BILL ANALYSIS SB 1163 Page 1 Date of Hearing: August 26, 2010 ASSEMBLY COMMITTEE ON HEALTH William W. Monning, Chair SB 1163 (Leno) - As Amended: August 25, 2010 SENATE VOTE : 23-12 SUBJECT : Health care coverage: denials: premium rates. SUMMARY : Requires health care service plans (health plans) and health insurers to file with the Department of Managed Health Care (DMHC) and the California Department of Insurance (CDI) (regulators) specified rate information for individual and small group at least 60 days prior to implementing any rate change. Requires rate filings to be actuarially sound and to include a certification by an independent actuary that any increase is reasonable or unreasonable. Requires the filings in the case of large group contracts only for unreasonable rate increases, as defined by the Patient Protection and Affordable Care Act (PPACA) (Public Law 111-148), prior to implementing any such rate change. Increases, from 30 days to 60 days, the amount of time that health plan or insurer provides written noticed to an enrollee or insured before a change in premium rates or coverage becomes effective. Requires health plans and insurers that decline to offer coverage to or deny enrollment for a large group applying for coverage or that offer small group coverage at a rate that is higher than the standard employee risk rate to, at the time of the denial or offer of coverage, provide the applicant with reason for the decision, as specified. Specifically, this bill : Rate Review 1)Requires health plans and insurers to file with regulators all required rate information for individual and small group at least 60 days prior to implementing any rate change. Requires the filings in the case of large group contracts only for unreasonable rate increases, as defined by PPACA, at least 60 days prior to implementing any such rate change. 2)Requires health plans and insurers, for individual and small group contracts, to disclose to regulators information regarding identifying and contact information, contract forms, product and segment type, enrollment, annual rates, earned SB 1163 Page 2 premiums, incurred claims, average rate increases and effective date of increase, review category, number of affected subscribers/enrollees, overall annual medical trend factor assumptions, amount of the projected trend attributable to the use of certain factors, claims cost and rate of changes, enrollee/insured cost-sharing, changes in benefits and administrative costs, actuarial certification, consumer inquiries and complaints, and any other information required to be reported under the PPACA. 3)Requires health plan subject to 1) above to also disclose specified aggregate data for all rate filings in the individual and small group health plan markets related to the number and percentage of rate filings and the plan's average rate increase by the following categories, as specified. 4)Permits regulators to require health plans and insurers to submit all rate filings to the National Association of Insurance Commissioners' (NAIC) System for Electronic Rate and Form Filing (SERFF). Requires submission of rate filings to SERFF to be deemed to be filing with regulators for purposes of compliance with the rate filing requirements of this bill, but requires plans and insurers to submit any other information required comply with this bill. 5)Requires rate filings to be actuarially sound and to include a certification by an independent actuary or actuarial firm that the rate increase is reasonable or unreasonable and, if unreasonable, that the justification for the increase is based on accurate and sound actuarial assumptions and methodologies. 6)Requires plans and insurers to contract with an independent actuary to comply with 5) above. Prohibits the actuary or actuarial firm from being be an affiliate or a subsidiary of, nor in any way owned or controlled by, a health plan, health insurer, or a trade association of health plans or insurers. Prohibits a contracted actuary or actuarial firm board member, director, officer, or employee from serving as a board member, director, or employee of a health plan or insurer. Prohibits a health plan, health insurer, or a trade association of health plans board member, director, or officer from serving a board member, director, officer, or employee of the actuary or actuarial firm. SB 1163 Page 3 7)Prohibits anything in this bill from being construed to permit regulators to establish rates for contractual health care services. 8)Requires all information submitted under this bill to be made publicly available by regulators except, that contracted rates between a health plan or insurer and a provider or a large group are deemed confidential information that will not be made public. 9)Requires all information to be submitted to regulators electronically. Requires the information below to be made available on regulators' and plan/insurers Web sites, as specified, 60 days prior to the implementation of the rate increase: a) Justifications for any unreasonable rate increases, including all information and supporting documentation as to why the rate increase is justified; b) Overall annual medical trend factor assumptions in each rate filing for all benefits; c) Actual costs by aggregate benefit category to include hospital inpatient, hospital outpatient, physician services, prescription drugs, and other ancillary services, laboratory, and radiology; and, d) The amount of the projected trend attributable to the use of services, price inflation, or fees and risk for annual plan contract trends by aggregate benefit category, such as hospital inpatient, hospital outpatient, physician services, prescription drugs and other ancillary services, laboratory, and radiology. Requires a health plan or insurer that exclusively contracts with no more than two medical groups to instead disclose the amount of their actual trend experience for the prior contract year by aggregate benefit category, using benefit categories that are to the maximum extent possible the same or similar to those used by other plans. 