BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 1422
A
AUTHOR: Bass
B
AMENDED: August 25, 2009
HEARING DATE: August 26, 2009
1
CONSULTANT:
4
Dunstan/
2
2
SUBJECT
Funding for children's health care coverage: gross premiums
tax
SUMMARY
Grants the California Children and Families Commission
authority to transfer funds between specified accounts that
are used to fund the California Children and Families
Program. Increases the premiums paid by families for
children enrolled in the Healthy Families program.
Provides that Medi-Cal managed care plans would be subject
to the gross premium taxes, which are levied pursuant to
section 28 of article XIII of the California Constitution.
CHANGES TO EXISTING LAW
Existing federal law:
Establishes the Medicaid program which provides
comprehensive health coverage to low-income eligible
individuals and families, including children; the aged,
blind, and disabled; and pregnant women, through a program
that reimburses states for the Medicaid programs in the
individual states. Requires states to set actuarially
Continued---
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
2
sound rates for Medicaid managed care plans. Prevents
states from taxing specified Medicare revenues.
Establishes the Children's Insurance Fund (CHIP) which
provides matching funds for state health insurance
programs.
Existing state law:
Establishes the state's Medicaid program known as Medi-Cal,
administered by the Department of Health Care Services
(DHCS), which provides comprehensive health benefits to
low-income children, their parents or caretaker relatives,
pregnant women, seniors, persons with disabilities, nursing
home residents and refugees who meet specified eligibility
criteria.
Authorizes DHCS to contract, on a bid or nonbid basis, with
any qualified individual, organization, or entity to
provide services to, arrange for, or case manage, the care
of Medi-Cal beneficiaries. Defines a Medi-Cal managed care
plan as any entity that enters into one of several types of
contracts with DHCS including county organized health
systems (COHS), geographic managed care plans and local
initiatives. Requires DHCS to use actuarial methods in
calculating rates for managed care plans.
Establishes the California Children and Families Program
(CCFP), which was created by the enactment of Proposition
10 in November 1998, and is funded by a tax on tobacco
products equivalent to $.50 per pack of cigarettes.
Creates the California Children and Families Trust Fund
(Trust Fund) to receive revenue from the tax on tobacco
products and requires the revenues to be appropriated for
the purposes of promoting, supporting, and improving the
development of children from birth to five years of age and
to offset certain revenue losses to Proposition 99
programs. Allocates funds for specified purposes and
places those allocated funds in specified accounts.
Creates the California Children and Families Commission
(CCFC), with members appointed by the Governor, the Speaker
of the Assembly, and the Senate Rules Committee, to
administer the program, formulate statewide program
guidelines, distribute educational materials, provide
technical assistance to counties, and conduct research and
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
3
evaluation of early childhood development programs.
Establishes the Healthy Families program to provide
low-cost insurance, including health, dental and vision
coverage to children who do not have health insurance, do
not qualify for free Medi-Cal and are in families at or
below 250 percent of the federal poverty level (FPL).
Provides that the Managed Risk Medical Insurance Board
(MRMIB) administers Healthy Families. Establishes premiums
that families must pay for their Healthy Families coverage.
Requires insurers (generally defined as property insurance,
life insurance, casualty insurance, some preferred provider
organizations and some point of service plans) to pay a tax
based upon gross premiums received. Establishes that the
premium tax is 2.35 percent of annual gross premiums and is
in lieu of all other taxes and licenses upon insurers and
their property, with certain specified exceptions (e.g.,
taxes upon real estate and DMV license fees). This tax is
established in section 28 of article XIII of the California
Constitution.
This bill:
Grants the California Children and Families Commission the
authority to transfer funds that are allocated to the state
commission, but are not needed for the specific purposes as
directed in law to the Unallocated Account. The specific
accounts from which the state commission may transfer funds
are the Mass Media Communications Account, the Education
Account, Child Care Account, and Research and Development
Account. Declares legislative intent that these changes
are in furtherance of the California Children and Families
Act of 1998, an initiative statute.
Increases, commencing November 1, 2009, the premiums paid
by certain families for children enrolled in the Healthy
Families Program. Provides that the monthly increase will
only apply for families whose income is greater than 150
percent of the FPL, with families whose family income
exceeds 200 percent paying a greater increase. Requires
the Managed Risk Medical Insurance Board (MRMIB) to notify
families of the increase in premiums and provide them an
opportunity to demonstrate that their family income has
decreased making them eligible for a lower premium. For
families enrolled in the community value plan, the cheapest
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
4
plan for subscribers, the premiums would change in the
following manner:
No changes for families at or below 150 percent of
the FPL.
