BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 2540|
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THIRD READING
Bill No: AB 2540
Author: De La Torre (D)
Amended: 7/15/10 in Senate
Vote: 21
SENATE HEALTH COMMITTEE : 6-0, 6/23/10
AYES: Alquist, Cedillo, Leno, Negrete McLeod, Pavley,
Romero
NO VOTE RECORDED: Strickland, Aanestad, Cox
SENATE APPROPRIATIONS COMMITTEE : 8-1, 8/2/10
AYES: Kehoe, Alquist, Corbett, Emmerson, Leno, Price,
Wolk, Yee
NOES: Ashburn
NO VOTE RECORDED: Walters, Wyland
ASSEMBLY FLOOR : 76-0, 5/13/10 (Consent) - See last page
for vote
SUBJECT : Health insurance: postclaims underwriting:
unfair and deceptive practices
SOURCE : Author
DIGEST : This bill increases the maximum civil penalty
for health insurance post-claims underwriting from $118 per
violation to $5,000 per violation. This bill also
increases that amount to $10,000 for each act of
post-claims underwriting that the insurer knew was
unlawful.
CONTINUED
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ANALYSIS :
Existing law:
1. Provides for the regulation of health plans and insurers
by the Department of Managed Health Care and the
Department of Insurance (CDI), respectively.
2. Defines specified practices as unfair methods of
competition, and unfair and deceptive acts or practices
in the business of insurance.
3. 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.
4. 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.
5. 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.
6. Prohibits insurers from engaging in the practice of
postclaims underwriting.
7. 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.
8. Requires any person who willfully violates the
prohibition against postclaims underwriting to pay a
fine of up $118 for each violation, recovered by civil
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action.
9. Permits CDI to also suspend or revoke the license of an
insurer or agent for any such willful violation.
This bill increases the civil penalty on a health insurer
for each act of post-claims underwriting from $118 to a
maximum of $5,000, 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. To the extent that
insurers practice post-claims underwriting and CDI collects
penalties, there would be unknown, increased revenue for
the Major Risk Medical Insurance Fund.
NOTE: This bill is nearly identical in intent to AB 730
(De La Torre), 2009-10 Session, which the Governor
vetoed. The veto message 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? 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."
Background
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 a
misrepresentation by the enrollee at the time of
application. Therefore, any health care services the
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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 Los Angeles 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 Accountability and Administrative Review
Committee, the insurers were only fined $4.6 million, and
only 104 out of 2,770 people, or four 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,
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
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12
2012-13 Fund
Penalties revenue unknown
Special*/
General
* The first $118 of each penalty will go to the
General Fund; the balance will go to the Major Risk
Medical Insurance Fund.
SUPPORT : (Verified 8/3/10)
American College of Emergency Physicians, California
Chapter
California Medical Association
Consumer Attorneys of California
Department of Insurance
Health Access
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
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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
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.
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall,
Bill Berryhill, Tom Berryhill, Blakeslee, Block,
Blumenfield, Bradford, Brownley, Buchanan, Charles
Calderon, Carter, Chesbro, Conway, Cook, Coto, Davis, De
La Torre, De Leon, DeVore, Emmerson, Eng, Evans, Feuer,
Fletcher, Fong, Fuentes, Fuller, Furutani, Gaines,
Galgiani, Garrick, Gilmore, Hagman, Hall, Harkey,
Hayashi, Hernandez, Hill, Huber, Huffman, Jeffries,
Jones, Knight, Lieu, Logue, Bonnie Lowenthal, Ma,
Mendoza, Miller, Monning, Nava, Nestande, Niello,
Nielsen, V. Manuel Perez, Portantino, Ruskin, Salas,
Saldana, Silva, Smyth, Solorio, Audra Strickland,
Swanson, Torlakson, Torres, Torrico, Tran, Villines,
Yamada, John A. Perez
NO VOTE RECORDED: Caballero, Norby, Skinner, Vacancy
CTW:mw 8/3/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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