BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 2578| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 2578 Author: Jones (D), et al Amended: 8/17/10 in Senate Vote: 21 SENATE HEALTH COMMITTEE : 5-1, 6/23/10 AYES: Alquist, Cedillo, Leno, Pavley, Romero NOES: Aanestad NO VOTE RECORDED: Strickland, Cox, Negrete McLeod SENATE APPROPRIATIONS COMMITTEE : 7-4, 8/12/10 AYES: Kehoe, Alquist, Corbett, Leno, Price, Wolk, Yee NOES: Ashburn, Emmerson, Walters, Wyland ASSEMBLY FLOOR : 43-28, 6/2/10 - See last page for vote SUBJECT : Health care coverage: rate approval SOURCE : Author DIGEST : This bill requires health care service plans and health insurers, effective January 1, 2012, to apply for prior approval of proposed rate increases, under specified conditions, imposes on the Department of Managed Health Care (DMHC) and California Department of Insurance (CDI) specific rate review criteria, timelines and hearing requirements, and states that any proposed rate that is not acted on by DMHC or CDI on its own discretion within 60 days is deemed approved. CONTINUED AB 2578 Page 2 ANALYSIS : Existing law 1. Provides for the regulation of health plans and insurers by the Department of Managed Health Care (DMHC) and the California Department of Insurance (CDI), respectively. 2. Limits administrative costs for health plans regulated by DMHC to 15 percent and establishes minimum medical loss ratios for health insurers regulated by CDI for specified individual indemnity dental and vision policies (50 percent), and minimum loss ratios for individual health insurance, excluding indemnity payout policies (70 percent). 3. Authorizes DMHC and CDI to charge fees associated with regulatory filings and, in addition, requires that the regulatory enforcement programs be entirely paid for by health plan and insurer fees and assessments. 4. Establishes the Consumer Participation Program (CPP) within DMHC, which allows for the awarding of reasonable advocacy and witness fees to any person who meets specified criteria and who has made a substantial contribution on behalf of consumers to the adoption of a regulation, order, or decision made by the director. This bill: 1. Prohibits health plans and insurers from implementing a rate increase without regulatory approval, except as specified in this bill, and requires health plans and insurers to submit proposed rate increases to DMHC or CDI respectively, for review and approval. Specifies certain information that is required to be included in a rate application. 2. Defines "rate" for purposes of this bill to include premiums, copayments, coinsurance obligations, deductibles, and other charges. 3. Exempts Medicare supplement contracts and specialized health plan contracts covering dental services or vision AB 2578 Page 3 services. 4. Prohibits any rate from being approved or remaining in effect that is excessive, inadequate, unfairly discriminatory, or otherwise in violation of specified existing law. 5. Requires DMHC or CDI to consider whether the rate mathematically reflects the health plan or insurer's investment income, and is reasonable in comparison to coverage benefits. Prohibits DMHC and CDI from considering the degree of competition. 6. Requires DMHC and CDI review a rate application pursuant to regulations promulgated by the department to determine reasonable rates for medical expenses and all nonmedical expenses, including the rate of return, surplus, overhead, and administration. 7. Requires health plans and insurers to file any required rate application as a complete application, as specified, with the respective regulator, for a rate increase that will become effective on or after January 1, 2012. 8. Allows for no more than one rate application, per product, per year, and requires officers of the company, specifically the chief executive and chief financial officers, to certify the data, information, and representations in the rate filing. 9. Imposes a burden of proof on health plans and insurers to provide the DMHC or CDI with evidence and documents establishing, by a preponderance of the evidence, the health plan or insurer's compliance with the requirements of this bill. 10.Requires health plans and insurers to submit rate applications electronically and requires DMHC or CDI to post the applications on their websites within 10 days of receipt. 11.Requires all information submitted in a rate application, and all information submitted in support of AB 2578 Page 4 the application, to be subject to the California Public Records Act, except for financial data, as specified. 12.Requires DMHC or CDI to review all rate increases which become effective January 1, 2010 to December 31, 2011 for compliance with this bill. 13.Requires DMHC or CDI to notify the media and the public of any rate application submitted by a health plan or insurer, as specified, and requires the rate to be deemed approved within 60 days after the date of the public notice, unless the regulatory agency conducts a hearing, as specified. 