For families whose income is greater than 150
percent of the FPL, but does not exceed 200 percent,
their premium will increased from $9 to $13 per child
with a family maximum increasing from $27 to $39.
For families whose income is greater than 200
percent of the FPL, but does not exceed 250 percent,
their premium will increased from $14 to $21 per child
with a family maximum increasing from $42 to $63.
Grants MRMIB the authority to use emergency regulations to
modify health, dental and visions benefits or other program
requirements for the 2009-10 and 2010-2011 fiscal years.
Provides that Medi-Cal managed care plans are subject to
the gross premium taxes established by section 28 of
article XIII of the California Constitution. The Medi-Cal
managed care plans would the gross premiums tax rate of
2.35 percent on their total operating revenues.
Provides that the funds raised will be continuously
appropriated with 38.41 percent of the total revenues to
DHCS for purposes of the Medical program and 61.59 percent
of the total revenues to MRMIB for the Healthy Families
program. Provides that the gross premiums tax will be paid
on total operating revenue of Medi-Cal managed care plans,
including, but not limited to, Medi-Cal services. Exempts
dental managed care plans from the gross premiums tax.
Amends the laws governing the gross premium tax for
insurers to include Medi-Cal managed care plans, including
provisions related to timing of payments, handling of
overpayments, prepayment requirements, penalties, in lieu
taxes and method and procedures for filing returns.
Renders the provisions related to the gross premium tax for
Medi-Cal managed care plans inoperable on January 1, 2011.
Provides that the provisions of the bill are inoperable if
specified conditions occur, including lack of federal
approval and matching funds, the revenues raised by the
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
5
premiums tax are diverted to purposes that are not
contained in this bill and a judicial determination that
this tax is found to be in lieu of all other taxes that
insurers must ordinarily pay.
Directs DHCS to use the funds attributable to the tax on
managed care plans, for the purposes of ensuring that the
Medi-Cal managed care plans receive contracted rates of
payment for services that are actuarially sound. Provides
for a delay in paying the tax due if DHCS has not met their
statutory obligations related to calculating rates and
making payments. Allows DHCS to retroactively increase
rates and make payments to plans.
Authorizes the Director of Finance to make necessary budget
adjustments to allow the expenditure of funds allocated by
the California Children and Families Commission. Requires
that appropriate committees of the Legislature be notified
within 30 days.
Declares that this bill is an urgency statute in order to
address important issues related to health care.
FISCAL IMPACT
According to DHCS, the gross premiums tax for Medi-Cal
managed care plans is expected to raise $150 million on an
annual basis. Medi-Cal managed care plans have previously
been assessed a Quality Assurance Fee which generated
revenues that were matched by the federal government.
Federal law eliminated this fee and therefore the matching
program. This measure imposes the gross premiums tax on
Medi-Cal managed care plans which these plans currently do
not pay and would then result in significant matching of
federal dollars as follows:
These new funds would be used as matching funds to
stabilize the state's Medi-Cal and Healthy Families
programs pursuant to the following percentages: 38.41
percent of total revenues to the Medi-Cal program and
61.59 percent of total revenues to the Healthy
Families program. (This division of funds reflects
the author's proposed amendments).
Under the federal stimulus package, the state is
currently receiving an enhanced level of reimbursement
through the Medi-Cal program. The enhanced match will
be applied to the revenues that are generated through
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
6
the gross premiums tax.
The measure has a continuous appropriation that
would direct the additional revenues to maintain the
level of funding in the Healthy Families' Program. 2-1
match.
BACKGROUND AND DISCUSSION
Purpose of the bill
The bill was introduced to address the problem of the
funding shortfall in the Healthy Families program, which in
this fiscal year is facing a $194 million shortfall in
state funds as a result of the budget and other actions.
With this significant reduction, MRMIB is contemplating
disenrolling significant numbers of children, beginning in
October. As a result of the shortfall, the state will not
be able to use approximately $400 million in federal funds.
Originally, MRMIB projected that 650,000 children would
need to be disenrolled. However, the California Children
and Families Commission voted to grant MRMIB $81 million,
which would allow coverage for children aged zero to five
to be maintained this year. Even with these additional
funds, MRMIB would need to disenroll about 500,000
children, or more than half of the program's total
enrollment of 950,000 children.
