BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 316|
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THIRD READING
Bill No: SB 316
Author: Alquist (D)
Amended: 12/17/09
Vote: 21
SENATE HEALTH COMMITTEE : 6-4, 4/1/09
AYES: Alquist, Cedillo, DeSaulnier, Leno, Pavley, Wolk
NOES: Strickland, Aanestad, Cox, Maldonado
NO VOTE RECORDED: Negrete McLeod
SENATE APPROPRIATIONS COMMITTEE : 7-5, 5/28/09
AYES: Kehoe, Corbett, DeSaulnier, Hancock, Leno, Oropeza,
Yee
NOES: Cox, Denham, Runner, Walters, Wyland
NO VOTE RECORDED: Wolk
SUBJECT : Health care coverage: disclosures
SOURCE : Author
DIGEST : This bill requires health plans to annually
report to their respective regulators for medical loss
ratio of each individual and small group product. This
information will also have to be disclosed by employees or
agents of the plan when presenting a plan for sale to any
individual or the representative of a group consisting of
50 or fewer individuals.
Senate Floor Amendments of 12/17/09 delete a requirement
that health plans and insurers have a "medical Loss ration"
CONTINUED
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(a requirement that health plans spend a minimum percentage
of premiums on health care services) of 85 percent, and
broaden an existing medical loss ration disclosure
requirement that currently applies to individuals and
groups of 25 or fewer individuals, to instead apply to
individuals and groups of 50 or fewer individuals.
ANALYSIS : Existing law provides for the regulation of
health care service plans (health plans) by the Department
of Managed Health Care (DMHC) and regulation of disability
insurers who sell health insurance (health insurers) by the
Department of Insurance (DOI).
Existing law requires health care service plans to submit
for review and approval all of the types of plan contracts
they offer. 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 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.
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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
individuals.
This bill requires health plans to annually report to their
respective regulators the medical loss ratio of each
individual and small group product. This information will
also have to be disclosed by employees or agents of the
plan when presenting a plan for sale to any individual or
the representative of a group consisting of 50 or fewer
individuals.
Background
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
health insurance policies. The DOI 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
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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. DOI 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 DOI, 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 DOI 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
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Major Provisions 2009-10 2010-11
2011-12 Fund
DOI Regulations $227 Special*
DMHC Regulations $90-$167 $180-$333Special**
DOI oversight $529 $1,058$1,058Special**
& evaluation
DMHC oversight $90-$200
$180-$400Special**
& evaluation
* Insurance Fund
**Managed Care Fund
SUPPORT : (Verified 1/5/10)
American Federation of State, County and Municipal
Employees
California School Employees Association
California Teachers Association
Health Access California
OPPOSITION : (Verified 1/5/10)
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
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
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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 ensures that
a significant amount of the dollars consumers pay for
health coverage will be spent on them.
Health Access notes that the bill does not address the
issue that insurers can maintain their profits by
increasing rates, and that the bill furthers improve 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-health maintenance organization business
(HMOs), and fully accounting for administrative overhead
ought to include accounting for physician overhead.
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 preferred provider
organization (PPO) insurers that have no HMO will 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 will be
confusing for consumers, as these individual policies may
not achieve 85 percent. ACLHIC believes that as a
standalone reform measure, the bill eliminates choice in
the individual and group market, erodes competition, and
lead to higher premiums.
CTW:do 1/5/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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