14.Requires all hearings to be conducted in accordance with laws governing state administrative hearings, including that the hearing be conducted by an administrative law judge (ALJ) in the Department of General Services Office of Administrative Hearings, that the DMHC or CDI be subject to required notices and discovery, and that the decision of the ALJ is subject to review by the DMHC or CDI. 15.Requires the right to discovery to be liberally construed and requires discovery disputes to be determined by the ALJ. 16.Authorizes any person to initiate or intervene in any of the proceedings, establishes parameters for judicial review, and ensures the right of consumers to challenge final decisions by the regulator in court, as specified. 17.Requires DMHC, CDI, or the court to award reasonable costs, including witness fees, for persons meeting specified requirements, and requires the applicant to pay those fees. 18.Subjects health plans and insurers to penalties for violation of the provisions in this bill, and authorizes DMHC and CDI to charge fees to cover costs of applications filed, and establishes two new state special funds to receive those revenues for the sole purpose of implementing this bill. AB 2578 Page 5 FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes Local: Yes According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund CDI rate review $7,700 $15,400$15,400 Special* and approval DMHC rate review $10,000 $20,000 $20,000Special** and approval *Department of Insurance Health Rate Approval Fund **Department of Managed Health Care Rate Approval Fund ***These amounts could be partially offset by federal grant funds SUPPORT : (unable to verify at time of writing) American Association of Retired Persons American Federation of State, County and Municipal Employees, AFL-CIO California Alliance for Retired Americans California Chiropractic Association California Congress of Seniors California Federation of Teachers California Labor Federation California National Organization for Women California Psychological Association California Retired Teachers Association California School Employees Association California Teachers Association CALPIRG Community Resource Project Consumer Federation of California Consumer Watchdog Consumers Union Democratic Party, Los Angeles County Disability Rights Legal Center AB 2578 Page 6 Glendale City Employees Association Gray Panthers Sacramento Greenlining Institute Health Access California Health Care for All - California International Longshore and Warehouse Union - N. CA District Council Korean Health, Education, Information and Research Center Occupational Therapy Association of California Organization of SMUD Employees Planned Parenthood Affiliates of California San Bernardino Public Employees Association San Luis Obispo County Employees Association Santa Rosa City Employees Association Senator Dianne Feinstein Ship Clerks' Association, Local 34 Six Rivers Planned Parenthood Teamsters United Food and Commercial Workers OPPOSITION : (unable to verify at time of writing) Anthem Blue Cross America's Health Insurance Plans Association of California Life & Health Insurance Companies Blue Shield of California California Advocates, Inc California Academy of Family Physicians California Association of Health Plans California Association of Joint Powers Authorities California Chamber of Commerce California Hospital Association California Medical Association California Taxpayers Association CSAC Excess Insurance Authority Civil Justice Association of California Health Net Kaiser Permanente ARGUMENTS IN SUPPORT : Senator Dianne Feinstein writes in support, stating that she has also introduced similar legislation nationally which gives the Secretary of Health and Human Services the authority to deny or modify rate increases that are found to be unjustified. Senator AB 2578 Page 7 Feinstein points out that it is critical to protect California consumers given that insurance companies are driven by the need to return profits to shareholders. Without proper regulatory oversight, health plans and insurers will continue to raise rates and drop people from coverage to maximize profits. The California Labor Federation argues that this bill gives the state a valuable tool to help contain health insurance costs by requiring state approval of increases. This vital cost containment measure is essential to help working families keep the coverage they have, and to expand coverage to six million Californians without it. Many consumer advocacy groups, such as Disability Rights Legal Center, and labor organizations, like the California School Employees Association, and the California Teachers Association, also write in support, stating that when employers pay more for