BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 730
A
AUTHOR: De La Torre
B
AMENDED: April 29, 2009
HEARING DATE: July 8, 2009
7
REFERRAL: Judiciary
3
CONSULTANT:
0
Park/cjt
SUBJECT
Health insurance: unlawful postclaims underwriting of
policy: penalties
SUMMARY
Increases the maximum civil penalty for health insurance
post-claims underwriting from $118 per violation to $5,000
for each act of postclaims underwriting, and increases that
amount to $10,000 for each act or violation if the insurer
knew, or had reason to know, that the act of postclaims
underwriting was unlawful. Applies these increased penalty
amounts to health insurers under the jurisdiction of the
Commissioner of the California Department of Insurance
(CDI) only. Requires civil penalties and disciplinary
actions related to violations of standard provisions in
disability policies, as defined, to be determined at a
hearing conducted in accordance with the Administrative
Procedure Act (APA).
CHANGES TO EXISTING LAW
Existing law:
Existing law provides for regulation of health plans by the
Department of Managed Health Care (DMHC) and for regulation
Continued---
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
2
of health insurers by the California Department of
Insurance.
Existing law prohibits health plans and health insurers
from engaging in "post-claims underwriting" which is
defined as rescinding, canceling, or limiting a plan
contract due to a plan or insurer's failure to complete
medical underwriting and to 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, existing law
provides that the prohibition against post-claims
underwriting does not limit a plan's remedies upon a
showing of willful misrepresentation.
Existing law requires applications for health plan
contracts and health insurance policies to conform to
certain standards for underwriting, including use of 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
that is reasonable and necessary for medical underwriting
purposes.
Existing law authorizes the Insurance Commissioner to
impose civil penalties of up to $118 for each violation of
the standard provisions in disability policies, as defined,
including post-claims underwriting. Existing law
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, in accordance
with the APA.
Existing law authorizes the Director of DMHC, after
appropriate notice and opportunity for a hearing, to by
order suspend or revoke any license issued under the
Knox-Keene Act, 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. Existing law establishes
civil penalties of up to $2,500 per violation for any
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
3
person who violates any provision of Knox-Keene, and
establishes criminal penalties, including a fine of up to
$10,000, upon conviction for willful violations.
Existing law requires hearings conducted in accordance with
APA to be conducted by administrative law judges and
requires specified processes to be followed, including the
filing of accusations or issues, notices to respondents by
specified timelines, allowing respondents to file a
defense, requests for discovery, opportunities for
witnesses, pre-hearing conferences, among others, and
requires hearings to take place at specified locations.
This bill:
This bill would increase the maximum civil penalty for each
act of post-claims underwriting, as defined 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.
This bill would require civil penalties and disciplinary
actions imposed against insurers for standard provisions in
disability policies, as defined, including post-claims
underwriting violations, to be determined at a hearing
conducted in accordance with the APA.
FISCAL IMPACT
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.
BACKGROUND AND DISCUSSION
According to the author, this bill is intended to bring the
penalties for health insurers, under the jurisdiction of
the Insurance Commissioner, that are engaging in
post-claims underwriting, more in line with the penalties
available under the Knox-Keene Act, which governs health
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
4
care service plans under the jurisdiction of the DMHC. 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.
The author believes that health insurers continue to engage
in postclaims undwriting, although the practice is
forbidden, and believes that the low fines create an
incentive for plans to rescind or cancel policies. The
author states that, by increasing the Commissioner's
ability to fine health insurers who engage in this
practice, the frequency of the practice will be reduced.
Rescission and post-claims underwriting
Rescission involves a determination by the health plan or
health insurer that the contract between the plan or
insurer and enrollee, subscriber, or policyholder never
existed because of a misrepresentation by the enrollee,
subscriber, or policyholder at the time of application, and
that would have had a material affect on the plan or
insurer's decision to offer coverage. The effect of
rescission is to make any health care services the
enrollee, subscriber, or policyholder received during the
entire time of the contract the responsibility of the
enrollee, subscriber, or policyholder. As a remedy,
rescission 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.
