Cost Caps on Medical Procedures Approved

Federal officials recently approved “reference pricing,” a new cost-control mechanism that allows insurers to put a dollar limit on the amount that health plans pay for some expensive medical procedures, such as knee and hip replacements. The decision affects most employer-based plans as well as plans purchased through the Affordable Care Act’s exchanges. Plans must use a “reasonable method” to ensure “adequate access to quality providers.” 

The following illustrates how reference pricing works:

Assume that a health plan sets a hard cap of $30,000 — known as the “reference price” — on what it will pay for hospital charges associated with a knee replacement surgery. The plan offers the insured a choice of hospitals within its provider network. If the insured chooses a hospital that charges $40,000 for the knee replacement, the insured could owe $10,000 to the hospital, in addition to the insured’s usual cost-sharing for the $30,000 covered by the plan. 

The extra $10,000 is treated as an out-of-network expense and does not count toward the plan’s annual limit on out-of-pocket costs. This is important because, under the Affordable Care Act, most plans have to pick up the entire cost of care after the patient reaches the annual out-of-pocket limit (currently $6,350 for single coverage and $12,700 for a family plan). Prior to the federal officials’ ruling, it was unclear whether reference pricing violated this provision.

CalPERS, the California agency that manages health and retirement benefits for public employees, began using reference pricing in 2011 with regard to knee and hip replacements by steering patients to hospitals that were approved for quality and charged $30,000 or less. CalPERS’ health benefits director said the program has been a success and that patients are able to choose from about fifty hospitals. 

However, reference pricing may be suitable only for a specific subset of medical care: frequently-performed procedures where the prices charged vary widely but the quality of results do not. This could include MRIs and other imaging tests, cataract surgeries, and colonoscopies. 

Lawsuits Over Health Exchange Premium Subsidies Challenge Heart of Reform Law

Royal Oakes was quoted in a Jan. 5th, 2014, Business Insurance article, Lawsuits Over Health Exchange Premium Subsidies Challenge Heart of Reform Law, by discussing a pair of lawsuits aimed at limiting availability of premium subsidies for health care coverage purchased through certain public exchanges.

In both cases, one filed in 2011 and another in May of 2013, the plaintiffs argue that the IRS decision to include the federal exchanges in the subsidy program improperly exposes employers in states that have declined to establish their own public exchanges to penalties from which they otherwise would have been shielded.

So far, Judges in both cases have denied the government's request for summary dismissal of the suits. Legal experts have warned that a ruling against the government would hinder the government’s ability to enforce minimum coverage requirements for employers and individuals in states that refuse to establish insurance exchanges and essentially, will cut-off access to subsidized coverage for lower-income, uninsured adults in those states.

When coupled with the enormous complication caused by the cancellation of millions of insurance policies, the subsidy issue has the potential to accomplish indirectly what the law's staunchest critics have hoped to accomplish in Congress, which is a repeal,” said Royal Oakes.


Californians Will Not Allow Health Insurers to Reinstate Coverage

By Peter Felsenfeld

More than a million California residents whose health plans were cancelled under the Affordable Care Act, a.k.a. Obamacare, will not be able to keep their existing coverage, despite President Obama’s directive that insurers keep such plans available for another year. The decision about whether to implement the president’s administrative “fix” rested with Covered California, the state’s new insurance exchange. The exchange’s board announced today that it would not allow insurers to revive plans that fell short of the ACA’s coverage mandates. Instead, California’s exchange will stay the course and continue to enroll residents into Obamacare.

Covered California made the best decision for consumers by supporting the success of our new health insurance marketplace,” said Patrick Johnston, President and CEO of the California Association of Health Plans. “Today’s decision comes with a renewed effort to ease the transition process for consumers in the form of a five-step action plan focusing on extending deadlines and increasing enrollment assistance.”

The decision will undoubtedly disappoint California residents who liked their previous coverage and had hoped they could keep their nonconforming plans for another year. The announcement also drew the consternation of state Insurance Commissioner Dave Jones, who previously expressed support for President Obama’s directive.

Covered California rejected what President Obama and I asked for – that individual policyholders be allowed to keep their existing health insurance through all of 2014. Covered California’s decision denies Californians the same opportunity health insurers are giving to its small business customers who are being allowed to renew current policies throughout 2014.”

The board’s decision, however, does not come as a surprise. Allowing nonconforming policies to continue for another year poses a risk to Obamacare’s financial viability as the move could prevent young, healthy individuals from participating in the new exchanges. A risk pool disproportionately made up of previously hard-to-insure participants could cause premiums to soar. We will watch the developments and keep you informed.

Originally posted to Barger & Wolen's Employment Law Observer

White House Delays Implementation of Employer Coverage Mandate of ACA

On Tuesday, July 2, 2013, the U.S. Department of Treasury announced that it will provide an additional year before the mandatory employer and insurer reporting requirements of the Affordable Care Act (ACA) begin.  

In a blog posting, Mark J. Mazur, Assistant Secretary for Tax Policy at the U.S. Department of Treasury, stated that the Administration has been engaging in a dialogue with businesses about the new reporting requirements under the ACA.  

According to Mr. Mazur, "[w]e have heard concerns about the complexity of the requirements and the need for more time to implement them effectively."  

The additional year will meet two goals, according to Mazur:

First, it will allow us to consider ways to simplify the new reporting requirements consistent with the law.  Second it will provide time to adapt health coverage and reporting systems while employers are moving toward making health coverage affordable and accessible for their employees."    


UnitedHealth to Exit California's Individual Health Market By Year End

UnitedHealth recently announced that it will be leaving California's individual health market at the end of this year.  

UnitedHealth's announcement comes on the heels of a similar announcement by Aetna last month. Both UnitedHealth and Aetna will remain in California's group market.  

UnitedHealth and Aetna combined account for approximately 7% of California's individual health market, while Blue Shield of California, Anthem Blue Cross and Kaiser Permenente, collectively, account for approximately 87% of California's individual market.

Legal Challenges to ACA Not Quite Finished

If you thought that the legal battle over the constitutionality of the Patient Protection and Affordable Care Act ("ACA") was put to rest in NFIB v. Sebelius, you may want to pay attention to Liberty University v. Geithner.  

Today, the United States Supreme Court granted certiorari and then returned the case to the U.S. Court of Appeals for the Fourth Circuit to consider new challenges to the ACA.

In its lawsuit, among other things, Liberty University contended that the ACA violates its First Amendment religious freedoms through the funding of abortions and other practices that it maintains are at odds with the core beliefs of the school. Liberty University also challenged the so-called "employer mandate" that requires all employers employing 50 or more people to provide health coverage to those employees, or face a penalty.

The Fourth Circuit had previously held that the mandates were "taxes," but dismissed the case for lack of jurisdiction on the grounds that the federal Anti-Injunction Act did not permit the federal courts to consider the legality of the tax until it went into effect. Because it dismissed the case on jurisdictional grounds, it did not rule on the merits of the religious freedom and employer mandate arguments. Liberty University sought review in the Supreme Court, which was denied.

In NFIB v. Sebelius, the Supreme Court unanimously held that the Anti-Injunction Act did not preclude the federal courts from deciding the constitutionality of a "tax" only after it goes into effect. Liberty University therefore filed a motion for rehearing, and the Supreme Court ordered the Department of Justice to file a response. In a somewhat surprising move, the DOJ did not oppose Liberty University's motion for pre-hearing, paving the way for today's ruling from the Supreme Court.

On remand, the Fourth Circuit will now have to consider Liberty University's arguments on their merits, and its rulings could conceivably make their way back to the Supreme Court.

More than 20 new insurance-related bills signed into law by Governor Brown

By Sam Sorich

September 30, 2012, was the deadline for Governor Jerry Brown to take action on bills passed by the California Legislature during the 2012 regular legislative session.

Here are summaries of noteworthy insurance-related bills that were signed into law. All of these new laws will go into effect on January 1, 2013.

Senate Bills

SB 863 increases workers’ compensation permanent disability benefits by an estimated $750 million per year, phased in over a two-year period. The new law changes several aspects of the workers’ compensation system. Among other things, SB 863 creates an independent medical review process for resolving medical care disputes, establishes an independent bill review process for resolving medical billing disagreements, adopts a statute of limitations for workers’ compensation liens, and restricts the reasons that can be used to avoid obtaining treatment within a medical provider network.

SB 1216 conforms California law to the revisions made to the NAIC Credit for Reinsurance Model Law (adopted in 2011). Among other things, SB 1216 establishes criteria that the insurance commissioner is to use in certifying reinsurers; reinsurance provided by certified reinsurers qualifies as an asset or credit against the liabilities of a ceding insurer.

