BILL ANALYSIS
AB 730
Page 1
Date of Hearing: April 21, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 730 (De La Torre) - As Amended: March 26, 2009
As Proposed to be Amended
SUBJECT : Health Insurance: Unlawful Postclaims Underwriting
KEY ISSUE : Should the penalties for postclaims underwriting of
health insurance policies regulated by the Insurance
Commissioner be increased, so as to correspond to the penalties
for the same OFFENSE WHEN committed by health plans regulated by
the Department of Managed Health Care?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
Under existing law, as a general rule, individual health
insurance policies are regulated by the Department of Insurance
(DOI) under the Insurance Code while group health plans (HMOs,
PPOs etc.) are regulated by the Department of Managed Health
Care (DMHC) under the Health & Safety Code. Under both codes,
it is unlawful for a health insurance company, whether selling
individual or group plans, to engage in so-called "postclaims
underwriting" - the practice of rescinding a previously issued
health insurance policy, on underwriting grounds, usually after
a patient has made a claim. Because of the potential for abuse
and unfairness - i.e. canceling a policy the first time a
patient makes a claim - existing law makes this practice
unlawful for both DOI-regulated health insurance policies and
DMHC-regulated health insurance plans. However, the two code
sections provide different penalties. Existing law allows the
DOI Commissioner to impose a standard penalty not to exceed $118
per willful violation, while DMHC may impose a penalty of up to
$10,000 per each willful violation. This bill simply makes the
penalty for postclaims underwriting of health insurance policies
covered by the Insurance Code more consistent with provisions
for DMHC in the Health & Safety Code. As noted in the analysis,
the author has agreed to amendments relating to the procedure
for assessing penalties deleting a provision relating to
required translations of policies into languages other than
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English that proved to be unnecessary. The author wishes to
take those amendments in this Committee and the following
analysis reflects the bill as proposed to be amended by the
author. As noted in the analysis, there is still some question
between the author, sponsor, and insurance industry about the
appropriate state-of-mind standard for commission of an offense,
but the analysis suggests that the author's preference for a
"knowing" standard is preferable to a "willful" standard for
reasons cited. This bill passed out of the Assembly Health
Committee on a 12 to 3 vote.
SUMMARY : Provides that a health insurer that unlawfully engages
in "postclaims underwriting," as defined, shall be liable to the
state for a civil penalty, as specified. Specifically, this
bill :
1)Provides that any person who engages in postclaims
underwriting of a health insurance policy, as defined, shall
be liable to the state for a civil penalty to be fixed by the
Commissioner, in an amount not to exceed $5000 for each act of
postclaims underwriting, except that if the insurer knew, or
had reason to know, that the act of postclaims underwriting
was unlawful, the civil penalty shall be fixed by the
Commissioner in an amount not to exceed $10,000 dollars for
each act or violation.
2)Defines "postclaims underwriting" to mean rescinding,
canceling, or limiting of a policy due to the 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 policy.
EXISTING LAW :
1)Provides, generally, that individual health insurance policies
are regulated by the Insurance Commissioner under the
Insurance Code, and that "managed care" health service plans
are regulated by the Department of Managed Health Care under
the Health & Safety Code.
2)Provides that no insurer that covers hospital, medical, or
surgical expenses and that is regulated by the Department of
Insurance shall engage in the practice of "postclaims
underwriting," which for purposes of this provision means
rescinding, canceling, or limiting of a policy due to the
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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 policy.
(Insurance Code Section 10384.)
3)Provides that any person who willfully violates provisions of
Chapter 5 of the Insurance Code, including engaging in
postclaims underwriting, shall be liable to the state for a
civil penalty to be fixed by the Insurance Commissioner in an
amount not to exceed $118 per violation. (Insurance Code
Section 10400.)
4)Prohibits any health care service plan regulated by the
Department of Managed Health Care from engaging in the
practice of postclaims underwriting, which for purposes of
this provision means rescinding, canceling, or limiting of a
policy due to the plan's failure to complete medical
underwriting and resolve all reasonable questions arising from
written information submitted on or with an application before
issuing a plan contract. (Health & Safety Code Section
1389.3.)
5)Provides that any person who willfully violates provisions of
Chapter 2.2 of the Health & Safety Code or any rule
promulgated thereunder, including underwriting violations,
shall upon conviction be fined not more than ten thousand
dollars or imprisoned for not more than one year, but no
person may be imprisoned for the violation of any rule unless
it is proven that such person had no knowledge of the rule.