Currently, different statutory provisions apply to health
plans under DMHC and health insurers under CDI, related to
rescission. In both cases, the provisions prohibit
post-claims underwriting, defined as rescinding, canceling,
or limiting 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,
existing law provides that the prohibition against
post-claims underwriting does not limit a plan's remedies
upon a showing of willful misrepresentation. The Insurance
Code does not have a parallel provision regarding willful
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
5
misrepresentation.
A recent Court of Appeal opinion (see Hailey below), issued
in December 2007, interprets the post-claims underwriting
statute and a plan's right to rescission.
Hailey v. California Physicians Service (Blue Shield)
In 2000, Cindy Hailey applied to Blue Shield for herself,
her husband, Steve, and their son, even though her new
employer offered coverage, because the employer's plan did
not include the family's doctor. Cindy completed an
individual application and Blue Shield issued a policy at
its preferred rate in December 2000. In February 2001,
Steve Hailey was hospitalized, prompting Blue Shield to
investigate the application. In June 2001, Blue Shield
rescinded their coverage, based on the Haileys' failure to
disclose medical information, and later alleged that the
Haileys had willfully misrepresented information about her
husband's 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 Haileys to pay back more than
$100,000 in medical costs to Blue Shield. In December 2007,
the Court of Appeal, (Cal.App.4th), 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 appeals court
determined that these were triable issues and sent the case
back to the trial court level to determine whether a) or b)
were true.
Blue Shield appealed to the California Supreme Court. On
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
6
March 25, 2008, the California Supreme Court refused to
hear the case, effectively making the interpretation of the
post-claims underwriting statute in the Hailey decision,
the applicable law relating to rescission under Knox-Keene.
On May 28, 2009, the Orange County Superior Court judge
ruled that Blue Shield had acted properly, after the
Haileys stipulated that they had lied about Steve Hailey's
preexisting condition to obtain coverage. The appeals
court ruling remains the applicable law for Knox-Keene
regulated plans.
Rescission settlements
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 |
|-----------+-------------|
|2003 |743 |
|-----------+-------------|
|2004 |1,436 |
|-----------+-------------|
|2005 |1,536 |
|-----------+-------------|
|2006 |302 |
-------------------------
-------------------------
|Source: |
|DMHC |
-------------------------
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
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
7
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 canceled 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 percent) and 293 (8 percent) 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, 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
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
8
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. As
noted above, in the case of Hailey, on May 28, 2009, the
Orange County Superior Court judge issued a directed
verdict, dismissing the case and ruling that Blue Shield
had acted properly, after the Haileys stipulated that they
had lied about Steve Hailey's preexisting condition to
obtain coverage. According to one report of court minutes,
Blue Shield reportedly dropped a countersuit against the
couple worth more than $100,000, and agreed to waive all
court costs and fees, a day after the ruling.
Related bills
AB 2 (De La Torre) imposes specific requirements and
standards on health care service plans licensed by the
Department of Managed Health Care (DMHC) and health
insurers subject to regulation by the California Department
of Insurance (CDI), (collectively carriers) related to the
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 carrier's decision to
cancel or rescind an individual's health care coverage.
To be heard in the Senate Health Committee on July 1, 2009.
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
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
9
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. Pending in the Senate
Judiciary Committee.
Prior legislation
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.
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. Would
have required a health plan or insurer to demonstrate
intentional misrepresentation or intentional material
omission on the application in order to rescind the
plan contract or health policy. Vetoed by Governor.
AB 2549 (Hayashi) of 2008 would have prohibited health
plans and health insurers from rescinding a health plan
contract or health insurance policy after 18 months from
the time the contract is effective for any reason. Held in
the Senate Appropriations Committee.
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
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
10
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.
