BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 2578
                                                                  Page  1

          Date of Hearing:   April 21, 2010

                                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           


          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  

          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.


           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,  


                                                                  AB 2578
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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  

           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  
          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  

           Analysis Prepared by  :    Mary Ader / APPR. / (916) 319-2081