BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: SB 316
S
AUTHOR: Alquist
B
AMENDED: As Introduced
HEARING DATE: April 1, 2009
3
CONSULTANT:
1
Park/cjt
6
SUBJECT
Health care coverage: benefits
SUMMARY
Requires full service health plans and health insurers to
spend on average at least 85 percent of premiums on health
care benefits, a requirement known as a "medical loss
ratio" or "minimum loss ratio" (MLR), beginning January 1,
2011. Additionally requires reporting of MLF information
by plan contract or policy to regulators and specified
individuals and small groups by January 1, 2011.
CHANGES TO EXISTING LAW
Existing law:
Existing law provides for the regulation of health care
service plans (health plans) by the DMHC and regulation of
disability insurers who sell health insurance (health
insurers) by the California Department of Insurance.
Existing law requires health care service plans to submit
for review and approval all of the types of plan contracts
they offer. Existing law prohibits health care service
plans
from expending excessive portions of the payments they
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STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 2
receive on administrative costs, as defined. Existing
regulations provide that the definition of administrative
costs shall take into consideration such factors as the
plan's stage of development, and provides that, if
administrative costs exceed a certain percentage (15
percent for established plans and 25 percent for plans in
the development stage), the plan may be required to justify
administrative costs and/or show that it is taking
effective action to reduce administrative costs.
Existing regulations pertaining to health plans provide
that "administrative costs" include only those costs which
arise out of the operation of the plan, including salaries,
bonuses and benefits paid, the cost of soliciting and
enrolling subscribers and enrollees, the cost of processing
and paying claims of providers and of claims for
reimbursement by subscribers and enrollees, legal and
accounting fees and expenses, and costs associated with the
establishment and maintenance of agreements with providers
of health care services enrollees.
Existing law requires the Insurance Commissioner to
withdraw approval of an individual or mass-marketed policy
of disability insurance if the Commissioner finds that the
benefits provided under the policy are unreasonable in
relation to the premium charged. Existing regulations
define a standard of "reasonableness," for the ratio of
medical benefits to the premium charged for individual
health insurance, and sets this ratio at 70 percent.
Existing law also gives the Commissioner authority to
disapprove individual health insurance policies that
provide no economic benefit to the consumer.
Existing law requires that Medicare supplement policies
sold by health plans and health insurers return to
enrollees a minimum percentage of the aggregate amount of
premiums earned (75 percent for group policies and 65
percent for individual policies).
Existing law requires health plans and health insurers to
disclose in writing the ratio of premium costs to health
services paid for plan contracts with individuals and with
groups of the same or similar size for the plan's preceding
fiscal year when presenting a plan for sale to any
individual purchaser, or a group consisting of 25 or fewer
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 3
individuals.
This bill:
This bill would require a full service health care service
plan or a health insurer, on or after January 1, 2011, to
expend in the form of health care benefits at least 85
percent of the aggregate dues, fees, premiums, and other
periodic payments received by the plan or insurer,
excluding the amount of income taxes or other taxes that
the plan or insurer expensed.
The bill would define "health care benefits" to include,
but not be limited to, health care services that are either
provided or reimbursed by the plan or its contracted
providers as covered benefits; the costs of programs or
activities, including training and the provision of
informational materials determined through regulation to
improve the provision of quality care, improve health care
outcomes, or encourage the use of evidence-based medicine;
disease management expenses; payments to providers as risk
pool payments of pay-for-performance initiatives; plan
medical advice by telephone; and, prescription drug
management programs.
The bill would exclude from the definition of "health care
benefits" administrative costs, as listed in a specific
regulation, agent and broker commission and solicitation
costs, dividends, profits, stock options, income taxes, or
any other tax the plan expensed, assessments or fines
levied by its regulator (the Department of Managed Health
Care [DMHC] for health plans or the California Department
of Insurance [CDI] for health insurers), or administrative
costs associated with existing or new regulatory
requirements.
