BILL ANALYSIS                                                                                                                                                                                                    

                                 SENATE HEALTH
                               COMMITTEE ANALYSIS
                        Senator Elaine K. Alquist, Chair

          BILL NO:       SB 227                                       
          AUTHOR:        Alquist                                      
          AMENDED:       June 21, 2010                               
          HEARING DATE:  June 23, 2010                                
                              PURSUANT TO S.R. 29.10
                              Health care coverage


          Requires the Managed Risk Medical Insurance Board (MRMIB)  
          to enter into an agreement with the federal Department of  
          Health and Human Services (DHHS) to administer a qualified  
          high-risk pool to provide health coverage, until January 1,  
          2014, to individuals who have pre-existing conditions,  
          consistent with PPACA.  Establishes the authority and  
          requirements for MRMIB in administering the federal pool,  
          consistent with federal law.  Appropriates $761 million  
          from the Federal Trust Fund to MRMIB.  Makes this bill  
          operative contingent upon enactment of AB 1887 (Villines),  
          and both bills would sunset on January 1, 2020.  Takes  
          effect immediately as an urgency bill.

                             CHANGES TO EXISTING LAW  

          Existing state law:
          Establishes the Major Risk Medical Insurance Program  
          (MRMIP), which is administered by the Managed Risk Medical  
          Insurance Board (MRMIB), to provide major risk medical  
          coverage to California residents who have been rejected for  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 2


          coverage by at least one private health plan, or if the  
          only private health coverage that the applicant can secure  

           Impose substantial waivers or provide limited coverage  
            that the MRMIB determines would leave a subscriber  
            without adequate coverage for medically necessary  
            services; or,
           Afford coverage only at an excessive price, which MRMIB  
            determines is significantly above standard average  
            individual coverage rates.

          Caps the premium subscribers in MRMIP pay at 125 to 137.5  
          percent of the standard average individual rate the  
          enrollee would pay for comparable coverage.  

          Establishes the Major Risk Medical Insurance Fund, and,  
          except for the 2009-10 fiscal year, continuously  
          appropriates $30 million in Proposition 99 tobacco tax  
          funds from the Cigarette and Tobacco Products Surtax Fund  
          to this Fund.

          Existing federal law:
          The federal health care reform bill, known as the Patient  
          Protection and Affordable Care Act (PPACA), requires the  
          federal Secretary of the Department of Health and Human  
          Services (DHHS) to establish a temporary high-risk health  
          insurance pool program to provide health insurance coverage  
          for eligible individuals until January 1, 2014.  PPACA  
          authorizes the Secretary to carry out the program directly  
          or through contracts with a state or nonprofit entity.  To  
          be eligible for the federal pool, an individual must meet  
          the following:

           Be a citizen or national of the United States (U.S.) or  
            lawfully present in the U.S.; 
           Have not been covered under "creditable coverage" (as  
            defined in federal law) during the six-month period prior  
            to the date on which such individual is applying for  
            coverage through the high-risk pool; and,
           Have a pre-existing condition, as determined in a manner  
            consistent with guidance issued by the Secretary of DHHS.

          Under PPACA, in order for a high-risk pool to be eligible  
          for federal funding, the pool must meet the following  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 3


           Provide health insurance coverage to all eligible  
            individuals that does not impose any pre-existing  
            condition exclusion; 
           Provide health insurance coverage:

                  o         In which the health insurer's share of  
                    the total allowed costs of benefits provided  
                    under the coverage is not less than 65 percent of  
                    such costs; and, 
                  o         That has an out-of-pocket limit not  
                    greater than the amount in federal law for a high  
                    deductible health plan offered in conjunction  
                    with a health savings account (except that the  
                    Secretary may modify such limit if necessary to  
                    ensure the pool meets the actuarial value limit).

