One of the benefits of the market for individual health insurance in California is that health plans can underwrite.  "What!", I hear you say, "You approve of cherry-picking?".  Well, yes: underwriting motivates people to buy insurance when they are young and healthy in order to indemnify them against catastrophically expensive illness.  If you allow them to wait until they get sick to buy insurance (through guaranteed issue), premiums spiral upwards.

On the other hand, because underwriting is expensive, insurers are tempted to do "post-claims underwriting": liberally enrol applicants, wait until the claims start coming in, and then take a fine-toothed comb to the files of those with high costs, looking for evidence that those beneficiaries deceived the insurer about their health status when they signed up.

Earlier this year, two California carriers, Blue Cross and Kaiser, were fined by the Department of Managed Health Care (DMHC) for "post-claims underwriting".  It looked like DMHC whacked the health plans in cases where a reasonable person could conclude that the beneficiary was trying to deceive.  For example, Kaiser beneficiaries neglected to inform Kaiser if they had seen a Kaiser physician for treatment before they enrolled in a Kaiser plan.  I suppose they figured that Kaiser should already know that!

Let's put these "revocations" in perspective.  One percent of the people in the individual market have claims of over $30,000 annually.  California has about 2.6 million so insured, so about 26,000 people annually would fit the bill here.  How many cancellation complaints have there been? From 2003 through September 2007, an average of 39 annually: less than one sixth of one percent of expensive claims.

The regulators' crusade (DMHC has combined with the Insurance Commissioner) to put an even tighter squeeze on health plans has resulted in the departments' proposing new regulations on cancelling or rescinding individual policies.  The proposed regs clarify that health plans must prove "willful misprepresentation" before taking action.  To see the harm that this will do, let's take a less esoteric example.

Suppose I sell you a lawnmower with a warranty, and the lawnmower breaks a week after you buy it.  If I refused to honor the warranty, you would sue me.  Suppose I was able to wriggle out of it by claiming I did not "willfully misrepresent" the quality of the lawnmower.  I could claim ignorance of the functioning of lawnmowers, or I could say that some 3rd party had told me that lawnmower worked fine.  I never verified it myself, but I believed him.  Or this, that, or some other thing.  There is really no limit to the excuses I could make up to deny "willfully misrepresenting" the lawnmower.

Until health plans gain the skill of mind-reading, they will face the same impossibility. The result will be that health plans will restrict eligibility and increase premiums to reduce the risk of stepping into this minefield.

The proposed regulations are harmful to the public interest.  DMHC and the California Department of Insurance are run by capable leaders.  They should not let themselves be carried away by overconfidence in the state's ability to regulate our health care.