The bill would allow a health plan or insurer to average
its total costs across all plans and policies regulated by
CDI and DMHC, except Medicare supplement plan contracts or
certain specified types of policies and contracts,
including behavioral health plan contracts.
The bill would require, beginning January 1, 2011, health
plans and health insurers to annually report to their
respective regulator the medical loss ratio of each
individual and small group product/policy, and would
require health plans, health insurers, their employees, or
agents to disclose the MLR information when presenting a
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 4
plan for examination or sale to any individual or the
representative of a group consisting of 50 or fewer
individuals.
The bill would require, beginning January 1, 2011, and
annually thereafter, health plans and health insurers to
provide written affirmation to the respective regulator
that the plan or insurer meets the requirements of this
bill.
The bill would require DMHC and CDI to jointly adopt
regulations to establish uniform reporting, and permit DMHC
and CDI to assess compliance with this bill in their
periodic onsite medical survey or in nonroutine medical
surveys, as appropriate.
The bill would permit the DMHC and the CDI to exclude from
the determination of compliance with 85 percent MLR any new
health plan contracts or health insurance policies for up
to the first two years those contracts are offered for
sale, if the Director of DMHC or Insurance Commissioner
determines that the new contracts/policies are
substantially different from the existing contracts offered
by the plan/insurer seeking the exclusion.
The bill would permit the regulators to disapprove a health
plan or health insurer's use of a plan or policy, issue a
fine or assessment, suspend or revoke the license or
certificate, or take any other action the regulator deems
appropriate if the regulator determines that the plan has
failed to comply with this bill.
The bill would exempt from the provisions of this bill
Medicare supplement plans, administrative-services-only
contracts or other similar administrative arrangements,
specialized plans, and other specified types of coverage,
including behavioral health, chiropractic, and naturopathic
coverage.
FISCAL IMPACT
According to the Assembly Appropriations Committee analysis
of a similar measure, SB 1440 (Kuehl), the bill would
result in one-time fee-supported special fund costs of
$700,000 to $1 million to DMHC and CDI, combined, to
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 5
establish the regulatory framework, MLR reporting
framework, and auditing required at the outset of
evaluating a distribution of health carrier costs across
numerous coverage products. Additionally, the bill would
result in annual on-going fee-supported special fund costs
of $400,000, combined, to DMHC and CDI to continue
oversight and evaluation of health carrier submissions.
BACKGROUND AND DISCUSSION
Author's statement
The author states that current law fails to protect
consumers or ensure that plans and insurers are spending
premium dollars on medical care, rather than wasteful
administrative costs and excessive profits. The author
notes that while administrative costs of health plans
regulated by the DMHC are generally limited to 15 percent,
profits, which have skyrocketed alongside rising premiums,
are not included in the definition of administrative costs.
The author notes that, according to the Street.com's
rating's review of financial performance of the nation's
648 health insurers, total net income for health
maintenance organizations rose 27.5 percent during the
first six months of 2007 to $8.8 billion, up from $6.98
billion during the prior year, itself a 21.2 percent
increase over the year before that. The author further
notes that administrative spending is cited as one of the
fastest growing expenditures in health care. The author
believes that requiring HMOs to spend at least 85 percent
of their revenues on patient care, will ensure that our
limited health care dollars are not going to excessive
salaries and overhead charges.
Medical loss ratio
The amount of money that a health plan or health insurer
spends on medical care, versus administrative expenses and
profit, is referred to in the health care industry as a
medical loss ratio, or a minimum loss ratio.
California law does not prescribe specific medical loss
ratio requirements per se, with the exception of individual
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 6
health insurance policies. The CDI sets a standard of
"reasonableness" for the ratio of medical benefits to the
premium charged for individual health insurance at 70
percent for new policy forms submitted after July 1, 2007,
and for existing policy forms that file rate increases.
