HIPAA, Rescission and Insurer Conflicts of Interest
Today the U.S. Court of Appeals for the Eighth Circuit issued a fascinating opinion, Werdehausen v. Benicorp Ins. Co., which you can find on the court’s website here. When Werdehausen’s employer switched from one group insurer to another, Benicorp, the new insurer, required all the employees of the company to complete enrollment forms and fill out health history questionnaires. Benicorp made clear that it could use the medical histories not to determine whether or not it would insure the group but only to set the group’s insurance premium. The enrollment materials also reserved Benicorp’s right to rescind an individual’s coverage if there were material misstatements in a person’s application. Werdehausen had a history of back problems, including surgery just a few months before the date of the application, which he properly disclosed. What he did not state in the enrollment materials was that he had been told by his doctor about two weeks before the application that he would need surgery for a herniated disk in his neck in the future. After Werdehausen had that surgery on his cervical spine a few months later, Benicorp investigated his medical history, found the omission and rescinded his coverage. Werdehausen sued and the trial court upheld Benicorp’s action. Werdehausen appealed to the Eighth Circuit and that court reversed. Initially, the court discussed the conflicting financial interests underlying Benicorp’s actions. On the one hand, Benicorp was prevented by HIPAA from imposing any pre-existing conditions limitation on any of the new insureds. However, HIPAA did not limit the ability of Benicorp to adjust its premium based on the health histories of the members of the group. In addition, Benicorp specifically reserved the right to adjust an individual’s premium retroactively if it determined that any misstatement regarding health history, such as Werdehausen’s, was made in the enrollment process. Despite this ability, testimony from Benicorp’s claims review manager was that company policy was never to retroactively adjust the premium when misstatements were uncovered. Rather the more drastic step, rescission, was performed in every case. The court determined that this action by Benicorp was a substantial conflict of interest. It states: "The fortuitous business impact of this automatic rescission policy comes at the expense of the federal policy enacted in HIPAA–it results in retroactive non-coverage of employees who are most in need of group health care coverage because of preexisting medical conditions, when under HIPAA those employees could not have been excluded from the plan because of preexisting conditions at the time the policy issued. If an ERISA fiduciary decides to retroactively rescind an employee’s coverage solely on the basis of an automatic rescission policy, when it could have recouped any loss to the plan by retroactively increasing the employer’s premium, we find it hard to conceive of a more 'palpable' financial conflict of interest, directly connected to the substantive benefit decision made and demonstrating that the result reached was an arbitrary exercise of the fiduciary’s discretion that conflicts with its obligation to 'discharge [its] duties with respect to a plan solely in the interest of the participants and beneficiaries.' . . . Judicial review of such a decision is therefore de novo.” The decision also discusses how, despite the fact that HIPAA provides no private cause of action for a violation of its terms, Werdehausen had a remedy under ERISA for Benicorp's HIPAA transgression. In addition, the opinion discusses how the Missouri Health Care Utilization Review Act is saved from ERISA preemption. All in all, a meaty read. Thank you Chief Judge Loken!