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.

 

In particular, ACLHIC argued that the CDI lacked the authority to promulgate the regulations. The Court agreed with the ACLHIC with respect to the key regulations at issue. It held that the CDI lacked authority to issue either 10 California Code of Regulations § 2274.74 or 10 California Code of Regulations § 2274.77. The CDI argued, unsuccessfully, that its authority to issue these sections was found in Insurance Code §§ 790.10 and 12921

Proposed Section 2274.74, entitled “Standard for Avoiding Prohibited Postclaims Underwriting,” would have prohibited a health insurer from rescinding or canceling a policy if it did not comply with certain underwriting requirements set forth in the regulation, including requiring insurers to obtain health history information from a source other than the applicant. 

The regulation also purported to define medical underwriting by seven enumerated activities required of health insurers, without limiting medical underwriting to those seven activities. 

Further, the regulation attempted to establish the six activities that a health insurer had to conduct in order to resolve all questions arising from application materials.

If a health insurer failed with respect to either of these two items (i.e., any failure to complete the seven enumerated medical underwriting activities or the six activities required to resolve application questions), the regulation barred any rescission or cancellation. 

Finally, if a health insurer made any error in applying its own underwriting procedures – no matter how minor – the regulation likewise prohibited any rescission or cancellation.    

The Court concluded that the CDI lacked the authority to promulgate Section 2274.74.  

It determined that Insurance Code§ 790.10 only applied to those activities governed by Article 6.5 of Chapter 1 of Part 2 of Division 1 of the Insurance Code (within which section 790.10 falls) and that postclaims underwriting is governed by a separate article outside the reach of Insurance Code § 790.10. 

It reinforced this conclusion with the fact that the items prohibited by Insurance Code§§ 790.03, which Insurance Code § 790.10 governs, included an exhaustive list of prohibited business practices, none of which included postclaims underwriting and rescission based thereon. 

Finally, the Court concluded that Insurance Code§ 12921 only permitted the CDI to enforce existing laws regulating the insurance industry and that it did not provide authority for the CDI to promulgate new regulations.

The Court also invalided Section 2274.77 for these same reasons, as the CDI again relied on Insurance Code§§ 790.10 and 12921 to support its position that it was empowered to promulgate this regulation. 

Section 2274.77 purported to require an insurer, at the time of issuance and delivery of a policy, to return a complete copy of the application to the insured for review by including it in the same mailing, or other delivery mechanism, as the policy. If the insurer failed to comply with this requirement, it was precluded from using the information in the application as the basis for rescinding or canceling the policy.

 

California Insurance Commissioner Unveils Proposed Rescission Regulations

California Insurance Commissioner Steve Poizner unveiled his proposed regulations today to, according to an LA Times article dated June 3, 2009, “combat the health insurance industry practice of dropping members with costly illnesses.” According to the article, Poizner's draft regulations would require insurers to write applications for coverage in “plain English and allow applicants a ‘not sure’ answer to questions about their preexisting medical conditions.”  

According to Mr. Poizner’s news release, the new regulations will (in his words) do the following:

  • Set clear and rigorous standards that insurers must meet before they issue a health insurance policy. Insurers must do their underwriting job before they issue the policy.
  • Put insurers on notice that they must prove that they have met ALL of the underwriting standards before they can consider rescission.
  • Put an end to lightweight sloppy underwriting if insurers want to keep the right to rescind.
  • Put insurers on notice that they must be 100% sure that an individual knew the answer to a health history question and failed to provide it before considering rescinding that person.
  • Require insurers to make sure that health insurance applications are accurate and complete.
  • Require insurers to ask clear and unambiguous health history questions and avoid confusing applicants.
  • Require agents who assist applicants with their questions to attest to the insurer regarding their assistance, at every stage of the application process.
  • Encourage insurers to use Personal Health Records instead of potentially confusing health history questionnaires to underwrite applicants.
  • Provide fair due process protections for consumers who are being investigated for possible rescission including early notice, opportunity to provide input to the insurers, and the chance to clarify their application. No hidden rescission investigations are allowed under the new rules and this encourages insurers to work with their insureds to resolve questions about the accuracy of their responses.
  • Require insurers to share documentation used during rescission investigations with the insured under investigation.  

The notice of the regulations will be officially published by the Office of Administrative Law on Friday, June 5.  According to the news release, implementation of the regulations is expected by the end of 2009, following a public hearing, public comment and regulation finalization period.

The regulations would apply to individual health coverage sold by companies licensed by the Department of Insurance.  A second state regulator, the Department of Managed Health Care, said more than two years ago that it would pursue rescission regulations, but has not done so.  The proposed regulations can be viewed here.

On a related note, the California State Assembly is expected to vote soon on a bill that would set a high bar on rescissions for people who purchase individual insurance of all types, regardless of who regulates it.