Pre-Existing Conditions
A pre-existing condition is a health problem that an insured person has before the start of health insurance coverage.[1] Prior to the passage of the Affordable Care Act in 2010, health insurers in most states could deny coverage if a person had a pre-existing condition, examples of which included asthma, diabetes or even cancer.
Health insurers commonly avoided insuring such a person to avoid the costs of medical treatment. An insurer would either categorically deny the applicant, exclude the pre-existing condition from coverage or price a health insurance plan out of her reach.[2] It could also exclude coverage of all conditions caused by the pre-existing condition. For example, imagine a person with high blood pressure as a pre-existing condition applied for health insurance and the insurance company issued a policy that excluded all conditions associated with high blood pressure from his policy. He then suffered a stroke or heart attack. The insurance company might refuse to pay for the insured’s treatment on the grounds that the stroke or heart attack was a direct result of the excluded high blood pressure.[3]
The insurer could consider any test, diagnosis or preventive measure a pre-existing condition to reduce its risk.[4] As a result, 47 percent of those who had pre-existing conditions and sought private health insurance couldn’t acquire it, which then impacted nearly 50 million people.[5]
The Affordable Care Act revolutionized the healthcare industry and sought to make health insurance more accessible for people with pre-existing conditions. Starting in 2014, under the Act, an insurer could no longer use health status to determine eligibility, benefits or premiums, charge higher premiums to a person with a pre-existing condition or set lifetime limits on benefits to a person based on pre-existing condition.
The law made it easier for a person with a pre-existing condition to secure individual health insurance and to change jobs, since the insured could now be confident of being covered by a new employer’s plan. Moreover, the patient could retire or start his own business prior to being eligible for Medicare, secure in the knowledge that he could secure health insurance. He no longer had to worry that he was one diagnosis away from being uninsurable.
Despite the industry-wide changes, there are a variety of health insurance plans to which the ACA does not apply. For example, limited-benefit plans, short-term coverage, and critical illness health insurance policies are exempted from ACA requirements regarding pre-existing conditions.[6] Additionally, the new rules regarding pre-existing conditions do not apply to “grandfathered” health plans, which are individual health insurance policies purchased on or before March 23, 2010. As such, a health insurer offering any one of these plans can reject an applicant based on medical history or can exclude pre-existing conditions from coverage.[7]
Rescission of a Health Insurance Policy
Rescission means to cancel a health insurance policy. When legal, rescission permits the insurer to avoid paying benefits to which the insured would be otherwise entitled.[8] The Affordable Care Act prohibits rescission except in cases of fraud or intentional misrepresentation of material fact under the terms of the plan or coverage.[9]
A fraudulent or material misrepresentation is deliberately false and designed to mislead the insurer into issuing a policy that it either would not have issued or would have issued at a higher premium.[10] This includes false statements that might affect the coverage rate, premium, number of people covered, etc. A material misrepresentation may also be made through concealment, which is the intentional withholding from the insurer by the insured of material facts that increase the insurer’s risk and that in good faith ought to have been disclosed.[11]
State law governs whether a person has made a fraudulent material misrepresentation.[12] Arizona, for example, deploys a three-pronged approach. For a health insurer to rescind a policy due to a material misrepresentation, the insurer must prove by a preponderance of the evidence:[13]
- A fraudulent misrepresentation, omission, concealment of facts or incorrect statement made to the insurer;
- which was material to the acceptance of the risk; and
- the insurer would not have issued the policy in its current form if the truth had been known.
The first element, a fraudulent omission or misrepresentation, applies when an applicant for insurance doesn’t tell her health insurance company the truth about her medical history. For example, a middle-aged smoker applies for a health insurance policy but, although the application asked for significant medical history, she fails to disclose that she’s seen numerous doctors who have diagnosed her with pulmonary fibrosis for which they have prescribed several medications. The second element, materiality, is defined as a misrepresentation that “might have influenced a reasonable insurer in deciding whether to accept or reject the risk.”[14]
Let’s look at a case where a jury found that an insurance applicant made material misrepresentations and omissions regarding her medical condition and treatment. In the medical history portion of her health insurance application, the applicant, who had been uninsured for seven years, answered “No” to almost every question regarding prior medical history.[15] Less than four months after insuring her, she was scheduled for surgery and the insurer’s underwriting unit began investigating. The insurer learned that immediately before her application, the applicant received extensive treatment for back and hip pain and had been prescribed multiple medications. She didn’t disclose that she had suffered from chronic back problems and had lied about the last time she had seen a chiropractor. All this information was “material.” Had the insurance company been aware of the undisclosed information, it either would have declined to issue the policy or, at a minimum, would not have issued the policy before receiving additional information from the applicant.