(Health & Safety Code Section 1390.)
COMMENTS : Under existing law "traditional" health insurance
policies are regulated by the Department of Insurance (DOI),
under the Insurance Code, while "managed care" health plans are
regulated by the Department of Managed Health Care (DMHC) under
the Health & Safety Code. Both codes make it unlawful for a
health insurance company, whether selling individual or group
plans, to engage in so-called "postclaims underwriting."
What is Postclaims Underwriting ? "Postclaims underwriting"
refers to the practice of a health insurer rescinding or
limiting an already issued policy, usually after a patient has
submitted a claim. The ostensible reason given for the
rescission is that the particular coverage provided in the
policy never should have been approved for that particular
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consumer in the first place, either because the insurer failed
to complete medical underwriting before issuing the policy
and/or the consumer failed to provide some required piece of
information. To prevent the obvious potential for mischief -
i.e. canceling an insurance policy as soon as the patient
attempts to make use of it - this practice has been unlawful
under both Insurance Code and the Health & Safety Code since
1994. (AB 1100, Chapter 1210, Stats. of 1993.)
However, while the practice is unlawful for all insurers,
penalties differ depending upon whether the insurer is a more
traditional health insurance policy regulated by DOI, or a
"managed care" plan regulated by DMHC. For DOI-regulated
policies, the Insurance Code does not impose a fine specific to
underwriting violations as such, but instead imposes a standard
fine, as determined by the Commissioner, not to exceed $118 per
violation of the Commissions regulations or orders. For
DMHC-regulated policies, on the other hand, the Health & Safety
Code imposes a much heftier fine of up to $10,000 for each
underwriting violation. This bill, on the quite reasonable
assumption that it as harmful and egregious for a DOI-regulated
entity to unlawfully commit a postclaim rescission as it is for
a DMHC-regulated entity to do so, seeks to make the Insurance
Code penalty consistent with the parallel provision in the
Health & Safety Code. This bill is sponsored by the California
Department of Insurance so that penalties may be increased to a
more appropriate and effective level, as well as to make the DOI
and DMHC penalties more comparable.
ARGUMENTS IN SUPPORT : The California Department of Insurance
(DOI), the sponsor of this bill, argues that this measure is
intended to stop the practice of illegally rescinding health
insurance policies by increasing the penalty for illegal
rescission from the current $118 per violation cap on penalties
"to a more appropriate level: $5,000 for each violation, and up
to $10,000 if the violation is willful." In addition to
providing a penalty that is more appropriate to the offense,
this measure will create consistency between penalties of
insurance policies and managed health care plans. Tougher
penalties are needed, DOI claims, because some health plans and
insurers "paid significant bonuses to employees for rescission
policies, practiced illegal rescission, and put patients at
enormous risk of bankruptcy by rescinding their health coverage
when they needed it most." DOI believes that increasing the
penalty will "make it clear [to insurers] that illegal
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rescission of health insurance is an especially noteworthy
violation of the law."
The California Association of Marriage and Family Therapists
(CAMFT) supports this bill because over the past few years, it
avers, "health care insurance plans have routinely canceled
consumers' health care policies retroactively when patients are
in the greatest need: when the patient is attempting to get
coverage for medical care." Because rescission generally occurs
after expensive claims have been submitted, CAMFT claims, the
$118 penalty for each violation is woefully inadequate in
today's health care market and provides no incentive for
insurers to refrain from this unlawful practice. A mere $118
fine, CAMFT reasons, is more than offset by the thousands, or
even hundreds of thousands of dollars that may be saved by
illegally rescinding a health insurance policy.
Health Insurance Industry Concerns : Although the Association of
California Life and Health Insurance Companies (ACLHIC) did not
submit a letter of opposition or concern to this Committee, the
analysis prepared by the Assembly Health Committee, which heard
this bill on April 14th, indicates that ACLHIC previously
opposed this bill unless it was amended to change the "knowing"
standard to a "willful" standard for the $10,000 penalty.
Although no amendments were taken in the Assembly Health
Committee, the author and sponsor have apparently agreed to
address ACLHIC's concerns, as discussed below in the proposed
author amendments.
PROPOSED AUTHOR AND SPONSOR AMENDMENTS : As noted below, both
the author and sponsor agree that Section 1 of the bill,
relating to language translations of insurance policies, is not
needed and should be eliminated. Both author and sponsor also
agree with an amendment providing that any penalties shall be
assessed in a hearing as prescribed by the Administrative
Procedures Act. However, the author and sponsor disagree as to
how to respond to ACLHIC's concern regarding using the "knowing"
or "willful" standard. While the sponsor prefers the "knowing"
standard for the fine not to exceed $5000, and the "willful"
standard for fines not to exceed $10,000, the author prefers
using the "knowing" standard for the $10,000 fine.