10)Requires regulators to accept and post to their websites any public comment on a rate increase submitted during the 60-day period in 9) above. SB 1163 Page 4 11)Exempts a number of programs and contracts from the rate review provisions, including specialized health plan contracts, Medicare supplement plans; Medi-Cal managed care, Healthy Families Program, Access for Infants and Mothers Program, the California Major Risk Medical Insurance Program, the Federal Temporary High Risk Pool, and health plan conversion contracts. 12)Permits regulators, in consultation with each other and on or after July 1, 2012, to issue guidance to plans and insurers regarding compliance with this bill. Exempts such guidance from being subject to the Administrative Procedure Act. Requires regulators to consult with each other when issuing guidance, adopting necessary regulations, or posting information on their websites. 13)Permits regulators, whenever it appears that any person has engaged, or is about to engage, in any act or practice constituting a violation of this bill, including the filing of inaccurate or unjustified rates or inaccurate or unjustified rate information, to review the rate filing to ensure compliance with the law. 14)Permits regulators to review other filings. 15)Requires regulators to report at least quarterly to the Legislature on all unreasonable rate filings. 16)Requires regulators to post on its Web site any changes to the proposed rate increase, including any documentation supporting those changes. Requires regulators to post findings on its Web site if it finds that an unreasonable rate increase is not justified or that a rate filing contains inaccurate information. 17)Requires regulators, in a manner consistent with applicable federal laws, rules, and regulations, to: a) Provide data to the United States Secretary of the U.S. Department of Health and Human Services (DHHS) on health care service plan rate trends in premium rating areas; b) Provide to the California Health Benefit Exchange (established pursuant to the PPACA) commencing with its SB 1163 Page 5 creation, such information as may be necessary to allow compliance with federal law, roles, regulations, and guidance. Consumer notification 18) Requires health plans and insurers that decline to offer coverage to or deny enrollment for a large group applying for coverage or that offer group coverage at a rate that is higher than the standard rate to, at the time of the denial or offer of coverage, provide the applicant with the specific reason or reasons for the decision in writing, in clear, easily understandable language, as specified. 19) Increases, from 30 days to 60 days, the amount of time that a health plan or an insurer provides written noticed to an enrollee or insured before a change in premium rates or coverage becomes effective. Requires the notice in 18) above, and written notices regarding rate changes in existing law to be in 12-point type. Grandfathered Plans 20)Deems a health plan or a health insurer to be in compliance with the requirement in the small employer health insurance law that health plans and health insurers fairly, affirmatively offer, market and sell all of the benefit plans designs it makes available (known as the "all products" requirement) with respect to grandfathered plan contracts under the PPACA, as long as: a) The plan/insurer offers to renew the grandfathered plan contract unless the plan withdraws the plan contract/policy from the small employer market; b) The plan/insurer provides appropriate notice of the grandfathered status of the plan in any materials provided to an enrollee of the contract describing the benefits provided under the contract, as required under PPACA; and, c) The plan/insurer makes no changes to the benefits set forth in the grandfathered plan contract other than those required by state or federal law, regulation, rule or guidance and those permitted to be made to a grandfathered plan under PPACA. SB 1163 Page 6 EXISTING LAW : 1)Provides for the regulation of health plans by DMHC and regulation of health insurers by CDI. 2)Requires health plans and health insurers that decline to offer coverage or that deny enrollment of an individual or his or her dependents applying for individual coverage, or that offer individual coverage at a rate that is higher than the standard rate, to provide the individual applicant with the specific reason for the decision in writing at the time of the denial or offer of coverage. 3)Prohibits health plans from changing the premium rate or coverage for an individual plan contract unless the plan has delivered a written notice of the change at least 30 days prior to the effective date of the contract renewal, or the date on which the rate or coverage changes. Requires a notice of an increase in the premium rate to include the reasons for the rate increase. 