Many employers have asked for clarification of rescission and what is allowable due to "normal course of business". Below is a response providing some guidance and examples on appropriate rescissions. Additionally, we have provided a link to the interim final rules on rescissions that was released on June 28, 2010.
Q7: The Affordable Care Act (through Public Health Service Act section 2712) generally provides that plans and issuers must not rescind coverage unless there is fraud or an individual makes an intentional misrepresentation of material fact. A rescission is defined as it is commonly understood under the law – a cancellation or discontinuance of coverage that has a retroactive effect, except to the extent attributable to a failure to pay timely premiums towards coverage.
Is the exception to the statutory ban on rescission limited to fraudulent or intentional misrepresentations about prior medical history? What about retroactive terminations of coverage in the “normal course of business”?
The statutory prohibition related to rescissions is not limited to rescissions based on fraudulent or intentional misrepresentations about prior medical history. An example in the Departments’ interim final regulations on rescissions clarifies that some plan errors (such as mistakenly covering a part-time employee and providing coverage upon which the employee relies for some time) may be cancelled prospectively once identified, but not retroactively rescinded unless there was some fraud or intentional
misrepresentation by the employee.
On the other hand, some plans and issuers have commented that some employers’ human resource departments may reconcile lists of eligible individuals with their plan or issuer via data feed only once per month. If a plan covers only active employees (subject to the COBRA continuation coverage provisions) and an employee pays no premiums for coverage after termination of employment, the Departments do not consider the retroactive elimination of coverage back to the date of termination of employment, due to delay in administrative record-keeping, to be a rescission.
Similarly, if a plan does not cover ex-spouses (subject to the COBRA continuation coverage provisions) and the plan is not notified of a divorce and the full COBRA premium is not paid by the employee or ex-spouse for coverage, the Departments do not consider a plan’s termination of coverage retroactive to the divorce to be a rescission of coverage. (Of course, in such situations COBRA may require coverage to be offered for up to 36 months if the COBRA applicable premium is paid by the qualified beneficiary.)
Per the interim final rules: Rescission is permitted only for an act, practice, or omission that constitutes fraud, or an intentional misrepresentation of a material fact. Rescission is not permitted in the case of inadvertentincorrect statementsof fact. The rescission restriction applies regardless of any contestability period that may otherwise apply.
If the rescission is permitted under federal and state law, the coverage may be retroactively terminated. Thirty (30) calendar days advance written notice is required when coverage is to be rescinded, and the notice must include the appeal rights as required by law and as provided in the member’s plan benefit documents. The purpose for the advance notice is to allow the affected individual(s)/group(s) to explore other coverage and their rights. To re-clarify: Even though prior notice must be provided in the case of a rescission, applicable law may permit the rescission to void coverage retroactively.
The Departments have indicated they expect to issue additional guidance on any notice requirements under PHS Act section 2712 for cancellations of coverage other than in the case of rescission. This may take place prior to the final regulations being issued.
In addition, some state laws go beyond the federal requirements and the PPACA generally allows states to impose requirements on issuers (fully insured plans) in the group market that are more protective than the Federal provisions.