SB 1234 and SB 923 create the California Secure Choice Retirement Savings Investment Board which is charged with conducting a market analysis to determine if the necessary conditions for implementation can be met and then report to the Legislature as to whether a statewide retirement savings plan for private employees, who do not participate in any other type of employer-sponsored retirement savings plan, should be created. The Board’s analysis would have to be paid for by funds made available through a non-profit or private entity, federal funding, or an annual Budget Act appropriation.

SB 1298 establishes conditions for the operation of autonomous vehicles on public roadways for testing purposes. The bill defines “autonomous vehicle” as a vehicle equipped with technology that has the capability to drive a vehicle without the active physical control or monitoring by a human operator.

SB 1448 conforms California law to the revision to the NAIC Insurance Holding Company System Regulatory Model Act (adopted in 2010). Among other things, SB 1448 requires the board of directors of an insurer, which is part of a holding company system, to file a statement affirming that the board is responsible for overseeing corporate governance and internal controls. In addition, SB 1448 authorizes the insurance commissioner to evaluate the enterprise risk related to an insurer that is part of a holding company.

SB 1449 permits the approval of life insurance and annuity products that include the waiver of premium during periods of disability and the waiver of surrender charges if the insured encounters specified medical conditions, disability, or unemployment.

SB 1513 expands the investment options available to the State Compensation Insurance Fund.

Assembly Bills

AB 53 requires each admitted insurer with written California premiums of $100 million or more to submit a report to the insurance commissioner on its minority, women, and disabled veteran-owned business procurement efforts. The first report is due July 1, 2013. An insurer is required to update its report biennially. AB 53 includes a January 1, 2019 sunset date.

AB 999 revises the standards used by the insurance commissioner to approve the rates for long-term care insurance. AB 999 prohibits an insurer from using asset investment yield changes to justify a rate increase for long-term care policies unless the insurer can demonstrate that its return on investments is lower than the maximum valuation interest rate for contract reserves for those policies; or the insurance commissioner determines that a change in interest rates is justified due to changes in laws or regulations that are retroactively applicable to long-term care insurance previously sold in California. AB 999 requires all of the experience on all similar long-term care policy forms issued by an insurer and its affiliates and retained within the affiliated group to be pooled together and used as the basis for determining whether a rate increase is reasonable.

AB 1631 removes the January 1, 2013, repeal date for the existing law which permits a person admitted to the bar of another state to represent a party in a California arbitration proceeding.

AB 1708 authorizes auto insurers to provide proof of insurance coverage in an electronic format that may be displayed on a mobile electronic device. Proof of insurance in this format is allowed to be presented to a peace officer.

AB 1747 requires every life insurance policy to include a provision for a grace period of not less than 60 days from the premium due date; the provision must state that the policy remains in force during the grace period. AB 1747 requires an insurer to provide an applicant for an individual life insurance policy an opportunity to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy for nonpayment of premium. AB 1747 provides that a notice of pending lapse or termination of a life insurance policy is not effective unless the notice is mailed by the insurer to the named policy owner, a designee for an individual life insurance policy, and a known assignee or other person having an interest in the individual life insurance policy, at least 30 days prior to the effective date of policy termination if termination is for nonpayment of premium.

AB 1875 limits the civil deposition of any person to one day of seven hours. The bill specifies exceptions to this limit.

AB 1888 allows a person who has a commercial driver’s license to attend a traffic violator school for a traffic offense while operating a passenger car, a light duty truck, or a motorcycle.  Attendance at the school prevents the offense from being counted as a point for determining whether the driver is presumed to be a negligent operator who is subject to license revocation. However, attendance at the school does not bar the disclosure of the offense to insurers for underwriting or rating purposes.

AB 2084 establishes new permitted types of blanket insurance policies and expands the list of eligible policyholders who can purchase blanket insurance.  

AB 2138 gives the insurance commissioner the authority to require every admitted disability insurer, and every other entity liable for any loss due to health insurance fraud, to pay an annual maximum fee of 20 cents for each insured under an individual or group insurance policy it issues in California. The fee is to be used to fund increased investigation and prosecution of fraudulent disability insurance claims. Under current law, the maximum fee is 10 cents. AB 2138 allows an insurer to recoup the fee through a surcharge on premiums or by including the fee in the insurer’s rates.

AB 2160 requires the California insurance commissioner to treat a domestic insurer’s investment in a company that has business operations in Iran as a non-admitted asset. We recently blogged on the passage of AB 2160 here.

AB 2219 removes the January 1, 2013, repeal date for the existing law which requires a contractor with a C-39 roofing classification to obtain and maintain workers’ compensation insurance even if he or she has no employees. AB 2219 also removes the January 1, 2013, repeal date for the existing law which requires an insurer that issues a workers’ compensation insurance policy to a roofing contractor, who holds a C-39 license, to perform an annual payroll audit for the contractor. AB 2219 adds the requirement that the insurer’s audit must include an in-person visit to the place of business of the roofing contractor to verify whether the number of employees reported by the contractor is accurate.     

AB 2298 prohibits an insurer that issues or renews a private passenger auto insurance policy to a peace officer or a firefighter from increasing the premium for the policy because the peace officer or firefighter was involved in an accident while operating his or her private passenger auto in the performance of his or her duty at the request or direction of his or her employer. AB 2298 provides that in the event of a loss or injury that occurs as a result of an accident during any time period when the private passenger auto is operated by the peace officer or firefighter and is used by him or her at the request or direction of the employer in the performance of the employee’s duty, the auto’s owner shall have no liability.

AB 2301 modifies the definition of “covered claims” in the Insurance Code article relating to the California Insurance Guarantee Association (CIGA) to make clear that a covered claim is one which is presented to the liquidator in the state of domicile of the insolvent insurer or to CIGA.  

AB 2303 is the Department of Insurance’s omnibus bill which addresses a variety of matters, including applications for non-resident surplus lines broker licenses, pre-licensing requirements for bail agents, the creation of a limited lines license for crop insurance adjusters, and changes to the conservation and liquidation process. AB 2303 abolishes the advisory committee on automobile insurance fraud within the Fraud Division of the Department of Insurance. AB 2303 also repeals the provision that excludes policies that have been effect less than 60 days from the statute which governs the cancellation of private passenger auto insurance policies.

AB 2354 revises the licensing requirements for travel insurance agents.

AB 2406 requires the Department of Insurance to publish on the Department’s website all requests by a person or group representing the interests of consumers for compensation relating to intervention in a proceeding on an insurer rate filing or participation in other proceedings. Findings on such requests also must be published on the website.

Originally posted to Barger & Wolen's Insurance Litigation & Regulatory Law Blog.

Update: California Health Insurance Initiative Will Be on the Ballot in November 2014

by Larry Golub

On June 28, we reported that a proposed initiative that would bring prior approval of rates for health insurance to California had failed to qualify for the November 2012 California ballot. 

An earlier blog addressed in more detail that the the initiative would have:

  1. given the California Insurance Commissioner the power to approve health insurance rates proposed after November 6, 2012;
  2. required health insurers’ rate applications to be accompanied by a sworn statement by the insurer’s chief executive officer declaring that the contents of the application were accurate and complied in all respects with California law; and
  3. required health insurers to pay refunds with interest if the Commissioner determined that the company’s rates were excessive.

While the initiative failed to qualify for the November 2012 ballot, we observed that the backers of the initiative were seeking to obtain the requisite number of valid signatures to place the initiative on the next general election ballot in November 2014.

According to the Secretary of State, on August 23, 2012, the initiative qualified for the general election to occur on November 4, 2014.

This will ensure plenty of time for both sides to present to the California electorate their arguments in favor of and against the as-of-yet un-numbered proposition.  We will continue to update developments on this ballot initiative.    

Supreme Court Upholds Affordable Care Act, But Just Barely

Barger & Wolen partner John LeBlanc and summer associate Natalie Ferrall wrote an article published in the Westlaw Journal – Insurance Coverage on Aug. 10, 2012, about the Supreme Court's closely watched ruling on healthcare reform and how the court found its controversial individual mandate to be constitutional.

In their article, LeBlanc and Ferrall note that the court focused on two key provisions of the Patient Protection and Affordable Care Act: the individual mandate, requiring most Americans to have insurance coverage; and the Medicaid expansion requirement which, had the court not struck it down, would have required states to meet certain federal requirements to receive funding. The article provided legal context and background on the Affordable Care Act and discussed how the court came to the conclusion that the law was “mostly constitutional.”

“In doing so, the court emphasized that its role was not to address the soundness of federal policy, but rather to interpret the law and enforce limits on federal power,” LeBlanc and Ferrall wrote.

Please click on the link to download the PDF: Supreme Court Upholds Affordable Care Act, But Just Barely.

