BILL ANALYSIS
AB 2470
Page 1
Date of Hearing: March 23, 2010
ASSEMBLY COMMITTEE ON HEALTH
William W. Monning, Chair
AB 2470 (De La Torre) - As Introduced: February 19, 2010
SUBJECT : Individual health care coverage.
SUMMARY : 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 system related to carrier decisions
to cancel or rescind an individual's health care coverage.
Specifically, this bill :
Underwriting Provisions
1)Requires DMHC and CDI to jointly establish, by regulation,
standard information and health history questions that
carriers must use in individual health care coverage
application forms, as specified, including a pool of approved
questions for use in applications, and prohibits applications
from containing any other questions except for the approved
questions.
2)Requires carriers to complete medical underwriting prior to
issuing a health plan contract or health insurance policy, and
establishes the elements of a reasonable investigation of the
applicant's health history information, as specified.
3)Requires carriers to adopt and implement written medical
underwriting policies and procedures, and to file the policies
and procedures with the respective regulator on or before
January 1, 2012, to ensure that the carrier meets specified
requirements relating to application review.
4)Requires carriers to send a copy of a written application with
a copy of the contract or policy to an individual within 10
days after coverage is issued and to include a specified
notice.
AB 2470
Page 2
Rescission Provisions
5)Prohibits, after an individual contract or policy is issued,
the cancellation or rescission of the contract or policy
unless all of the following apply:
a) There was a material misrepresentation or material
omission in the application prior to the issuance of the
contract or policy that would have prevented the contract
from being entered into;
b) The carrier completed medical underwriting as specified
prior to issuing the coverage;
c) The carrier demonstrates that the applicant
intentionally misrepresented or intentionally omitted
information on the application prior to the issuance of
coverage, with the purpose of misrepresenting his or her
health history; in order to obtain health care coverage;
d) The application form was approved by DMHC or CDI; and,
e) The carrier complied with the requirement to send the
complete application to the applicant along with the
written notice as required under 4) above.
6)Permits, notwithstanding the prohibition against rescission in
this bill, coverage to be canceled or not renewed for failure
to pay the premium as provided in existing law.
7)Authorizes carriers to conduct a "postcontract insurance
investigation," if the carrier obtains information that a
covered person may have intentionally misrepresented or
intentionally omitted information on the application, and
requires carriers to send a specified notice within five days
to the covered person that the investigation may lead to
rescission or cancellation of the covered person's coverage.
Establishes specific timelines and notice requirements related
to the investigation.
8)Requires carriers to continue to authorize and provide all
medically necessary services until the effective date of a
cancellation or rescission, and establishes the effective date
of cancellation or any rescission as no earlier than the date
AB 2470
Page 3
of certified notice to the covered person that the independent
review organization established in this bill has made a
determination upholding the decision to cancel or rescind.
Independent Review Provisions
9)Establishes within DMHC and CDI, commencing January 1, 2012,
an independent review process (IRP) for decisions to cancel or
rescind individual health plan contracts or individual health
insurance policies and requires that all carrier decisions to
cancel or rescind be reviewed in the IRP, unless the covered
person opts-out of the process.
10)Establishes the rules for operation of the IRP, requires DMHC
and CDI to contract or otherwise arrange for one or more
independent not-for-profit organizations to conduct IRPs, and
sets the standards for selection of the review organizations,
including conflict of interest standards.
11)Requires DMHC and CDI to immediately adopt the IRP
determination and promptly issue a written decision to the
parties that is binding on the carrier and after removing the
names of the parties, as specified, make available to the
public IRP decisions adopted by DMHC and CDI, at cost, and
after considering applicable laws governing disclosure of
public records, confidentiality, and persons privacy.
12)Prohibits carriers from engaging in conduct to prolong the
IRP, subject to a specific administrative penalty of $5,000
for each day the IRP is prolonged or an IRP decision is not
implemented, as specified.
13)Imposes a per case assessment on carriers to support the
costs of the IRP, but exempts carriers that do not cancel or
rescind contracts from the fees and assessments established.
14)Requires, on and after January 1, 2011, carriers to report
the number of individual contracts and policies issued and the
number where the carrier initiated a cancellation or
rescission, and requires DMHC and CDI to annually post the
information on the respective department Web sites, as
specified.
Other Provisions
AB 2470
Page 4
15)Requires that revenues from administrative penalties imposed
on carriers for prolonging an independent review of a
rescission, or for failure to timely implement an independent
review decision, be deposited into the Major Risk Medical
Insurance Fund, to be used, upon appropriation to the
Legislature, for the Major Risk Medical Insurance Program
(MRMIP).
16)Exempts specialized dental health plans from the provisions
of this bill.
EXISTING LAW :
1)Prohibits carriers from engaging in "post-claims
underwriting," defined as rescinding, canceling, or limiting
of a plan contract due to a carrier'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.
