Rescissions-Limiting Bill Heads to Schwarzenegger's Desk for Second Year

California health insurers would be forced to meet a high standard before retroactively canceling a policy, under legislation now before Gov. Arnold Schwarzenegger.

Sponsored by Assemblyman Hector De La Torre -- a Democratic candidate for state insurance commissioner -- the bill would require insurers to show that a patient "intentionally misrepresented" a known health condition when applying for coverage. Also, all plans would have to complete medical underwriting prior to issuing a contract. It would apply only to individual market policies. Schwarzenegger, a Republican, vetoed a similar bill last year.

De La Torre, D-South Gate, said health insurance companies have practiced "shameful" canceling of policies with little or no oversight. "People who get sick deserve to get the treatment they need and the coverage for services that they paid for, and anything less is unacceptable," he said in a statement.

A.B. 2 cleared the state Assembly and Senate by wide margins mostly along party lines.

Dr. Dev GnanaDev, president of the California Medical Association, said current laws have proven inadequate. "It is not sufficient to give insurance companies what amounts to a slap on the wrist; the time has come for an external review process to protect patients," he said in a statement.

In a statement to members of the state Assembly, the California Association of Health Plans defended rescission as "an important tool based on basic contract law." The De La Torre bill would create a disincentive for insurers to enroll customers, CAHP said.

Schwarzenegger has not taken a public position on A.B. 2, but last year vetoed A.B. 1945, also sponsored by De La Torre (BestWire, Oct. 2, 2008). Supporters of the legislation called the veto a betrayal of a pledge to stop unfair rescissions. Health insurers welcomed that veto, saying the bill would have encouraged dishonesty and increased costs by encouraging unnecessary litigation.

Schwarzenegger may be more open to signing this year's bill as an incremental step toward reform, said Alan Katz, a California health insurance consultant and past president of the National Association of Health Underwriters. The governor had preferred a comprehensive bill, but "the budget and financial dysfunction in the state made a push for meaningful, overarching reform impossible," Katz said.

Also, Katz said, the effect of the bill may be temporary, as any federal health care reform legislation will include a rescissions component.

In June, California Insurance Commissioner Steve Poizner introduced what he said would be the state's first-ever regulations to limit the practice of rescissions for individual health insurance policies (BestWire, June 9, 2009). The proposed regulations would mandate that insurers prove they have met all of the underwriting standards before considering rescission; require insurers to ensure that health insurance applications are accurate and complete; and require insurers to be "100% sure" that an individual knew the answer to a health history question and failed to provide it.

The insurance department has reached settlements on rescission practices with Health Net, Blue Shield of California and Anthem Blue Cross, the three largest health insurance companies in the state (BestWire, Feb. 12, 2009). In addition to financial components and reinstatements of coverage, the settlements included pledges by the companies to change their rescission practices. Combined, these companies cover 85% of the California market, Poizner said.

In 2008, Gov. Arnold Schwarzenegger signed legislation that clarified existing law banning health insurance companies from rewarding employees for rescinding a policyholder's insurance (BestWire, July 24, 2008).