ABX1 1 (Nunez) of 2007 among its comprehensive health
reform provisions, would have prohibited health plans and
insurers from rescinding any individual plan contract or
policy after it is issued and would have prohibited plans
and insurers from compensating individuals employed by, or
contracted with, the plan or insurer, or from setting any
performance goals or quotas, based on the number of
persons for whom coverage is rescinded or the financial
savings to the plan or insurer associated with the
rescission of coverage. Failed passage in the Senate
Health Committee.
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.
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.
Arguments in support
CDI, as sponsor of this bill, writes that $5,000 for each
violation of post-claims underriting and $10,000 for
willful violations, 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 supports parity between the two
oversight agencies regulating health care with regard to
these penalties. The California Association of Marriage
and Family Therapists (CAMFT) states that rescission of an
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
11
insurer contract generally occurs after expensive claims
have been submitted by the patient, prompting insurers to
comb through a patient's original application file to
discover any discrepancy within the application, no matter
how minute. CAMFT states that when insurers rescind
coverage, patients are left with exorbitant medical costs.
CAMFT believes that the measure will protect consumers from
these post-claims underwriting practices by increasing the
penalty for such unlawful practices.
Arguments in opposition
The Association of California Life and Health Insurance
Companies (ACLHIC) writes that it is 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.
PRIOR ACTIONS
Assembly Floor: 53-23
Assembly Appropriations:11-0
Assembly Judiciary: 9-1
Assembly Health: 12-3
COMMENTS
1.Double-referral.
This bill has been double-referred. Should this bill
pass out of this committee, it will be referred to the
Senate Judiciary Committee. Any amendments agreed to in
this committee should be processed by Judiciary
Committee.
2.Requirement for APA.
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
12
According to CDI, the requirement for civil penalties and
disciplinary actions, related to violations of standard
provisions in disability policies, to be determined at a
hearing that is conducted in accordance with APA
recognizes the fact that the APA process is the valid
process for enforcement of these penalty statutes, and is
how the department enforces major penalties. CDI states
it is already using the APA process for violations
outlined by the bill.
3.Higher penalty should apply toward "willful" acts.
In order to maintain consistency with the "willful"
standard found in other major penalties of $10,000
imposed by the Insurance Commissioner, staff recommends
the higher penalty of $10,000 for postclaims underwriting
be imposed for violations that are determined to be
willful.
(b) Notwithstanding subdivision (a), a health insurer
that unlawfully 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 act of postclaims
underwriting of a policy, except that if the insurer
knew, or had reason to know, that the act of 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.
4.Penalties to MRMIP.
Because post-claims underwriting and rescission practices
have a direct impact on the increasing the medically
uninsurable population, staff recommends that the
penalties collected pursuant to violations of post-claims
underwriting be transferred to the Major Risk Medical
Insurance Fund created pursuant to Section 12739 of the
Insurance Code, to be used, upon appropriation by the
Legislature, for the Major Risk Medical Insurance Program
for the purposes specified in Section 12739.1 of the
Insurance Code. A parallel amendment is recommended in AB
2 (De La Torre) of 2009.
Page 3, line 13:
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
13
(b) Notwithstanding subdivision (a), a health insurer
that
unlawfully 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 act
of postclaims underwriting of a policy, 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 ten thousand
dollars
($10,000) for each act or violation. Penalties
collected pursuant to this subdivision shall be
transferred to the Major Risk Medical Insurance Fund
created pursuant to Section 12739 of the Insurance
Code, to be used, upon appropriation by the
Legislature, for the Major Risk Medical Insurance
Program for the purposes specified in Section 12739.1
of the Insurance Code.
POSITIONS
Support: California Department of Insurance (sponsor)
AIDS Healthcare Foundation
California Association of Marriage and Family
Therapists
California Medical Association
California Psychological Association
Latino Coalition for a Healthy California
Professional Fiduciary Association
Oppose: Association of California Life and Health
Insurance Companies (unless
amended)
STAFF ANALYSIS OF ASSEMBLY BILL 730 (De La Torre) Page
14
-- END --