2)Prohibits a carrier from rescinding or modifying an
authorization for services after the service is rendered, for
any reason, including but not limited to, the carrier's
subsequent rescission, cancellation, or modification of the
enrollee or insured's contract or policy, or the carrier's
subsequent eligibility determination.
3)Requires applications for health plan contracts and 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 requires questions relating to the health
condition or health history of the applicant to be based on
medical information reasonable and necessary for medical
underwriting purposes.
4)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.
AB 2470
Page 5
5)Establishes the MRMIP, administered by the Managed Risk
Medical Insurance Board (MRMIB), to provide health coverage
for individuals unable to purchase coverage, because they have
been denied health coverage by at least one private health
plan or are offered only limited coverage or coverage
significantly above standard average individual rates, as
determined by MRMIB.
FISCAL EFFECT : This bill has not been analyzed by a fiscal
committee.
COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, current law
prohibits plans and insurers from post claims 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. It is well publicized that health plans and
insurers have paid large bonuses to their employees for
rescission of policies, practiced illegal rescission, and
putting patients in harms way by rescinding their health
coverage when they need it most. The author states this bill
protects consumers from having their health insurance coverage
canceled or rescinded when they need care by maintaining their
current coverage while allowing regulators to independently
analyze and adjudicate on any rescission, cancellation, or
limitation of a policy. The time has come to have an unbiased
analysis on whether a policy should be rescinded or cancelled,
and to provide the utmost protection to patients whenever
their health plans and insurers want to rescind their health
coverage.
2)RESCISSION . "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 misrepresentation by the
enrollee at the time of application, and that; therefore, any
health care services the enrollee received during the entire
time of the contract are to be paid for by the enrollee.
AB 2470
Page 6
Rescission is what is known as an equitable remedy, where the
remedy 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.
3)RESCISSION SETTLEMENTS . In 2007, DMHC concluded non-routine
investigations of the five largest plans regulated by the
Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene)
related to rescissions of health coverage. In 2008, DMHC
reached agreements with Anthem Blue Cross, Blue Shield, Health
Net, Kaiser, and PacifiCare requiring them to offer health
care coverage to former members whose policies they rescinded
or cancelled over a four year period, regardless of the former
member's health condition. The settlement also resulted in
fines ranging from $50,000 to $10 million, with additional
fines to be levied if the plans failed to properly implement
corrective action plans approved by DMHC. The settlements
require the plans to offer health care coverage to former
members whose policies they rescinded or cancelled 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. Arbitration was available if the consumer wanted
to pursue other damages. A neutral arbitrator was available
to determine if the rescission was wrongful and award damages.
According to DMHC, by the end of February 2009, of the 3,400
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%) and 300 (9%) have requested
reimbursement under the terms of the settlement. DMHC has
approved the health plan corrective action plans related to
rescission policies and practices going forward. Those
changes however, are still in the process of being implemented
by the health plans, and will be reviewed by DMHC.
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 or
reimburse any medical expenses that would have been covered
AB 2470
Page 7
under the rescinded policies from the effective date of the
rescinded policy to the date of confirmed delivery of the
Notice of settlement, 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 reimbursement
disputes regarding coverage issues and/or the amount of
reimbursable expenses and to refer determinations about
medical necessity to an Independent Medical Review
Organization, at the cost of insurers. 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, the
rescission appeals process, and internal audits and oversight
of its claims handling. Insurers also agreed to establish an
independent third party review process for rescissions going
forward and to review at least one source of information other
than the application in the pre-enrollment underwriting
process prior to issuing the policy.
Under the agreements with both DMHC and CDI, rescinded
patients can accept new coverage without forfeiting any legal
rights but 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.
4)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 does not restrict a plan's
AB 2470
Page 8
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.
5)THE HAILEY COURT RULING . In 2000, Cindy Hailey applied to
Blue Shield for herself, her husband (Steve Hailey), 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 the preferred rate in December 2000. In June 2001,
Blue Shield retroactively cancelled the Hailey's coverage,
alleging that Cindy Hailey had failed to disclose information
about Steve Hailey's prior medical history. Blue Shield
uncovered the medical history during an investigation
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
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 precontract 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) above 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 California Supreme Court refused to take up on
AB 2470
Page 9
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 rescission
under Knox-Keene.
6)PREVIOUS LEGISLATION . AB 1945 (De La Torre) of 2008 and AB 2
(De La Torre) of 2009 were substantially similar to this bill,
and were both vetoed by Governor Schwarzenegger. The veto
message of AB 2 reads as follows:
I have repeatedly indicated I would support a bill
that provides strong statutory protections for
consumers against inappropriate rescissions by health
plans. However, this bill continues to have a
provision that benefits trial lawyers rather than
consumers. I remain comfortable sending this bill
back for a second time without my signature because of
the strong consumer protections the Department of
Managed Health Care and Department of Insurance have
successfully implemented over the past two years. The
number of rescissions industry-wide has decreased
significantly since 2005. Millions of dollars have
been assessed against health plans and insurers;
corrective action plans have been received and
approved; revised consumer disclosures have been
reviewed for literacy, consistency and compliance with
the settlement agreements; and lastly, the two
departments are working together to ensure that all
health plans meet the same standards of fairness and
full disclosure. The market has changed and it is
because of my Administration's strong action in this
area.