Families would be notified that they will be disenrolled
starting in early September.
This bill would provide additional funding besides the
allocation from the California Children and Families
Commission. MRMIB is also pursuing other program changes
to save funds. Besides the premium increases that are
contained in the bill, MRMIB is considering increasing
co-pays from $5 to $10 for non-preventive care; increasing
co-pays for ER; increase co-pays for non-generics and
potentially conforming the dental to state employees,
namely using a dental managed care plan for the first two
years of enrollment.
Gross premiums tax
The gross premiums tax is paid by insurers (generally
defined as property insurance, life insurance, casualty
insurance and some preferred provider organizations and
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
7
point of service plans). The premium tax is 2.35 percent
of annual gross premiums. The premium tax is in lieu of
all other taxes and licenses upon insurers and their
property, with certain specified exceptions (e.g., taxes
upon real estate and DMV license fees). This tax is
established in the California Constitution (section 28 of
article XIII) and is considered an excise tax on insurers
for the privilege of transacting insurance in the state.
Health plans that operate under the regulation of the DMHC
("managed care" plans that include HMOs, some preferred
provider organizations or PPOs, and hybrid plans called
point of service), including Medi-Cal managed care plans,
are subject to the Knox-Keene Act. Generally these plans
are not subject to the gross premiums tax.
Provider taxes and fees
The Medi-Cal managed care plans currently pay a provider
fee as recognized under federal law. Federal law
authorizes states to levy fees on health care providers if
the fees meet federal requirements. Many states (including
California) fund a portion of their share of Medicaid
Program costs through a fee on health care providers.
Under these funding methods, states collect funds (through
fees, taxes, or other means) from providers, which can then
be matched with federal funds. The resulting combination
of state and federal funds is then used to increase
Medicaid reimbursement to providers. California currently
has provider fees on intermediate care facilities for the
developmentally disabled, Medi-Cal managed care plans and
skilled nursing facilities.
The provider fee on Medi-Cal managed care plans, termed a
quality improvement fee (QIF), is assessed on Medi-Cal
managed care plans at a rate of 5.5 percent of revenues.
The net increase in revenue is deposited into the state
general fund, and is estimated to be $238.8 million (total
funds) in 2008-09. Half of the fee is used to draw down
federal funds and is returned to the Medi-Cal managed care
plans through increased rates The QIF is currently assessed
on Medi-Cal managed care revenue, but changes in federal
law will result in this fee sunsetting on October 1, 2009
as it no longer complies with federal requirements. To
prevent states from only levying an assessment on certain
providers, federal law now requires provider fees to be
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
8
"broad based" and uniformly imposed throughout a
jurisdiction, meaning that they cannot be levied on a
subgroup of providers, such as only those who are enrolled
in Medicaid programs.
Because the gross premiums tax is an existing tax on a
broad group of insurers, the overwhelming majority of which
are not health care insurers, it can be extended to
Medi-Cal managed care plans without being considered a
provider fee under federal law. As such, the state does
not have to meet federal requirements for provider fees to
obtain federal matching funds, using this source of
revenues as the state match.
Medi-Cal managed care
Under the traditional Medi-Cal fee-for-service program,
providers are reimbursed for every service they provide and
assume no financial risk. Under Medi-Cal managed care,
DHCS reimburses health care plans on a "capitated" basis,
which is a set payment per enrolled person, per month,
regardless of the number of services, if any, a Medi-Cal
beneficiary receives. The health plans that contract with
the state on a capitated basis assume financial risk, in
that it may cost them more or less money than the capitated
amount paid to them to deliver the necessary care.
Medi-Cal managed care plans operate in 23 of the state's 58
counties, generally urban counties with larger populations.
DHCS is negotiating expansion of managed care in an
additional nine counties. There are three types of
Medi-Cal managed care plans:
County organized health systems (COHS). Under this
model, there is one health plan for Medi-Cal, run by a
public agency and governed by an independent board that
includes local representatives. Nearly all Medi-Cal
beneficiaries are required to receive their care from a
COHS plan. The five COHS plans operate in nine counties
in the state.
Geographic Managed Care Plan (GMC). The GMC system
allows Medi-Cal beneficiaries to choose one of many
commercial HMOs operating in a county. GMC is limited to
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
9
two counties.