Health Reform Bills Approved by California Assembly Health Committee

By John M. LeBlanc and Natalie J. Ferrall

The California Assembly Committee on Health recently heard and approved two high-profile health care reform bills with the stated purpose of bringing California into compliance with the federal Affordable Care Act (“ACA”). 

The first bill, Senate Bill 951 (Hernandez, D-West Covina), would require individual and small group health care service plans and insurance policies to cover essential health benefits beginning in 2014. Under the ACA, essential health benefits must include the following ten categories of items and services:

  • Ambulatory patient services
  • Emergency services
  • Hospitalization
  • Maternity and newborn care
  • Mental health and substance use disorder services, including behavioral health treatment
  • Prescription drugs
  • Rehabilitative and “habilitative” services and devices (to date, there is no guidance as to what the “habilitative” umbrella will include)
  • Laboratory services
  • Preventive and wellness services and chronic disease management
  • Pediatric services, including oral and vision care

SB 951 designates the Kaiser Small Group HMO as the benchmark standard for essential health benefits coverage in California.

The second piece of legislation, Senate Bill 961 (Hernandez, D-West Covina), prohibits health care service plans and insurers from denying coverage to individuals based on preexisting conditions. It requires guaranteed issue of individual health service plans and insurance policies. The bill only allows health plans and insurers to use age, geographic region, and family size in establishing individual coverage rates.

Supreme Court Rules Affordable Care Act is Constitutional

By John M. LeBlanc and Natalie J. Ferrall

In a 5-4 decision, the United States Supreme Court ruled that the Patient Protection and Affordable Care Act (“ACA”) is constitutional. The majority opinion, authored by Chief Justice Roberts, upheld the centerpiece of the ACA—the individual mandate—requiring citizens to obtain health insurance or pay a penalty to the IRS beginning in 2014. The Court construed the penalty as a tax on persons who choose not to purchase health insurance and thus within Congress’ taxing power. The Chief Justice, however, rejected the argument that the individual mandate was constitutional under the Commerce Clause. He stated that the Commerce Clause “authorizes Congress to regulate interstate commerce, not to order individuals to engage in it.” Justices Scalia, Kennedy, Thomas, and Alito filed a dissenting opinion in which they also found that the individual mandate could not be upheld under the Commerce Clause.

The Court further addressed the so-called Medicaid expansion provision, which required states to extend Medicaid coverage by 2014 to all individuals under the age of 65 with incomes below 133% of the federal poverty line; if a state fails to do so, the federal government could withdraw all of the state’s existing Medicaid funds. The Court held that it was unconstitutional under the Spending Clause for the federal government to coerce states into accepting changes to Medicaid, describing this financial threat as a “gun to the head”, leaving states with no meaningful choice but to accept the terms of the Medicaid expansion. The Court struck the provision, but left the remaining portions of the ACA intact.

Click here to read the full decision (pdf).

Signatures Filed for California Health Insurance Initiative

By Samuel Sorich

Supporters of a proposed California initiative that would give the Insurance Commissioner the power to approve health insurance rates have filed signatures to qualify the measure for a place on the November 6, 2012 ballot.

The initiative needs 504,760 valid signatures to qualify. County clerks now are counting the filed signatures.

Under the initiative, rate approval statutes similar to those enacted by Proposition 103 in 1988 for most property and casualty insurance would be made applicable to health insurance.

The initiative also would affect automobile and homeowners insurance. For health insurance, as well as automobile and homeowners insurance, the initiative would prohibit insurers from using the absence of prior insurance coverage or a person’s credit history as a rating factor or a criterion for determining insurance eligibility.

The initiative is summarized in this blog here.     

California Assembly Passes Bill Requiring Health Insurance Filing and Disclosures

By Samuel Sorich

On May 3, 2012, the California Assembly passed a bill that would require health insurers that are regulated by the Department of Insurance to submit information to the department when the insurer plans to terminate its contract with a provider group or hospital. The bill also would require insurers to provide insureds with additional disclosures. The 80-member Assembly passed Assembly Bill 2152 with a 46-25 vote.

AB 2152, which is sponsored by the Department of Insurance, has three major elements.

  1. The bill would require a health insurer to notify the Department of Insurance at least 75 days before the insurer terminates its contract with a provider group or hospital to provide services at alternative rates of payment. The department would have the authority to review and approve the written notice that the insurer proposes to send to the insureds affected by the termination. 
  2. AB 2152 would require a health insurer to include in its disclosure form a statement clearly describing the basic method of reimbursement made to its contracting providers of health care services, and whether financial bonuses or any other incentives are used. 
  3. AB 2152 would require health insurance policies to include additional notices and disclosures. 

The bill is now waiting to be assigned to a Senate committee. 

Emergency Regulation to Enforce Medical Loss Ratio in Patient Protection and Affordable Care Act of 2009 Made Permanent

On Thursday February 9, 2012, California Insurance Commissioner Dave Jones announced that he had obtained approval from the California Office of Administrative Law to make permanent the emergency regulation issued in 2011 allowing the Department of Insurance (the “Department”) to enforce the medical loss ratio guidelines in the Patient Protection and Affordable Care Act of 2009 (“PPACA”) (which we previously discussed here).

As of January 1, 2011, the PPACA required all health insurers in the individual market to maintain an 80% medical loss ratio.

The Department obtained approval to make permanent its amendment to 10 California Code of Regulations § 2222.12 to reflect this requirement. A copy of the text of the regulation can be viewed here.

This permanent regulation went into effect on February 8, 2012.

The regulation adopted by the Department contains more stringent requirements than PPACA, as it allows the Department to evaluate whether the 80% medical loss ratio will be met at the time a rate is filed with the Department, rather than waiting until the end of the year to determine if this ratio was satisfied.

Signatures May Be Collected for California Health Insurance Initiative

By Sam Sorich and Larry Golub

On January 4, 2012, the California Secretary of State announced that signatures may be collected for a proposed initiative which would bring prior approval of rates for health insurance to California, and also amend the existing regulation of automobile and homeowners insurance.

Jamie Court, the President of Consumer Watchdog, is the proponent of the measure, termed the Insurance Rate Public Justification and Accountability Act. There were actually two virtually identical versions of the initiative submitted to (and allowed to proceed to collect signatures by) the Secretary of State, file numbers 11-0070 and 11-0072, but it is expected that Consumer Watchdog will pursue signature gathering for only the second version of the initiative.  (In fact, its website only links to the second version of the initiative.)

In order to qualify for the November 6, 2012, ballot, backers of an initiative must file 504,760 valid signatures in support of the measure. The deadline for submitting signatures for the initiative is June 4, 2012.

Among other things, the initiative would give the California Insurance Commissioner the power to approve health insurance rates proposed after November 6, 2012. The rate approval statutes enacted by Proposition 103 in 1988 for most property and casualty insurance would be made applicable to health insurance. A health insurer’s rate application would have to be accompanied by a sworn statement by insurer’s chief executive officer declaring that the contents of the application are accurate and comply in all respects with California law.

The initiative would require a health insurance company to pay refunds with interest if the insurance commissioner determines that the company’s rates are excessive; this requirement would apply to rates in effect on November 6, 2012 and rates in effect after that date.

Large group health insurance policies would be excluded from the scope of the initiative unless any one of four specified conditions exists; two of the conditions relate to the level of the proposed rate increase.

For health insurance, as well as automobile and homeowners insurance, the initiative would prohibit insurers from using the absence of prior insurance coverage or a person’s credit history as a rating factor or a criterion for determining insurance eligibility.

The initiative specifies that it may be amended only (1) by the Legislature if the legislation furthers the initiative’s purposes and is passed by a two-thirds vote in both the Assembly and the Senate or (2) by another voter ballot initiative.

In its summary of the fiscal effects of the initiative if approved by the voters, the Legislative Analyst’s Office estimates that the measure would increase “state administrative costs in the low tens of millions of dollars annually to regulate health insurance rates, funded with revenues collected from filing fees paid by health insurance companies.”

Originally published on Barger & Wolen's Insurance Litigation & Regulatory Law Blog.

Health Insurance Rescission Case Upheld by California Appellate Court

On Wednesday, December 28, 2011, the First District Court of Appeal affirmed the trial court's granting of summary judgment in Hagan v. California Physicians' Service dba Blue Shield of California, et al, Case No. A130809 (unpublished), a health insurance rescission matter.

