Pre-Existing Conditions, Bad Faith and Health Insurance Portability - Module 3 of 5
Module 3-Pre-Existing Conditions, Bad Faith and Health Insurance Portability
In this module, we’ll explore various topics affecting health insurance. First, we’ll look at pre-existing conditions and how they are treated in the health insurance landscape. Next, we turn to rescission of a health insurance policy and what a person can do to fight against “improper” rescission. Finally, we’ll examine health insurance policy portability, which is the ability to enroll or change health insurance policies outside of an enrollment period.
pre-existing condition is a health problem that an insured person has before
the start of health insurance coverage. 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. 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.
The insurer could consider any test, diagnosis or preventive measure a pre-existing condition to reduce its risk. 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.
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
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. 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.
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. 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.
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. 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.
State law governs
whether a person has made a fraudulent material misrepresentation. 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
· 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
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. 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.
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
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. 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
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.
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. 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
Liability for intentional
infliction of emotional distress applies only where the conduct is so
outrageous that it goes “beyond all possible bounds of decency.” Based on these standards,
a court must find that an insurer did more than delay or deny insurance
The operative word is “outrageous.”
A court sustained an action for intentional infliction of emotional distress in Hailey v. California Physicians’ Service. 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,
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. 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 and the Health Insurance
Portability and Accountability Act of 1996, work in tandem to govern
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.
and lists a variety of life changes that can be classified as a qualifying
event. 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.
In our fourth module, we’ll discuss notice and proof of loss provisions in a health insurance policy.
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