Most people are aware of the problem of bad faith denials by insurance companies, but there is another troubling practice that has not received enough attention: illegal rescissions. Illegal rescissions are cancellation of coverage sold in the individual insurance market by plans that want to avoid paying for expensive medical treatment. This problem is even more serious than bad faith denials because the consequences are far worse, plans have an even greater financial incentive to do it, and it is much more difficult to prevent.
For all of these reasons, government regulators have a critical role to play in protecting consumers from illegal rescissions, yet their response has largely been slow and ineffective. One regulator in California has finally taken steps to address this problem proactively. Last month, the Department of Insurance issued new regulations designed to combat illegal rescissions. These new rules are a good start, but unfortunately do not go far enough and leave too many consumers unprotected.
Insurance companies typically have broad discretion to decide whether to sell someone insurance in the individual market. Insurers can deny coverage to those deemed too risky and therefore unprofitable. They identify such customers using a process called underwriting (or risk evaluation). Applicants fill out a medical history questionnaire as part of their application so that plans can evaluate the risk and then decide whether to cover, or how much to charge, the applicant. While this may be troubling from a health care access perspective, this is a necessary protection for plans from a business perspective because it prevents consumers from waiting until they get sick to purchase coverage.
Once a policy is issued, however, there are legal rules that limit plans' ability to avoid risk. Insurers cannot later cancel (or rescind) coverage simply because the person ends up needing expensive health care and therefore becomes unprofitable. The plan is bound to cover these expenses - indeed this is precisely the risk the plan contracted to ensure against. Plans cannot try to alter their risk down the line; this is a practice termed "post-claims underwriting" and it is expressly prohibted by California law. Post claims underwriting is defined as "rescinding ...a plan contract due to the plan'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."
The law does allow plans to rescind coverage if the applicant commits fraud or deliberately conceals information on the insurance application. However, this protection has been exploited by some plans try to justify what is, in fact, an illegal rescission based on post-claims underwriting. Questions about whether a plan has illegally rescinded coverage or justifiably canceled coverage due to fraud depends on the facts of a particular case; nonetheless, there are certain practices that enable plans to more easily commit post-claims underwriting. For example, plans use applications that have ambiguous questions that can lead to innocent mistakes by the applicant, yet they refrain from interviewing applicants or from using medical release forms to verify the completeness or accuracy of the information at the time it is given. Instead, plans adopt a wait-and-see approach: they wait until claims for expensive medical treatment are submitted to investigate risk. Only then is the person's application flagged for review. Plans try to game the system by using innocent mistakes pretextually to justify rescission once the insured becomes too costly.
Illegal rescissions can have devastating consequences for the insured: Plans immediately deny coverage for medical care, refuse to pay outstanding bills and seek reimbursement for the difference of what the plan already paid and premiums received. This can jeopardize access to medical care, causing patients with serious or chronic health conditions to end up in the emergency room or suffer permanent injury. When rescission occurs after diagnosis of a serious medical condition, it is usually too late to secure alternate forms of coverage and patients may be left with extraordinary medical bills that can lead to serious credit problems and even bankruptcy. This can also strain the public fisc, as more uninsured are forced to search for care in an already overburdened public health system.
For years, consumer advocates have called for greater protections against illegal resicssions by insurance plans. And the new rules issued by the California Department of Insurance try to minimize plans' ability to game the system in several ways:
1) They require plans to follow reasonable underwriting requirements before they can claim a legitimate right to rescind. Plans can no longer simply rely on patients' self-reported history; they must investigate further where possible.
2) They create uniform standards for insurance applications to increase the clarity and precision of the questions and answers. This, in turn, should decrease the likelihood of innocent mistakes and make it easier to determine whether an omission was really the result of fraud in a later investigation.
3) They create certain procedural protections for insureds prior to rescission, such as requiring insurers to give consumers the opportunity to respond to claims of fraud, and to consider the insureds' explanations. It is not clear how much protection this will actually provide, without requiring approval by an independent gatekeeper, such as the regulator, before the plan rescinds coverage.
4) The rules also try to prevent the "wait and see" approach described above, by prohibting insurers from conducting rescission-focused investigations long after becoming aware of a possible misrepresentation or omission by the applicant.
Click here for a complete list of the new rules.
While it is good to see the Department of Insurance become more proactive, these rules only apply to certain plans. Most consumers are members of managed care plans, such as HMOs and some PPOs, which are regulated by the Depatment of Managed Health Care (DMHC). Unfortunately the Deparment of Managed Care has not promulgated comparable rules to protect these consumers, and regulations are long overdue. In December 2006, the DMHC said that it would promulgate rules to address the problem of illegal rescissions in response to a rule-making petition by Consumer Watchdog, a nonprofit consumer advocacy group. Yet almost four years later, no final rule has been issued, and it does not appear that the DMHC is even still working on it.
