You are probably all too familiar with this scenario: A hospital or other health care provider contacts a patient’s health plan to confirm whether he is an active member of the health plan and to obtain authorization to treat the patient for a planned procedure. The health plan states the patient is an eligible member of the plan and tells the provider to treat the patient. The provider accepts the health plan’s representation and treats the patient. The provider then bills the health plan and the health plan denies the claim. The reason given by the health plan for denying the claim is that it discovered, (after receiving the claim for payment and after providing verification of eligibility and authorization for treatment), that the patient omitted important information on his or her health plan application. As a result, the health plan retroactively cancels the patient’s policy to its inception date, which is prior to the hospitalization. In other words, the health plan now claims that the patient was not eligible for health plan benefits at the time of the hospitalization after all, and is therefore now not financially responsible for the claim.

The above scenario occurs even though health plans usually have provisions in their applications that allow them to investigate an applicant’s health history prior to issuing health plans. In other words, health plans have the ability to obtain medical records and other information from the applicants’ prior and current health care providers and review that information prior to issuing coverage. But in reality, health plans rarely investigate the applicants’ health histories prior to issuing health plans or prior to representing to providers that the patient has eligibility or prior to granting authorization for treatment. It would be way too time consuming and overly burdensome to investigate every application! Yet, once the health plan is billed for one of its member’s hospitalizations, the health plan then finds the time to investigate the patient’s health history. After its investigation, if the health plan believes it has a basis to rescind the health plan contract with its member it will do so, and then deny the provider’s claim.

So by postponing their investigations until after treatment is provided, yet verifying benefits and authorizing treatment, the health plans save money and transfer their actuarial risk to hospitals and other health care providers.

Luckily California law now limits the ability of health plans to rescind or cancel coverage when the health plan failed to complete its investigation or medical underwriting. Plans are still able to rescind or cancel coverage though if they can show the applicant made a willful misrepresentation on the application (which is often difficult for the health plan to prove)..