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May a Health Plan Rescind a Participant’s Coverage Based on a Plan Error?



QUESTION: Our company sponsors a group health plan that covers employees who work at least 30 hours per week. After reassigning one of our covered full-time employees to a part-time position, we mistakenly continued to provide coverage for two months—collecting premiums and paying claims for that period. After a routine audit, we discovered the error. May we rescind the employee’s health coverage effective as of the date that his status changed from full-time to part-time?

ANSWER: No, the plan may not rescind coverage in this instance. Health care reform prohibits rescissions—defined as the cancellation or discontinuation of coverage with retroactive effect—except in cases of fraud or intentional misrepresentation of a material fact as prohibited by the terms of the plan (see our Checkpoint article). Even when there is fraud or misrepresentation, plans must give at least 30 days’ advance written notice of a rescission.

In the situation that you describe, there was no fraud or intentional misrepresentation of a material fact, so the rescission of coverage as of the date the employee’s status changed to part-time would not be permissible. Your plan may cancel the employee’s coverage prospectively, subject to other applicable federal and state laws.

For more information, see EBIA’s Health Care Reform manual at Section X.D (“Prohibition on Rescissions”) and EBIA’s HIPAA Portability, Privacy & Security manual at Section XII.B (“Prohibition on Rescissions”).

Contributing Editors: EBIA Staff.

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