How Health Insurance Policy Rescission Works

In the legal world, rescission means that a contract between two parties is unmade, taking the two parties of the contract back to where they were before they made the contract or transaction.

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Rescission is the term used when a health insurance policy is canceled retroactively by an insurance company. They can only do this legally under the Affordable Care Act if the patient has committed fraud or if the patient lied deliberately about a material fact in a way prohibited in the terms of the health insurance plan. In other cases, it is illegal for the insurance company to do a rescission.

In a rescission, the coverage is removed from the beginning of the policy, leaving the patient liable for their costs incurred. Generally, they are refunded the amount of their premiums.

The No-Rescission of Coverage Provision of the ACA

Rescissions are prohibited (except for fraud and intentional misrepresentation of facts) under the Affordable Care Act by federal regulation 45 CFR 147.128: Rules Regarding Rescissions. It took effect for plan years beginning on or after September 23, 2010.

In practice, the requirement to provide coverage despite pre-existing conditions under the Affordable Care Act eliminated most of the incentive for insurance companies to do policy rescissions for high-cost patients. Whereas before their terms of service might require disclosure of a preexisting condition before being covered and they had the ability to deny coverage or charge you a much higher fee, they can no longer do this. Previously, patients had an incentive to lie and not disclose medical conditions, and the insurance companies had an incentive to look carefully for non-disclosures and to call them fraudulent.

Insurance companies can still do rescissions for other intentional misrepresentations, such as failure to disclose a divorce and the former spouse continuing to get benefits under the plan. The insurer has to prove intent to deceive.

Abuse of Rescissions Prior to the ACA

Rescissions were often discussed in the development of healthcare reform, with many practices coming to light. Health insurance companies, in an effort to contain costs, would decide to drop coverage for an insured patient whose care was more expensive than they want to pay.

Once the patient became sick, the insurer would carefully review his or her original application for coverage, find (what they consider to be) a discrepancy, then claim the insured patient lied on his or her application. That gave the insurer legal permission to drop the claim. Some insurance companies developed software the triggered automatic fraud investigations for patients who received a diagnosis for a condition that would become high cost.

Problems developed for patients who have not intentionally lied on their applications, and for whom the insurer found discrepancies that didn't relate.

Further problems developed for patients who paid premiums for a period of time but then had their coverage dropped after they got sick. The insurer didn't bother reviewing the policy until after the person has been paying into the system. They collected money, but then would not provide their promised services. This "drop when you get sick" practice is now subject to the no-rescission clause of the Affordable Care Act.

Time will tell if such abuses will continue and whether further legislation is needed to end the practice.

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  1. Reichard J. Benefit 'rescissions' prompt wider Waxman probe of insurers. The Commonwealth Fund. July 21, 2008.