California’s Department of Managed Health Care (DMHC) recently issued proposed regulations to combat insurance companies from rescinding healthcare policies that not only leave consumers without insurance, but make it almost impossible for them to obtain insurance from another carrier.

Illegal rescission

Insurance companies will rescind an insurance policy if they find that the policyholder lied about a health condition on their application. Insurers are allowed to do this to combat fraud; however, many insurers have been rescinding policies simply because they don’t want to pay – something they are not allowed to do.

Several insurance companies, such as Blue Cross and Kaiser Permanente, have been hit with big fines from the DMHC over the past few years for rescinding policies without adequate explanation. When a policy is rescinded, it’s as if it never existed. The policyholder does not receive any of the benefits they thought they would receive and it makes it almost impossible for them to obtain insurance from any other carrier as they now have a ‘black mark’ on their record.

Proposed regulations

The DMHC and the California Department of Insurance are preparing joint regulations that would clarify the existing law that states that a consumer must ‘willfully misrepresent his/her health history before a health insurance policy can be rescinded’. That definition has come under scrutiny in the past because it generally boils down to a ‘he said, she said’ argument – and since the insurance company has the upper hand, they usually prevail unless the policyholder brings a lawsuit against them.

According to the DMHC, the proposed regulations would also require that health plans conduct medical underwriting before issuing a policy and fully investigate questionable responses on health history questionnaires. This would avoid what is known as ‘post-claim underwriting’ – a practice where insurance companies accept your application without doing a thorough investigation, take your premiums and then rescind your policy if you make a claim that they think is fraudulent based on your application. In other words, they underwrite the policy after a claim is made.

Specifics

The joint regulations, if adopted, would be the strongest protection for consumers regarding healthcare policy rescissions in the nation. The proposed regulations would:

• Establish definitions that clarify the terms medical underwriting, resolving reasonable questions and limiting a plan contract.
• Clarify what is considered an unacceptable coverage application form (e.g.: unclear, ambiguous or unreasonable.)
• Specify that willful misrepresentation must be determined by a plan before rescinding, canceling or limiting a subscriber contract.
• Clarify that rescissions and cancellations for misrepresentation in the coverage application are subject to review.
• Prohibit plans from suspending coverage during an investigation, specifically, plans shall not delay, deny or modify medically necessary covered services that are needed on an urgent or necessary basis and must complete investigation and deliver a determination within 30 days.
• Prohibit cancellation, rescission or limitation of coverage for all enrollees under a contract if there is willful misrepresentation by only one person.
• Prohibit rescission, cancellation or limitation of coverage after two years.
• Require notice before cancellation and notice of the right to request a review.
• Impose a temporary (two year) reporting requirement necessary for effective DMHC oversight to confirm that widespread noncompliance has been corrected.

Next steps

The proposed regulations must be formally submitted to the Office of Administrative Law (OAL) and are subject to public comment before they become final.

To view a draft of the proposed regulations, go to http://www.dmhc.ca.gov/library/reports/news/pcuregsd.pdf.