The Two-Plan Model. In these counties, DHCS contracts
with only two managed care plans. Generally, one is
locally developed and operated and is known as a local
initiative, while the second is a commercial health plan.
Medi-Cal coverage is provided in twelve counties using
the two-plan model.
Both state and federal law require that managed care plans
be paid rates that are actuarially sound. Such a
requirement ensures that managed care plans are adequately
paid a rate that takes into consideration the costs they
incur and the populations that they serve. This federal
regulatory criterion is a significant protection for
managed care plans. Plans have sued in federal court in
other states, to force compliance with the federal rate
requirements.
This principle does not guarantee that plans are paid for
their costs, but that the state must set rates that
accurately reflect the costs of doing business for plans as
a whole. Complying with this requirement is complex.
Several years ago DHCS contracted with Mercer Consulting to
develop a rate-setting methodology that would meet these
requirements and DHCS is now using this methodology for
rate setting.
Plans would be able to avoid having to pay on their
revenues from other programs by shifting them to a separate
corporate entity, which many have already done. Public
plans, like the COHS, are less likely to have separated
their lines of business. As a result, the COHS are likely
to face slightly higher tax bills because they will be
paying for multiple lines of business. They have the
option of pursuing a different structure, but they face
greater administrative and logistical difficulties in
establishing a separate entity than commercial plans. The
COHS report that their other lines of business besides
Medi-Cal are relatively small and will not increase the
taxes they pay by a significant magnitude. The exception
is Medicare revenues which, according to DHCS, cannot be
taxed by states.
Proposition 10--The California Children and Families
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
10
Program
This program, which was established by the enactment of
Proposition 10 in November 1998, is funded by a tax on
tobacco products equivalent to $.50 per pack of cigarettes.
The revenues are appropriated for the purposes of
promoting, supporting, and improving the development of
children from birth to five years of age and to offset
certain revenue losses to Proposition 99 programs. The
initiative allocated a defined proportion of the funds
raised by Proposition 10 to specific purposes and accounts.
The purpose of Proposition 10 was to create a coordinated,
integrated, and comprehensive statewide program that
supports early childhood development services from the
prenatal stage to five years of age. Research presented by
the Carnegie Corporation and others at the 1997 White House
Conference on Early Childhood Development and Learning
showed that the first three years of a child's life are
critical, not only for healthy brain development, but also
for the physical, social, emotional, and intellectual
growth of the child.
The bill's provisions related to the California Children
and Families Program grant the commission greater
flexibility in spending. Current law provides specific
allocations for statewide programs. For example, six
percent is allocated to the Mass Media Communications
Account for specified purposes, with specific allocations
also being made for child care, education and research and
development. Among other things, granting the commission
flexibility would allow it to increase funding of
children's health programs, as it has done twice recently
in an effort to assist Healthy Families.
Children's Health Insurance Program (CHIP)
CHIP was adopted as part of the federal Balanced Budget Act
of 1997. California's program is called Healthy Families.
Under CHIP, the federal government uses a formula to
determine how much money each state will be allocated, the
money is then used to provide the federal match to state
funds. California currently receives 65 percent of its
Healthy Families program expenses from the federal match;
the state contributes the other 35 percent.
Uninsured children
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
11
There are approximately 700,000 children in California who
are not covered by health insurance, according to
researchers. Many of these uninsured children come from
low-income working families. As a result of the lack of
insurance, they are less likely to visit a doctor, less
likely to receive preventive services, and may delay
seeking necessary care. Often when they seek care, they
have more serious conditions and require more extensive and
costly treatment.
According to the UCLA Center for Health Policy Research,
among the nearly 700,000 children who are uninsured, over
half are eligible for two of California's public health
insurance programs; approximately 200,000 for Medi-Cal and
180,000 for Healthy Families. Another 150,000 are eligible
for local children's programs, although these are not
offered in all counties. Approximately the same number of
children were not eligible either because of income or
immigration status.
Studies have reported that when parents of uninsured
children who are potentially eligible for Medi-Cal were
asked why their children were not enrolled, close to eight
percent reported being unsure about their children's
eligibility as the reason for not applying, and less than
one percent did not know the program existed. Parents of
about one in eight uninsured eligible children objected to
some characteristics of the program, particularly the
onerous paperwork. Of the uninsured children who are
eligible for Healthy Families, parents of nearly 25 percent
did not know of the program's existence and 20 percent knew
of it but thought that their children were not eligible.
