BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 2540
A
AUTHOR: De La Torre
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AMENDED: April 8, 2010
HEARING DATE: June 23, 2010
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CONSULTANT:
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Chan-Sawin
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SUBJECT
Health insurance: postclaims underwriting:
unfair and deceptive practices.
SUMMARY
Adds postclaims underwriting to the definition of unfair
methods of competition in the business of health insurance.
CHANGES TO EXISTING LAW
Existing law:
Provides for the regulation of health plans and insurers by
the Department of Managed Health Care (DMHC) and the
California Department of Insurance (CDI), respectively.
Defines specified practices as unfair methods of
competition, and unfair and deceptive acts or practices in
the business of insurance. 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.
Continued---
STAFF ANALYSIS OF ASSEMBLY BILL 2540 (De La Torre) Page
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Makes a person who engages in any unfair method of
competition or any unfair or deceptive act or practice, as
specified, 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.
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.
Requires any person who willfully violates the prohibition
against postclaims underwriting to pay a fine 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.
This bill:
Adds postclaims underwriting, the practice of health
insurers waiting for health claims to be submitted and then
canceling insurance coverage retroactively, to the
definition of unfair methods of competition in the business
of health insurance.
FISCAL IMPACT
According to the Assembly Appropriations Committee
analysis, this bill creates insurer exposure to fines of up
to $5,000, and up to $10,000 for willful violations, for
each infraction. These fines are to be levied by CDI.
Under current law, these infractions incur a penalty of up
to $118 for each violation of postclaims underwriting.
The recently enacted federal health reform law, the Patient
Protection and Affordable Care Act, prohibits rescissions
across the health care market, effective in September 2010.
STAFF ANALYSIS OF ASSEMBLY BILL 2540 (De La Torre) Page
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Therefore, although this bill increases penalties, insurer
infractions in this area are likely to lessen
substantially.
BACKGROUND AND DISCUSSION
AB 2540 seeks to protect patients by increasing the Insurance
Commissioner's ability to fine health insurers who unlawfully
engage in postclaims underwriting. 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. For
CDI-regulated insurance policies, the Insurance Commissioner has
jurisdiction to fine plans up to $118 per violation. This bill
will give the Commissioner greater jurisdiction to fine health
insurers who engage in this practice.
According to the author, while the practice of postclaims
underwriting is forbidden, insurers continue to engage in
this practice in an effort to save money. When a patient
becomes sick with an expensive disease, such as cancer,
insurers research their health history to find a reason to
rescind or cancel their policies. Insurers often collect
premiums from insureds, sometimes for years, before doing
so. The author asserts that current fines provide little
disincentive for plans from employing these unfair
practices, compared to the savings that could result from
rescinding or canceling policies. For example, since 2004,
CDI fined Anthem Blue Cross only $1 million for 2,330
members. That equals only $429 per member.
Postclaims underwriting and rescission
The practice of waiting for a major health care claim to be
submitted for payment, then investigating a patient's
medical history, and canceling or rescinding the policy
retroactively is known as postclaims underwriting.
Postclaims underwriting means health plans and insurers are
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 existed because of
STAFF ANALYSIS OF ASSEMBLY BILL 2540 (De La Torre) Page
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a misrepresentation by the enrollee at the time of
application. 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.
As recently as December 2009, the LA City Attorney's office
won a lawsuit filed against Anthem Blue Cross for engaging
in illegal rescission practices to deny coverage to
thousands of seriously ill Californians. The City
Attorney's office argued 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
104 out of 2,770 people, or 4 percent of the rescinded CDI
consumers, received new coverage
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:
1) 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,
2) 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.
Insurers also agreed to make changes to the application
forms, underwriting process, agent and broker training,
STAFF ANALYSIS OF ASSEMBLY BILL 2540 (De La Torre) Page
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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.
Federal health care reform
On March 23, 2010, President Obama signed the federal
health reform act, the Patient Protection and Affordable
Care Act. Among other things, the new law makes statutory
changes affecting the regulation of, and payment for,
certain types of private health insurance, including a
prohibition against rescission. Effective September 2010,
health plans and insurers 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.
