BILL ANALYSIS
AB 2578
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Date of Hearing: April 21, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 2578 (Jones) - As Amended: March 18, 2010
Policy Committee: Health Vote:13-5
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill establishes rate regulation, effective January 1,
2012, of California health plans and insurers (carriers) under
the jurisdiction of the Department of Managed Health Care (DMHC)
and the California Department of Insurance (CDI). Specifically,
this bill:
1)Prohibits health plans and insurers from increasing rates,
including premiums , copayments , coinsurance , and deductibles ,
without prior annual approval from DMHC or CDI. Requires prior
approval to be granted via a highly detailed application
process. Applications are required to include variables such
as overhead loss ratio, reserves, excess tangible net equity,
surpluses, medical expenses, salaries, bonuses, and payments
for specified procedures.
2)Prohibits the approval or renewal of rates that are excessive,
inadequate, or discriminatory. Specifies factors for
regulators to consider in making such determinations.
3)Requires DMHC and CDI to post rate applications online and to
notify the public about any rate application. Requires rates
to be deemed approved by DMHC or CDI unless the respective
department conducts an application hearing.
4)Authorizes consumers to request an administrative hearing
within 45 days of the date of public notice. Requires these
hearings to be conducted by the Office of Administrative
Hearings.
5)Subjects health plans and health insurers to penalties for
violations of provisions of this bill.
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6)Authorizes DMHC and CDI to charge health plans and insurers
for the administrative costs associated with rate regulation
as created in this bill.
FISCAL EFFECT
1)Annual fee-supported special fund costs of at least $30
million to $40 million to DMHC and CDI, combined, to process,
review, approve, post, and monitor activities related to rate
increase approvals. According to the regulators and the
carriers, several thousand policies may be subject to review
per requirements of this bill. The number of policy changes
under review is numerous because each proposed increase in
premiums, copayments, coinsurance, and deductibles would be
subject to review.
2)Workload to DMHC and CDI includes data collection, actuarial
analysis, consumer services, rate enforcement, legal analysis,
administrative law hearings, and continued oversight. Assuming
an expansion of magnitude considered in this bill, DMHC may
increase total staffing by up to 50% and CDI may increase
staffing up to 15%.
3)The significant increase in fee-supported special funds may be
required for several years and especially during major
coverage expansions in several years per requirements of the
federal Patient and Patient Protection and Affordable Care Act
(PL-111-148) (health reform). Actual costs may subside earlier
depending on patterns of health coverage expansions and
related changes in insurance product pricing.
4)Federal health reform includes some support for states to
conduct general rate review and report to the federal
government about unjustified rates. California will likely
receive $5 million each year for the next five years. This
federal funding would offset fee-supported special fund costs
generated by this bill.
COMMENTS
1)Rationale . This bill, supported by a variety of consumer
groups including Health Access, Consumers Union, and the
California Labor Federation, models health insurance
regulation on parts of Proposition 103. Proposition 103,
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passed by voters in 1988, regulates car insurance rates.
According to the author, Proposition 103 has saved consumers
billions of dollars. This bill is designed to increase
oversight of health insurance rates and slow ever-escalating
increases in premiums.
2)Burdensome Increases in Premiums . According to the author,
sponsor, and published data, the country's ten largest
insurers' have increased premiums 250%, or ten times faster
than inflation over the past decade. In addition, the author
indicates profits at the five largest insurers grew more than
50% from 2008 to 2009. In addition, one large California
insurer has garnered national attention by proposing to
increase premiums in the individual insurance market by up to
39%. The author, when Chair of the Assembly Health Committee,
held an oversight hearing about this specific rate increase.
Congressional hearings have also been held on the same topic.
3)Recent Massachusetts Experience with Rate Regulation . The
state of Massachusetts is currently involved in a legal battle
over health insurance rate regulation. The governor of that
state recently denied more than 200 proposed double-digit
increases by insurers. This action was the first of its kind
in that state. Insurers claimed these rate rejections would
cost them hundreds of millions of dollars. The insurers have
threatened to stop writing new health coverage for individuals
and small businesses. A judge has denied the insurers' request
to increase premiums and the insurers are appealing the
decision.
4)Proposition 103 Comparisons . Several years ago the RAND
Institute considered whether the approach of Proposition 103
is applicable to the health insurance market. RAND concluded
the regulation of health care rates would likely have a
short-term impact, but would do little in the longer term to
control root causes of health care inflation. These root
causes include pharmaceutical and technology expenses, the
aging of the population, increased health needs across age
groups, and labor costs.
RAND also compared health and car insurance markets and
identified important differences. Unlike car insurers, health
plans have greater control over the services used. Most health
insurance is employer-based, while car insurance is purchased
individually. Because many people with health insurance are
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not subject to underwriting, there is less incentive to change
behavior, as compared to driving, where records and history
matter to premium costs. A good driver discount in car
insurance is difficult to transfer to the health care setting
because individual health is difficult to monitor health
behaviors over time.
5)Opposition . Health plans and insurers, the California Medical
Association, the California Hospital Association, and the
Chamber of Commerce strenuously oppose this bill. Opponents
indicate the framework proposed in this bill increases
bureaucratic controls without reducing health care costs.
Opponents indicate the comparison to Proposition 103 is
misplaced and that savings in the car insurance market have
accrued due to judicial limitations imposed on law suits,
safety changes, and more rigorous enforcement of safety laws.
Opponents are concerned insurance rate regulation will further
reduce access to health coverage and product choice for
consumers.
6)Related Legislation
a) AB 1554 (Jones) in 2007 and AB 1219 (Jones) in 2009 were
substantially similar to AB 2578. AB 1554 failed passage in
the Senate Health Committee and AB 1218 failed passage in
the Assembly Health Committee.
b) SB 425 (Ortiz) in 2006 required health plans and
insurers to obtain prior approval for a rate increase. SB
425 was not heard in the Senate Health Committee.
c) SB 26 (Figueroa) in 2003 required health plan and
insurer regulation and required significant health premium
refunds. SB 26 was never heard in the Senate Insurance
Committee.
Analysis Prepared by : Mary Ader / APPR. / (916) 319-2081