           Require, with respect to the premium rate charged for  
            health insurance coverage offered to eligible individuals  
            through the high-risk pool, rates to:

                  o         Vary only for family size (individual or  
                    family), geographic rating area, and tobacco use;
                  o         Vary on the basis of age by a factor of  
                    not greater than 4 to 1; 
                  o         Be established at a standard rate for a  
                    standard population; and,
                  o         Meet any other requirements determined  
                    appropriate by the Secretary of DHHS.

          PPACA requires the Secretary of DHHS to develop procedures  
          to provide for the transition of eligible individuals  
          enrolled in health insurance coverage offered through a  
          high-risk pool into qualified health plans offered through  
          an Exchange.

          PPACA appropriates to the Secretary of DHHS $5 billion to  
          pay claims against (and the administrative costs of) the  
          high-risk pool that are in excess of the amount of premiums  
          collected from eligible individuals enrolled in the  
          high-risk pool.

          This bill:
          Establishes the Federal Temporary High Risk Pool in the  
          Health and Human Services Agency, and requires the program  
          to be managed by MRMIB.


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 4


          Authorizes MRMIB to take the specified actions, consistent  
          with the provisions of PPACA establishing a federal pool.   
          These include the following:

           Entering in an agreement with the federal DHHS to  
            administer the federal pool; 
           Determining eligibility criteria for the federal pool,  
            including when coverage begins and ends;
           Determining the high-risk medical coverage to be provided  
            (including the scope of benefits and cost-sharing);
           Establishing rates paid by individuals enrolled in the  
            federal pool;
           Providing coverage through health plans or third-party  
            administrators (TPA);
           Determining participation requirements for people  
            enrolling in the federal pool, and entities contracting  
            with MRMIB;
           Contracting with private and public entities for program  
           Issuing rules and regulations;
           Initially implementing the provisions of this bill  
            pursuant to the agreement with DHHS without taking  
            regulatory action;
           Aligning program administration with MRMIP; and,
           Authorizing expenditures for the federal pool.

          Requires, consistent with PPACA, state and federal law and  
          contingent on the agreement of the federal DHHS and receipt  
          of sufficient federal funding, MRMIB to enter into an  
          agreement with the federal DHHS to administer the federal  
          temporary high risk pool.  Requires MRMIB, if the federal  
          DHHS and the state enter into an agreement, to take  
          specified actions to administer the program, including:

           Establishing the scope and content of high risk medical  
           Determining standards for participating health plans,  
            TPAs, and other contractors; 
           Implementing procedures to transition individuals into  
            health plans offered through an exchange after the end of  
            the federal pool; and,
           Developing a plan for marketing and outreach.

          Prohibits plan rates for high risk medical benefits  
          approved for the federal pool from being excessive,  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 5


          inadequate, or unfairly discriminatory, but requires plans  
          rates to be adequate to pay anticipated costs of claims or  
          services and administration.

          Requires MRMIB to provide coverage under this bill through  
          participating health plans or through provider networks  
          using a TPA, and permits MRMIB to contract for the  
          processing of applications, the enrollment of subscribers,  
          and all activities necessary to administer the program.   
          Exempts any contract entered into under this bill from  
          provisions of law relating to competitive bidding, and also  
          exempts contracts from the review or approval of the  
          Department of General Services.  

          Permits program decisions concerning an applicant's or  
          subscriber's eligibility or eligibility date to be appealed  
          to MRMIB, according to procedures to be established by  
          MRMIB.  Permits coverage determinations to be appealed to  
          MRMIB, according to procedures established by MRMIB.  If  
          allowed by DHHS, MRMIB is not required to provide an appeal  
          concerning a coverage determination if the subject of the  
          appeal is within the jurisdiction of the Department of  
          Managed Health Care or the Department of Insurance.   
          Requires hearings to be conducted according to the  
          requirements of the federal DHHS and, insofar as  
          practicable and not inconsistent with those requirements,  
          pursuant to the APA.

          Appropriates $761 million in federal funds without regard  
          to fiscal years from the Federal Trust Fund to MRMIB for  
          transfer to the Federal Temporary High Risk Health  
          Insurance Fund created by AB 1887 for covered, medically  
          necessary services that exceed subscribers' contributions,  
          program administration, and marketing and outreach.

