BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: SB 890
S
AUTHOR: Alquist
B
AMENDED: August 25, 2010
HEARING DATE: August 31, 2010
8
CONSULTANT:
9
Bain
0
PURSUANT TO S.R. 29.10
SUBJECT
Health care coverage
SUMMARY
Requires health plans and health insurers to categorize all
individual market products into tiers based on actuarial
level, as specified. Requires health plans and health
insurers to allow an individual to transfer without medical
underwriting to any other individual plan contract offered
by that same health plan or health insurer that provides
equal or lesser benefits upon the annual renewal date of
the contract or policy. Requires health plans and health
insurers to meet federal annual and lifetime limits and the
medical loss ratio requirements (MLR) in specified
provisions of the federal health care reform law, and any
federal rules or regulations issued under those provisions.
CHANGES TO EXISTING LAW
Existing law:
Provides for the regulation of health plans by DMHC under
Knox-Keene, and for the regulation of health insurers by
CDI under provisions of the Insurance Code.
Continued---
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Allows individuals to switch plans within their current
health plan/insurer once a year, if they have been covered
for at least 18 months under an individual plan contract,
and to transfer, without medical underwriting (meaning the
individual cannot be turned down for coverage), to any
other individual plan contract offered by that same health
plan/insurer that provides equal or lesser benefits.
Requires health care service plans to use disclosure forms
or materials containing information regarding the benefits,
services, and terms of the plan contract as the Director of
DMHC may require, so as to afford the public, subscribers,
and enrollees with a full and fair disclosure of the
provisions of the plan in readily understood language and
in a clearly organized manner.
This bill:
Categorization into Tiers Based on Actuarial Value
Requires, effective July 1, 2011, health plan and health
insurers to categorize all products offered or renewed in
the individual market. Requires, effective July 1, 2011
through December 31, 2013, each product to be categorized
on the basis of actuarial value into one of the following
tiers:
Catastrophic coverage for products with an actuarial
value less than 55 percent;
Bronze level for products with have an actuarial value of
55 percent to 64 percent;
Silver level for products with have an actuarial value of
65 percent to 74 percent;
Gold level for products with an actuarial value of 75
percent to 84 percent; and,
Platinum level for products with an actuarial value of 85
percent or greater.
Requires each product, effective January 1, 2014, to be
categorized on the basis of actuarial value into one of the
following tiers:
Catastrophic coverage for products with an actuarial
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value less than 60 percent;
Bronze level for products with an actuarial value equal
to 60 percent;
Silver level for product with an actuarial value equal to
70 percent;
Gold level for products with an actuarial value equal to
80 percent; and,
Platinum level for products with an actuarial value equal
to 90 percent.
Allows health plans and health insurers to have a de
minimus variation from the actuarial value categorization
tiers that take effect on January 1, 2014.
Requires, by July 1, 2011, the Department of Managed Health
Care (DMHC) and the California Department of Insurance
(CDI) to jointly adopt a common actuarial model, which is
required to be used by health plans and health insurers to
categorize products in the individual market within one
year of the date of adoption of the model. Requires the
model to be updated at least every three years and to
reflect the method of calculating actuarial value below.
Exempts the establishment of the model and updates to the
model from the rulemaking provisions of the Administrative
Procedure Act.
Permits DMHC and CDI, in lieu of establishing a common
actuarial model, to require plans and insurers to
categorize their products using a qualified actuary and the
applicable method of calculation described above. Requires
plans and insurers, in this case, to submit a copy of the
actuarial value calculations and a certification signed by
the qualified actuary in a manner and format specified by
DMHC and CDI.
Requires, until January 1, 2014, the benefits required to
be covered under the Knox-Keene Health Care Service Plan
Act of 1975 (Knox-Keene) benefit package to be used to
determine the denominator of the actuarial value
calculation, using a standard population. Prohibits this
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provision from being construed to require health insurers
to provide the Knox-Keene benefit package. Requires, after
January 1, 2014, the actuarial value to be calculated using
a specified section of the federal Patient Protection and
Affordable Care Act (PPACA), (Public Law 111-148) and any
regulations adopted pursuant to that law. Requires health
plans and health insurers to use a qualified actuary, as
defined, to certify its categorization under this bill.
Permits DMHC and the CDI to review the categorization of
any product for accuracy, and the methodology used by a
plan or insurer to establish actuarial value.
Permits DMHC and CDI to require the submission of any
information needed to categorize products under the
actuarial value provisions of this bill.
