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Health Insurance

Strategies for Navigating, Shaping and Succeeding within Federal and State
Legislation and Regulation

April 2011
Rescission Overview

c In the health insurance context, a termination of a policy

due to a misrepresentation by the policyholder on the

c Premiums returned to the insured, but insurer does not have

to pay for often expensive treatment
How Rescission Benefits
Individual applies for health
Treatment Provider files a
insurance and the Insured Individual receives
claim with the insurer for
application is approved by medical treatment
the Insurer

Insurer underwrites the

If a discrepancy is found,
Unable to collect from the policy, check for
the insurer rescinds the
insurer, the provider bills discrepancies between the
policy and does not pay the
the individual insured·s medical record
and application

In either case, the insurer

The Individual must pay for If the Individual files for will be able to avoid a
the treatments received out- bankruptcy, the hospital payment, or to be
of-pocket or file for will be unable to collect for reimbursed for payments
bankruptcy services rendered made under a rescinded
The Insurer·s Perspective

c Rescission is a necessary tool in combating fraudulent or

inaccurate applications

c Underwriting post-claim allows applications to be processed

faster and keeps overall system costs to a minimum

c Controls and oversight are already in place, as well as

judicial review, to prevent abuses
Criticism of Rescissions

c Can lead to seemingly unfair results:

c Coverage pulled shortly before an operation
c Coverage rescinded due to relatively minor/immaterial discrepancies
c Lack of oversight
c Judicial process can be unavailing due to time and cost

c Allows the insurer to keep the benefit of premiums

(including those based on inaccurate applications) and
selectively choose which policies to rescind
c Method has been termed ´cherry pickingµ
Rescissions by the Numbers

Source: 2009 Rescission Data Call, National Association of Insurance Commissioners

Rescissions by the Numbers, 2

Source: 2009 Rescission Data Call, National Association of Insurance Commissioners

Rescissions by the Numbers, 3

c While rescission may not be numerous, they are cost


c The19,776 rescission reported to Congress saved insurers at

least $300,000,000
Congressional Investigation
House Committee on Energy and Commerce
Memorandum and Hearings

c Found several ´controversial practicesµ where coverage was

c Even though mistakes on the application were unintentional or
caused by others
c For conditions the policyholder did not know about
c For a condition unrelated to the one for which the patient was
seeking care
c For family members who were not involved in
Congressional Investigation, 2

c Certain conditions or dollar amounts trigger automatic

investigations of a claimant·s medical history

c At least one company, WellPoint, based employee

performance evaluations on the amount an employee saved
the company through rescinding policies
Congressional Investigation, 3

c Number of Rescissions may be higher than previously

c WellPoint, UnitedHealth and Assurant Health Alone
accounted for at least 19,776 between 2003 and 2007
c These three companies saved more than $300 million as a
result of these rescissions during that time
c At a June 19, 2009 hearing, officers at each of the three
companies refused to promise the committee that they would
limit rescissions to cases where the insured had made a
fraudulent or material misrepresentation
Before PPACA: A ´Disparateµ
Regulatory Framework

c HIPAA already provided that ´[A] health insurer [providing

coverage] to an individual shall renew or continue in force
such coverage at the option of the individualµ
c Exception, however, if the insured committed fraud or an
intentional misrepresentation of material fact

c Majority of states, however, do not require a showing of

fraud or intent
Federal Government Response


c ¶¶A group health plan and a health insurance issuer offering group or
individual health insurance coverage shall not rescind such plan or
coverage with respect to an enrollee once the 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 O  makes an  

O as prohibited by the terms of the
plan or coverage. Such plan or coverage may not be cancelled except
with prior notice to the enrollee, and only as permitted under section
2702(c) or 2742(b).µ
´Interim Finalµ Rules
Departments of HHS, Treasury, & Labor
26 CFR 54.9815-2712T

c Issuers cannot rescind coverage unless an individual was involved in O  

made an  

c Defines rescission as a cancellation or discontinuation that has   


c Applies to individual and group plans, as well as grandfathered plans

c 30 days notice must be given beforehand

c Must be a written notice and given to all individual affected by the rescission

c Provides a ´federal floorµ that allows states to impose greater restrictions on

Pure Administrative Law Issues

c ´Interim Finalµ means Final, i.e. Enforceable.

c No notice and comment before the adoption of the regulations

c Exception under APA § 553 ´The Secretaries have determined
that it would be  

putting the provisions in these interim final regulations in
c ´Specific authority granted by section 9833 of the Code, section
734 of ERISA, and section 2792 of the PHS Actµ

Source: IRS Bulletin T.D. 9489

Comments on the Regulations

c Terms such as ´materialµ need a clearer definition

c More examples are necessary

c Potentially strict/impracticable reporting requirements for


c Potential inconsistency with COBRA reporting

Other Admin Issues

c Sen. Orin Hatch·s letter to Sec. Sebelius

c Constitutionality of the Act/ Authority of the Dept·s to

issue the regulations
Recommendations to the Board

c Focus efforts on state level

c Efforts at federal level may not have much traction
c States have started crafting more stringent requirements
c Advocacy at the state level has met some success
c States will be relied on heavily to enforce regulations

c Perform a more complete pre-issuance underwriting

c Create an application with specific questions about each individual
preexisting condition in laymen·s terms.
c Contact applicant for specific information when an response on the form
is unclear
c The easier the application is to understand and the more through the
underwriting, the more likely a court will find a misrepresentation or
omission to be fraudulent
Recommendations, 2
Limited Efforts at the Federal Level

c Most major health insurers have already complied to the

major provisions of the rescission regulations even before
the regulations· effective date
c Courts have sustained the enforceability of rules
promulgated without notice and comment

c Continued opposition has the potential for negative

c However opposition to PPACA ´public optionµ provision
Recommendations, 3
Efforts at the State Level

c States can and have crafted requirements that are more

difficult on insurers

c Advocacy and lobbying in state legislatures- focus on access

and costs

c Challenges to state regulations have had some success

c CA holding that the DOI lacked authority to implement
certain restrictions on insurers

c Barring the repeal of PPACA, compliance with the

prohibition on rescissions established by § 2712 will be
c Until 2014, a through pre-issuance underwriting system
should be in place to prevent fraudulent claims

c Lobbying on the state-level to keep state laws identical to §

2712 will keep the financial burden on insurers to a