(The reasonableness standard for existing policy forms,
that do not file a rate increase, is 50 percent, which was
the standard of reasonableness set in 1962.)
Health plans regulated under DMHC are required by
regulation to hold administrative costs, as defined, to 15
percent of premiums, with certain exceptions. This leaves
the amount spent on medical care at the discretion of the
plan, provided this limit is maintained. Health plans have
been held to this standard since 1975.
While "medical loss ratio" appears to be a straightforward
term, there are several ways it is applied. CDI uses
"lifetime anticipated loss ratio," an actuarial method that
recognizes that the loss experience of policies,
particularly individual health policies that undergo
medical underwriting, changes over the life span of the
policy. According to guidance from CDI, the medical
expenses in a new policy would be expected to be low in the
first few years, because subscribers are subject to
underwriting that is designed to eliminate those likely to
generate a large number of claims. As a consequence, in the
early years, the loss ratio might be lower than 70 percent.
But as the predictive force of medical underwriting
declines over time, the benefits paid out typically
increase, so that the loss ratio in later years could
exceed 70 percent. The lifetime anticipated loss ratio
used by CDI takes this "durational effect" into account
and, in combination with other factors, combines the low
and high loss ratio years so that the overall loss ratio
during the anticipated life span of the insurance product
will meet the 70 percent target, even if it dips below the
target in a particular year.
Another way to apply a medical loss ratio is by averaging
total costs across all contracts or policies offered by a
health plan or health insurer. Additionally, what counts as
a medical expense can be broadly construed to include
programs or services that aim to improve patient care and
outcomes, such as disease management programs, health
information technology, wellness programs and
pay-for-performance programs.
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 7
Trends in administrative costs and profits
According to a January 2007 Commonwealth Fund report, "the
fastest-rising component of health spending in recent years
has been insurance administrative overhead. Between 2000
and 2005, the net insurance administrative
overhead-including both administrative expenses and
insurance industry profits-increased by 12.0 percent per
year, 3.4 percentage points faster than the average health
expenditure growth of 8.6 percent."
The report also noted that the U.S. is an outlier with
respect to insurance administrative expenses compared with
other countries, pointing out that, if the U.S. had spent
what countries with mixed public-private insurance systems,
such as Germany and Switzerland, spend on their insurance
systems' administrative costs, it could have saved $32 to
$46 billion a year.
Medical loss ratios, profits, and administrative expenses
of the five largest health plans
According to data from DMHC below, the following five
health care service plans serving 80 percent of the market,
or 20 million Californians, reported the following data for
2002 through 2008:
---------------------------------------------------------
| Top 5 HMOs Medical Loss Ratio: 2002 Through 2008 |
---------------------------------------------------------
|--------------------+----+----+----+----+----+----+----|
| |2002|2003|2004|2005|2006|2007|2008|
| | | | | | | | |
|--------------------+----+----+----+----+----+----+----|
|Blue Cross of |80.8|80.8|80.1|80.8|81.5|80.4|83.3|
|California | 1%| 1%| 4%| 7%| 4%| 3%| 8%|
|--------------------+----+----+----+----+----+----+----|
|California |83.6|82.7|83.4|84.5|84.1|83.1|84.1|
|Physicians' Service | 8%| 4%| 1%| 7%| 4%| 3%| 0%|
|--------------------+----+----+----+----+----+----+----|
|Health Net of |85.6|84.0|89.5|85.8|85.0|85.1|88.1|
|California, Inc. | 4%| 3%| 8%| 6%| 4%| 5%| 3%|