The matter was handled by Barger & Wolen Senior Partners John M. LeBlanc and Sandra Weishart, Senior Associates Ophir Johna and Vivian Orlando, and Greg Pimstone of Manatt, Phelps and Phillips


In 2005, the Hagan family applied for health coverage with Blue Shield of California Life & Health Insurance Company. Beginning in 2001, Lori Hagan -- in her mid-thirties -- began to experience heavy menstrual cramping and bleeding. Over the next four years, she saw at least four physicians who diagnosed her with an enlarged uterus, fibroid tumors, menorrhagia and dysmenorrhea. She underwent exploratory laparoscopic surgery under general anesthesia, which confirmed the fibroid tumors and also revealed uterine adhesions and endometrial tissue. Ms. Hagan also underwent hormone therapy to treat the bleeding and severe pain. She was advised on multiple occasions that she needed to consider a hysterectomy or uterine ablation as treatment options.  

In applying for insurance coverage, however, the Hagans failed to disclose any of this information, despite application questions that asked the applicants to disclose any treatment, advice or symptoms concerning the female reproductive system, such as abnormal bleeding or fibroids, questions that inquired about any visits to the hospital, outpatient center, surgeries, and questions that requested disclosure of any other symptoms, conditions or recommended treatment not mentioned elsewhere on the application. 

In response to the application question that asked the applicants to disclose their last physician visit, Ms. Hagan failed to disclose that she had seen her physician just three weeks earlier, where he had again diagnosed her with painful symptoms related to her fibroids and where they again discussed hysterectomy as an option. 

Blue Shield Life rescinded the policy after it discovered these misrepresentations and omissions.

Though not required, Blue Shield Life paid all of the medical expenses incurred by the Hagans through the date of the rescission. The Hagans obtained replacement coverage within a few days, and Ms. Hagan was not deprived of any medical treatment as a result of the rescission.

Unfortunately, Ms. Hagan later passed away from uterine cancer. John Hagan sued Blue Shield Life alleging breach of contract, breach of the covenant of good faith and fair dealing and punitive damages. 

The Court's Decision

In upholding the trial court's decision granting summary judgment, the Court of Appeal first reviewed general principles governing an insurer's right to rescind. It rejected Hagan's argument that the language of Blue Shield Life's policy required it to prove that the Hagans' misrepresentations were intentional. 

The Court then reviewed the undisputed evidence in detail, in light of the specific questions on the application, as well as the excuses proffered by Hagan for why Ms. Hagan failed to disclose her long medical history, and concluded that the trial court properly granted summary judgment in Blue Shield Life's favor, in that there were clear misrepresentations and omissions of material facts on the application. 

The Court also found that Blue Shield Life did not engage in postclaims underwriting as defined in California Insurance Code section 10384

The Court held that the case was governed by the legal standards concerning underwriting and rescission set forth in Nieto v. Blue Shield of California Life & Health Insurance Company, 181 Cal. App. 4th 60 (2010) (click here for list of prior posts on Nieto). 

According to the Court, Blue Shield Life can only be guilty of postclaims underwriting if the "written information submitted on or with" the Hagans' application gave rise to "reasonable questions" that Blue Shield Life failed to resolve prior to issuing the policy. 

Against the background of California law that entitles Blue Shield Life to rely on the accuracy of the information the Hagans provided on their application (i.e., Blue Shield Life was not required to assume any of the Hagans' statements were false), Blue Shield Life properly completed its medical underwriting, and therefore did not violate Insurance Code section 10384.

Health Care Rate Regulation Bill Stalls In State Senate

Controversial California Assembly Bill 52 (“AB 52”), which, among other things, granted the California Department of Insurance (“CDI”) and the California Department of Managed Health (“DMHC”) the authority to reject or modify any proposed rate or rate change by a health insurer or health care service plan, has stalled out in the California Senate. Under current law, neither the CDI nor the DMHC has the authority to reject or modify proposed rates or rate changes.

While AB 52 had previously cleared the California Assembly in June, on Wednesday August 31, 2011, AB 52’s author – Assemblyman Mike Feuer – halted efforts to try to get AB 52 passed by the Senate this year, indicating that there were insufficient votes to win approval from the Senate before the deadline next week for approving bills. Assemblyman Feuer stated that he would re-visit passage of AB 52 next year when the Senate returns to session.

Draft Guidance 2470, Concerning Review of Complaints Concerning Health Insurance Policy Rescission or Cancellation, Released by California Department of Insurance

On May 26, 2011, the California Department of Insurance (“CDI”) released a second draft of its Guidance 2470, which is designed to implement various provisions of AB 2470. AB 2470, enacted in 2010, legislated certain aspects of rescission, non-renewal, and cancellation of health insurance policies and health care service plans in California. 

The CDI’s draft Guidance 2470 purports to set forth requirements concerning the CDI’s review of complaints related to the cancellation, rescission, or non-renewal of a health insurance policy. T

he draft Guidance includes, among other items, provisions concerning the notice health insurers are required to provide to policyholders about the CDI’s review process and information concerning the mechanisms for the review process. 

The draft Guidance also purports to enumerate the factual showing required of health insurers in order to demonstrate that a cancellation or rescission is lawful.

Finally, the draft Guidance requires health insurers to continue to provide coverage to the policyholder until such time as the CDI makes a decision on the lawfulness of a cancellation, rescission, or non-renewal following the CDI’s receipt of a valid complaint from the policyholder.

As the public comment period on draft Guidance 2470 closed on June 6, 2011, it is anticipated that the CDI will issue its final version of Guidance 2470 in the near future.

Rate Regulation Bill Applicable to Health Care Service Plans and Health Insurers Passed by California Assembly

On June 1, 2011, the California State Assembly passed AB 52, which was initially introduced in December 2010.

Beginning January 1, 2012, the bill would require health care service plans and health insurers in California to obtain prior approval from the Department of Managed Health Care or the Department of Insurance for all proposed rate increases.

Under the proposed legislation, the Department of Managed Health Care and the Department of Insurance would be prohibited from approving any rate or rate change that is excessive, inadequate, or unfairly discriminatory. 

In addition, the bill calls for an examination by the Department of Managed Health Care and the Department of Insurance of all rate increases that become effective between January 1, 2011 and December 31, 2011, to ensure that those rates are not excessive, inadequate, or unfairly discriminatory, and to order the refund of any payments made pursuant to any such rate.

The bill must still be approved by the California Senate and signed into law by the Governor in order to become legally operative.

California Department of Managed Health Care Releases Draft Guidance Concerning SB 1163

On April 22, 2011, the California Department of Managed Health Care (“DMHC”) released draft Letter No. 8-K, which is designed to provide health care service plans with guidance concerning SB 1163. This follows the California Department of Insurance’s (“CDI”) release on April 5, 2011, of Guidance 1163:2 concerning SB 1163.

SB 1163, effective January 1, 2011, amended the California Health and Safety Code and the California Insurance Code to provide for review of rate increases by health care service plans and health insurers for purposes of determining whether the rate increase is unreasonable. 

SB 1163 was adopted in response to a provision in the federal Patient Protection and Affordable Care Act (“PPACA”) that requires health care service plans and health insurers’ rate increases to be reviewed by the federal government to determine whether the rate increase is unreasonable, unless a state has established its own rate review process. The key implementing provisions of SB 1163 are located at California Health and Safety Code Sections 1385.01 to 1385.13 and California Insurance Code Sections 10181 to 10181.13

California Health and Safety Code Section 1385.08(a) states that the DMHC, “may issue guidance to health care service plans regarding compliance with this article.” This tracks the language found in California Insurance Code Section 10181.9(a), which states that the CDI, “may issue guidance to health insurers regarding compliance with this article.” 

Both Health and Safety Code Section 1385.08(a) and Insurance Code Section 10181.9(a) exempt the DMHC and the CDI from following the formal procedures employed for the adoption of regulations in California when issuing guidance concerning compliance with Health and Safety Code Sections 1385.01 to 1385.13 and Insurance Code Sections 10181 to 10181.13. 

Guidance 1163:2 issued by the CDI purports to define the factors the CDI will consider in determining whether a rate increase is “unreasonable” in the individual and small group markets, in addition to attempting to implement certain procedural aspects of SB 1163 for these markets. 

A comparison of the DMHC’s draft Letter No. 8-K with the CDI’s Guidance 1163:2 reveals that the DMHC has preliminarily adopted many of the provisions contained in the CDI’s Guidance, without modification, and may consider some of the other factors contained in the CDI's Guidance when making reasonableness determinations for these markets.

Concerns Growing Over Additional Health Care Mandates

The California Legislature is looking to impose additional health coverage mandates on Californians, forcing insurers to cover such things as acupuncture and tobacco cessation drugs. Insurers are concerned over the costs of these mandates, especially in light of federal reforms.  

A recent article, Health insurers to fight Calif. coverage mandates, by , discusses why these new mandates might do more harm than good:

The state Legislature is considering a bumper crop of 15 bills that would increase what health insurers have to cover - everything from acupuncture to maternity care to autism treatments.

