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May 2008

California Consumer Groups, Regulators, and Government Officials Focus on Health Coverage Rescissions

There has been a flurry of activity in California in recent months related to insurance companies that are rescinding health coverage once their enrollees become sick. The concern is that health plans are first allowing people to purchase coverage, often for months or years. Then, when they begin submitting claims, the insurer checks their applications for possible irregularities or inaccurate information. If any are found, coverage is rescinded and claims are not paid. 

Recent events include:

  • The California Department of Managed Health Care has begun reviewing insurance rescissions. Of the first 286 cases reviewed, 26 of the plans were reinstated after the Department determined that individuals had not misrepresented their health status or medical history. They expect to review thousands more rescissions dating back to 2004.
  • The Los Angeles City Attorney’s Office filed a lawsuit against three health insurers, charging that are practicing “post-claims underwriting.” The lawsuit charges that the insurers have complicated applications that maximize the possibility of error. They wait to check these applications until the customers start submitting claims. Then they rescind coverage based on application errors.
  • On March 26, the California Supreme Court affirmed a Court of Appeal ruling that stated that health plans must either prove an applicant willfully misrepresented or omitted her/her medical history or prove that the plan made “reasonable efforts” to verify the applicant’s information before rescinding coverage.

The state legislature is considering several bills on the topic. AB 1945 would require prior approval from regulators before coverage is rescinded. Another bill would require standard application forms that would help limit the possibility of error. AB 2549 measure would prevent insurers from rescinding a policy once it has been in place six months. AB 1150, which passed the Assembly, would prohibit insurers from paying bonuses to staff based on the number of policy rescissions.