BILL ANALYSIS
AB 108
Page 1
Date of Hearing: March 31, 2009
ASSEMBLY COMMITTEE ON HEALTH
Dave Jones, Chair
AB 108 (Hayashi) - As Amended: March 24, 2009
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 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.
EXISTING LAW :
1)Provides for regulation of health plans by Department of
Managed Health Care (DMHC) under the Knox-Keene Health Care
Service Plan Act of 1975 (Knox-Keene) and for regulation of
health insurers by the California Department of Insurance
(CDI) under the Insurance Code.
2)Prohibits health plans and health insurers from engaging in
"post-claims underwriting," defined as rescinding, canceling,
or limiting of 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,
provides that the prohibition against post-claims underwriting
does not limit a plan's remedies upon a showing of willful
misrepresentation.
3)Prohibits a health plan or health insurer from rescinding or
modifying an authorization for services after the service is
rendered, for any reason, including but not limited to, the
health plan or health insurer's subsequent rescission,
cancellation, or modification of the enrollee or insured's
contract or policy, or the health plan or health insurer's
subsequent determination that the carrier did not make an
accurate determination of the enrollee or subscriber's
eligibility.
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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 : This bill has not yet been analyzed by a fiscal
committee.
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COMMENTS :
1)PURPOSE OF THIS BILL . 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.
2)RESCISSION . "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
services paid for by the plan owed by the enrollee. 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 |
|-----------+-------------|
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|2003 |743 |
|-----------+-------------|
|2004 |1,436 |
|-----------+-------------|
|2005 |1,536 |
|-----------+-------------|
|2006 |302 |
-------------------------
-------------------------
|Source: |
|DMHC |
-------------------------
3)RESCISSSION 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 cancelled 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 offered coverage. Of those offered
reinstatement, 170 had re-started coverage (5%) and 293 (8%)
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,
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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 their policies were
improperly rescinded or canceled.
4)POST-CLAIMS UNDERWRITING . 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
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all reasonable questions arising from written information
submitted on or with an application prior to issuing the
coverage. Under Knox-Keene, 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 section of law
prohibiting post-claims underwriting in the Insurance Code
does not include the same specific reference to rescissions
based on willful misrepresentation.
5)THE HAILEY COURT RULING . In 2000, Cindy Hailey applied to
Blue Shield for herself, her husband, Steve and their son even
though her new employer offered coverage, but did so because
the employer's plan did not include the family's doctor.
Cindy completed an individual application and Blue Shield
issued a policy at the preferred rate in December 2000. In
February 2001, Steve Hailey was hospitalized, prompting Blue
Shield to investigate the application. In June 2001, Blue
Shield retroactively cancelled the Hailey's coverage. Blue
Shield alleged that Cindy Hailey had failed to disclose in the
application information about her husband's prior 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 Hailey's to pay more than $100,000 in medical
costs to Blue Shield.
The Court of Appeal 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 Court raised
questions about the Blue Shield application, finding it "no
model of clarity" and wrote that "Cindy's explanation for
omission was not patently unbelievable." The Appeals Court
sent the case back to the trial court level to determine
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whether a) or b) were true. In addition, the Court found that
the Hailey's complaint sufficiently alleged that they suffered
severe emotional distress and suggested that they may have a
claim of bad faith against the insurer, another issue for
consideration by the trial court. On March 25, 2008, the
California Supreme Court refused to take up on appeal Hailey
v. California Physician's Service (dba Blue Shield of
California) 2007, Cal.App.4th, effectively making the Hailey
decision the applicable law relating to rescission under
Knox-Keene.
6)FRAUD . According to the Lectric Law Library, an online legal
dictionary, the term "fraud" is generally defined in law as an
intentional misrepresentation of material existing fact made
by one person to another with knowledge of its falsity and for
the purpose of inducing another person to act, and upon which
another person relies with resulting injury or damage. In
order to constitute fraud, a misrepresentation must be false
(or an omission must make other statements misleading), and it
must be material in the sense that it relates to a matter of
some importance or significance rather than a minor or trivial
detail. To constitute fraud the misrepresentation or omission
must be made knowingly and intentionally with the intention
that the other party rely on it. The party claiming fraud
also has to show that the reliance on the person's
misstatement or omission was justified, and that in the
exercise of reasonable care for the protection of its own
interest, the contracting party could not have learned the
truth by making a reasonable inquiry or investigation.
Finally, for any injury or damage to be the result of fraud,
it must be shown that except for the fraud, the injury or
damage (in this case health care claims costs paid by the plan
or insurer) would not have occurred.
7)SUPPORT . 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. The American Federation of State,
County and Municipal Employees argues that Californians lose
their health care coverage based on decisions made by the
health plan or insurer they have applied to and that these
decisions leave those most in need of health care without it.
Consumer Attorneys of California (CAC) supports a prior
version of this bill, describing it as a step in the right
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direction, which CAC states will protect consumers from
unscrupulous insurers and health plans that go through a
patient's medical records to find an excuse to rescind their
health care policy. CAC points out that rescissions based on
innocent mistakes hurt patients when they are most vulnerable
and in need of health care.
8)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 twelve
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 they write
that this practice appears to affect several thousand people
each year. Blue Shield of California, on the other hand,
seeks amendments consistent with the Insurance Code provisions
they argue currently requires that a contract between an
insurer and an enrollee cannot be rescinded after two years,
except in the instance of fraud. Blue Shield further states
that eighteen 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.
9)OPPOSITION . The California Association of Health Plans (CAHP)
writes in opposition that this bill would bar rescission after
eighteen 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, and 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. 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 1% of individual policies are rescinded, because only
5% 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. CAHU has
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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.