California has a long history of mandating or trying to impose coverage requirements on health insurers. But what's different this year is that insurers are gearing up for a fight based on the year-old federal health care law, which will establish a minimum level of benefits that insurers would have to provide for their products to be sold in the new marketplace.

If California forces its health insurers to cover more than the federal government requires, the state will be on the hook for the extra costs in subsidized policies. And with a budget deficit of $26 billion, that's probably not something the state can afford.

Barger & Wolen will continue to track these bills as they move their way through the legislature. For a list of health care bills introduced in California, please see the California Association of Health Plan's Legislative Update.

Commissioner Jones Responds to Federal Government Announcement of New State Grants for Health Insurance Rate Review

by Marina Karvelas

In a press release issued today, California Insurance Commissioner Jones applauded the U.S. Department of Health and Human Services after it announced the availability of roughly $200 million in new health insurance rate review grants

Specific funding is available to support states in their efforts to stop excessive premium increases from being implemented. However, California would not be eligible for this portion of the grant because California law currently does not empower the Commissioner to reject excessive health insurance premium increases.

As discussed earlier in this blog, Commissioner Jones recently issued Guidance 1163:2 which allows the Commissioner to determine, based upon a list of factors, including a federal medical loss ratio, whether a health insurance premium rate increase is “unreasonable”.

The Commissioner however has no power to reject an "unreasonable" rate increase.  

Commissioner Jones is actively supporting legislation that would give him such power and the new federal grants gives him yet another platform to do so.

While California is eligible for some of the grant funding through this program, we would be eligible for more federal funding if California law provided the Insurance Commissioner with the authority to reject excessive premium increases. This again brings to light the need to change the law and provide the Insurance Commissioner with that authority. I am working with Assembly Member Mike Feuer to pass AB 52, which would give me the authority to reject excessive health insurance premium increases." 

We will follow AB 52 and the Commissioner's efforts to reform health insurance rate regulation.

Concerned About Excessive Rates, California Insurance Commissioner Requests Rate Filings from Medical Malpractice Carriers

On February 17, 2011, California Insurance Commissioner David Jones announced in a press release that the California Department of Insurance had contacted several unnamed medical malpractice insurers to raise concerns about excessive rates and request that these insurers submit rate filings with the CDI to reduce their rates. 

California Insurance Code sections 1861.01 and 1861.05, enacted in 1988 as part of Proposition 103, specifically grants the CDI the authority to regulate the rates of certain property and casualty lines of insurance, including medical malpractice insurance. It requires these insurers to apply to the CDI for prior approval of rates and prohibits the use of excessive rates. 

The CDI noted in its press release that it has employed these provisions in the past to regulate the rates of medical malpractice insurers, including reducing rate increases. 

In contrast, the CDI specifically confirmed that it does not have the authority to reject rates from health insurers that it deems excessive or unreasonable, as health insurance is not subject to California Insurance Code sections 1861.01 and 1861.05.

In his announcement, Commissioner Jones noted that the basis for the CDI’s determination that medical malpractice rates might be excessive is the low loss ratios that these medical malpractice insurers experienced. 

In the CDI’s view, low loss ratios are an indication that premiums might be excessive and in violation of the law. 

The CDI plans to require a rate filing from those medical malpractice insurers it believes have excessive rates and review the rate filings to ensure that the rates comply with the aforementioned provisions of the California Insurance Code as well as all other applicable provisions of the law.

Guidelines for Health Insurers Requesting Rate Increase Issued by California Insurance Commissioner (SB 1163)

by Marina Karvelas

On February 4, 2011, California Insurance Commissioner Dave Jones released draft guidelines for implementing SB 1163 (“Guidance 1163:2”).

SB 1163, signed by former Governor Schwarzenegger on September 30, 2010, responds to the federal Patient Protection and Affordable Care Act (“PPACA”), which requires the United States Secretary of Health and Human Services to establish a process for the annual review of “unreasonable” increases in premiums for health insurance coverage.

Under the federal act, health insurers must submit to the secretary, and the relevant state, a justification for an “unreasonable” premium increase prior to implementation of the increase.

SB 1163, effective January 1, 2011, requires health insurers to file with the California Department of Managed Health Care or the California Department of Insurance detailed rate information regarding proposed premium increases and requires that the rate information be certified by an independent actuary. 

The bill authorizes the departments to review these filings and issue guidance regarding compliance. It also requires the departments to consult with each other regarding specified actions as well as post certain findings on their Internet Web sites.

In his draft guidelines (“Guidance 1163:2”), Commissioner Jones lists several factors that will be used by the Department to determine if a rate is “unreasonable.”

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Patient Protection and Affordable Care Act of 2009 Declared Unconstitutional and Void

On January 31, 2011, United States District Judge Roger Vinson, sitting in the Northern District of Florida, ruled that the Minimum Essential Coverage Provision in the Patient Protection and Affordable Care Act of 2009 (“PPACA”), recently enacted by Congress, violated the United States Constitution

The Minimum Essential Coverage Provision – referred to as the “individual mandate” -- requires that most United States citizens purchase health insurance by 2014 or face a penalty included in the individual’s tax return.

Because he found that this provision was not severable from the remainder of the PPACA, Judge Vinson declared the entire PPACA void. 

The lawsuit challenging the constitutionality of the PPACA was filed by the Attorneys General and/or the Governors of Alabama, Alaska, Arizona, Colorado, Florida, Georgia, Idaho, Indian, Iowa, Kansas, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, North Dakota, Ohio, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming, along with two private citizens and the National Federal of Independent Business (collectively the “Plaintiffs”). 

The Plaintiffs contended, among other items, that the individual mandate exceeded the power of Congress under both the Commerce Clause and Necessary and Proper Clause of the United States Constitution. 

Judge Vinson agreed, explaining in a 78-page opinion, that the provision attempted to impermissibly regulate “economic inactivity,” as the Commerce Clause only permits Congress to regulate “activity.” A copy of Judge Vinson’s opinion can be found here.

It is widely anticipated that the ultimate resolution of the constitutionality of the PPACA will be made by the United States Supreme Court.

Emergency Regulations to Enforce PPACA Medical Loss Ratio Guidelines Granted to California Department of Insurance

On Monday January 24, 2011, newly elected California Insurance Commissioner Dave Jones announced in a press release that he had obtained approval from the California Office of Administrative Law to issue an emergency regulation allowing the Department of Insurance (the “Department”) to enforce the medical loss ratio guidelines in the Patient Protection and Affordable Care Act of 2009 (“PPACA”). 

As of January 1, 2011, the PPACA requires all health insurers in the individual market to maintain an 80% medical loss ratio. The Department obtained approval to amend 10 California Code of Regulations § 2222.12 to mirror this requirement. A copy of the amended text can be viewed here

The emergency regulation went into effect on January 24, 2011, and expires on July 26, 2011. It requires California health insurers to demonstrate compliance with the 80% medical loss ratio at the time of the Department’s rate review.

Court Invalidates New Regulations Issued by Department of Insurance Concerning Underwriting and Rescission of Health Insurance Policies

On December 30, 2010, Sacramento County Superior Court Judge Michael Kenny invalidated several recently issued regulations by the California Department of Insurance (“CDI”) in response to a challenge filed by the Association of California Life & Health Insurance Companies (“ACLHIC”). 

ACLHIC was represented by Gregory Pimstone of Manatt, Phelps and Phillips and by Barger & Wolen partner John M. LeBlanc

The regulations were issued by the CDI on August 5, 2010, and attempted to impose a series of underwriting requirements on health insurers and restrict health insurers’ ability to rescind health insurance policies in California. A copy of the Court’s ruling can be found here.

ACLHIC challenged the regulations on several grounds, claiming that the CDI abused its discretion in adopting the regulations.


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Provision in the Patient Protection and Affordable Care Act of 2009 Requiring Individuals to Purchase Health Insurance Declared Unconstitutional

On December 13, 2010, United States District Judge Henry Hudson, sitting in the Eastern District of Virginia, ruled that the Minimum Essential Coverage Provision in the Patient Protection and Affordable Care Act of 2009 (“PPACA”) recently enacted by Congress violated the United States Constitution. The Minimum Essential Coverage Provision requires that most United States citizens purchase health insurance by 2014 or face a penalty included in the individual’s tax return. 

The lawsuit challenging the constitutionality of the Minimum Essential Coverage Provision in the PPACA was filed by the Commonwealth of Virginia. The state contended, among other items, that the Minimum Essential Coverage Provision exceeded the power of Congress under both the Commerce Clause and General Welfare Clause of the United States Constitution. Judge Hudson agreed, explaining in a 42-page opinion, that the provision “exceeds the constitutional boundaries of congressional power.”

