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Draft Rules Won't Stop Insurers' Illegal Cancellations of Health Policies

Rules Compound Problems With Governor's Mandatory Health Insurance Plan

SANTA MONICA, Calif., Oct. 23 /PRNewswire-USNewswire/ -- Draft regulations released today by the Schwarzenegger Administration fail to protect patients from illegal cancellation of policies and allow insurers to decide which policies to cancel without prior review by independent regulators, said the Foundation for Taxpayer and Consumer Rights (FTCR). FTCR said that the weak cancellation rules add to problems with legislation supported by Governor Schwarzenegger that would require all Californians to buy private health insurance policies.

Following widespread reports of insurers violating the law by canceling coverage on the basis of so-called "omissions" on a patient's enrollment application -- regardless of whether patients "willfully misrepresented" their medical histories as the law requires -- FTCR called for new regulations requiring insurers to get approval from regulators before canceling a patient's coverage.

"Insurers who have a profit motive to cancel coverage cannot be trusted to make fair decisions about which policies to cancel. The burden should be on insurers to prove to independent regulators that a cancellation is justified, not on patients who don't have the time or energy to fight for their rights when they are sick and fending off collection agencies," said Jerry Flanagan of FTCR. "The rules will result in more litigation because patients will be forced to go to court when regulators fail to prevent illegal cancellations of coverage."

FTCR said that due to the overwhelming financial incentive for insurers to revoke coverage when patients rack up medical bills, the draft regulations must be amended to include an independent review by regulators before, not after, insurers rescind coverage. When policies are cancelled, patients are left uninsured, uninsurable and often in deep medical debt.

Download the draft rules at:

FTCR welcomed the draft rules' reaffirmation of the existing legal standard that policy "rescissions" -- retroactive cancellations of coverage -- can legally be carried out only if patients "willfully misrepresented" their health condition when applying for coverage. But FTCR said that such a standard will not protect patients unless an impartial regulator is in charge of deciding whether a proposed cancellation is legal.

Additionally, FTCR said the draft rules are problematic because:

-- Even relief through litigation may be too little, too late. The person whose health coverage has been cancelled is left uninsured and their health put in jeopardy while awaiting legal review.

-- Insurers are allowed to retain investment income they earned off premiums paid on cancelled policies. By retaining investment income, insurers profit directly from illegal rescissions as well as preventing further payouts. Since 2002, the six largest DMHC -- regulated health plans have earned $1.6 billion in investment income on premium payments.

Weak Cancellation Rules Add to Problems With Mandatory Purchase Law

Affordability and enforcement problems with the mandatory purchase of private health insurance, as backed by Gov. Schwarzenegger, are compounded by weak cancellation rules. Under the proposed law, patients whose coverage was improperly rescinded would be required to buy substandard care at a higher price.

"It is absurd that the Governor would even consider requiring patients to buy private health insurance policies at a time when insurers are allowed to flout the law and cancel policies when patients need coverage the most," said Jerry Flanagan of FTCR. "A mandatory purchase regime amounts only to a customer delivery system to an industry whose MO is to put profits before patients."

Governor Schwarzenegger has received $719,600 in campaign contributions from health insurers.

Read FTCR's November 2006 petition to the DMHC calling for new regulations:

Read DMHC's response to FTCR's petition:

FTCR is California's leading public interest watchdog. For more information, visit us on the web at

SOURCE Foundation for Taxpayer and Consumer Rights
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