Consequences of being uninsured
Uninsured children reported slightly lower health status
than those enrolled in Medi-Cal or Healthy Families. Over
three-fourths of insured children or their parents reported
their health as "excellent" or "very good," while less than
half of uninsured children reported the same. Uninsured
children were also more than three times as likely to
report their health status as "fair" or "poor" than those
with job-based coverage. Nearly half of the uninsured
reported no usual source of care and were only half as
likely as those with Medi-Cal to list a doctor's office or
health maintenance organization as their usual source of
care and only one-third as likely as those with job-based
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
12
coverage or individually purchased private insurance. Over
50 percent of the uninsured cited lack of insurance or cost
as a reason for not having a usual source of care, compared
to about 33 percent of those with Medi-Cal or other public
coverage and less than one percent of those with job-based
or individually purchased coverage.
Related bills
SB X3 25 (Cox), subject to voter approval, would eliminate
those percentages for allocations to various accounts and
would, instead, provide that those funds, with specified
exceptions, shall be transferred to the General Fund for
appropriation by the Legislature for purposes of the
Healthy Families program and the Medi-Cal program. This
bill is in Senate Rules Committee.
Prior legislation
SB X1 5 (Cox) of 2008, would have eliminated existing
allocations of tobacco tax revenue under Proposition 10 to
state and local county children and families commission
accounts and, instead, requires those funds to be used to
provide health care services and health care initiatives,
including, but not limited to, the Healthy Families
program.
SB 893 (Cox) of 2007, contained substantially similar
provisions as contained in SB X1 5 and failed passage by a
vote of 4-6 when heard in the Senate Health Committee on
April 25, 2007.
Arguments in support
The California Association of Health Plans supports to bill
to help ensure thousand of children in low income families
do not lose vital health care coverage by providing support
for the Medi-Cal and Healthy Families programs. They argue
that this bill represents part of an overall approach
involving contributions from various sources, including the
health plans. The Local Health Plans of California support
the bill because it would help the state avoid disenrolling
children from the Healthy Families program. They also
support the authority the bill gives to MRMIB to enact
regulations to make changes to the Healthy Families
program.
Letter of concern
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
13
Access Dental, a dental Medi-Cal managed care plan, and the
California Association of Dental Plans writes that they
strongly support the purpose of AB 1422. However, they are
concerned that since most dental plans do not have a stand
alone entity for their Medi-Cal services, the tax would be
imposed on all of their businesses, which would result in
them paying the tax on their significant commercial
revenues. They argue that since the tax is retroactive,
plans could not set up a separate entity to segregate their
Medi-Cal lines of business. They note that the bill would
result in the dental plans paying far more in revenue than
they could ever get back in their Medi-Cal rates. They
also note that the dental plans have not been paying the
QIF that other managed care plans have been paying.
PRIOR ACTIONS
Not relevant to this version of the bill
COMMENTS
1. New version of bill address concerns of dental plans.
The amendments in the August 25th version of the bill
clarify that dental plans are
not subject to the gross premiums tax.
2. Structure of plan can affect its tax premiums.
If a Medi-Cal managed care plan has not separated their
lines of business, they could face slightly higher tax
bills as the premium tax is levied on all operating
revenues of the plan. Many plans have separated out
their lines of business while other may contain other
sources of revenues such as Healthy Families or Healthy
Kids. Plans have the option of pursuing a different
structure, but could face some administrative and
logistical hurdles in establishing a separate entity and
may require assistance from DHCS and/or DMHC to complete
the task. Provided that the other lines of business are
small, combining lines of business will not increase the
taxes paid by a significant magnitude. Health Access
California supports the bill as a means to substantially
restore the cuts made to the Healthy Families program but
notes their preference that the premiums be sunsetted
because of the burden they can present to low and
STAFF ANALYSIS OF ASSEMBLY BILL 1422 (Bass) Page
14
moderate income families.
3. AB 1422 is double referred.
The bill will be heard first by Senate Revenue and
Taxation Committee. Because of the urgency of this bill,
there may be amendments agreed to in Revenue and Taxation
Committee or Health Committee that will need to be taken
in Appropriations Committee.
PRIOR ACTIONS
Senate Revenue and Taxation:6-1
POSITIONS
Support: California Association of Health Plans
Health Access California
Local Health Plans of California
Oppose: None received
-- END --