health care, working families end up paying those increases through higher co-payments or by foregoing wage increases. If health insurance premiums continue to rise, millions of additional Californians will be unable to afford the costs and be forced to forgo health coverage. Consumers Union supports this bill, stating that rate regulation must provide means for California to understand and attack the underlying causes of health care growth, and urges that deliberations over rate requests should eventually include consideration of how well insurers are meeting standards for lowering costs. Consumer Watchdog concurs, stating that this bill likely will qualify for federal grant money for premium rate review, as provided under federal health care reform. Consumer Watchdog further states that California patients need rate regulation for health insurance and that small businesses and individually insured Californians are one more rate increase away from being priced out of coverage. Health Access California supports this bill, pointing out that the stunning increases in health insurance premiums for individuals and small businesses revealed earlier in the year have capped years of steady increases in overall premiums. Health Access asserts that existing law is AB 2578 Page 8 plainly inadequate in light of the fact that medical inflation, due to the aging population and increasing medical cost, is far below the rate hikes imposed by insurers and HMOs. ARGUMENTS IN OPPOSITION : The Association of California Life & Health Insurance Companies (ACLHIC) opposes this bill, stating that it imposes an extensive system of rate regulation that will do little to address well-documented factors contributing to increasing premiums. ACLHIC asserts that health insurance rate regulation has proven to be a failure in states that have gone that route. In New York, small employers experienced rate increases of over 20 percent and consumers pay up to 50 percent more than in California. ACLHIC believes there is simply no way to artificially lower premiums, outside of getting at the root causes of medical inflation, without reducing physician and hospital fees, reducing access to care and consumer choice, increasing employer cost sharing, or other unpalatable impacts on consumers. Blue Shield opposes this bill, stating that this approach is inherently flawed because it focuses on one very small segment of the health care system. Blue Shield states that 2008 data shows that health care spending on insurance costs amount to 13 percent of the total, including spending on prevention, disease management, care coordination, investments in health information technology, etc. In contrast, 87 percent of the health care dollar is spent on hospitals, physicians, pharmaceuticals and other medical services, and that is the percentage that is on the rise. Blue Shield argues that the bill ignores the true cost drivers in the health care system. Health Net raises concerns that this bill will hinder innovation in product design, limit choices in the marketplace; they point out that Health Net administers hundreds of product designs. Each change varies the rate charged to the purchaser, and in some cases, a product may be unique to one employer. The California Chamber of Commerce (CalChamber) opposes this bill, stating that it creates an additional bureaucracy to implement rate regulation on health insurance products by requiring a complex and regulated rate approval process. The California Taxpayers AB 2578 Page 9 Association also opposes the bill because it interferes with the operation of the free market, and does nothing to stem the tide of rising health care costs that have forced insurers to charge higher premiums. The California Association of Joint Powers Authorities and the CSAC Excess Insurance Authority points out this bill appears to override any mid-year bargaining agreement or modifications to existing bargaining agreements between labor and management to adjust premiums, co-pays, deductibles or any other level of service. ASSEMBLY FLOOR : AYES: Ammiano, Bass, Beall, Blumenfield, Bradford, Brownley, Caballero, Carter, Chesbro, Coto, Davis, De La Torre, De Leon, Eng, Evans, Feuer, Fong, Fuentes, Furutani, Hayashi, Hernandez, Hill, Huber, Huffman, Jones, Bonnie Lowenthal, Ma, Mendoza, Monning, Nava, V. Manuel Perez, Portantino, Ruskin, Salas, Saldana, Skinner, Solorio, Swanson, Torlakson, Torres, Torrico, Yamada, John A. Perez NOES: Adams, Anderson, Bill Berryhill, Blakeslee, Buchanan, Conway, Cook, DeVore, Emmerson, Fletcher, Fuller, Gaines, Garrick, Gilmore, Hagman, Harkey, Jeffries, Knight, Logue, Miller, Nestande, Niello, Nielsen, Norby, Silva, Smyth, Tran, Villines NO VOTE RECORDED: Arambula, Tom Berryhill, Block, Charles Calderon, Galgiani, Hall, Lieu, Audra Strickland, Vacancy CTW:do 8/17/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****