BILL ANALYSIS
AB 730
Page 1
Date of Hearing: April 14, 2009
ASSEMBLY COMMITTEE ON HEALTH
Dave Jones, Chair
AB 730 (De La Torre) - As Amended: March 26, 2009
SUBJECT : Health insurance: unlawful post-claims underwriting
of policy: penalties.
SUMMARY : Increases 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 authorizes the Commissioner to approve policies of health
insurance in languages other than English. Specifically, this
bill :
1)Increases the maximum civil penalty for each act of
post-claims underwriting, as prohibited in the Insurance Code,
from $118 to a maximum of $5,000 for each act and up to
$10,000 for each act or violation where the health insurer
knew or had reason to know that the act was unlawful.
2)Clarifies that CDI may approve health insurance policies, and
associated materials, in languages other than English, for
purposes of implementation of the requirement in law that
health insurers provide health insurance policies and related
materials in languages other than English.
EXISTING LAW :
1)Provides for regulation of health plans by the Department of
Managed Health Care (DMHC) under the Knox-Keene Health Care
Service Plan Act of 1975 (Knox-Keene) and for regulation of
disability insurers who sell health insurance (health
insurers) by the 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
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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.
4)Specifically 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.
5)Under the Insurance Code, authorizes the Insurance
Commissioner, after appropriate notice and opportunity for a
hearing, to impose civil penalties of up to $118 for each
violation of specified provisions of the Insurance Code
relating to disability insurance, including the prohibition
against post-claims underwriting. Authorizes civil penalties
for certain unfair or deceptive acts or practices, or for
violations of specified orders issued by the Commissioner, of
up to $5,000 for each act, or up to $10,000 for each willful
act, and imposes penalties of up to $55,000 for certain
violations of specified cease and desist or court orders.
6)Under Knox-Keene, authorizes the Director of DMHC, after
appropriate notice and opportunity for a hearing, to by order
suspend or revoke any license issued under Knox-Keene, or to
assess administrative penalties of any amount, if the Director
determines that the licensee has committed specified acts or
omissions constituting grounds for disciplinary action,
establishes civil penalties of up to $2,500 per violation for
any person who violates any provision of Knox-Keene, and
establishes criminal penalties of up to $10,000 for willful
violations.
FISCAL EFFECT : This bill has not yet been analyzed by a fiscal
committee.
COMMENTS :
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1)PURPOSE OF THIS BILL . According to the author, this bill is
intended to bring the penalties for health insurers engaging
in post-claims underwriting more in line with the
penalties available under Knox-Keene. The author points out
that in recent rescission cases involving Anthem Blue Cross,
for example, CDI fined Anthem $1 million for 2,330 members, or
$429 per member, while DMHC fined Anthem $10 million for 1,840
members, or more than $5,000 per member. In addition, the
author argues that this bill clarifies that CDI-approved
health insurance policies and materials, approved in languages
other than English, are the official documents. Existing law
otherwise provides that the English version of insurance
documents is the official version. CDI states that this
clarification is needed to ensure there is no conflict
impeding implementation of SB 853 (Escutia), Chapter 713,
Statutes of 2003, which requires health plans and health
insurers to provide specified materials in other languages.
2)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
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 underwriting 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. "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
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misrepresentation by the enrollee at the time of application,
and that; therefore, the enrollee must pay for any health care
services the enrollee received during the time of the
contract.
3)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 pre-contract 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
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
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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 post-claims
underwriting and rescission under Knox-Keene.
4)SUPPORT . CDI, as sponsor of this bill, writes that the
penalties established in this bill are at the standard level
for CDI's major fines and will make it clear that illegal
rescission of health insurance is an especially noteworthy
violation of law. The California Medical Association (CMA)
writes in support of this bill, that parity between the two
oversight agencies regulating health care is crucial. CMA
views the change in this bill as conforming CDI and DMHC
authority to assess civil penalties for unlawful rescission.
The Professional Fiduciary Association of California supports
this bill as a protection for the most vulnerable in the state
and accountability from those who provide services to the
public.
5)OPPOSE UNLESS AMENDED . The Association of California Life and
Health Insurance Companies (ACLHIC) writes opposed to this
bill unless it is amended to change the "knowing" standard for
the higher $10,000 penalty to a "willful" standard. ACLHIC
suggests that this change to willful for the higher fine would
make the fining authority for CDI comparable to the fining
authority of DMHC. ACLHIC states that it has no objection
with increasing penalties to reflect today's marketplace.
ACLHIC does object to making the fines more stringent for
CDI-regulated health insurers than the penalties for plans
regulated under DMHC.
6)RELATED LEGISLATION .
a) 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
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cancel or rescind health care coverage.
b) 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. AB 108 passed Assembly
Health Committee and is pending in the Assembly
Appropriations Committee.
1)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 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. 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.
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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
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
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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 1 X1 (Nunez) of 2007 would have enacted
comprehensive health care system reforms and coverage
expansions. Among other market reform elements, AB 1 X1
would have 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
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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.
h) SB 853 (Escutia) requires, by January 1, 2006, DMHC and
CDI to develop and adopt regulations to ensure that health
plan and health insurer enrollees have access to language
assistance and culturally competent health services.
1)DRAFTING NOTE . The stated intent of this bill is to increase
fines for health insurers engaging in post-claims
underwriting, as well as to make post-claims underwriting
fines comparable between DMHC and CDI. However, this bill
deals entirely with civil penalties, and, in that way, may
not be completely comparable to Knox-Keene fines typically
imposed for post-claims underwriting violations. According to
DMHC, the fines imposed on health plans related to post-claims
underwriting and rescission are generally administrative
penalties, not civil penalties. Under Knox-Keene, the DMHC
administrative fine authority has no dollar limits or
maximums. The civil penalty authority is limited to $2,500
per violation. Criminal penalties for a willful violation may
be up to $10,000 per violation.
2)DOUBLE REFERRAL . This bill has been double-referred. Should
this bill pass out of this committee, it will be referred to
the Assembly Judiciary Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Department of Insurance (sponsor)
Aids Healthcare Foundation
California Association of Marriage and Family Therapists
California Medical Association
California Psychological Association
Professional Fiduciary Association
Oppose unless amended
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Association of California Life and Health Insurance Companies
Opposition
None on file.
Analysis Prepared by : Deborah Kelch / HEALTH / (916) 319-2097