Reports indicate that President Obama’s administration intends to appeal the decision. It is widely anticipated that the ultimate resolution of the constitutionality of the Minimum Essential Coverage Provision will be made by the United States Supreme Court.

Insurer Has No Duty to Disclose Means of Obtaining Lower Premiums

In Levine v. Blue Shield of California, the California Court of Appeal for the Fourth Appellate District, Division One, unanimously held that a health insurer has no duty to advise an applicant concerning how coverage could be structured to obtain lower monthly insurance premiums. 

The Levines filed the action, both individually and on behalf of a putative class, alleging causes of action for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment and unfair competition under Business and Professions Code section 17200

The appellate court affirmed the trial court's order sustaining Blue Shield's demurrer to the entire complaint, holding that Blue Shield had no duty to disclose the information that the Levines alleged was not provided during the application process.

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Liability Insurer Does Not Waive Right to Raise Misrepresentations in Application for Failing to Follow Internal Underwriting Guidelines

While this blog is dedicated to Life, Health and Disability Insurance, including ERISA matters, a recent Court of Appeal liability insurance decision concerning waiver, estoppel and Health & Safety Code § 1389.3 Colony Insurance Co. v. Crusader Insurance Co.should apply with equal force to life, health and disability insurers.

Colony Insurance Company sought a declaration that Crusader Insurance Company improperly refused to defend a tenant lawsuit and share the costs incurred in defending the tenant litigation. Among the many issues argued was Colony’s contention that Crusader engaged in post-claims underwriting in violation of Health & Safety Code § 1389.3, relying on Hailey v. California Physicians’ Service, a case tried and won by Barger & Wolen partner John LeBlanc, as discussed here.

Mr. LeBlanc has taken the time to analyze the issue in Colony.

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14th Annual Insurance Forum in Chicago Sponsored by Barger & Wolen

Barger & Wolen is proud to join JVP Partners in sponsoring the 14th Annual Insurance Forum on November 9, 2010 in Chicago. This complimentary event is open to all.

14th Annual Insurance Forum
Tuesday, November 9, 2010
7:30 a.m. - 5:30 p.m
The Union League Club
65 West Jackson
Chicago, IL  60604

What is the Insurance Forum? The Forum is an event presented by the Insurance Forum Committee, chaired by Kenneth M. Weine. This is an executive-level program designed for insurance and risk management professionals, accountants, attorneys, corporate officers, financial examiners and regulators.

Can I Earn Continuing Education Credit? Continuing Education credit is available for attorneys, AIRs, CPAs, CFEs, CIRs and other insurance designations. (Certain restrictions apply, so please verify that your designation is approved in the state(s) you require.)

To register for this complimentary event, click here

For more information, click here

Panels & Speakers (order subject to change)

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Patient Protection and Affordable Care Act of 2009 Now in Effect

By Larry M. Golub and Misty A. Murray

On March 23, 2010, President Obama signed the Patient Protection and Affordable Health Care Act of 2009 (“PPACA”) into law. (After the amendments made March 30, 2010, the law is referred to as The Affordable Care Act.) 

While Republicans in Congress vow to repeal such enactment, key aspects of the PPACA went into effect on September 23, 2010, which marks the six-month anniversary of the legislation. 

Although the following list is not exhaustive, here are some of the more notable changes in the health care reform law (effective September 23, 2010) that will apply to individual and group health plans:

Coverage Changes

No Lifetime or Annual Limits on Essential Benefits:

Health plans may not contain lifetime limits on the amount of benefits that will be provided for essential benefits. No regulations have yet been issued regarding the definition of “essential benefits, which in general include, but are not limited to, ambulatory patient services, emergency services, hospitalization, maternity and newborn care, prescription drugs, laboratory services, preventive and wellness services, and chronic disease management.  As for annual limits, for plan years beginning before January 1, 2014, the Department of Health and Human Services’ (“HHS”) interim regulations adopt a three-year phase-in approach of removing annual limits on essential health benefits. For more information, click here.

Anti-Rescission Rules:

Health plans may not rescind, i.e., retroactively cancel coverage, except in cases of fraud or intentional misrepresentations of material fact. These rules do not apply to prospective cancellations or any cancellation due to failure to timely pay premiums.

Mandatory Preventative Health Care Services:

Health plans must provide benefits without cost sharing (i.e., no co-payments, deductibles or co-insurance) for certain preventative services, including, but not limited to, immunizations recommended by the CDC, as well as preventative care and screening for infants, children and adolescents and for women as recommended by the Health Resources and Services Administration. Grandfathered health plans are exempt. (A grandfathered health plan is a group health plan that was created – or an individual health insurance policy that was purchased – on or before March 23, 2010, and a health plan must disclose in its plan materials whether it considers itself to be a grandfathered plan.) 

Extension of Adult Dependents Coverage:

For health plans that elect to provide dependent coverage, such coverage must be extended to adult children up to age 26.

No Pre-existing Condition Exclusions for Children:

Health plans may not impose any preexisting condition exclusions for children 19 and under. (Grandfathered plans are exempt.).

Patient Protection Changes

Right to Choose Primary Care Provider (“PCP”):

For health plans that require designation of a PCP, the patient must be allowed to designate any participating PCP accepting new patients. For children, any participating physician specializing in pediatrics can be designated as the child’s PCP and, for women, any participating OB-GYN can be designated as a PCP.

Coverage for Emergency Services:

For health plans that provide coverage for emergency services, such plans must do so without requiring prior authorization and regardless of whether the provider of emergency services is a participating provider. Emergency services provided by a non-participating provider must also be provided at the same level of cost-sharing as would apply to a participating provider.

Appeals Process:

Group plans must provide for an internal appeals process that complies with the U.S. Department of Labor regulations and individual plans must provide an internal appeals process that comports with the standards established by the Secretary of Health and Human Services. Both group and individual plans must also provide for an external appeals process that complies with applicable law or at a minimum with the NAIC Uniform External Review Model Act.

Additional health care reform changes will continue to take effect in 2010 and as late as 2018. More information about the PPACA can be found on the National Association of Insurance Commissioners (NAIC) website here.

For additional information on ERISA plans and the PPACA, the U.S. Department of Labor has posted information on its website here.

For additional information on the PPACA and individual policies and nonfederal governmental plans, the HHS has posted information on its websites here and here.

Blue Shield Wins Summary Judgment in Rescission Case

by John M. LeBlanc and Ophir Johna

On September 20, 2010, the Lake County Superior Court granted summary judgment in favor of Barger & Wolen client Blue Shield of California Life & Health Insurance Company in the health insurance rescission action titled John M. Hagan v. California Physicians’ Service, et al. 

Blue Shield Life was represented by Barger & Wolen partners John M. LeBlanc and Sandra I. Weishart and senior associate Ophir Johna, and by Gregory N. Pimstone from Manatt, Phelps & Phillips, LLP.

In 2006, Blue Shield Life rescinded a health insurance policy issued to the Hagan family after discovering that they misrepresented and omitted Ms. Hagan’s ongoing, serious medical problems and treatment in their insurance application. Had it known about Ms. Hagan’s true medical history, Blue Shield Life would not have issued the policy. 

The Hagans asserted several claims against Blue Shield Life, including breach of contract and bad faith. They contended that the rescission was improper and that it amounted to illegal “post-claims underwriting.”

On Monday, the court rejected all of the Hagans’ arguments, granting summary judgment as to the entire action and thereby confirming that Blue Shield Life was legally justified in rescinding the Hagans’ policy. 

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Court Refuses Requests to Depublish Decision Affirming Rescission of Health Insurance Policy

On April 28, 2010, the California Supreme Court declined to review the Second District Court of Appeal’s decision in Nieto v. Blue Shield of California Life & Health Insurance Company, 181 Cal. App. 4th 60 (2010) (previously discussed here). The Supreme Court also declined to depublish the Nieto decision, despite numerous requests from consumer groups and a specific request from the Los Angeles City Attorney’s office. 

The Supreme Court’s decision confirms the Nieto court’s holding that the underwriting standards addressed by the Second District in Hailey v. California Physicians’ Service, 158 Cal. App. 4th 452 (2007), have no application to health insurers in California. It also confirms the holding in Nieto that advising applicants in the application, and in the policy, that an insurance policy is issued in reliance on the application statements will satisfy the requirements of the California Insurance Code attachment statutes to “endorse” the application on the policy. 

Finally, the Nieto decision is also being widely reviewed for its holding concerning when successive motions for summary judgment can be filed.

