BILL ANALYSIS
AB 730
Page 1
ASSEBLY THIRD READING
AB 730 (De La Torre)
As Amended April 29, 2009
Majority vote
HEALTH 12-3 JUDICIARY 9-1
-----------------------------------------------------------------
|Ayes:|Jones, Ammiano, Block, |Ayes:|Feuer, Tran, Brownley, |
| |Carter, De La Torre, | |Evans, Jones, Krekorian, |
| |De Leon, Hall, Hayashi, | |Lieu, Monning, Nielsen |
| |Hernandez, Bonnie | | |
| |Lowenthal, Hill, Salas | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Adams, Conway, Gaines |Nays:|Knight |
| | | | |
-----------------------------------------------------------------
APPROPRIATIONS 11-0
----------------------------------
|Ayes:|De Leon, Ammiano, Charles |
| |Calderon, Davis, Krekorian, |
| |Hall, John A. Perez, Price, |
| |Skinner, Solorio, Torlakson |
| | |
----------------------------------
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
requires the penalties and civil penalties established to be
determined at a hearing conducted in accordance with the
Administrative Procedures Act (APA). 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)Requires civil penalties and disciplinary actions imposed
against insurers for specified violations of the Insurance
Code, including post-claims underwriting violations, to be
AB 730
Page 2
determined at a hearing conducted in accordance with the APA.
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
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
AB 730
Page 3
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 : According to the Assembly Appropriations
Committee, this bill results in minor absorbable workload to CDI
to continue oversight of health insurers in the individual
insurance market.
COMMENTS : 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.
The practice of waiting for a health care claim to come in and
then canceling or rescinding the policy retroactively, based on
alleged misrepresentations or omissions at the time of
application, is known as "post-claims underwriting."
Post-claims underwriting is essentially using the underwriting
process, review of a person's health status or health service
use to determine insurability, after the fact instead of before
coverage is offered. Post-claims underwriting is prohibited
under both Knox-Keene and the Insurance Code and health plans
under both departments are required to complete medical
underwriting and to have answered all reasonable questions
AB 730
Page 4
arising from written information submitted on or with an
application prior to issuing the coverage, as specified.
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.
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, however, object to
making the fines more stringent for CDI-regulated health
insurers than the penalties for plans regulated under DMHC.
The 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.
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.
See the April 14, 2009 Assembly Health Committee analysis for
additional discussion regarding post-claims underwriting and the
regulatory and legal history affecting these practices.
AB 730
Page 5
Analysis Prepared by : Deborah Kelch / HEALTH / (916) 319-2097
FN: 0000760