BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 730
Assemblymember De La Torre
As Amended April 29, 2009
Hearing Date: July 14, 2009
Insurance Code
NRB:jd
SUBJECT
Health Insurance; Unlawful Postclaims Underwriting; Penalties
DESCRIPTION
Under current law, it is unlawful to engage in the practice of
postclaims underwriting, which is defined to mean the
rescinding, canceling, or limiting of a plan contract or
insurance policy due to the plan's 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.
This bill would increase the civil penalty in existing law for
postclaims underwriting by disability insurers from $118 per
violation, to up to $5,000 for each act of postclaims
underwriting. The bill also would establish a civil penalty of
up to $10,000 for each act of postclaims underwriting if the
Insurance Commissioner proves that the insurer knew, or had
reason to know, that the act of postclaims underwriting was
unlawful.
BACKGROUND
Postclaims underwriting refers to the practice of a health
insurer rescinding or limiting an 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
consumer in the first place, either because the insurer failed
to complete medical underwriting before issuing the policy or
the consumer failed to provide some required information. To
(more)
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prevent the 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 the Insurance Code and the
Health and Safety Code since 1994. (AB 1100, W. Brown, Chapter
1210, Statutes of 1993.)
While it is unlawful for all insurers to engage in postclaims
underwriting, existing law provides different penalties for
violations depending upon whether the insurer is a managed
health care plan regulated by the Department of Managed Health
Care (DMHC), or a disability insurer regulated by the California
Department of Insurance (CDI). For CDI regulated policies, the
Insurance Code does not create a penalty specific to postclaim
underwriting violations. Instead, violators are subject to the
same generic penalty as other violations, a fine of up to $118
per violation.
In contrast, for DMHC-regulated policies, the Health and Safety
Code imposes much more severe penalties for postclaims
underwriting violations, subjecting offenders to up to three
years in prison and/or a fine of up to $10,000 for each willful
violation. (Health & Saf. Code Sec. 1390.) In addition, any
violation of the applicable Health and Safety Code provisions,
regardless of the intent of the violator, is subject to a fine
of up to $2,500 per violation. (Id. at Sec. 1387.)
This bill seeks to contemporize and make more consistent the
penalties for postclaims violations by disability insurers with
those applicable to managed health care insurers.
CHANGES TO EXISTING LAW
Existing law provides for regulation of health care service
plans, as defined, by the DMHC under the Knox-Keene Health Care
Service Plan Act of 1975, and for regulation of disability
insurers who sell health insurance by the CDI under the
Insurance Code. (Health & Saf. Code Sec. 1340 et seq.; Ins.
Code Sec. 769.01 et seq.)
Existing law provides that a health care service plan that
authorizes a specific type of treatment by a provider shall not
rescind or modify this authorization after the provider renders
the health care service in good faith and pursuant to the
authorization. (Health & Saf. Code Sec. 1371.8.)
Existing law provides that a disability insurer that provides
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coverage for hospital, medical, or surgical expenses and a
nonprofit hospital service plan that authorizes a specific type
of treatment for services covered under a policyholder's
contract or plan by a provider shall not rescind or modify this
authorization after the provider renders the health care service
in good faith and pursuant to authorization. (Ins. Code Sec.
796.04.)
Existing law provides that no health care service plan or
disability insurer shall engage in the practice of postclaims
underwriting, which is defined to mean the rescinding,
canceling, or limiting of a plan contract or insurance policy
due to the plan's 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. (Health & Saf. Code Sec.
1389.3; Ins. Code Sec. 10384.)
Existing law provides that any person who willfully violates
provisions of Chapter 4 of the Insurance Code (Sec. 10270 et
seq.), including postclaims underwriting by disability insurers,
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. (Ins. Code Sec. 10400.)
Existing law provides that any person who willfully violates
provisions of Chapter 2.2 of the Health and Safety Code,
including postclaims underwriting by a health care service plan,
shall upon conviction be fined not more than ten thousand
dollars or imprisoned, as specified, 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 & Saf.
Code Sec. 1390.) In addition, existing law provides that
postclaims underwriting violations under the Health and Safety
Code, shall also be punishable by a civil penalty not to exceed
$2,500 for each violation, which shall be assessed and recovered
in a civil action brought by the Director of the DMHC. (Health
& Saf. Code Sec. 1387.)