|--------------------+----+----+----+----+----+----+----|
|Kaiser Foundation |98.6|93.7|91.4|94.2|93.5|91.7|99.4|
|Health Plan, Inc. | 5%| 0%| 5%| 3%| 9%| 2%| 4%|
|--------------------+----+----+----+----+----+----+----|
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 8
|PacifiCare of |88.0|83.8|85.0|86.1|85.5|86.7|86.9|
|California | 6%| 2%| 1%| 5%| 2%| 6%| 8%|
-------------------------------------------------------
---------------------------------------------------------
| |
|---------------------------------------------------------|
| Admin Expenses: 2002 Through 2008 |
---------------------------------------------------------
-------------------------------------------------------
| |2002|2003|2004|2005|2006|2007|2008|
| | | | | | | | |
-------------------------------------------------------
|Blue Cross of |13.3|12.4|11.9|11.3|11.6|11.2|10.3|
|California | 4%| 4%| 0%| 2%| 7%| 6%| 1%|
-------------------------------------------------------
|California |13.6|12.4|11.8|11.4|11.1|11.6|12.1|
|Physicians' Service | 7%| 4%| 2%| 9%| 5%| 7%| 9%|
-------------------------------------------------------
|Health Net of |9.96|9.96|10.1|9.77|10.2|10.5|9.93|
|California, Inc. | %| %| 5%| %| 2%| 0%| %|
-------------------------------------------------------
|Kaiser Foundation |2.43|3.27|3.50|3.70|3.70|3.60|4.46|
|Health Plan, Inc. | %| %| %| %| %| %| %|
|--------------------+----+----+----+----+----+----+----|
|PacifiCare of |9.58|10.6|9.02|8.96|7.76|6.91|7.20|
|California | %| 3%| %| %| %| %| %|
-------------------------------------------------------
---------------------------------------------------------
| |
|---------------------------------------------------------|
| Net Profit Margin: 2002 Through 2008 |
---------------------------------------------------------
-------------------------------------------------------
| |2002|2003|2004|2005|2006|2007|2008|
| | | | | | | | |
-------------------------------------------------------
|Blue Cross of |5.86|6.75|7.95|7.80|6.80|8.30|6.31|
|California | %| %| %| %| %| %| %|
-------------------------------------------------------
|California |2.65|4.82|4.77|3.94|4.71|5.20|3.71|
|Physicians' Service | %| %| %| %| %| %| %|
-------------------------------------------------------
|Health Net of |4.40|6.02|0.27|4.37|4.74|4.35|1.94|
|California, Inc. | %| %| %| %| %| %| %|
-------------------------------------------------------
|Kaiser Foundation |-1.0|3.03|5.06|2.08|2.72|4.68|-3.9|
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 9
|Health Plan, Inc. | 8%| %| %| %| %| %| 0%|
|--------------------+----+----+----+----+----+----+----|
|PacifiCare of |2.36|5.55|5.97|4.89|6.72|6.33|5.81|
|California | %| %| %| %| %| %|% |
-------------------------------------------------------
Data provided by DMHC. California Physicians' Service is
the parent of Blue Shield of California.
Managed Risk Medical Insurance Board
The Managed Risk Medical Insurance Board (MRMIB)
administers the Healthy Families Program (HFP), which
provides low-cost health coverage to low-income children.
HFP enrollees receive care through health plans that
contract with MRMIB. MRMIB currently requires its
HFP-contracting health plans to meet a contractual
requirement that each plan spend 85 percent of premiums
received on total covered benefit and services costs. MRMIB
uses this data, among other data, when conducting rate
negotiations with health plans to determine if health plan
rate increase requests are warranted based on the previous
year's claims history.
Governor's veto
Last year, the Governor vetoed an identical measure to SB
316. In vetoing SB 1440 (Kuehl), the Governor stated the
bill represented a piecemeal approach to health care
reform. He further wrote:
My comprehensive health care reform contained a
similar provision to
what is proposed in this bill. However, my plan also
contained a great
deal more. I cannot support individual reform efforts
that do not include
the other essential components. Taken in its isolated
and singular fashion,
this bill may weaken our already-broken system.