Requires health plans and health insurers, as part of the
disclosure form required by existing law, to disclose the
actuarial value of each product with an explanation of
actuarial value in easily understood language expressed as
a percent of expenses paid by insurance versus
out-of-pocket. Requires the disclosure to include an
estimate of the annual out-of-pocket expenses of an
individual in average health who is enrolled in such a
contract, and the total annual cost (the sum of premium
plus out-of-pocket cost) of a person of average health.
Requires the notice to also disclose that the share of cost
may be more or less depending on the age, illness, or
health condition of the consumer, and to make a statement
requesting that consumers examine other features of the
insurance product carefully, as specified.
Switching Earlier to Lower Cost Plan of Current Carrier
Requires health plans and health insurers to allow an
individual to transfer without medical underwriting to any
other individual plan contract offered by that same health
plan or health insurer that provides equal or lesser
benefits upon the annual renewal date of the individual
plan contract or policy. Under current law, an individual
must have been covered for at least 18 months under an
individual plan contract to transfer without medical
underwriting.
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State Enforcement of Federal Law
Requires a health plan and a health insurer that issues,
sells, renews, or offers contracts for health care coverage
to meet federal annual and lifetime limits in a specified
provision of PPACA, and any federal rules or regulations
issued under that section, to the extent required by
federal law. Requires health plans and health insurers to
meet any state laws or regulations that do not prevent the
application of those federal annual and lifetime limit
provisions, to the extent required by federal law.
Requires health plans and health insurers that issue, sell,
renew, or offers contracts for health care coverage to meet
the MLR requirements of PPACA, and any rules or regulations
issued under that provision of PPACA, to the extent
required by federal law.
FISCAL IMPACT
According to the Assembly Appropriations Committee analysis
of a previous version of this bill, annual fee-supported
(health plan fees) special fund costs of $1 million to $1.5
million to DMHC and CDI, combined, to establish and
maintain oversight of the standardization requirements and
reforms contained in this bill.
BACKGROUND AND DISCUSSION
According to the author, Californians purchasing health
insurance in the individual market face a dizzying array of
products to choose from with different benefit standards
that makes price shopping difficult. The author states
that roughly 2 to 2.5 million Californians buy health
insurance in the individual market, and they have over a
hundred different products to choose from, with different
benefits (for example, with maternity coverage and without
it), cost-sharing provisions (deductibles and co-payments)
offered by competing health plans and health insurers. The
author states that this bill addresses some of the
shortcomings in the state's individual health insurance
market, and provides a bridge to the full implementation of
federal health insurance reforms in 2014.
This bill will tell people shopping for individual coverage
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the percentage of expenses paid for by insurance for an
individual of average health, an individual's annual
out-of-pocket expenses, and his or her total annual cost
(premiums plus out-of-pocket costs). The author states
that these disclosure requirements will help individuals
make sense of complex insurance policy provisions using
actuarial value as a common frame of reference. Consumer
comparison shopping will be enhanced as the disclosure
provisions will help illustrate the premium and
out-of-pocket cost trade-offs individuals face when
choosing an individual health insurance product that best
meets their needs and budget. Finally, the author contends
that this bill will ensure state enforcement of the federal
medical loss ratio and annual and lifetime benefit limit
provisions contained in federal health care reform.
Switching to a lesser benefit plan earlier
Approximately 2 to 2.5 million Californians purchase
individual health insurance, representing approximately 7
percent of Californians. Existing law allows individuals a
limited ability to switch plans within their current
carrier (e.g., within Blue Cross), if the individual has
been covered for at least 18 months under an individual
plan contract. Such an individual can transfer, without
medical underwriting (meaning the individual cannot be
turned down for coverage), to any other individual plan
contract offered by that same health plan/insurer that
provides equal or lesser benefits. This bill would allow a
person to switch plans on the annual renewal date of their
contract (12 months following the time they signed up for
coverage, instead of being required to have at least 18
months of coverage under current law).
Federal health care reform
In March 2010, the President signed into law two federal
health care reform bills, the Patient Protection and
Affordable Care Act (PPACA) and the Health Care and
Education Reconciliation Act of 2010. These bills make
significant changes to the California health insurance
market and its regulatory environment, including provisions
relating to annual and lifetime benefit limits, medical
loss ratio and a requirement that health insurance products
be categorized based on actuarial value, effective January
1, 2014. Federal law allows states to require health plans
and insurers to the federal requirements. If a state has
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failed to substantially enforce a federal provision, the
federal Secretary is charged with enforcing the federal
requirements. DMHC and CDI indicate they need authority in
state law to enforce the new federal health care reform
requirements.
