Department of Insurance (CDI) to continue oversight of the
individual insurance market, including enforcement related
to this bill and other rescission-related issues. According
to the Senate Appropriations Committee of a similar
measure, to the extent that this bill results in more
rigorous up-front underwriting, there will be an increase
in the number of persons rejected for coverage, and thus
eligible for the MRMIP, which will increase cost pressure
on the program, currently funded by Proposition 99 and
subscriber premiums.
STAFF ANALYSIS OF ASSEMBLY BILL 108 (Hayashi) Page
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BACKGROUND AND DISCUSSION
Author's statement
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 108 (Hayashi) Page
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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, therefore, any health care services the enrollee,
subscriber, or policyholder received during the entire time
of the contract are 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. Both statutory 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.
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 |
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| Five Largest Knox-Keene |
| Plans |
-------------------------
|-----------+-------------|
|2002 |882 |
|-----------+-------------|
|2003 |743 |
|-----------+-------------|
|2004 |1,436 |
|-----------+-------------|
|2005 |1,536 |
|-----------+-------------|
|2006 |302 |
-------------------------
-------------------------
|Source: |
|DMHC |
-------------------------
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
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,
STAFF ANALYSIS OF ASSEMBLY BILL 108 (Hayashi) Page
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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.
Rescission settlements
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
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
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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
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
STAFF ANALYSIS OF ASSEMBLY BILL 108 (Hayashi) Page
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their policies were improperly rescinded or canceled.
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. Specifically, in the veto
message, the Governor stated, " My proposal contained a
two-year lookback protection that prevented plans from
rescinding or cancelling after two years. This bill [AB
1945] does not contain that protection."
Arguments in support
The California Association of Marriage and Family
Therapists (CAMFT) and other supporters write that, over
the last few years, insurance and health care plans have
routinely canceled consumer's health care policies
retroactively when patients are in the greatest need: when
the patient is attempting to get coverage for medical care.
CAMFT states that, when insurers and plans retroactively
cancel plans, patients are left with exorbitant medical
costs at no fault of their own. The California Medical
Association writes in support that this bill is an
important consumer protection and provides more stability
for patients by making it harder for health insurers to
rescind coverage in order to avoid paying for health care
services. Consumer Attorneys of California (CAC) states
that the bill is a step in the right direction, and will
protect consumers from unscrupulous insurers and health
plans that go through a patient's medical records to find
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an excuse to rescind their health care policy.
Support if amended
Health Access California has a support if amended position,
requesting that the timeframe allowing for rescissions be
shortened to prohibit rescission after 12 months. Health
Access argues that insurers and health plans sell coverage
to individuals and then rescind coverage later when the
enrollee actually needs health care and writes that this
practice appears to affect several thousand people each
year. Blue Shield of California seeks amendments
consistent with the Insurance Code provisions, which
prohibits rescission after two years, except in the
instance of fraud. Blue Shield states that 18 months is
too short a limitation and that they do not understand why
anyone who is found to commit fraud should be able to
retain their coverage after any time period.
Arguments in opposition
The California Association of Health Plans (CAHP) writes
that this bill would bar rescission after 18 months
regardless of whether the enrollee misrepresented, omitted,
or lied about an existing health condition. CAHP states
that rescission is an important tool based on basic
contract law that ensures that if applicants misrepresent
their health status at the signing of that contract, then
the health plan has the right to later rescind coverage due
to a "lack of meeting of the minds," which CAHP states is a
requirement for a contract. CAHP argues that this bill
will lead to fraud and abuse because potential enrollees
will understand that they can falsify applications for
coverage and, if they can avoid detection for 18 months,
will secure coverage for a major medical condition. The
Association of California Life and Health Insurance
Companies and CAHP argue that while only one tenth of one
percent of individual policies are rescinded, because only
five percent of beneficiaries account for more than half of
health care expenditures, it takes only a few people
misrepresenting themselves to increase the premiums for
everyone.
The California Association of Health Underwriters (CAHU)
states that applicants have incentives to omit information
or lie on applications in order to get insurance coverage.