4)Requires individual health plans and health insurers to have written policies, procedures, or underwriting guidelines establishing the criteria and process by which the plan or insurer makes its decision to provide or to deny coverage to individuals applying for coverage, and sets the rate for that coverage. These guidelines, policies, or procedures are required to assure that the plan rating and underwriting criteria comply with all other applicable provisions of state and federal law. 5)Requires health plans and health insurers to annually file with DHMC or CDI a general description of the criteria, policies, procedures, or guidelines the plan or insurer uses for rating and underwriting decisions related to individual health plan contracts, including automatic declinable health conditions, health conditions that may lead to a coverage decline, height and weight standards, health history, health care utilization, lifestyle, or behavior that might result in a decline for coverage or severely limit the plan products for which they would be eligible. 6)Permits a health plan or insurer to comply with this requirement by submitting to DMHC or CDI underwriting SB 1163 Page 7 materials or resource guides provided to plan solicitors or solicitor firms, provided that those materials include the information required to be submitted. 7)Defines, under the federal PPACA, a "grandfathered plan" as a plan in which an individual was enrolled on the date federal health care reform was signed into law. Exempts grandfathered plans, with specified exceptions, from the requirements placed on health plans and insurers by PPACA, including when grandfathered plans are renewed. FISCAL EFFECT : According to the Assembly Appropriations Committee analysis of a previous version of this bill: 1)Increased costs of $1 million, combined, to DMHC and CDI to comply with the increased reporting and oversight requirements established by this bill. These costs will likely be supported by a federal grant. California recently applied to the federal government for $1 million in funding to comply with rate review requirements. 2)The federal government has allocated $250 million over a five-year period to support state efforts with regard to rate review. COMMENTS : 1)PURPOSE OF THIS BILL . According to the author, this bill seeks to provide California consumers, regulatory agencies and policymakers critical information regarding the actuarial basis and justification for premium increases as well as data regarding denial and coverage rates. The author states that the provisions of this bill requiring detailed data and actuarial justification for premium increases and non-standard premium charges are necessary in response to provisions contained in the recently enacted federal health reform legislation requiring California regulatory agencies to provide detailed information regarding premium trends and to identify inappropriate premium increases. In addition, the author states the recent public furor over annual premium rate hikes as high as 39% led policymakers and DMHC and CDI, including the Attorney General, to seek detailed information justifying the rate increases. Failure to comply with these requests forced the Attorney General to file subpoenas seeking the kind of information that DMHC and CDI are required to provide to the federal government. The author further states that provisions SB 1163 Page 8 of the bill increase the amount of time consumers have to research and shop for comparable products, from 30 days to 60 days, because existing law does not provide sufficient time for consumers to either make alternative arrangements for coverage, or to plan for the increased burden for their household or business. 2)BACKGROUND . In California, health insurance is generally not subject to rate regulation, with few exceptions. Medicare supplement policies and contracts sold by both health plans and insurers are subject to prior approval and regulation of their medical loss ratios (MLRs), the ratio of benefits to premium. Health plans and insurers are subject to specific marketing, underwriting, and rating rules relating to health coverage sold to small employer groups of 2-50. Both regulators ensure compliance with the small group rating rules primarily in response to complaints. CDI-regulated insurers are subject to filing and review of rates, referred to as "file and use" and must meet minimum MLR standards, but only for individual products. The MLR requirements do not apply to Knox-Keene plans. Knox-Keene plans are limited to no more than 15% administrative costs, but DMHC does not include profit as an administrative cost. 3)FEDERAL HEALTH CARE REFORM . On March 23, 2010, President Obama signed the PPACA, which makes several fundamental changes to the private health insurance market, including requiring the DHHS Secretary, in conjunction with states, to establish a process for the annual review, beginning with the 2010 plan year, of "unreasonable increases in premiums" for health insurance coverage. This process must require health plans and insurers to submit to the Secretary and the relevant state a justification for an unreasonable premium increase prior to the implementation of the increase. Health plans and insurers must prominently post such information on their Internet Web sites. The Secretary of DHHS is required to carry out a program to award grants to states during the five-year period beginning with fiscal year 2010 to assist states in carrying out the annual review of unreasonable increases in premiums for health insurance coverage. As a condition of receiving a grant, a state, through its Commissioner of Insurance, must provide the Secretary with information about trends in premium increases in health insurance coverage in premium rating areas in the state; and make recommendations, as appropriate, to the state Exchange (Exchanges are entities required to be established by SB 1163 Page 9 federal health care reform) about whether particular health insurance issuers should be excluded from participation in the Exchange based on a pattern or practice of excessive or unjustified premium increases. The PPACA appropriated to the Secretary $250 million to be available for expenditure for