Further discussions on the Hailey and Nieto decisions can be found here:

Court Finds Triable Issue of Fact as to Rescission of Health Insurance, but Upholds Dismissal of Bad Faith and Punitive Damage Claims

Following the Hailey and Nieto decisions, issues exist whether a Health Care Service Plan completed sufficient medical underwriting prior to rescission

In Nazaretyan v. California Physicians’ Service, the California Court of Appeal reversed the trial court’s grant of summary judgment in favor of California Physicians’ Service dba Blue Shield of California (“Blue Shield”), a health care service plan, following its rescission of Gevork Nazaretyan and Narine Ghazaryan’s (the “Plaintiffs”) health care coverage. In a fact-driven decision, the Court of Appeal held that Blue Shield failed to establish, as matter of law, that its investigation prior to issuing Plaintiffs’ coverage was sufficient to demonstrate that it completed medical underwriting, as required under Health & Safety Code § 1389.3, to rescind for non-willful, material misrepresentations in the application for coverage.

The Court of Appeal also concluded that, as a matter of law, it could not hold that the Plaintiffs, who are husband and wife, willfully misrepresented material information in their application to Blue Shield. However, the Court of Appeal affirmed summary adjudication in Blue Shield’s favor on the Plaintiffs’ bad faith and punitive damage claims.

In August 2004, the Plaintiffs applied for health care coverage with Blue Shield with the assistance of their long-time insurance broker Ahman Yusop. On September 10, 2004, Blue Shield sent Yusop a form requesting information that was missing from the initial application. On September 21, 2004, the missing-information form was returned to Blue Shield with the questions answered, and on October 12, 2004, the Plaintiffs resubmitted their application to Blue Shield. Based on the information in the applications, Blue Shield approved coverage at its most favorable rate on November 1, 2004.

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AB 2578: Proposition 103 Coming to Managed Health Care?

by Richard De La Mora

Having unsuccessfully urged Congress to impose a national freeze on health insurance rates, Harvey Rosenfield has refocused his efforts on the California legislature and AB 2578.

Who is Harvey Rosenfield? He is, in his own words, the “author of California’s landmark property-casualty insurance rate regulation Proposition 103 – recognized as the most successful rate regulation in the country.” In fact, AB 2578, which cleared Assembly Health Committee earlier this week, includes the following provisions modeled closely on Proposition 103:

  • A prohibition on the use or approval of rates that are “excessive, inadequate, or unfairly discriminatory”;
  • A right for consumer advocates to request a hearing on a rate application, and a requirement that a hearing be granted whenever the rate increase sought exceeds 7%.

Finally, Mr. Rosenfield has made sure that he and his friends in the consumer advocacy industry are taken care of by advocating a provision requiring health plans to pay the consumer advocacy fees associated with fighting the health plan’s rate application.    

We have seen this played out before, as our firm has represented property-casualty insurers in administrative and judicial matters involving insurance rates regulated under Proposition 103 since 1989.

While property-casualty insurers have had plenty of time to adjust to the dictates of rate regulation, health plans will face a steep learning curve if AB 2578 becomes law. 

We are hopeful that this legislation will not become law. Even if it does, AB 2578 will likely face legal challenges and hurdles as did Proposition 103.

From our experience, we learned some of those challenges will be more successful than others. Nevertheless, if rate regulation comes to pass, a company’s goals can still be achieved provided that it has a complete understanding of the proposed regulatory system, plans ahead, has input into the development of regulations, and prepares itself for life after the system is implemented.

Barger & Wolen will continue to keep our clients and friends apprised on new issues pertaining to AB 2578 via the firm’s Insurance Litigation & Regulatory Law Blog and the Life, Health & Disability Law Blog. If you would like to be notified about upcoming events and seminars pertaining to AB 2578 and other issues, please subscribe to our blog via the RSS feed or add your e-mail in the left column.

Originally posted on Barger & Wolen's Insurance Litigation & Regulatory Law Blog.

Federal Mental Health Parity Interim Rules Published

Two weeks ago, federal agencies published the interim final rules amending the mental health parity provisions, which appear in the Federal Register at Volume 75, Number 21, page 5409 (the “Rules”). The Rules are intended to implement the Wellstone-Domenici Mental Health Parity and Addiction Equity Act of 2008 (“MHPAEA”).  A brief summary of some highlights of the Rules follows.

Among other things, the Rules prohibit large group health plans (or group insurers) from imposing a separate deductible for mental health or substance abuse disorder benefits. In other words, a group health plan cannot require a subscriber to meet one deductible for mental health/substance abuse disorder benefits and another deductible for medical/surgical benefits. Rather, a single deductible must be applied for all benefits provided by the group health plan for each coverage unit (i.e., for individual plan deductibles as well as family plan deductibles). 

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California Court of Appeal Upholds Rescission of Health Insurance Policy

Concludes that Health Insurer Does Not Have to Physically Attach the Application to the Policy to Rely on Misrepresentations in Application to Support Rescission

In Nieto v. Blue Shield of California Life & Health Insurance Company, ___ Cal.Rptr.3d. ___, 2010 WL 162027 (2010), the Court of Appeal considered whether Blue Shield Life – an California insurance company subject to the California Insurance Code – could rescind plaintiff Julie Nieto’s (“Nieto”) individual health insurance policy based on misrepresentations concerning her medical history contained in the application she submitted to Blue Shield Life.

The Court of Appeal affirmed the trial court’s grant of summary judgment in Blue Shield Life’s favor, concluding that Blue Shield Life had no statutory duty to physically attach Nieto’s application to the insurance policy, nor to conduct further inquiries beyond the application during the underwriting process to ascertain the truthfulness of Nieto’s representations in the application before it issued the policy.

In reaching this conclusion, the Court discussed its holding in light of the recent decisions in Ticconi v. Blue Shield of California Life & Health Ins. Co., 160 Cal.App.4th 528 (2008) and Hailey v. California Physicians' Service, 158 Cal.App.4th 452 (2007).

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No More Gender Rating in California

The practice of paying different rates based on gender for the same insurance is called gender rating.  Effective January 1, 2010, health insurance companies and HMO's writing insurance in California will not be able to charge men and women different rates for the same type of insurance policy.  It has been reported that currently, California women pay anywhere from 5% to 30% more than male counterparts for equivalent insurance, even on policies without maternity coverage.   

The issue was helped along by San Francisco City Attorney Dennis Herrera who sued state officials for gender rating, claiming that the practice violates provisions of the California Constitution.   The suit was stayed while details of the bill were negotiated and, in light of the new California health insurance law, will likely be dismissed.

House Committee Votes to Strip Health Insurance Industry of Exemption from Federal Antitrust Laws

As reported by the Associated Press today, a House committee has voted to strip the health insurance industry of its exemption from federal antitrust laws as senators announced plans to take the same step.  The House Judiciary Committee voted 20 to 9 to repeal a law that exempted the health insurance industry from federal controls over certain antitrust violations, including price-fixing.

An Insurance Agent Who Portrays Herself As Expert Owes a Heightened Duty of Care to the Insured

In Williams v. Hilb, Rogal & Hobbs Insurance Services of California, Inc., __ Cal. App. 4th __, 2009 WL 2872403 (September 9, 2009), the court held that an insurance agent who portrays herself as having expertise in the particular insurance sought by an insured may owe the insured a heightened duty of care. Further, the failure of an insured to read the policy does not, as a matter of law, render the insured’s reliance on the agent’s advice unjustifiable.

This case involved a franchise business owner’s purchase of an “insurance package” that did not contain workers’ compensation insurance, which, under California law, is mandatory. The owners discovered their lack of coverage following a fire that severely injured an employee. The employee sued the owners who in turn sued the insurance agent for negligence for failing to provide the appropriate insurance necessary for their business. In her defense, the agent argued that she did not have a duty to volunteer additional or different insurance coverage and that insured was bound by the “clear and conspicuous” terms of the policy even if they failed to read or understand them. However, the court was not convinced by these arguments.

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ERISA-Governed Health Plan Excluding Coverage for Non-Contracted Providers Held to be Unambiguous

In Dupree v. Holman Prof'l. Counseling Ctrs., ___ F.3d ___, 2009 WL 2245219 (9th Cir. July 29, 2009), the Ninth Circuit Court of Appeals held that an ERISA-governed health plan, which repeatedly asserted that non-contracted services were generally not covered, unambiguously excluded coverage of non-emergency treatment at a non-contracted residential treatment center. In doing so, the Ninth Circuit employed the well-established canon of contract interpretation, applicable in ERISA cases, that a contract should be read as a whole, giving effect to every part. The court rejected Plaintiff’s attempt to pick out policy provisions and read them out of context to find ambiguity where none exists.

Plaintiff’s employer contracted with Holman Professional Counseling Centers (“Holman”) for behavioral health insurance coverage. Holman agreed to provide behavioral health services “through Providers pursuant to the Schedule of Benefits” and that if enrollees chose to use non-contracted providers, they would do so at their own expense “except as otherwise provided in this Group Plan Contract.”