Related legislation
SB 227 (Alquist) would require health plans and health
insurers to report their medical loss ratios to the Managed
Risk Medical Insurance Board (MRMIB), and would require
MRMIB to establish a quartile ranking of all health plans
and health insurers, based on their reported medical loss
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 10
ratio, for the purpose of applying a graduated fee schedule
to plans and insurers that elect to be payers to the Major
Risk Medical Insurance Program. Would require MRMIB to
establish fees, as prescribed by the bill, for those plans
and insurers electing to be payers based on the plan or
insurer's relative number of covered lives, as defined, and
the ranking of the plan or insurer's reported medical loss
ratio. Set for hearing in the Senate Health Committee on
April 22, 2009.
AB 812 (De La Torre) would require health plans and health
insurers to report to their respective regulators the
medical loss ratio of each health care plan product or
health insurance policy, which would become available to
the public. Pending in the Assembly Insurance Committee.
Prior legislation
SB 1440 (Kuehl, 2008) was an identical measure to SB 316.
Vetoed
AB 1554 (Jones, 2007) would have required health care
service plans licensed by DMHC and health insurers
certificated by CDI, effective January 1, 2009, to submit a
rate application for approval by the respective regulator
for any increase in the rate charged to a subscriber or
insured, as specified. The bill would have imposed on DMHC
and CDI specific rate approval criteria, timelines, and
hearing and notice requirements. Failed passage in the
Senate Health Committee and granted reconsideration.
ABX1 1 (Nunez, 2007) among its provisions, would have, on
and after July 1, 2010, required full-service health plans
and health insurers to expend no less than 85 percent of
the after tax revenues they receive from dues, fees,
premiums, or other periodic payments, on health care
benefits. The bill would have allowed plans and insurers
to average their administrative costs across all of the
plans and insurance policies they offer, with the exception
of Medicare supplement plans and policies and certain other
limited benefit policies, and would have allowed DMHC and
CDI to exclude any new contracts or policies from this
limit for the first two years they are offered in
California. "Health care benefits" would have been broadly
defined to include the costs of programs or activities
which improve the provision of health care services and
improve health care outcomes, as well as disease management
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 11
services, medical advice, and pay-for-performance payments.
Failed passage in the Senate Health Committee.
AB 8 (Nunez, 2007) contained similar provisions to ABX1 1
with regard to the amount health plans and health insurers
would have been required to expend on health care benefits.
Vetoed by the Governor.
SB 48 (Perata, 2007) contained similar provisions to ABX1 1
with regard to the amount health plans and health insurers
would have been required to expend on health care benefits.
These provisions were amended out of the bill.
SB 1591 (Kuehl, 2006) would have prohibited health insurers
from spending on administrative costs in any fiscal year an
excessive amount of aggregate dues, fees, or other periodic
payments received by the insurer. Provides, for purposes
of the bill, that administrative costs include all costs
identified in current regulations that apply to health care
service plans. Requires the Department of Insurance to
develop regulations to implement the bill by January 1,
2008, and provides that the bill is to take effect on July
1, 2008. These provisions were amended out of the bill.
Arguments in support
Health Access California believes that the percentage of
premium dollars spent on patient care is an important
measure of a plan's value (although not the only measure),
and that patients do not have the actuarial expertise or
information to assess whether a low-premium product will
provide them value. Health Access notes that low-value
health plans have dedicated as little as 51 cents of every
premium dollar on what patients need, and often do not
cover maternity care or prescription drugs. Health Access
believes that
this bill would ensure that a significant amount of the
dollars consumers pay for health coverage would be spent on
them.
Health Access notes that the measure does not address the
issue that insurers can maintain their profits by
increasing rates, and that the measure would be further
improved by adding the medical loss ratio of risk bearing
medical groups. Health Access notes that physician groups
have substantial overhead and administrative costs because
of their role as mini-HMOs, and fully accounting for
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 12
administrative overhead ought to include accounting for
physician overhead.