          Permits MRMIB to obtain loans from the General Fund (GF),  
          subject to the approval of the Department of Finance, for  
          all necessary and reasonable expenses related to the  
          administration of the fund and the program.  MRMIB must  
          repay principal and interest to the GF, using the pooled  
          money investment account rate of interest, no later than  
          July 1, 2014.

          Requires MRMIB to ensure that the program subsidy amount  
          does not exceed amounts transferred to the fund under this  
          bill, and that the aggregate amount spent for high risk  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 6


          medical coverage and program administration does not exceed  
          the federal funds available to the state for this purpose,  
          and that no state funds are spent for the purposes of this  

          Requires MRMIB to maintain enrollment and expenditures to  
          ensure that expenditures do not exceed amounts available in  
          the fund and that no state funds are spent for purposes of  
          this bill.  If sufficient funds are not available to cover  
          the estimated cost of program expenditures, MRMIB is  
          required to institute appropriate measures to limit  

          Requires health plans and health insurers to inform  
          applicants rejected for coverage, or offered coverage at  
          higher than a standard rate, about the temporary high risk  
          health insurance pool established by this bill, and would  
          require that the information be provided in accordance with  
          standards developed by the Department of Managed Health  
          Care or the Department of Insurance, as specified.

          Prohibits any liability in a private capacity from being  
          imposed on the part of MRMIB or any member of the board, or  
          any officer or employee of MRMIB for or on account of any  
          act performed or obligation entered into in an official  
          capacity, when done in good faith, without intent to  
          defraud, and in connection with the administration,  
          management, or conduct of this bill or affairs related to  
          this bill.

          Requires MRMIB to cease to provide coverage through the  
          program on January 1, 2014, and at that time to cease to  
          operate the program except as required to complete payments  
          to, or payment reconciliations with, participating health  
          plans or other contractors, process appeals, or conduct  
          other necessary transition activities, including, but not  
          limited to, transition of subscribers into an exchange or  
          exchanges established under PPACA.

          Makes this bill take effect immediately as an urgency  
          statute, makes this bill operative contingent upon  
          enactment of AB 1887 (Villines), and sunsets this bill on  
          January 1, 2020.
                                  FISCAL IMPACT  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 7


          According to the Assembly Appropriations Committee:

          1)According to preliminary information provided by the  
            federal government, California will receive $761 million  
            (100 percent federal) to administer a state-run high risk  
            pool until January 1, 2014, when broader insurance market  
            reforms and coverage expansions occur.

          2)Funding will be used to support MRMIB workload as the  
            pool administrator and to provide premium support to  
            enrollees whose premium costs exceed a specified level.   
            The eligibility for the risk pool as well as the product  
            design of the coverage offered will determine how quickly  
            the fixed allocation of federal funding is spent. 

          3)The federal government proposes to allocate state funds  
            based on a formula used for the Children's Health  
            Insurance Program, which relies on a combination of  
            factors including non-elderly population, proportion of  
            uninsured, and geographic cost variation. 

          4)Under current law, California's high risk pool has only  
            7,000 enrollees, due to funding limitations. According to  
            estimates, several hundred thousand Californians may lack  
            access to health coverage due to pre-existing conditions.  
             The risk pool established pursuant to this bill may be  
            able to support an additional 20,000 to 25,000 enrollees.  

          5)Per federal requirements, premium pricing in the high  
            risk pool must be similar to the rates found in the  
            individual insurance market and cannot vary by a person's  
            age by more than a four to one ratio. 