The precedent-setting 4th District Court of Appeals
decision in Hailey v. Blue Shield relied heavily on
the Department of Managed Health Care's amicus brief.
The court's reliance on this brief speaks to the
strong work of the Department and the balance required
when enacting consumer protections and ensuring access
to the individual health plan market. I have no
interest in overturning that appellate decision and
the definitive interpretation of the post-claims
underwriting statute.
In addition, I have signed targeted measures that
AB 2470
Page 10
prohibit plans from financially incentivizing their
employees to rescind or cancel policies; require plans
to offer coverage to families when the individual on
the contract has been rescinded or cancelled; and most
recently, I have signed Assembly Bill 108 that will
prohibit a health plan from rescinding or canceling a
contract after 24 months.
I would request that the Legislature send me a bill
that codifies the Hailey decision, as I have asked for
since 2008. When that occurs, I will be happy to sign
that bill.
AB 108 (Hayashi), Chapter 406, Statutes of 2009, prohibits
health plans and health insurers, after 24 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 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 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 died on the Senate Appropriations Suspense
file.
AB 2569 (De Leon), Chapter 604, Statutes of 2008, requires
health plans and health insurers to offer new coverage, or
AB 2470
Page 11
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.
AB 1 X1 (Nunez) of 2007 would have enacted comprehensive
health care system reforms, including coverage expansions, an
employer spending requirement and individual health insurance
mandate, affordability protections, insurance market reforms,
cost containment elements and provisions to support health
care safety net providers. Among other market reform
elements, AB 1 X1 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.
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.
SUPPORT . The California Medical Association (CMA), the
sponsor of this bill, writes that recent settlements and
enforcement actions are insufficient because they take place
after the damage is done; after the patient has already lost
coverage and has had to file costly, lengthy lawsuits or lodge
complaints through a bureaucratic regulatory process. The CMA
additionally states that these actions do nothing to prevent
AB 2470
Page 12
illegal rescissions from happening in the future, and that
this bill protects patients before their coverage is illegally
rescinded. The California Society of Anesthesiologists states
that even with the action of DMHC and CDI, only 300 of the
6,000 cancelled policyholders benefited from the settlement
agreements and it is time to finally close the loopholes that
enable some managed care firms to continue this egregious
practice. The California Psychiatric Association states that
rescission of a patient's health insurance is a traumatic
event with far reaching consequences to not only the patient's
health but the iscal health of the entire family and that this
bill establish protections against that.
7)OPPOSITION . The California Chamber of Commerce writes that
this bill could drive up the cost of health care premiums and
increase the number of uninsured by establishing litigation as
the only meaningful approach to resolving coverage rescission
disputes. Health Net writes that this bill will increase
litigation in California without providing consumers the
certainty that health plans and insurers will only rescind
policies and contracts for good reasons, creating incentives
for applicants to misrepresent their medical conditions.
Anthem Blue Cross writes that this bill creates an ambiguous
standard for medical underwriting, will make rescissions
virtually impossible (resulting in insurers denying more
applications for coverage), and will lead to increased
litigation. The Association of California Life and Health
Insurance Companies states that it has been willing to sit
down with the Administration, regulators, and interested
stakeholders to develop changes to the rescission process to
add more transparency while protecting those currently paying
premiums in the individual market, but unfortunately this bill
is not the solutions as it will make it more difficult for
consumers seeking coverage in the individual market. The
California Association of Health Plans writes that they also
have expressed a willingness to discuss ways of providing
additional consumer protections in the individual market
including establishing an independent review process for
rescission cases but state that as currently written will
increase litigation, increase premiums, and decrease coverage.
8)OPPOSE UNLESS AMENDED . Blue Shield of California writes that
this bill contains language that was designed by the trial
attorneys to gain an upper hand in their contingency fee cases
against health plans and undermines over 100 years of contract
AB 2470
Page 13
law by requiring health plans to prove "intentional"
misrepresentation by an applicant any time a misrepresentation
occurs. Blue Shield contends that it is nearly impossible for
a plan to prove intentional misrepresentation when an
applicant can merely claim that they were "rushed" when
filling out the application or they "did not understand" the
application questions, or that the omission is "someone else's
fault" (e.g. a spouse or insurance broker).
REGISTERED SUPPORT / OPPOSITION :
Support
California Medical Association (sponsor)
California Psychiatric Association
California Society of Anesthesiologists
Opposition
Anthem Blue Cross
Association of California Life and Health Insurance Companies
Blue Shield of California (unless amended)
California Association of Health Plans
California Chamber of Commerce
Health Net
Analysis Prepared by : Melanie Moreno / HEALTH / (916)
319-2097