Concerns
HealthMarkets writes that legislation establishing a
medical cost ratio for health insurers must recognize the
unique status of an individual-market only carrier and
establish a separate standard for companies that have no
group policies to lower the average administrative costs.
HealthMarkets states that selling to individuals is labor
intensive, and that California already has a medical cost
ratio that is already among the highest of all the states
(at 70 percent for CDI-regulated products). HealthMarkets
writes that, without a separate standard for
individual-only carriers, it may not be able to operate in
the state, which would impact the 500 agents that sell
their products and risk coverage for nearly 55,000
Californians who obtain their coverage from HealthMarkets'
two licensed carriers in the individual market.
Arguments in opposition
Health plans and health insurers believe that medical cost
ratios are not a valid indicator of health plan quality or
efficiency, and that arbitrary medical cost ratios create
perverse incentives for carriers to stop offering products
in the individual and small employer market, eliminate
lower cost plan options, and reduce quality of care
measures. The Association of California Life and Health
Insurance Companies (ACLHIC) also states that PPO insurers
that have no HMO business would be disadvantaged, as PPO
plans cannot contractually obligate medical groups and
other providers to handle many of the quality of care,
claims payment, and other administrative functions through
a pre-paid capitation arrangement. ACLHIC also states the
requirement to disclose individual policy and small group
policy medical cost ratios would be confusing for
consumers, as these individual policies may not achieve 85
percent. ACLHIC believes that as a standalone reform
measure, the bill would eliminate choice in the individual
and group market, erode competition, and lead to higher
premiums.
The California Association of Health Plans writes that
administrative costs are only one component of health care,
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 13
and placing arbitrary caps does nothing to lower the more
relevant cost drivers in our health system, which include
rising hospital costs, provider costs, and continued
underfunding of public programs.
The American Specialty Health Insurance Company writes that
while the measure restricts its application to full-service
health plans under the Health and Safety Code, the
exceptions provided in the Insurance Code do not appear to
provide the same level of exclusion for limited benefit
plans offered by health insurers, such as chiropractic,
acupuncture, and massage therapy services that are provided
on a supplemental basis in the large group market.
Anthem Blue Cross writes the reporting requirement in the
bill is anti-competitive in nature and costly. Blue Cross
cites a 1997 article by U.C. Berkeley economics professor
Jamie Robinson, which states that MLR was an accounting
tool that was never intended to measure quality or
efficiency. Blue Cross also recommends extension of the
implementation deadline from January 1, 2011, to January 1,
2013.
COMMENTS
1.Insurers offering only individual market policies. The
author may wish to address how insurers offering
individual insurance products only should be treated with
respect to the 85 percent MLR requirement, given that
individual market products have higher administrative
costs than group products. As noted above, HealthMarkets
has indicated it offers only individual insurance
products that are regulated by CDI, and would not benefit
from the ability to average across group and individual
market products.
2.Time period of MLR reporting information to individuals
and groups. The author may wish to specify how many
years' worth of MLR data would be required to be reported
to individuals and groups with 50 members or less.
Current law specifies the plan's preceding fiscal year.
STAFF ANALYSIS OF SENATE BILL SB 316 (Alquist)Page 14
3.Treatment of limited benefit policies under DMHC vs. CDI.
The author may wish to consider further clarifying
language to address the issue raised by American
Specialty Health Insurance Company regarding the
application of the bill's requirements to limited benefit
policies covering chiropractic and acupuncture that are
regulated by CDI.
POSITIONS
Support: American Federation of State, County and
Municipal Employees
California School Employees Association
California Teachers Association
Health Access California
Oppose: America's Health Insurance Plans
American Specialty Health Insurance Company
Anthem Blue Cross
Association of California Life and Health Insurance
Companies
California Association of Health Plans
California Association of Health Underwriters
California Chamber of Commerce
Health Net
National Association of Insurance and Financial
Advisors of California
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