Arguments in support
The Consumer Attorneys of California assert that current
law merely imposes a $118 penalty for each violation of
postclaims underwriting by an insurer, which is not strong
enough to deter such unethical business practices. With
such weak protections in place, health plans actually have
a profit-driven incentive to rescind or cancel the
insured's policy and pay the minimal fine instead.
CDI writes in support, stating that postclaims underwriting
is one of the most egregious problems in the individual
health insurance market. Some health 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. According to CDI, while
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recently passed federal health care reform will require
insurers to prove and enrollee "intentionally
misrepresented" information on an application as a
condition to rescind coverage, it does not add further
protections to end this practice.
Arguments in opposition
The Association of California Life & Health Insurance
Companies (ACLHIC) writes in opposition, stating that,
while ACLHIC has no objection to increasing current
penalties to reflect today's marketplace, this bill would
subject violations of postclaims underwriting by insurers
to two separate penalty provisions.
Governor's veto
This bill is substantively similar to three bills that
Governor Schwarzenegger vetoed in the last four years. In
his veto message of AB 730 (De La Torre) of 2009, Governor
Schwarzenegger stated:
This bill attempts to align enforcement provisions
between the Department of Managed Health Care and the
California Department of Insurance. However, it does
not create this much-needed consistency, but instead
continues to subject regulated entities to differing
standards.
In addition, while I believe the Managed Risk Medical
Insurance Program to be a possible and appropriate
location for some of the penalties associated with
these fines, I cannot support provisions that further
limit revenue to the General Fund and decrease the
state's ability to direct resources to its highest
priorities.
Related bills
AB 2470 (De La Torre) imposes specific requirements and
standards on health plans and 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.
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AB 730 (De La Torre) of 2009 was substantively similar to
AB 2540. Vetoed by the Governor.
Prior legislation
AB 2 (De La Torre) of 2009 was substantively similar to AB
2540. Vetoed by the Governor.
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 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.
ABX1 1 (Nunez) of 2007 would have enacted comprehensive
health care system reforms. Among other market reform
elements, ABX1 1 prohibited health plans and insurers from
setting performance goals or quotas, or providing
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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.
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 1680 (Duvall) of 2007 would have modified the definition
of postclaims underwriting. Never heard in committee.
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 postclaims underwriting.
PRIOR ACTIONS
Assembly Health Committee: 16-0
Assembly Appropriations Committee:17-0
Assembly Floor: 76-0 (Consent Calendar)
COMMENTS
1. Bill overlaps with existing penalties. Individuals
found in violation would be subject to penalties and fines
under this bill of up to $5,000, or up to $10,000 for
willful violations, as well as the $118 fine specified in
current law. As the author's intent is to authorize the
Insurance Commissioner to levy a higher fine than currently
exists for such practices, rather than to impose two fines,
the committee suggests the following amendment:
On page 6, delete lines 16-17 and insert:
STAFF ANALYSIS OF ASSEMBLY BILL 2540 (De La Torre) Page
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(j) (1) Engaging in postclaims underwriting as defined
by Section 10384. In the event a penalty is levied
pursuant to Section 790.035, the department shall not
levy the penalty described in Section 10400.
2. Revenues to the Major Risk Medical Insurance Program.
Because postclaims underwriting and rescission practices
have a direct impact on increasing the medically
uninsurable population, staff recommends that the balance
of each penalty collected pursuant to violations of
postclaims underwriting, beyond the $118 fine specified in
current law, be transferred to the Major Risk Medical
Insurance Fund, to be used, upon appropriation by the
Legislature, for funding the Major Risk Medical Insurance
Program.
On page 6, between lines 17 and 18, insert:
(j) (2) The first one hundred eighteen dollars ($118)
of each penalty collected pursuant to subsection (j)
(1) shall be deposited in the General Fund, and the
balance of each penalty shall be deposited in the
Major Risk Medical Insurance Fund created pursuant to
Section 12739, to be used, upon appropriation by the
Legislature, for the Major Risk Medical Insurance
Program for the purposes specified in Section 12739.1.
POSITIONS
Support: American College of Emergency Physicians,
California Chapter
California Department of Insurance (CDI)
California Medical Association
Consumer Attorneys of California
Health Access
Oppose: Association of California Life & Health Insurance
Companies
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