                            BACKGROUND AND DISCUSSION  

          According to the author, if California chooses to  
          administer its own federal high-risk pool, legislation is  
          needed to establish a high-risk pool that meets federal  
          requirements because MRMIP and the federal high-risk pool  
          program established by Section 1011 of PPACA differ in  
          their eligibility criteria, benefits and coverage, and  
          premiums in ways that would prevent MRMIP as it is  
          currently structured from being used as the federal  
          high-risk pool.  This bill would require MRMIB to enter  
          into an agreement with DHHS to administer a qualified  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 8


          high-risk pool to provide health coverage, until January 1,  
          2014, to individuals who have pre-existing conditions,  
          consistent with the PPACA.  This bill establishes the  
          authority of MRMIB and the requirements MRMIB must meet in  
          administering the federal pool.

          The author argues having the federal high risk pool run at  
               the state level (instead of by 
          the federal government) by a public board (MRMIB) allows  
          for better public participation, on-going monitoring and  
          transparency.  MRMIB could provide a single point of  
          application for people applying for either high risk pool,  
          and the federal government has not directly administered a  
          program similar to this before.  Additionally, having  
          similar programs run by different levels of government is  
          confusing for the public and makes coordination of  
          enrollment and outreach more difficult.
          Although most Californians obtain health insurance through  
          their employer, many Californians do not have access to  
          employer-sponsored health coverage and cannot buy private  
          health insurance because they have a pre-existing medical  
          condition.  Since 1991, California has operated a high-risk  
          pool known as MRMIP to provide the medically uninsurable  
          with health coverage.  Premiums paid by individuals  
          receiving coverage are supplemented with state tobacco tax  
          revenues to fund coverage through the program.  MRMIP  
          currently has approximately 6,800 individuals receiving  
          coverage in the program, and approximately 4,700  
          individuals who were previously enrolled in MRMIP under a  
          pilot program, and whose costs above the amounts they pay  
          in premiums, are split by health plans in MRMIP and the  
          state.  However, the program's current enrollment is much  
          lower than the MRMIP's maximum enrollment of 21,900 in June  
          1998.  The 2010-11 proposed budget for MRMIP is $37  

          In March 2010, President Obama signed into law PPACA  
          (Public Law 111-148) as amended by the Health Care and  
          Education Reconciliation Act of 2010 (Public Law 111-152)  
          to provide coverage for over 90 percent of the presently  
          uninsured population.  Until the implementation of the  
          health insurance exchanges in 2014, individuals with  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 9


          pre-existing conditions, who have not had coverage for the  
          prior six months and who meet certain citizen or residency  
          requirements will be eligible for the temporary high-risk  
          pool program created by PPACA.  

          PPACA appropriated $5 billion in federal funds to support  
          the high-risk pool program, of which California is  
          estimated to receive $761 million.  According to an April  
          2, 2010 letter from the federal DHHS Secretary, states can  
          choose whether and how they participate in the program.  To  
          be eligible to enter into a contract with the Secretary, a  
          state must agree to not reduce the annual amount the state  
          expended for the operation of its high-risk pool.  

          To date, twenty-nine states plus the District of Columbia  
          have elected to operate their own pool, eighteen states  
          have elected to have HHS run the pool, two have deferred  
          the decision and one has not indicated.  In April 2010,  
          Governor Schwarzenegger indicated in a letter to the  
          federal DHHS Secretary his intention to contract with the  
          federal government to operate a temporary health insurance  
          program for currently uninsured individuals with  
          preexisting medical conditions.   The Governor's indicated  
          his decision was based on the Secretary's assurances that  
          100 percent of the costs will be provided by the federal  
          government for the duration of the program.  The Governor  
          announced the state will apply to operate the federal  
          high-risk pool alongside the current state high-risk pool,  
          under the same governance and operational framework.