This bill would provide that a disability insurer regulated by
the CDI that unlawfully engages 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 $5,000 for
each act of postclaims underwriting, and up to $10,000 per act
or violation if the insurer knew, or had reason to know, that
the act of postclaims underwriting was unlawful.
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This bill would provide that the civil penalties and
disciplinary actions it provides shall be determined pursuant to
a hearing conducted in accordance with the Administrative
Procedures Act.
COMMENT
1. Stated need for the bill
The author writes:
The Department of Managed Health Care has the authority to
fine health plans up to $10,000 per violation of postclaims
underwriting. Under the Insurance Code, the Commissioner has
jurisdiction to fine plans up to $118 per violation. It is
well publicized that health plans and insurers paid large
bonuses to their employees for rescission of policies,
practiced illegal rescission, and put patients in harm's way
by rescinding their health coverage when they need it most.
For example, in a class-action lawsuit in February of this
year, Health Net agreed to pay more than $40 million in fines
to resolve the regulatory actions and litigation over
rescission. Further, nearly a year ago it was revealed at one
hearing that Health Net paid bonuses to an employee based in
part on how many rescissions she carried out.
By increasing the civil penalties the Insurance Commissioner
may impose for postclaims underwriting, AB 730 will help deter
disability insurers from engaging in this unlawful activity.
The CDI, sponsor of AB 730, writes the following in support of
the measure:
Current law prohibits plans and insurers from postclaims
underwriting, which includes rescinding, canceling, or
limiting a plan contract due to the plan's failure to complete
medical underwriting and resolve all reasonable questions
arising from the application. Some health plans and insurers
paid significant bonuses to their employees for rescission of
policies, practiced illegal rescission, and put patients at
enormous risk of bankruptcy by rescinding their health
coverage when they needed it most. The small penalties in
existing law proved to be adequate for CDI to fine insurers
and force them to change their practices, since there were a
large number of violations. But in order to make sure this
does not happen again, a major increase in the penalties will
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be helpful.
2. Arguments in opposition
The Association of California Life and Health Insurance
Companies (ACLHIC) has taken an oppose unless amended position
on this bill. While ACLHIC does not object to the increased
penalties in the measure, it is concerned the bill would "put
health insurers under a more stringent penalty structure than
health plans regulated under the DMHC[.]"
As explained above, AB 730 would subject disability insurers to
a civil penalty of up to $5,000 for each act of postclaims
underwriting, and up to $10,000 if the insurer knew, or had
reason to know, that the act of postclaims underwriting was
unlawful. The bill would not expose violators to potential jail
or prison time. ACLHIC contends that because postclaims
underwriting is prohibited, and because ignorance of the law is
not a defense, the maximum penalty of $10,000 could be imposed,
at the discretion of the Insurance Commissioner, regardless of
whether an insurer knew that postclaims underwriting was
illegal. ACLHIC contends that this penalty structure differs
from that applicable to health service plans managed by the
DMHC, which provides a heightened penalty for those who
"willfully" commit postclaims underwriting. ACLHIC suggests
that the standard for the $10,000 fine in AB 730 should be
changed to require the CDI to prove that the health insurer
committed a "knowing violation" of the law when it rescinds,
cancels, or limits a particular policy.
Rather than conform these penalty structures, ACLHIC's proposed
amendment would actually make it more difficult to impose the
heightened penalty on disability insurers than on health service
plans. Under current law, willful postclaims underwriting
violations by health service plans are punishable by a fine of
up to $10,000 and/or up to three years in prison or up to one
year in jail. The definition of "willful" can mean different
things in different contexts, particularly in administrative and
criminal proceedings.
