Balance needed to cover high-risk consumers

The current situation in California-home to the country's largest individual health-insurance market-puts the debate over pre-existing conditions into perspective. In recent months, five large insurers have paid the state nearly $19 million in administrative penalties for retroactively rescinding policies. And that's separate from a variety of other settlement payments.

Michael Zablocki, a Torrance, Calif., lawyer who represents payers and providers in business and regulatory matters, who has been observing the situation, says California insurers have had a litigation posture, in which they act within the terms of the policy and don't break any laws. But that doesn't mean they're making friends either.

Insurers in general have treated rescission as an anti-fraud mechanism. Let's call it their way of keeping consumers "honest."

"In heat of the reform debate, it all sounds unfair, but the industry is very unapologetic," Zablocki says. "The industry's position is that if they receive a certain gross dollar amount, they balance the variables to avoid losses."

He says the industry should see the embarrassment the scandal is causing. Health Net, which is usually known as a good plan with an "Excellent" rating from the National Committee for Quality Assurance, was fined $1 million for incentivizing employees to find opportunities to rescind policies.

California state law does not specifically prohibit rescission, but at press time, a bill was on Gov. Arnold Schwarzenegger's desk to take rescission determinations out of the hands of insurers. The bill, AB 2, would create an independent review process that insurers must follow when they intend to rescind a policy. Existing law would be enhanced so coverage could only be rescinded if a member willfully misrepresents his or her health history/pre-existing conditions.

Health Net has already said it would institute an independent review process to determine rescissions.

"The difficulty has been distinguishing the borderline between obvious consumer fraud and inadvertent misrepresentation," Zablocki says.

California's attempts to regulate rescission and offer consumers a reasonable chance to disclose pre-existing conditions is merely a transition, he says. A long-term solution would have to come from national reforms that are fair to both the consumer and the plan.

"It's no consolation to consumers with life-threatening conditions that there is an easy form to fill out and that they are protected against rescissions if they make an innocent misrepresentation," he says. "It's small consolation that there is a great sense of fairness by which their application is denied."

High-cost members who are guaranteed coverage will clearly drive up costs. Reform advocates must make a stronger case for the counterbalance of mandated coverage to balance the risks of guaranteed issue.

America's Health Future Act, designed by Senate Finance Committee Chairman Max Baucus (D-Mont.), includes an individual mandate and guaranteed issue, however, his plan was picked apart the moment it was released.