BILL ANALYSIS
AB 108
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Date of Hearing: April 22, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 108 (Hayashi) - As Amended: March 24, 2009
Policy Committee: Health Vote:13-6
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill prohibits health plans and health insurers from
rescinding a contract or policy in the individual health
insurance market 18 months after the issuance of coverage. In
addition, this bill prohibits canceling, limiting, or raising
premiums in a contract or policy due to omissions,
misrepresentations, or inaccuracies in the application form,
whether willful or not.
FISCAL EFFECT
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.
COMMENTS
1)Rationale . This bill, supported by a number of provider groups
and labor unions, prohibits rescission of health coverage in
the individual market after 18 months. According to the
author, this bill protects consumers from open-ended health
coverage loss arising from missing or incomplete information
provided at the time of application. The author indicates the
18-month timeline gives insurers a reasonable amount of time
to review and investigate individual applications for
coverage.
Rescission occurs when a health policy is cancelled
retroactively and is based on a determination that the
contract between the insurer and insured never existed. When
policies are cancelled in this fashion, individuals and
families face major costs for health services that have been
provided. Under current law, there are 2.6 million enrollees
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of individual coverage. Between 300 and 1,500 of these
policies have been rescinded annually by the state's largest
insurers in recent years. This bill may reduce the number of
rescissions by limiting the time during which a policy may be
cancelled or limited.
2)Post-Claims Underwriting and Rescission . The practice of
waiting for a major health care claim to be submitted for
payment, then investigating a patient's medical history, and
canceling or rescinding the policy retroactively is known as
post-claims underwriting. Post-claims underwriting means
health plans and insurers are using the underwriting process
after the fact, instead of before coverage is offered.
Rescission involves a determination by the plan or insurer
that, as a result of application errors or omissions, the
contract between plan and enrollee never existed, and
therefore any health care services the enrollee received are
not covered by the health plan or insurer and are to be paid
by the enrollee. When a health plan rescinds a policy, this
affects not only the enrollee but also medical providers who
rendered services.
3)Regulatory Action . Both DMHC and CDI have taken regulatory
actions related to rescission. In 2008, DMHC reached
agreements with five of California's largest insurers,
requiring them to pay fines ranging from $50,000 to $10
million. Additional fines may be levied if corrective action
plans for rescission policies and practices are not submitted
by the health plans for DMHC approval and properly
implemented. The settlements also require these insurers to
offer health care coverage to individuals whose policies were
rescinded or cancelled over the past four years and to
reimburse the affected consumers for out-of-pocket costs
incurred after the policies were rescinded. According to DMHC
more than 3,000 individuals have been offered coverage under
these settlements.
The CDI reached agreements with three of California's largest
insurers related to the CDI-regulated insurers' rescission of
health insurance policies. Under these settlements, insurers
are required to offer coverage without medical underwriting
and to pay for medical claims incurred while the individual
lacked coverage due to rescission. Insurers also agreed to
modify application forms, underwriting processes, agent and
broker training, notification to consumers and providers, and
to establish an independent third party review process for
rescissions.
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4)Judicial Action . In addition to recent regulatory action in
the area of rescission, a significant court case was not taken
up by the California Supreme Court in 2008, Hailey v.
California Physician's Service, 2007, Cal. App. 4th , allowing
the Court of Appeals decision to stand. The Hailey case
pertains to a family with health coverage in the individual
health insurance market whose medical history was only
thoroughly investigated after the husband in the family
incurred major medical expenses after a car accident.
Following rescission by the insurer, the Hailey family
incurred major medical debt and the accident victim became
permanently disabled. That court determined that the Hailey's
family's rescission created severe emotional distress and
confirmed the possibility of a claim of bad faith by the
insurer. The court also held that health plans are precluded
from rescinding a health contract for a material
misrepresentation or omission unless the plan can demonstrate
the misrepresentation was willful or the plan made reasonable
efforts to ensure an application for coverage was correct.
5)Concerns . Several large health plans and insurers write with
concerns or opposition to this bill. These groups indicate
that current law in the Insurance Code already contains a
two-year timeline after which rescission is prohibited. The
laws governing health plans, in the Health and Safety Code do
not contain any time limit currently with regard to
rescission. By establishing an 18-month timeline in this bill,
an inconsistency is created, according to insurers. In
addition, underwriters indicate concern about this bill
limiting their ability to "engage applicants who want to bend
the truth, have short periods of amnesia and omit facts, lie
or genuinely cannot remember".
6)Related Legislation . AB 2549 (Hayashi), in 2008 was similar to
AB 108. AB 108 was held on the Suspense File of the Senate
Appropriations Committee. AB 1945 (De La Torre) in 2008,
similar to AB 2 (De La Torre) pending in the Assembly Health
Committee, imposed specific standards and requirements on
health plans and insurers with regard to rescission. AB 1945
was vetoed due to concerns about a lack of a comprehensive
solution to rescission practices.
Analysis Prepared by : Mary Ader / APPR. / (916) 319-2081