          The federal high-risk pool and the current MRMIP have  
          different eligibility, benefit and premium requirements, as  
          illustrated in the chart below, that make a separate  
          statute necessary for MRMIB to administer the federal high  
          risk pool program:

          |                        Eligibility                         |
          |    Federal High-Risk Pool    |        State MRMIP         |
          |                              |                            |
          | Citizen or national of the  |  California resident.     |
          |  US or lawfully present in   |                            |


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 10


          |  the US.                     |                            |
          | Have no creditable coverage |  Unable to secure adequate |
          |  for the previous 6 months   |  coverage in the           |
          |  before applying for         |  individual market within  |
          |  coverage.                   |  the last 12 months, and   |
          |                              |  ineligible for Medicare,  |
          |                              |  COBRA or Cal-COBRA.       |
          | Have a pre-existing         | No pre-existing condition |
          |  condition, as determined in |  requirement, but denial   |
          |  a manner consistent with    |  or termination of         |
          |  guidance issued by the      |  insurance for other than  |
          |  Secretary of DHHS.          |  nonpayment is one pathway |
          |                              |  to eligibility.           |
          |                              |                            |
          |                      Benefits/Coverage                     |
          | High-risk pool average      | Comprehensive benefits    |
          |  share of total costs of     |  with annual $500          |
          |  required benefits must be   |  household deductible.     |
          |  at least 65 percent of      |  Preventive services      |
          |  costs.                      |  excluded from the         |
          |                              |deductible.                 |
          | No pre-existing condition   |  MRMIP plans have a three |
          |  exclusion allowed.          |  month waiting period      |
          |                              |  (HMO) or pre-existing     |
          |                              |  condition exclusion       |
          |                              |(PPO).                      |
          | Limits out-of-pocket to     |  Limits out-of-pocket     |
          |  equivalent in               |  maximum per year to       |
          |  high-deductible plans       |  $2,500 for individuals    |
          |  linked to health savings    |  and $4,000 for an entire  |
          |  accounts ($5,950 for an     |  household covered by the  |
          |  individual/$11,900 for a    |  MRMIP (must be in network |
          |  family in 2010).            |  provider, out-of-plan     |
          |                              |  charges allowed).         |
          | No specification on caps,   | Annual benefit limits of  |
          |  but lifetime and            |  $75,000 and lifetime      |
          |  unreasonable annual caps    |  benefit limit of          |


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 11


          |  prohibited under federal    |  $750,000.                 |
          |  health care reform.         |                            |
          |                           Premiums                         |
          | Rates must be at a standard |  Capped at 25 percent to  |
          |  rate for a standard         |  37.5 percent higher than  |
          |  population.                 |  the standard average      |
          |                              |  individual rate that a    |
          |                              |  plan would charge for     |
          |                              |  MRMIP benefits in the     |
          |                              |  commercial market.        |
          | Limits rate variation by    | Twelve age variations     |
          |  age to a maximum ratio of 4 |  with no limit on          |
          |  to 1.                       |  permissible variation due |
          | Rate variations allowed for |  to age.                   |
          |  whether the plan covers an  | Three possible family     |
          |  individual or family,       |  sizes.                    |
          |  geographic regions, and for |  Six geographic           |
          |  tobacco use (but limited to |regions.                    |
          |  1.5 to 1).                  |                            |
          At its June 16th MRMIB meeting, PriceWaterhouseCoopers  
          (PWC), the actuaries for MRMIB, released estimates on  
          premiums and enrollment for the new federal pool that  
          reflect different levels of cost-sharing and out-of-pocket  
          limits in the benefit package.  PWC actuaries assumed the  
          federal pool would enroll the total number of people  
          supported by federal funding on its first day of operation  
          (which it estimated to be September 1, 2010), and that  
          disenrollments would be immediately replaced by new  

          PWC modeled enrollment and premiums using the current MRMIP  
          benefit package, but with no annual or lifetime limit.  PWC  
          modeled different deductibles ($500 to $2,500),  
          co-insurance (15 percent to 30 percent) and out-of-pocket  
          limits ($2,500 to $5,000), as well as including a premium  
          subsidy for low-income enrollees.  The analysis compared  
          the current MRMIP premium rate for a 50-year old individual  
          residing in San Francisco, which is currently $915 a month,  
          to estimated monthly premium rates in the new federal pool  
          for the various benefit options.  For the federal pool,  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 12