There are several ways for an insurer to rescind a health insurance policy. First, it may rescind a policy after investigating a claim, finding that the insured made a material misrepresentation, and then later filing a law suit seeking a declaratory judgment that its rescission was proper. Second, the insurer can file a rescission counterclaim in response to the insured who files a lawsuit seeking the payment of benefits. Finally, an insurer can plead rescission as a defense in the answer to a lawsuit filed by a person who is seeking his insurance benefits. An Arizona statute, for example, which is typical of those of other states, allows an insurer to prevail in a lawsuit by raising the rescission defense even without first rescinding the insured’s health insurance policy.[16]
The insured can claim several defenses to an allegation of a material misrepresentation. The first is estoppel, an equitable defense that bars recovery based on the insurer’s own actions. The estoppel defense prevents the health insurer from taking certain actions that might produce an unfair result for the insured based on reasonable reliance on the insurance company’s promises. A court will examine the degree to which the insured relied on those promises and may use the doctrine of estoppel to prevent the insurer from using policy rescission as a remedy in the event a material misrepresentation is discovered.
For example, assume that a person applies for a health insurance policy and on his application, he’s asked whether any prior applications for health insurance had been cancelled. He falsely answers, “No” when in fact, a prior application with the health insurance company’s corporate parent had been cancelled. Two months later, the health insurance company rescinds the policy and files a suit seeking a declaratory judgment that its rescission is proper. Here, a court can rule the insurance company is estopped from rescinding the health insurance contract because its corporate parent’s prior dealings with the insured should have alerted it to a prior cancellation. Since the insurance company had constructive notice about the prior denial, it was its responsibility to do its due diligence before issuing the policy. By issuing the policy, the insurance company could have been playing both sides of the fence – taking premiums but intending to rescind the policy if treatment were needed. Estoppel can be used to prevent the use of this unfair practice.
The second defense we’ll look at is waiver, which is a voluntary relinquishment of a known right. When claiming that a health insurance company waived its rescission right, the insured bears the burden of proof. For example, in DuBeck v. California Physicians’ Service, the insured applied for health insurance but failed to disclose her diagnosis for breast cancer. The insurance company nevertheless issued her a policy.[17] Seventeen months into coverage, as the insurance company processed her claims for cancer treatment, it cancelled her policy because of this omission. The reviewing court held that the insurance company had waived its rights to rescind the policy. First, it was aware of pertinent information which would have allowed it to rescind for nearly two years after it first issued coverage, but it chose not to. Furthermore, the company was aware of the insured’s medical condition as early as five days into coverage when she underwent breast surgery and did nothing about it.
Policy Holder’s Recourse for Improper Rescission
A policy holder may bring an action against an insurance company if the insurer improperly rescinds a policy in bad faith. Bad faith exists if the insurer knows that it lacks any reasonable basis to deny coverage or the insurer showed reckless disregard as to the unreasonableness of the denial.[18]
There are some recourses available to a policyholder. The simplest is to file a breach of contract action. Though state law will govern such a claim and these vary from state to state, the essential elements are that there was a valid health insurance policy, the insurer failed to pay for the insured’s claim, and the insured ended up having to pay for his own medical bills.
A second option for improper rescission may be to file a tort action for intentional infliction of emotional distress. The elements for this claim are extreme and outrageous conduct causing severe emotional distress.[19] This can apply because denials can cause great distress among patients who are faced with the prospect of not securing treatment or being forced into bankruptcy by enormous medical bills.
Liability for intentional infliction of emotional distress applies only where the conduct is so outrageous that it goes “beyond all possible bounds of decency.”[20] Based on these standards, a court must find that an insurer did more than delay or deny insurance benefits.[21] The operative word is “outrageous.”
A court sustained an action for intentional infliction of emotional distress in Hailey v. California Physicians’ Service.[22] There Blue Shield, the insurer, rescinded the plaintiff’s health insurance coverage less than a week after it authorized health care providers to provide surgery, treatment, care and physical therapy during his recovery from an auto accident, purportedly because the plaintiff hadn’t disclosed the entirety of his medical history prior to acquiring insurance. The court found that the plaintiff’s omissions were inadvertent and Blue Shield’s rescission of his policy only after he had suffered devastating injuries and knowing that he had over $400,000 in medical bills was conduct outrageous enough to permit him to sue for intentional infliction of emotional distress.
Health Insurance Portability
Finally, let’s discuss health insurance policy portability. Nearly half of all Americans, nearly 156 million of them,[23] have access to health insurance through an employer-sponsored health plan. Changing jobs or losing a job can, therefore, cause confusion and inconvenience in maintaining health coverage.[24] Health insurance portability is the employee’s ability to maintain access to health insurance coverage after leaving a job or to alter his insurance coverage.
The Affordable Care Act[25] and the Health Insurance Portability and Accountability Act of 1996,[26] work in tandem to govern portability.[27] HIPAA dictates that a group health plan must provide a person with a “special enrollment” period after the qualifying event (such as leaving a job) occurs. This means that when the qualifying event occurs, the insured acquires additional opportunities to enroll in a group health plan or modify his health insurance coverage within the specified time period.[28]
Healthcare.gov explains and lists a variety of life changes that can be classified as a qualifying event.[29] Some of these include:
- changes in residence: these include events such as moving to a new home in a new county or moving to the U.S. from a foreign country;
- changes in household: these changes include marriage, divorce, or having a baby;
- losing health insurance;
- other qualifying changes: this catchall category of changes in income, leaving prison and becoming a US citizen.