Actuarial value
Actuarial value is the percentage of health care costs that
would be paid for by a person's health plan coverage,
versus out-of-pocket costs at the point of service (e.g.,
co-payments, co-insurance or the deductible). For example,
a health plan with an actuarial value of 60 percent would
pay for 60 percent of an average individual's health care
costs (using a standard population), while the individual
would be responsible for the remaining 40 percent. Federal
law, effective 2014, requires health plans and health
insurers to categorize products based on actuarial value as
follows:
Bronze 60 percent
Silver 70 percent
Gold 80 percent
Platinum 90 percent
Under SB 890, health plans could use ranges prior to 2014,
as follows:
Catastrophic Below 55 percent
Bronze 56-64 percent
Silver 65-74 percent
Gold 75-84 percent
Platinum 85 percent and above
Federal law requires the federal Secretary of the
Department of Health and Human Services to provide for only
a "de minimis" variation in the AV used in determining the
level of coverage of a plan to account for differences in
actuarial estimates. SB 890 places this same "de minimis"
standard in state law, and uses the same percentages
post-2014 as are contained in federal health care reform.
Annual and lifetime benefit limits
This bill requires health plan insurers to meet federal
annual and lifetime limits in a specified provision of
PPACA, and any federal rules or regulations issued under
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that section, to the extent required by federal law. In
addition, health plans and insurers must meet any state
laws or regulations that do not prevent the application of
those federal annual and lifetime limit provisions, to the
extent required by federal law.
An example of an annual and lifetime benefit limit is in
the current state Major Risk Medical Insurance Program
(MRMIP). MRMIP has an annual benefit limit of $75,000 and
a lifetime benefit limit of $750,000. Benefits received
above these dollar amounts are excluded from coverage.
DMHC indicates that the requirements in existing law and
regulation that require health plans to cover medically
necessary basic health care services prohibit annual and
lifetime limits in DMHC-regulated HMOs. DMHC indicates
that point-of-service plans (POS) and PPO plans regulated
by DMHC are allowed to have annual and lifetime benefit
limits. CDI-regulated health insurers (PPOs and indemnity
carriers) are also allowed to have annual and lifetime
benefit limits.
Federal health care reform prohibits health plans and
insurers from establishing:
Any lifetime limits on the dollar value of essential
health benefits for any participant or beneficiary; or,
Annual limits on the dollar value of essential health
benefits for any participant or beneficiary, except that
until January 1, 2014, health plans and insurers can
establish a "restricted annual limit" on the dollar value
of benefits for any participant or beneficiary with
respect to essential health benefits required under the
Patient Protection and Affordable Care Act (HR 3590).
The lifetime limit provision takes effect six months
following enactment of federal health care reform. In
making the determination of what is a "restricted annual
limit," the Secretary of the federal Department of Health
and Human Services (DHHS) is charged with defining the term
"restricted annual limit." In defining this phrase, the
federal Secretary is required to ensure that access to
needed services is made available with a minimal impact on
premiums.
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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 (MLR), 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 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 for which insurers file rate
increases.
For plans regulated by the Department of Managed Health
Care, existing regulations require the administrative costs
incurred by a health plan to be reasonable and necessary,
taking into consideration such factors as the plan's stage
of development. If the administrative costs of an
established health plan exceed 15 percent, or if the
administrative costs of a plan in the development phase
exceed 25 percent, the plan is required to demonstrate to
the Director, if called upon to do so, that its
administrative costs are not excessive and are justified
under the circumstances, and/or that it has instituted
procedures to reduce administrative costs.
Federal health care reform requires health insurers
offering coverage in the large group market to have a MLR
of 85 percent, or a higher percentage as a state may, by
regulation, determine. With respect to a health insurance
issuer offering coverage in the small group market or in
the individual market, the MLR must be 80 percent, or such
higher percentage as a state may by regulation determine,
except that the Secretary may adjust such percentage with
respect to a state if the Secretary determines that the
application of the 80 percent MLR may destabilize the
individual market in such state. The federal law requires
annual rebates to enrollees on a pro rata basis if the plan
does not meet the minimum ratio.