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Second Circuit Holds Delayed Discovery Rule Applies to Unfair Competition Claims

Recently, in Broberg v. The Guardian Life Insurance Company of America, 171 Cal. App. 4th 912 (2009), the Court of Appeal for the Second Appellate District held that the "delayed discovery" rule, which applies to delay accrual of the statute of limitations for fraud causes of action until such time as the plaintiff discovers facts putting him on notice of the fraud, applies to unfair competition claims that are based upon alleged fraud. In so holding, the court added to the conflict in published decisions on the issue of whether the "delayed discovery" rule applies to unfair competition claims. See, e.g., Snapp & Associates Ins. Services, Inc. v. Robertson, 96 Cal. App. 4th 884, 891 (2002) (holding the "delayed discovery" rule does not apply to unfair competition claims).

In Broberg, David A. Powell purchased a $500,000 whole life insurance policy in 1993 from defendant The Guardian Life Insurance Company of America ("Guardian Life"). The Plaintiffs (Powell and the trustee of a related trust) alleged that Guardian Life's agent described the policy as so-called "vanishing premium" policy, i.e., one where, after a certain number of out-of-pocket premium payments were made, the policy itself would generate sufficient sums through its dividend and interest income to pay future premiums for the balance of his life. Claiming Guardian Life's marketing materials and its agent made false and misleading statements in 1993, when Powell purchased the policy, the plaintiffs alleged causes of action for fraud, negligent misrepresentation, unfair competition and false advertising under California's Unfair Practices Act (Business and Professions Code section 17200 et seq.) and violation of the Consumers Legal Remedies Act ("CLRA"), Civil Code section 1750 et seq.). The plaintiffs further alleged that Powell did not discover the deception until Guardian Life sent a bill for additional out-of-pocket premiums in 2004. The trial court sustained demurrers to the complaint, concluding disclosures in the policy and marketing materials were at least sufficient to give Powell inquiry, if not actual, notice of the alleged deception. The trial court determined the fraud, negligent misrepresentation and unfair competition causes of action accrued in 1993, when Powell purchased the policy and, therefore, those claims were time-barred under the three-year statute of limitations for fraud (see Code Civ. Proc.§ 338 (d)) and the four-year statute of limitations for unfair competition (see Bus.& Prof. Code § 17208). The trial court also concluded, based upon disclaimers in the documents, that the plaintiffs could not establish reliance as a matter of law. The trial court further determined that the CLRA claim was not viable, as the CLRA does not apply to insurance. (See Fairbanks v. Superior Court, 46 Cal. 4th 56 (2009) (holding the CLRA does not apply to insurance). Finally, although the trial court ruled that the allegations did not justify an unfair competition cause of action based on the "vanishing premium" theory, they were sufficient to state a claim amounting to an unfair and unlawful sales tactic.


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Court of Appeal Complicates the Analysis of Mental and Nervous Disability Claims

In Bosetti v. The United States Life Ins. Co., 175 Cal.App. 4th 1208 (2009), the California Court of Appeal addressed whether a standard, two-year benefits limitation on disabilities due to “mental, nervous or emotional disorder[s]” could serve to limit benefits payable to an insured disabled from depression and anxiety who also complained of interrelated physical impairments. The Bosetti court held that the limitation was ambiguous and was not applicable if the claimant’s physical problems contributed to her disabling depression or were a cause or symptom of that depression. The Bosetti court further concluded that the insurer’s denial of benefits based upon that two-year limitation was not in bad faith under the genuine issue doctrine.

Bosetti worked as an assistant director of adult education for a school district and first sought treatment after learning that her position would be terminated. Based upon the report of her treating physician and her complaints of depression and anxiety, she was put on temporary disability under her group policy. She thereafter applied for permanent disability benefits complaining of depression and fibromyalgia pain in her muscles, though her treating physician reported that her disabling impairment was solely mental or nervous in nature. After paying Bosetti’s benefits for two years, United States Life determined that she did not qualify for any additional benefits and could work in “any occupation”, which was the governing disability standard after two years. That determination was based primarily upon the two-year benefits limitation for mental or nervous disorders, the results of a functional capacity examination, and an independent physician consultation.

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Health & Safety Code Only Required Blue Cross to "Offer" to Provide Infertility Group Coverage

The Court of Appeal recently interpreted the infertility treatment provisions of Health and Safety Code section 1374.55 in Yeager v. Blue Cross of California, __ Cal. Rptr. 3d __, 2009 WL 2033209 (July 15, 2009). Yeager sued Blue Cross, alleging that it violated its duty under section 1374.55 to offer coverage for infertility treatment in the group plan that Blue Cross provided through Yeager’s employer, Westmont College. Blue Cross moved for summary judgment, arguing that it complied with section 1374.55 by offering optional coverage of up to $2,000 a year for half the cost of each group member’s infertility treatment, which Westmont College declined to purchase for cost-related reasons. The trial court granted summary judgment, and Yeager appealed.

The Court of Appeal held that section 1374.55 – which states that “every health care service plan contract . . . shall offer coverage for the treatment of infertility . . . under those terms and conditions as may be agreed upon between the group subscriber and the plan” – merely obligated Blue Cross to offer coverage for infertility treatment, and left the amount and cost of that coverage to agreement between Blue Cross and Westmont College. Thus, the court agreed that Blue Cross complied with the statute.



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Federal Bill for Health Care Reform Unveiled

Earlier this week, House Democrats introduced H.R. 3200: America's Affordable Health Choices Act of 2009 that seeks to make affordable health care available to an estimated 97% of Americans.

The key components of the plan are as follows:

• The plan mandates that employers provide health care coverage to employees. Employers that fail to provide health care coverage will have to pay fees or penalties based on the employer’s payroll (e.g., 8% for payrolls of $400,000). The plan does provide some exceptions to such penalties and fees, including small business with payrolls under $250,000.

• The plan also mandates that individuals maintain health care coverage or pay penalties in the form of a new tax based on his or her income. Individuals that meet a “hardship” exception would be exempted from the penalty.

• The plan provides credits for low- and moderate-income individuals and families to help fund the purchase of health care.

• The plan would create government-sponsored insurance to compete with the private sector. Those needing health care could shop for plans in a government-operated “exchange,” in which private carriers could participate if they meet standard benefit requirements designed by the federal government.

• To subsidize the plan, a surtax ranging from 1% to 5.4% would be imposed on the top 1.2% of income earners.

• The plan would introduce new regulations that would prohibit health care plans and insurers from excluding coverage based on pre-existing conditions.

Barger & Wolen LLP will provide continuous updates as the bill progresses through the House and Senate.

Health Care Service Plan Not Liable for Provider's Failure to Diagnose Illness

Watanabe v. California Physicians' Service, 169 Cal. App. 4th 56 (2008)

On February 25, 2009, the California Supreme Court denied a petition to review the Court of Appeal decision in Watanabe v. California Physicians' Service, 169 Cal. App. 4th 56 (2008). This decision let stand the opinion by Judge Flier which held Health Care Service Plans and plan providers are separately liable for their own acts or omissions under the Knox-Keene Health Care Service Plan Act of 1975 (the “Act”), notwithstanding the delegation of duties from one to the other.  Blue Shield of California, a Health Care Service Plan under the Act, delegated to the plan provider the task of initially determining whether a particular service or treatment was medically necessary (what is called a “utilization review”). Plaintiff sued Blue Shield on the grounds that it wrongfully delegated the utilization review to the plan provider and, as a result, should be vicariously liable for the provider’s failure to diagnose the Plaintiff’s brain tumor. The provider settled with the Plaintiff before trial which continued against Blue Shield. 

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Denial of Claim for Health Benefits Alone Not Sufficient to Support IIED

Mintz v. Blue Cross of California, __ Cal. App. 4th __, 2009 WL 1019039 (April 16, 2009).

On April 16, 2009, the Second Appellate District in Mintz v. Blue Cross of California, found Blue Cross liable in negligence when acting as claims administrator for CalPERS, when its claims denial caused physical injury to the member. Blue Cross denied the member's treatment on the grounds it was experimental. The member appealed, and though Blue Cross advised the member of his contractual appeal rights, it failed to advise him of his statutory right to Independent Medical Review.

While the court held that the administrator, as representative of the insurer, may not be held liable for interfering with its principal's contract, and the denial of health insurance benefits, without more, is not the kind of extreme outrageous conduct necessary to state a claim for intentional infliction of emotional distress, the court did hold that the administrator owes a duty to the members to exercise due care to protect them from physical injury caused by its negligence in making benefit determinations.  

Judicial Opinion Available Here