For example, assume that John recently started work at an investment bank and enrolled in his employer’s group health plan. If in the future, John marries or if his wife gives birth to a child, both of which are qualifying events, his special enrollment rights are triggered. With these special enrollment rights, he can enroll his new spouse or child in his group health insurance plan. Typically, John’s group health plan will include language requiring him to request enrollment for his spouse or new child within a specified time (often 30 days) of the qualifying event triggering special enrollment.[30]
[1] Pre-Existing Condition, HealthCare.gov, https://www.healthcare.gov/glossary/pre-existing-condition/ (last visited Aug. 6, 2018).
[2] Mark Bolin, “The Affordable Care Act and People Living With HIV/AIDS: A Roadmap to Better Health Outcomes”, 23 Ann. Health L. 28, 29 (2014).
[3] Elizabeth Davis, Pre-Existing Condition – What It Is & Why It’s a Big Deal, Very Well Health, (July 22, 2018), https://www.verywellhealth.com/understanding-pre-existing-conditions-1738432.
[4] Kimberly Amadeo, Obamacare Pre-Existing Conditions, The Balance, (May 10, 2018), https://www.thebalance.com/obamacare-pre-existing-conditions-3306072.
[5] Id.; At Risk: Pre-Existing Conditions Could Affect 1 in 2 Americans: 129 Million People Could Be Denied Affordable Coverage Without Health Reform, Off. of the Assistant Sec. for Planning and Educ., (Nov. 2011), https://aspe.hhs.gov/basic-report/risk-pre-existing-conditions-could-affect-1-2-americans.
[6] Louise Norris, Should You Look Outside the ACA’s Exchanges?, HealthInsurance.org, (July 1, 2018), https://www.healthinsurance.org/obamacare-enrollment-guide/off-exchange-plans/#excepted.
[7] Grandfathered Health Plan, HealthCare.gov, https://www.healthcare.gov/glossary/grandfathered-health-plan/ (last visited Aug. 6, 2018).
[8] Brian Barnes, “Against Insurance Rescission”, 120 Yale L.J. 328, 331 (2010).
[9] Rescission, HealthCare.gov, https://www.healthcare.gov/glossary/rescission/ (last visited Aug. 6, 2018).
[10] 6 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3d § 81:6.
[11] Black’s Law Dictionary (10th ed. 2014).
[12] 1-4 The Law of Life and Health Insurance § 4.02 (2017).
[13] Ariz. Rev. Stat. Ann. § 20-1109.
[14] S. David Childers & Jennifer L. Kraham, The Future of Insurance Rescission, Federation of Regulatory Counsel, (Fall 2012), http://www.forc.org/Public/Journals/2012/Articles/Fall/Vol23Ed3Article2.aspx#fn24.
[15] Nieto v. Blue Shield of California Life & Health Ins. Co., 103 Cal. Rptr. 3d 906, 918-19 (2010).
[16] State Compensation Fund v. Mar Pac Helicopter Corp., 156 Ariz. 348, 355 (Ct. App. 1987).
[17] DuBeck v. California Physicians’ Service, 234 Cal. App. 4th 1254, 1257, 1265-66 (Ct. App. 2015).
[18] Siefers v. PacifiCare Life Assur. Co., 729 F. Supp. 2d 1229, 1236 (D. Nev. 2010), aff’d, 461 F. App’x 652 (9th Cir. 2011).
[19] Restatement (Second) of Torts 46(1) (1965).
[20] Murphy v. Am. Home Prods. Corp., 448 N.E.2d 86, 90 (N.Y. 1983).
[21] Fletcher v. Western National Life Ins. Co., 10 Cal. App. 3d 376, 392 (Ct. App. 1970); Hailey v. California Physicians’ Service, 158 Cal. App. 4th 452, 474 (Ct. App. 2007).
[22] Hailey, 158 Cal. App. 4th at 475-76.
[23] Julie Appleby, Health Insurance: What If You Could Take It With You?, Kaiser Health News, (Mar. 1, 2017), https://khn.org/news/health-insurance-what-if-you-could-take-it-with-you/.
[24] Health Insurance Market Reforms: Portability, Kaiser Health News, (Mar. 6, 2013), https://www.kff.org/health-reform/fact-sheet/health-insurance-market-reforms-portability/.
[25] Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (Mar. 23, 2010).
[26] Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 110 Stat. 1936 (Aug. 21, 1996).
[27] 42 U.S.C. § 300gg-1.
[28] Health Coverage Portability (HIPAA) Compliance FAQs, Employee Benefits Security Administration, https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/hipaa-compliance (last visited Aug. 6, 2018).
[29] Enroll In or Change 2018 Plans – Only With a Special Enrollment Period, HealthCare.gov, https://www.healthcare.gov/coverage-outside-open-enrollment/special-enrollment-period/ (last visited Aug. 6, 2018).
[30] Appendix C: Model Notices, Department of Labor, https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/compliance-assistance-guide-appendix-c.pdf (last visited Aug. 6, 2018).