Double Jeopardy? Californians Are Already Protected from Health Insurance Cancellations
The health “reform” recently signed by President Obama may be expensive and over-regulated but its consumer protection parts are popular. They also turn out to be redundant, even though it’s hard to criticize a law that prevents a health insurer from dropping a beneficiary after someone falls ill.
Indeed, H.R. 3590 § 2712 states that an insurer “shall not rescind such plan or coverage with respect to an enrollee once an enrollee is covered under such plan or coverage involved, except that this section shall not apply to a covered individual who has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of material fact as prohibited by the terms of the plan or coverage.”
Good news? Not really. This law will likely result in higher premiums because insurers will suffer “double jeopardy,” being fined twice for the same offence. That’s because Californians already enjoy protection from health insurers “dropping” them once they become sick. This is found in both California’s Insurance Code § 10384 through 10384.17, and the Health and Safety Code § 1389.3, which came into effect in 1993. The legal terms here are “rescission,” “medical underwriting,” and “postclaims underwriting.”
Although ObamaCare will soon make medical underwriting illegal, health insurers offering individual policies in California have been able to charge actuarially fair premiums. This means that they determine the applicant’s risk of illness. Usually, this is done through a series of questions, as well as medical records. After the policy has been issued, the insurer can rescind it if it discovers that the applicant misrepresented his health status. After a policy has been in force for two years, a health insurer cannot rescind for any reason.
What has been illegal since 1993 is “postclaims underwriting.” This occurs when the insurer performs only cursory medical underwriting upon receiving an application, issues the policy, deposits the newly insured person’s premium checks, and only decides to scour his medical records if and when the company starts to receive expensive claims within a few months of issuing the policy.
Insurers must be confident that applicants are being truthful about their health. Otherwise, a health insurer will attract only applicants who wait until they become sick to buy health insurance, which could leave the insurer bankrupt. Despite the scare stories trafficked by President Obama and his supporters, rescissions rarely occur. WellPoint, one of the country’s largest health plans, enrolled approximately 873,000 new customers in 2008. Less than 0.15 percent of those customers had their policies rescinded.
The president appears to believe that laws like those in California are not being enforced, repeatedly claiming that “no one holds these companies accountable for these practices.” That may sound good, but it’s not true. State insurance commissioners are charged with enforcing good-faith execution of insurance contracts. The president should know better because his Secretary of Health and Human Services, Kathleen Sebelius, served for eight as Insurance Commissioner of Kansas.
Authorities in California are ruthless about policing rescission. In September 2008, the California Department of Insurance ordered Health Net Inc. to reinstate 926 policies that had been incorrectly rescinded. The company also paid $3.6 million in fines and another $14 million in medical claims. But this was a minor sum after the $9 million that a California arbitrator ordered it to pay a rescinded policy holder earlier that year. In July 2008, Anthem Blue Cross agreed to pay $11 million in hospital claims derived from rescinded policies in California.
Examples from other states hardly demonstrate slackness in enforcing similar laws. Even the most horrific cases result in severe punishment for offending health insurers. In the New York Times, professor Paul Krugman recently cited the case of a 17-year-old in South Carolina who had an individual health-insurance policy issued by Assurant Health.
After the young man was diagnosed with HIV, Assurant Health allegedly scoured his medical records, determined that he had contracted HIV before he applied for the policy, but had failed to disclose it. The health insurer used this as grounds to rescind his policy. The youth denied the charge; and sued the health insurer. The result? A South Carolina jury awarded the youth $15 million in damages (subsequently rolled back to $10 million on appeal).
These cases demonstrate that state law is more than competent to deal with bad-faith rescissions by health insurers. It is hard to accept that President Obama’s advisors, especially Secretary Sebelius, are unaware of this. This aspect of federal reform will not increase protection for consumers, but it will almost certainly increase trial lawyers’ profits.