On June 5, 2009, the California Department of Insurance ("CDI") provided notice of its intent to adopt regulations to develop standards for health history questionnaires, pre-issuance medical underwriting requirements, and rescission of health insurance policies ("Proposed Regulations"). The Proposed Regulations are intended to address the alleged practices of certain California health insurers that rescind health insurance policies if they discover a material misrepresentation or omission in the information submitted in connection with an application for insurance. On July 20, 2009, the CDI conducted an administrative hearing to receive comments on the Proposed Regulations. The CDI was represented by a panel consisting of Andrea Rosen, Staff Counsel; Joel Laucher, Chief of the Market Conduct Bureau; and David Link, Deputy Commissioner. Although there were several individuals in the audience at the hearing, only a few individuals actually provided oral comments. A summary of the substantive comments follows.
The first witness was Bill Shernoff, a plaintiff's class action lawyer who has sued several health insurers in connection with their rescission practices. In Mr. Shernoff's view, most of the problems relating to rescissions arise from the applications for coverage that are too long, confusing, and ambiguous. He indicated that no one knows exactly what is in their individual medical records or which doctors they saw over the past 10 years. He also indicated that many of the questions on most applications are compound and confusing. Mr. Shernoff posited that if the compound questions were divided into separate questions, an applicant would need to answer nearly 1,000 questions. Mr. Shernoff also asserted that not one application currently in use today in California would comply with the Proposed Regulations.
In addition to victimizing insureds when they most need coverage, Mr. Shernoff noted that the burden of insurers' rescission practices fall disproportionately on providers who do not get paid despite providing medical services in the good faith belief that the patients are insured at the time the services are rendered. Mr. Shernoff believes that the Proposed Regulations will make the entire underwriting and rescission process more fair.
Anne Eowan, Vice President of the California Association of Life and Health Insurance Companies, testified that the Association was generally supportive of the effort to standardize individual health insurance applications. She questioned, however, several aspects of the Proposed Regulations. Ms. Eowan observed that the Proposed Regulations apply to both individual and group health insurance even though only individual health insurance is medically underwritten. Ms. Eowan suggested the scope of the Proposed Regulations be narrowed to apply only to individual health insurance. The CDI responded by indicating that certain association group coverage is individually medically underwritten and that is the reason the Proposed Regulations were drafted to also apply to group health insurance.
Ms. Eowan also suggested that the absolute ban on compound questions in an application will make the applications longer and more difficult to complete. Instead, Ms. Eowan urged the CDI to consider allowing certain questions to be compound if the applicant is permitted to explain his or her answer in a space provided on the application. Ms. Eowan testified that by requiring that medical records be reviewed for each applicant, the Proposed Regulations will actually result in more denials of applications, because insurers will not be able to complete medical underwriting in the manner required by the Proposed Regulations. She observed that such a requirement will put an undue burden on providers who will be required to incur the expense and time necessary to respond to the insurers' requests for medical records. Again, Ms. Eowan requested that the Proposed Regulations be revised to permit flexibility regarding those circumstances where medical record review would be required prior to policy issuance. It was also advocated by Ms. Eowan that the Proposed Regulations attempt to use more objective standards instead of undefined subjective terms such as "complete medical underwriting."
Ms. Eowan also testified that the Proposed Regulations put too much emphasis on Personal Health Records, because there is no guarantee that such records are accurate; they are susceptible to manipulation by the individual; and they are not attested to in the same manner as the information contained in an application for insurance.
Lastly, Ms. Eowan noted that the Proposed Regulations do not provide any lead time for implementation despite the substantial changes certain carriers will need to make to implement the new requirements. She also observed that the timeframes to complete a rescission investigation are too restrictive, because an applicant could unilaterally slow the process and thereby prevent a rescission investigation from being completed in the required timeframes. Ms. Eowan encouraged the CDI to coordinate with the California Department of Managed Health Care to develop consistent standards so that health care service plans would not have an unfair advantage over indemnity insurers, because the health care service plans will not be subject to the Proposed Regulations and producers may drive business to the plans to take advantage of a less burdensome application process.
Representatives of the California Medical Association ("CMA") testified that they are supportive of the Proposed Regulations and advocated for a standard that would require an insurer to prove that an applicant intended to misrepresent his or her health history before a rescission would be permitted. The CMA representatives indicated that the CMA was sponsoring a bill in the California Legislature to codify the intentional standard for rescissions.
The CMA testified that it is generally supportive of a requirement mandating that health insurers obtain and review the medical records of each applicant as part of the underwriting process. The CMA stated that requiring health insurers to compare medical records to the information set forth in an application is not sufficient. Instead, the CMA testified that the Proposed Regulations should require health insurers to contact each applicant for health insurance to make certain that they understand the questions on the application and appreciate the significance of their answers. The CMA is concerned, however, that the obligation to provide medical records and the associated costs will be passed on to providers by the insurers by contract or otherwise.
The CMA also suggested that individual insureds should be provided notice when a rescission investigation is commenced, be allowed to participate in the investigation process, be informed that their insurance remains in force during the investigation, and that they are entitled to be represented by counsel at their own expense if they so desire. Lastly, the CMA testified that they are in favor of a system of independent review of rescission decisions, because insurers have an inherent conflict of interest reviewing their own actions.
The last witness of the day was Jerry Flanagan of Consumer Watchdog. Mr. Flanagan suggested that the CDI should not be swayed by the arguments of the insurers that the cost of reviewing medical records prior to policy issuance is too costly and burdensome, because the health insurers realized substantial profits over the past several years. Instead, Mr. Flanagan indicated that underwriting was a cost of doing business for an insurer, because insurers are in the business of evaluating and pricing risk. Mr. Flanagan suggested that certainty of coverage should be the paramount consideration of the CDI and not the cost that may be incurred by the insurers. Similar to the CMA, Mr. Flanagan suggested that individuals should have the opportunity to participate in the rescission investigation before a decision to rescind is made to provide an opportunity for the insured to demonstrate that he or she did not understand the significance of the questions asked or to explain an inaccurate or incomplete answer. Likewise, Mr. Flanagan supports the enactment of a standard that would require an insurer to prove that an applicant intended to deceive an insurer before that insurer would be legally permitted to rescind a policy.