ACA: Prohibition Against Rescission of Coverage

Section 2712 of the Public Health Service Act (the “Act”), as added by the Affordable Care Act (“ACA”), generally prohibits group health plans and health insurance issuers offering group insurance coverage from rescinding coverage.

On June 28, 2010, the Departments of Health and Human Services, Labor, and Treasury (the “Departments”) published a new Interim Final Rule addressing several provisions of the ACA, including the prohibition against rescission of coverage.

WHAT YOU SHOULD KNOW

A group health plan or health insurance issuer offering coverage to individual or group health plans cannot rescind coverage with respect to an enrollee except where the individual has performed an act or practice that constitutes fraud or makes an intentional misrepresentation of a material fact, and the plan contains a provision allowing the rescission under these circumstances.

For example, if a plan so provides, it may rescind coverage retroactively for a dependent if there is an intentional misrepresentation about the dependent’s relationship, age or other eligibility status.

The most important impact of this rule is that plans and insurers cannot rescind an individual’s coverage under the plan or policy on the basis of inadvertent misstatements on coverage applications.

Plans Covered

The regulation applies to grandfathered and non-grandfathered plans and to self-insured health plans and insurance policies (individual and group coverage).

Rescission Definition

The regulation defines “rescission” for purposes of the ACA’s prohibition as a cancellation or discontinuance of coverage that has a retroactive effect.

Examples provided in the regulation include a cancellation that treats a policy as void from the date of the individual’s or group’s enrollment, and cancellations that have the impact of void benefits paid for up to one year before cancellation.

In contrast, a cancellation of coverage is not a rescission if the cancellation has only a prospective effect, or if the cancellation of coverage is effective retroactively because of a failure to timely pay required premiums or contributions.  Rescission due to failure to timely pay required premiums, applies to COBRA participants.  Note however, that COBRA itself contains rules about when COBRA premiums are due and how to handle de minimis shortfalls in premium.

Notice Requirement

In order to rescind coverage, plans and insurers must provide at least 30 days advance written notice to each participant who would be affected before coverage may be rescinded, thus affording the affected person or group time to contest the rescission or locate other coverage.

The regulation only addresses rescissions, not cancellations. The preamble says the Departments expect to issue future guidance on any notice requirements for cancellations other than rescission.

Effective Date

The rules regarding rescissions and advance notice are effective for all group health plans and policies for plan years beginning on or after September 23, 2010.

EMPLOYER ACTIONS

Plan administrators should carefully review their summary plan descriptions, enrollment and other plan communication documents to determine whether these allow for retroactive termination in the event of fraud or intentional misrepresentation of material fact. In addition, plan administrators should eliminate any ambiguous terms or provisions in SPDs and plan materials which could provide the basis for a participant to assert that a misrepresentation was merely inadvertent and not intentional.

For example, if the term “spouse” is not defined, an employee with a common-law spouse could claim that the inclusion of the common-law spouse was inadvertent and not an intentional misrepresentation, even in states where common-law marriage is not recognized. To avoid these types of claims, all plan eligibility definitions and participation criteria should be clearly defined in SPDs and plan enrollment materials.

Additional Resources

Fact Sheet: Affordable Care Act’s New Patient’s Bill of Rights