Proposed Author Amendments :
On page 2 strike lines 1 through 21.
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On page 3, line 20 after "violation." add the
following: The civil penalties and disciplinary actions
provided for herein shall be determined at a hearing,
which hearing shall be conducted in accordance with the
Administrative Procedures Act, as described in Chapter 5
(commencing with Section 11500) of the Government Code,
and the commissioner shall have all the powers granted
therein.
Proposed Sponsor Amendment : Although the author does not agree,
the sponsor wishes to address concerns raised by ACLHIC by
making amendments related to the state of mind required for
committing an offense. In order to effectuate these changes,
the sponsor wishes to amend the proposed new subdivision (b), on
page 2 lines 11-20 of the bill in print, to read as follows:
(b) Notwithstanding subdivision (a), a health insurer that
knowingly, or with such frequency as to indicate a general
business practice, unlawfully rescinds engages in the
postclaims underwriting of a health insurance policy ,
as defined in Section 10384, shall be liable to the state
for a civil penalty to be fixed by the commissioner, in an
amount not to exceed five thousand dollars ($5,000) for
each violation unlawful rescission act of postclaims
underwriting of a policy, except that if the insurer
knew, or had reason to know, that the act violation or
practice of rescission postclaims underwriting was
willful unlawful , the civil penalty shall be fixed by the
commissioner in an amount not to exceed ten thousand
dollars ($10,000) for each act or violation.
The Committee may wish to discuss with the author and sponsor
the significance of the proposed distinction between the
"willful" and "knowing" standard and the corresponding penalties
in this particular context. Blacks Law Dictionary (5th Ed.)
provides multiple definitions of these terms, but generally
defines a "willful" act or omission as one that is "done
voluntarily and intentionally and with the specific intent to do
something that the law forbids." Black's states that a person
acts "knowingly" with respect to a material element of an
offense when he or she is practically certain that his or her
conduct will produce a result that is a material element of the
offense. On the other hand, one of Black's entries defines
"knowingly" as synonymous with "willfully," and another states
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that when the phrase "knowingly and willfully" appears in
reference to the violation of a statute, it means "consciously
and intentionally."
One possible meaning of the proposed distinction, as applied
here, may be that an insurance company "knowingly" commits a
violation when it knows that it is engaging in the act of
postclaims underwriting, and "willfully" commits a violation
when it knows that it is engaging in postclaims underwriting AND
it knows that postclaims underwriting is unlawful. The
"willful" standard, understood in this light, therefore, appears
to require an additional element. As a practical matter,
however, it is difficult to imagine that even a minimally aware
insurance company would not know that postclaims underwriting is
unlawful, given that it has been unlawful since 1994.
Thus the Committee may conclude that one standard should be used
throughout and that the "knowing" standard seems preferable
since any insurance company that knowingly engages in postclaims
underwriting would also be acting willfully, since it is
implausible that the insurance company would not know that the
practice is unlawful. In addition, while the DMHC statute uses
a "willful" standard, it is important to stress that in addition
to the fine, the DMHC also provides criminal sanctions,
including up to one year in prison for any person who violates
the rule when he or she has knowledge of the rule. Because this
bill only imposes a discretionary civil penalty, the "knowing"
standard seems more appropriate.
PENDING RELATED LEGISLATION : AB 2 (De La Torre) would impose
requirements and standards on health plans and health insurers
relating to policy applications, underwriting practices, and
disclosure of consumer rights and responsibilities. AB 2 is
similar to last year's AB 1945, which was vetoed by the
Governor. AB 2 is pending in the Assembly Health Committee.
AB 108 (Hayashi) would prohibit health plans and health insurers
from rescinding an individual health plan contract or health
insurance policy for any reason after 18 months of the issuance
of the contract or policy. AB 108 is similar to AB 2549
(Hayashi) of 2008, which would have prohibited rescinding a
policy or contract for any reasons after 6 months of issuance.
AB 2549 was held in Senate Appropriations. AB 108 passed out of
the Assembly Health Committee and was referred to the Assembly
Appropriations Committee.
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REGISTERED SUPPORT / OPPOSITION :
Support
California Department of Insurance (sponsor)
California Association of Marriage and Family Therapists (CAMFT)
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334