BILL ANALYSIS                                                                                                                                                                                                    



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          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  








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            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. 









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          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.








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          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  








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               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.








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           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  








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            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  








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            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  








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            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  








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               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  








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            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