10)RELATED LEGISLATION . AB 2 (De La Torre), pending in Assembly
Health Committee, is substantially similar to AB 1945 (De La
Torre) of 2008 which was vetoed by Governor Schwarzenegger.
AB 2 imposes 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.
11)PREVIOUS LEGISLATION .
a) 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
whose health coverage is rescinded or any financial savings
to the plan or insurer associated with rescission of
coverage.
b) AB 1945 (De a Torre), 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
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related to decisions to cancel or rescind an individual's
health care coverage. AB 1945 was vetoed by Governor
Schwarzenegger. The veto message read as follows:
I believe that unfair rescissions [rescissions]
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 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.
My Administration proposed comprehensive
legislation to address this problem. In
particular, my proposal contained several strong
consumer protections that this bill fails to
address. My proposal established a standard
application to remove any possibility of plans
using different health questions to disadvantage
applicants. This bill does not contain that
protection. My proposal required agents and
brokers to sign under penalty of perjury that
they had not altered an applicant's answers.
Penalties were levied if they engaged in this
unscrupulous behavior. This bill does not
contain that protection. My proposal clearly
outlined the rules that plans and insurers had to
follow when considering whether to offer a
contract to an applicant. This bill does not
contain that protection. My proposal didn't
allow plans to rescind or cancel if a doctor
failed to inform a patient of a medical
condition. This bill does not contain that
protection. My proposal contained a two-year
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lookback [look back] protection that prevented
plans from rescinding or cancelling [canceling]
after two years. This bill does not contain that
protection. My proposal protected family members
and required coverage to be continued without
additional underwriting or increase in premiums.
This bill does not contain that protection.
This bill was written by the attorneys that stand
to benefit from its provisions. In rushing to
protect a right to litigate, the proponents
failed to consider the real consumer protections
that are needed.
I would call on the Legislature next year to work
with my Administration on real legislation that
enacts important protections for consumers
without increasing premiums and reducing coverage
for those who need it most.
c) AB 2549 (Hayashi) of 2008 would have prohibited health
plans and health insurers from rescinding a health plan
contract or health insurance policy after six months from
the time the contract is effective for any reason. In its
initial form, AB 2549 restricted rescissions and
cancellations to a six-month period. AB 2549 was held
under submission on the Senate Appropriations Suspense
file.
d) 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.
e) AB 1X1 (Nunez) of 2007 would have enacted comprehensive
health care system reforms, including coverage expansions,
an employer spending requirement and individual health
insurance mandate, affordability protections, insurance
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market reforms, cost containment elements and provisions
to support health care safety net providers. Among other
market reform elements, AB 1X1 prohibited carriers from
setting performance goals or quotas or providing
additional compensation based on the number of people
whose coverage was rescinded, or the financial savings of
the plan associated with the rescission of coverage. In
January 2008, AB 1 X1 failed passage in the Senate Health
Committee.
f) 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.
g) 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.
12)POLICY ISSUES .
a) Administration proposal in 2008 . The language in this
bill is very similar to proposed language related to
rescission provided to the Legislature by Governor
Schwarzenegger in late summer 2008. The Governor's
rescission proposal contained multiple elements, including,
among other things, standardized application questions for
health plans and insurers to use, 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 relevant
provision for purposes of this bill is the Governor's
proposal to prohibit plans and insurers from rescinding,
canceling, limiting, or raising premiums in a contract or
policy due to any omissions, misrepresentations, or
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inaccuracies in the application form, whether willful or
not, after two years . The Governor's proposed language did
not include an exception for fraud and explicitly
prohibited all rescission after two years, even in the case
of willful misrepresentations or omissions in the
application. The Governor's language was never introduced
in the Legislature.
b) Limits on rescission . This bill proposes to establish a
certain time period (18 months) after which an individual's
health care coverage can no longer be rescinded or canceled
because of misstatements or omissions in the original
application. Health Access argues that the time period
should be shorter, set in law at 12 months, because
rescission is a dramatic and severe remedy which completely
erases the insurance contract and makes enrollees
potentially liable for any and all health care costs
incurred during the entire period of coverage. Health
plans and insurers argue that there should be no end date
or limit to the ability to rescind health care coverage in
cases where there has been a fraudulent (willful or
intentional) misrepresentation. The Governor's 2008
proposal established a certain end date at two years,
whether or not there was fraud, referred to in that
proposed language as a willful misrepresentation or
omission.
c) Coverage for medically uninsurable persons . Rescission
of an individual's coverage at the point they most need it
has the potential for serious and potentially life
threatening consequences. The Legislature has clearly
intended and the courts have affirmed that this remedy
should only be used under very rare circumstances, in
current law limited to instances where a person knowingly
withheld or lied on the application, and to instances where
the health insurer failed to meet a standard of complete
medical underwriting up front. This bill and other bills
relating to the rescission process, in light of the current
law and the recent Hailey decision, will undoubtedly result
in carriers engaging in more active and complete medical
underwriting up front, which could mean that more
individuals will be denied health coverage at the point of
application. California's existing program for medically
uninsurable persons denied private coverage, the Major Risk
Medical Insurance Program (MRMIP), has historically been
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plagued by waiting lists and high demand. As the
Legislature considers this bill and others related to
rescission, the issue of ensuring some coverage is
available for all individuals willing to pay the premiums,
but who cannot buy private coverage at any costs should be
addressed.
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REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees
California Chiropractic Association
California Medical Association
Consumer Attorney's of California
Support if Amended
Blue Shield of California
Health Access California
Opposition
Association of California Life & Health Insurance Companies
California Association of Health Plans
California Association of Health Underwriters
Analysis Prepared by : Deborah Kelch / HEALTH / (916) 319-2097