The National Association of Insurance Commissioners is
required to establish uniform definitions for purposes of
calculating the MLR by December 31, 2010. Federal law also
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permits the Secretary to adjust the MLR rates, if the
Secretary determines appropriate, on account of the
volatility of the individual market due to the
establishment of state Exchanges.
Related bills
AB 786 (Jones) would have required DMHC and CDI to jointly
promulgate regulations to develop standard definitions and
terminology for covered health benefits and cost-sharing
provisions applicable to individual health care contracts
and individual health insurance policies, and to develop a
system to categorize all contracts and policies to be
offered and sold to individuals on and after September 1,
2012. AB 786 also would have established a maximum
out-of-pocket limit of $5,000 per individual and $10,000
per family. Finally, AB 786 would have required the Office
of the Patient Advocate to develop and post on its Internet
website a description of each coverage choice category and
a uniform benefit matrix of all available individual health
plan contracts and individual health insurance policies.
AB 786 was amended on August 18, 2010, and the
health-related contents of the bill were deleted.
Prior legislation
SB 1522 (Steinberg) of 2008 would have required DMHC and
the CDI to jointly develop a system to categorize into five
coverage choice categories health coverage sold to
individuals, as specified. SB 1522 failed passage on the
Assembly Floor.
ABX1 1 (Nunez) of 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
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improve health care outcomes, as well as disease management
services, medical advice, and pay-for-performance payments.
Failed passage in the Senate Health Committee.
AB 8 (Nunez) of 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.
Arguments in support
Health Access California (HAC) writes in support that this
bill provides consumer protections for those Californians
who purchase health coverage as individuals, both now and
after 2014 when federal health reform is fully implemented,
by providing consumers with better information about the
policies that will remain in the market, by allowing
individual consumers to switch individual products sooner,
and by providing for state enforcement of the federal
annual and lifetime benefit limits and the federal medical
loss ratio requirements.
Arguments in opposition
The Department of Finance (DOF) argues legislation to amend
health plan/insurer requirements should be held in abeyance
until California has enacted legislation to comply with
federal health care reform, because it could conflict with
future legislation enacted to bring California into
compliance with federal requirements.
COMMENTS
1. Assembly amendments
The Assembly amendments delete the provision allowing
people to switch to a competing individual health plan or
insurer on the annual renewal date of their current
policy, on a guarantee issue basis, to a policy of equal
or lesser value. The Assembly amendments also delete
provisions requiring health plans and health insurers in
the individual market to offer standardized products
(five preferred provider organization [PPO] products and
five health maintenance organization [HMO] products),
delete provisions and that would have prohibited plans
and insurers from offering other products and delete
provisions that would have established specified premium
rating rules. The Assembly amendments instead require
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health plans and health insurers to categorize all
individual market products into tiers based on actuarial
value, as specified. Finally, the Assembly amendments
also delete the requirement that health insurers cover
medically necessary basic health care services.
PRIOR ACTIONS
Senate Health: 5-0
Senate Appropriations:10-0
Senate Appropriations:7-2
Senate Floor: 23-11
Assembly Health: 13-6
Assembly Appropriations:12-5
Assembly Health: 12-4
Assembly Floor: 51-27
POSITIONS
Support: Blue Shield
Health Access California
Kaiser Permanente Medical Care Program
(previous version)
AARP
Alliance of Californians for Community Empowerment
American Federation of State, County and Municipal
Employees
American Heart Association
Anaheim Chamber of Commerce
California Association of Physician Groups
California Children's Hospital Association
California Hispanic Chambers of Commerce
California Hospital Association
California Medical Association
CALPIRG
Community Health Partnership
Congress of California Seniors
Consumers Union
International Brotherhood of Electrical Workers -
Local 332
Kern County Medical Society
Local Health Plans of California
Los Angeles County Medical Society
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MemorialCare Health System
Monterey County Medical Society
Orange Coast Memorial
Orange County Hispanic Chamber of Commerce
Orange County Medical Association
Planned Parenthood Affiliates of California
San Bernardino County Medical Society
San Francisco Medical Society
San Mateo Central Labor Council
San Mateo County Board of Supervisors
San Mateo County Medical Association
Santa Clara Family Health Plan
Service Employees International Union
Sierra Sacramento Valley Medical Society
Six Rivers Planned Parenthood
South Bay AFL-CIO Labor Council
St. Joseph Health System
Stanford Hospital and Clinics
Stanislaus Medical Society
United Nurses Associations of California/Union of
Health Care Professionals
Working Partnerships USA
Oppose: Department of Finance (previous version)
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