          estimated premiums for such an individual ranged from $545  
          to $635 a month.  For the federal pool, estimated average  
          enrollment under the options modeled by PWC ranged from a  
          low-range estimate of 17,000 to a high-range estimate of  
          44,050, depending upon the benefit plan option selected by  
          MRMIB and whether the program includes a low-income premium  
          Arguments in support
          Governor Schwarzenegger, as the sponsor of this measure and  
          AB 1887, writes in support of this bill for several  
          reasons.  First, the Governor states the $761 million  
          allocated to California is for a time-limited purpose, and  
          the Governor argues California can maximize these federal  
          funds in a way that will quickly and capably address the  
          needs of our state's medically uninsured.  Second, the  
          federal government, which is operating these high-risk  
          pools in other states, does not have the ability to address  
          California's unique and diverse needs.  Third, the Governor  
          agues California is in the best position to run a program  
          for our residents, as we can bring jobs to California by  
          directing as much work as possible to California-based  
          companies and vendors.  While it is true that the federal  
          government can step in and run a federal pool for the  
          states that decline to do so, the Governor argues that he  
          believes running our own federal high-risk pool allows us  
          an opportunity to maximize jobs here in California.   
          Finally, the Governor concludes that these bills have  
          strong provisions that protect our state's General Fund,  
          and California will use this federal money responsibly and  
          without risking our state's own precarious fiscal  
          AARP writes in support of SB 227 and AB 1887 that this  
          issue is very important to AARP members as the individuals  
          over age 50 are most likely to be denied coverage on the  
          basis of pre-existing health conditions.  AARP states that,  
          while the federal government will administer the program in  
          California if the state does not, this is not a good option  
          for consumers.  AARP argues the state currently administers  
          a high-risk pool for consumers and will be able to  
          coordinate outreach and enrollment for the two programs so  
          that it is seamless, much less confusing for consumers, and  
          much less likely to result in consumers being dropped  
          between the cracks of the two programs.  The danger of  
          consumers getting lost in the shuffle between two similar  


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 13


          programs with distinct eligibility requirements is  
          magnified tremendously by having them administered by two  
          different entities and levels of government, one of which  
          have never before administered such a program.  AARP writes  
          it is much more comfortable that consumers will have  
          meaningful access to state program administrators to deal  
          with the inevitable glitches in any new program.  AARP  
          concludes that this is such an important benefit for AARP  
          members who have been denied coverage based on pre-existing  
          conditions that it does not want to take any chances on a  
          federal system that has been designed in just a few months.

          The California Medical Association (CMA) writes in support  
          that this bill and its companion measure, AB 1887  
          (Villines) will provide the statutory authority necessary  
          for California to access $761 million in federal funds and  
          provide a vital coverage option to individuals with a  
          pre-existing medical condition.  CMA states it supports  
          high risk pools, as they provide a critical health  
          insurance coverage option to those who do not have  
          employer-sponsored coverage and are otherwise medically  
          uninsurable in the individual market.
          Related bills
          AB 1887 (Villines) establishes the Federal Temporary High  
          Risk Health Insurance Fund (Fund).  Requires money in the  
          Fund to be continuously appropriated to the MRMIB for the  
          purpose of establishing a federal temporary high-risk pool  
          established under SB 227 for individuals with a  
          pre-existing medical condition.  Takes effect immediately  
          as an urgency statute, contingent upon the enactment of SB  

                                  PRIOR ACTIONS

           Assembly Health               18-0
          Assembly Appropriations: 14-0
          Assembly Floor:          76-0

          Support:  The Schwarzenegger Administration (sponsor)
                    Asthma and Allergy Foundation, California Chapter
                    Blue Shield of California
                    California Academy of Family Physicians


          STAFF ANALYSIS OF SENATE BILL  SB 227 (Alquist)Page 14


                    California Association of Health Plans
                    California Chronic Care Coalition
                    California Chiropractic Association
                    California Hepatitis C Task Force
                    California Hospital Association
                    California Medical Association
                    Consumers Union
                    Health Access California
                    TMJ Society of California

          Oppose:  None received

                                   -- END --