BILL ANALYSIS
AB 2540
Page 1
Date of Hearing: April 20, 2010
ASSEMBLY COMMITTEE ON HEALTH
William W. Monning, Chair
AB 2540 (De La Torre) - As Amended: April 8, 2010
SUBJECT : Health insurance: postclaims underwriting: unfair and
deceptive practices.
SUMMARY : Includes "engaging in postclaims underwriting," as
defined, in existing law which declares specified trade
practices as unfair methods of competition and unfair and
deceptive acts or practices in the business of insurance.
EXISTING LAW :
1)Provides for the regulation of health insurers by the
California Department of Insurance (CDI).
2)Defines specified practices as unfair methods of competition
and unfair and deceptive acts or practices in the business of
insurance and prohibits any person from engaging in any trade
practice which is defined as, or determined to be, an unfair
method of competition or an unfair or deceptive act or
practice in the business of insurance.
3)Makes a person who engages in any unfair method of competition
or any unfair or deceptive act or practice in 2) above liable
to the state for a civil penalty of up to $5,000 for each act,
or, if the act or practice was willful, a civil penalty of up
to $10,000 for each act. Gives the Insurance Commissioner the
discretion to establish what constitutes an act, however, when
the issuance, amendment, or servicing of a policy or
endorsement is inadvertent; all of those acts are considered a
single act.
4)Prohibits insurers from engaging in the practice of postclaims
underwriting. Defines "postclaims underwriting" as the
rescinding, canceling, or limiting of a policy or certificate
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 or certificate.
5)Requires any person willfully violating the above to pay fine
AB 2540
Page 2
of up $118 for each violation, recovered by civil action.
Permits CDI to also suspend or revoke the license of an
insurer or agent for any such willful violation.
FISCAL EFFECT : This bill has not been analyzed by a fiscal
committee.
COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, while the
practice of postclaims underwriting is forbidden, health
insurers continue to engage in this practice in an effort to
save money. Insurers collect premiums for years, and when a
patient becomes sick with an expensive disease such as cancer,
they research their health history to find a reason to rescind
or cancel the policies. As recently as December 2009, the Los
Angeles City Attorney's office prevailed in a lawsuit filed
against Anthem Blue Cross, alleging that the company engaged
in illegal rescission practices to deny coverage to thousands
of seriously ill Californians. The City Attorney's office
believes that since 2002, Blue Cross has denied benefits to
more than 6,000 individuals, and thousands more have had their
benefits delayed as a result of these practices. Furthermore,
as uncovered by the Assembly Committee on Accountability and
Administrative Review, the insurers were only fined $4.6
million and only 4% (104 out of 2770) of the rescinded CDI
consumers received new coverage. Considering the number of
people who were affected, this was a cost savings for the
insurers. The author states that when you look at the fines
compared to what insurers would save through post-claims
underwriting, it creates an incentive for the plans to rescind
or cancel policies. This bill seeks to protect patients by
increasing the Insurance Commissioner's ability to fine health
insurers who unlawfully engage in postclaims underwriting.
2)BACKGROUND . 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.
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
AB 2540
Page 3
existed because of a misrepresentation by the enrollee at the
time of application, and; therefore, any health care services
the enrollee received during the entire time of the contract
are to be paid for by the enrollee. 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 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 under the rescinded policies. As part
of 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,
consumers whose coverage was rescinded 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)FEDERAL HEALTH CARE REFORM . On March 23, 2010, President
Obama signed the Patient Protection and Affordable Care Act
(the Affordable Care Act); P. L. 111-148, as amended by the
Health Care and Education Reconciliation Act of 2010; P. L.
AB 2540
Page 4
111-152. Among other provisions, the new law makes statutory
changes affecting the regulation of and payment for certain
types of private health insurance. The new law contains a
prohibition against rescission. Effective September 2010,
health plans and insurance companies providing group or
individual market coverage are prohibited from rescinding
coverage once an enrollee is covered under a plan, except in
the case of an individual who has performed an act or practice
that constitutes fraud or makes an intentional
misrepresentation of material fact.
5)RELATED LEGISLATION . AB 2470 (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 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.
6)PREVIOUS LEGISLATION . AB 1945 (De La Torre) of 2008 and AB 2
(De La Torre) of 2009 were substantially similar to AB 2470,
and were both vetoed by Governor Schwarzenegger, who stated in
part:
I remain comfortable sending this bill back?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.
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
AB 2540
Page 5
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
insurance policy after six months from the effective date 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
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. 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. AB 1 X1 failed passage in
the Senate Health Committee.
AB 2540
Page 6
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.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Melanie Moreno / HEALTH / (916)
319-2097