The Penal Code provides, "The word 'willfully,' when applied to
the intent with which an act is done or omitted, implies a
purpose or willingness to commit the act, or make the omission
referred to. It does not require any intent to violate the law,
or to injure another, or to acquire any advantage." (Pen. Code
Sec. 7(1) [emphasis added].) In other words, "willfully implies
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no evil intent; it implies that the person knows what he is
doing, intends to do what he is doing and is a free agent." (1
Witkin, Cal. Crim. Law (3rd ed. 2008) Elements, Sec. 7 [citation
omitted].) In other circumstances, such as criminal
proceedings, courts have held that use of the word "willfully"
may be construed to require a guilty mind or intent; thus
requiring a person to not only do the act, but also to know that
doing so is illegal. (See e.g. People v. Simon (1995) 9 Cal.4th
493, 507, 509 [construing Corporations Code provisions
prohibiting false or misleading statements in sale of securities
as not strict liability offenses; "willful," as used in that
code requires guilty knowledge or negligence for criminal
sanctions to apply].)
The structure of the Health and Safety Code postclaims
underwriting provision suggests that a health service plan need
not know it is breaking the law to be held liable for a $10,000
monetary fine. After listing the available monetary and
criminal penalties, the statute goes on to provide that no
person may be imprisoned "if it is proven that such person had
no knowledge of the [prohibition on postclaims underwriting]."
(Health & Saf. Code Sec. 1390.) From this sentence, it may be
deduced that a person may be fined $10,000 if he/she engaged in
postclaims underwriting, even if he/she did not know that
postclaims underwriting was illegal. On the other hand, jail or
prison time may only be imposed if there is a "knowing"
violation of the law. Thus, the word willfully, for purposes of
the monetary fine imposed under Health and Safety Code Section
1390, does not require a knowing violation of the law.
In contrast, the ACLHIC amendment would limit the increased
monetary penalty to those situations where the CDI proves
criminal intent. The author objects to the ACLHIC's proposed
amendment for several reasons. First, he contends that given
the harm postclaims underwriting inflicts on insureds and the
pervasiveness of the practice, the penalty provisions in AB 730
are justified. Second, the author suggests that the amendment
would undermine a key purpose of the bill, which is to encourage
insurance companies to properly underwrite policies at the time
of application, by making administrative enforcement more
difficult and, therefore, less likely. Finally, the author
notes that if ACLHIC's goal truly is to conform the penalties
for health plans and insurers, the amendment would include
criminal penalties for "knowing" postclaims underwriting
violations.
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3.Senate Health Committee amendments
When this bill was heard in the Senate Health Committee last
week, the author agreed to take an amendment that would transfer
the penalties collected pursuant to violations of postclaims
underwriting to the Major Risk Medical Insurance Fund.
According to the Senate Health Committee analysis, the transfer
is appropriate because postclaims underwriting and rescission
practices necessarily serve to increase the medically
uninsurable population. To facilitate timely consideration of
AB 730, the author has agreed to take the following Senate
Health Committee amendment in this committee:
At page 3, line 22, after "violation." insert: "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."
Support : Insurance Commissioner
Opposition : Association of California Life and Health Insurance
Companies (unless amended)
HISTORY
Source : Insurance Commissioner
Related Pending Legislation :
AB 2 (De La Torre), imposes specific requirements and standards
on health care service plans licensed by the DMHC and health
insurers subject to regulation by the California Department of
Insurance, (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. This bill was approved in the Senate
Health Committee on July 8, 2009, and also will be heard in the
Senate Judiciary Committee on July 14, 2009.
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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. This bill was
approved by the Senate Health Committee on June 17, 2009, and
also will be heard in the Senate Judiciary Committee on July 14,
2009.
Prior Legislation :
AB 1150 (Lieu, Chapter 188, Statutes of 2008), prohibits a
health plan or insurer from compensating any person on the basis
of postclaims underwriting performance. 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, 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. The bill was vetoed by Governor.
AB 2549 (Hayashi, 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. The bill was 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 medical underwriting,
as defined. Establishes a duty for agents and brokers selling
individual health coverage products to assist applicants in
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providing answers to health questions accurately and completely,
as specified.
ABX1 1 (Nunez, 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. This bill 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.
Prior Vote :
Assembly Health Committee (Ayes 12, Noes 3)
Assembly Judiciary Committee (Ayes 9, Noes 1)
Assembly Appropriations Committee (Ayes 11, Noes 0)
Assembly Floor (Ayes 53, Noes 23)
Senate Health Committee (Ayes 8, Noes 3)
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