grants to states. The Secretary is required to establish a formula for determining the amount of any grant to a state that considers the number of plans of health insurance coverage offered in each state, and the population of the state. No state qualifying for a grant can receive less than $1 million or more than $5 million for a grant year. 4)HEALTH INSURANCE RATE INCREASES . According to a study published in the journal Health Affairs in 2007, premiums paid by employees for small group coverage (2-50 employees) in California increased 53% between 2003 and 2006, from $250 to $382 per month, and premiums for individual coverage rose 23% between 2002 and 2006, from $211 to $259 per month. In 2006, a single person age 32-52 earning the median income who purchased individual insurance spent, on average, 16% of income on premiums and out-of-pocket medical expenses. In addition to an increase in premiums, for individual insurance, the share of medical expenses paid by insurance as opposed to patients declined from 2002 to 2006. In 2003, individual market policies paid 75% of medical costs on average. That figure had dropped to 55% just three years later. In the small-group market the proportion of claims paid by insurers for a standardized population remained constant. Small group market policies retained their actuarial value, paying for roughly 83% of medical expenses across a similar period. 5)HEALTH CARE SPENDING . The 2009 edition of the California HealthCare Foundation's "Healthcare Costs 101" states that although there has been some moderation in health spending growth in recent years, its share of the economy continues to grow. In 2007, national health care spending reached $2.2 trillion ($7,421 per person). If left unchecked, health care spending is projected to reach 20% of the country's gross domestic product (GDP) by 2018. The report also highlighted the following trends: a) Health spending grew 6.1% in 2007, the smallest increase since 1998, extending a five-year decelerating trend. Nevertheless, health spending continues to outpace SB 1163 Page 10 inflation and is projected to reach $2.5 trillion this year; b) Projections indicate that the recession will more than offset the recent moderation in health spending. Health care's share of the GDP is expected to rise rapidly, to 17.6% of GDP this year; and, c) Nationally, per-person costs for health care increased 81% between 1997 and 2007. 6)ACLHIC/CAHP LETTER . Under the PPACA, "grandfathered" plans (plans in effect as of March 23, 2010 that are renewed on or after September 23, 2010), are not required to comply with specified provisions of the federal law. Plans that are not grandfathered, including products sold to new business as of September 23, 2010, must comply with all of the PPACA provisions applicable as of that date. According to a July 10, 2010 letter to regulators from the Association of California Life and Health Insurance Companies (ACLHIC) and the California Association of Health Plans (CAHP), under current California law, there is no process by which a small employer plan can be "closed." The product must either be actively marketed or it must be withdrawn. According to ACLHIC and CAHP, any product that is only offered to an existing employer on renewal and not to new business is not being actively marketed as described in the statutes. The Small Group Act in California had been interpreted by plans and insurers to mean that, if a product is not being actively marketed to new groups, it must be withdrawn from the market and the provisions in the Act dealing with renewals involving withdrawn plans apply. ACLHIC and CAHP expressed concern that there is a risk that a strict interpretation of current law will deprive employers of being able to keep their same plan as promised under PPACA. 7)RELATED LEGISLATION . AB 2578 (Jones) requires health plans and health insurers, effective January 1, 2012, to apply for prior approval of proposed rate increases, under specified conditions, and imposes on DMHC and CDI specific rate review criteria, timelines and hearing requirements. AB 2578 is on the Senate Floor. 8)PREVIOUS LEGISLATION . AB 1218 (Jones) of 2009 and AB 1554 (Jones) of 2008 would have required health plans licensed by SB 1163 Page 11 DMHC and health insurers certificated by CDI, to annually submit for prior approval to the respective regulator any increase in the rate charged to a subscriber or insured, as specified, and would have imposed on DMHC and CDI specific rate review criteria, timelines, and hearing requirements. AB 1218 failed passage in the Assembly Health Committee and AB 1554 failed in the Senate Health Committee. SB 425 (Ortiz) of 2006 would have required health plans and insurers to obtain prior approval for a rate increase, defined in a similar manner to rates under AB 1218 of 2009. SB 425 did not have a hearing, at the author's request, and died in the Senate Health Committee. SB 26 (Figueroa) of 2004 would have required health plans and health insurers to obtain prior approval of rate increases from DMHC and CDI, as specified, and would have potentially required significant refunds of premiums previously collected. SB 26 died in the Senate Insurance Committee. REGISTERED SUPPORT / OPPOSITION : Support Health Access California (sponsor) California Immigrant Policy Center (previous version) American Federation of State, County and Municipal Employees, AFL-CIO California Alliance for Retired Americans California Chiropractic Association California Nurses Association California School Employees Association California Teachers Association Congress of California Seniors Consumers Union Opposition None on file. Analysis Prepared by : Melanie Moreno / HEALTH / (916) 319-2097