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CAHU has found that applicants who want coverage will bend
the truth, have short periods of amnesia and omit facts,
lie, or genuinely cannot remember. In these cases of
misrepresentation, if the information had been disclosed
there would have been no contract for coverage issued.
CAHU writes that since this bill would remove the
fraudulent provision of current law and reduce the time
frame that a health plan has to uncover the fraud, this
bill would create a moral hazard and expose those who were
forthcoming on their applications to higher premiums to
cover the costs of those who were not.
Related legislation
AB 2 (De La Torre) is substantially similar to AB 1945 (De
La Torre) of 2008 (see below), which was vetoed by Governor
Schwarzenegger. AB 2 would impose specific requirements
and standards on health plans and health insurers related
to 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 process related to a health plan or health
insurer's decision to cancel or rescind health care
coverage. The bill would also require 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. Pending in
the Senate, for referral.
AB 730 (De La Torre) would increase the maximum civil
penalty for health insurance post-claims underwriting from
$118 per violation to $5,000 per violation 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). Pending in the Senate,
for referral.
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
STAFF ANALYSIS OF ASSEMBLY BILL 108 (Hayashi) Page
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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
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
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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.
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.
PRIOR ACTIONS
Assembly Floor: 48-29
Assembly Appropriations:11-5
Assembly Health: 13-6
COMMENTS
1.Recommended amendment. This committee passed AB 2549
(Hayashi) of 2008, a similar bill related to rescission
only, with the following language, to ensure that health
plans and insurers complied with applicable standards for
rescission found in current law. The recommended amendment
below adds parallel language to address cancellations,
limitations, and premium increases, added by this bill.
1389.21. Notwithstanding any other provision of law,
after 18 months following the issuance of an individual
health care service plan contract, a plan shall not
rescind the plan contract for any reason, and shall not
cancel the plan contract, or limit any of the provisions
STAFF ANALYSIS OF ASSEMBLY BILL 108 (Hayashi) Page
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of the plan contract, or raise premiums on the plan
contract due to any omissions, misrepresentations, or
inaccuracies in the application form, whether willful or
not. Nothing in this section shall be construed to allow
a health care service plan to rescind a plan contract
within the 18-month time period contrary to other
applicable law, or to allow a health care service plan to
cancel, limit, or raise premiums within this time period
contrary to other applicable law.
10384.17. (a) Notwithstanding any other provision of
law, after 18 months following the issuance of an
individual health insurance policy, an insurer shall not
rescind the policy for any reason, and shall not cancel
the policy, or limit any of the provisions of the policy,
or raise premiums on the policy due to any omissions,
misrepresentations, or inaccuracies in the application
form, whether willful or not. Nothing in this section
shall be construed to allow a health insurer to rescind a
health insurance policy within the 18-month time period
contrary to other applicable law, or to allow a health
insurer to cancel, limit, or raise premiums within this
time period contrary to other applicable law.
(b) Section 10350.2 shall not apply to any health
insurance policy that is subject to subdivision (a). If
necessary, the commissioner may make, amend, or rescind
any rules and regulations to implement this section.
2.Rulemaking authority for Insurance Commissioner. The author
may wish to explain why the bill authorizes the Insurance
Commissioner to make, amend, or rescind rules and
regulations to implement the provisions of the bill, but
not the DMHC, and whether such rulemaking relates only to
the current two-year incontestability standard that applies
to CDI policies only.
POSITIONS
Support: American Federation of State, County and
Municipal Employees
AIDS Healthcare Foundation
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Alliance of California Autism Organizations
Area Agency on Aging of Lake and Mendocino Counties
California Academy of Family Physicians
California Alliance for Retired Americans
California Association of Marriage and Family
Therapists
California Chiropractic Association
California Communities United Institute
California Medical Association
California Senior Legislature
Congress of California Seniors
Consumer Attorney's of California
Blue Shield of California, if amended
Health Access California, if amended
Oppose: Association of California Life and Health
Insurance Companies
California Association of Health Plans
California Association of Health Underwriters
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