BILL ANALYSIS                                                                                                                                                                                                    






                                 SENATE HEALTH
                               COMMITTEE ANALYSIS
                        Senator Elaine K. Alquist, Chair


          BILL NO:       SB 1163                                      
          S
          AUTHOR:        Leno                                         
          B
          AMENDED:       August 25, 2010                             
          HEARING DATE:  August 31, 2010                              
          1
          CONSULTANT:                                                 
          1
          Bain/                                                       
          6              3                                           
                              PURSUANT TO S.R. 29.10
           
                                                                     
                                     SUBJECT
                                         
                 Health care coverage:  denials:  premium rates

                                     SUMMARY  

          Requires 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 at least 60 days prior to implementing any  
          rate change.  Requires rate filings to be actuarially  
          sound.  Increases, from 30 days to 60 days, the amount of  
          time that a health plan or insurer must provide written  
          notice before a change in premium rates or coverage becomes  
          effective.  Requires health plans and insurers that decline  
          to offer coverage or that 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 provide the applicant with reason for the  
          decision.  

                             CHANGES TO EXISTING LAW  

          Existing federal law:
          Requires, under the federal Patient Protection and  
          Affordable Care Act (Public Law 111-148, known as "PPACA"),  
          the federal Secretary of the Department of Health and Human  
                                                         Continued---



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          Services, in conjunction with states, to establish a  
          process for the annual review of unreasonable increases in  
          premiums for health insurance coverage, beginning with the  
          2010 plan year.

          Requires the process described above to require health  
          insurance issuers to submit to the Secretary and the state  
          a justification for an unreasonable premium increase prior  
          to the implementation of the increase.  Requires health  
          plans and insurers to prominently post such information on  
          their Internet websites, and requires the Secretary to  
          ensure the public disclosure of information on such  
          increases and justifications for all health plans and  
          insurers.

          Defines a "grandfathered plan" under PPACA as a plan in  
          which an individual was enrolled on the date federal health  
          care reform was signed into law.  Grandfathered plans are  
          exempt, with specified exceptions, from the requirements  
          placed on health plans and insurers by PPACA.

          Existing state law:
          Provides for the regulation of health plans and insurers by  
          the Department of Managed Health Care (DMHC) and the  
          California Department of Insurance (CDI), respectively. 

          Existing state law does not limit the premiums for  
          individuals in the individual health            insurance  
          market, except for individuals eligible under federal law  
          who previously had 18 months of group coverage and who have  
          exhausted COBRA/Cal-COBRA coverage.

          Requires, through regulation, 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.  Requires, if the administrative costs of  
          an established plan exceed 15 percent, or if the  
          administrative costs of a plan in the development phase  
          exceed 25 percent, the plan to demonstrate to the Director,  
          if called upon to do so, that its administrative costs are  
          not excessive administrative costs and are justified under  
          the circumstances and/or that it has instituted procedures  
          to reduce administrative costs which are proving effective.

          Establishes, through regulation, minimum medical loss  




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          ratios for individual health insurance products regulated  
          by CDI.
          
          States that nothing in a specified provision of the  
          Knox-Keene Act is to be construed to permit the director to  
          establish the rates charged subscribers and enrollees for  
          contractual health care services, and prohibits the  
          director of DMHC's enforcement of the requirements of the  
          state's small group health law from being deemed to  
          establish the rates charged subscribers and enrollees for  
          contractual health care services.
          
          Requires health plans to fairly and affirmatively offer,  
          market, and sell health coverage to small employers.  This  
          is known as "guaranteed issue."  Requires health plans to  
          offer, market, and sell all of the health plan's contracts  
          that are sold to small employers, to any small employers in  
          each service area in which the plan provides health care  
          services.  This is known as an "all products" requirement.
          
          This bill:

           Rate Filings 
           
          Requires health plans and health insurers to file with the  
          respective regulator all required rate information for  
          individual and small group health plan contracts at least  
          60 days prior to implementing any rate change.  Requires  
          the filing to be concurrent with the existing required  
          written notice of a premium change for individual and small  
          group contracts.

          Requires a plan and insurer to disclose to its regulator 25  
          specified types of information for each individual and  
          small group rate filing.  Examples of the information  
          required to be filed include product type (PPO or HMO),  
          annual rate, total earned premiums in each plan contract  
          form, total incurred claims in each contract form, average  
          rate increase initially requested, average rate of  
          increase, effective date of rate increase, number of  
          subscribers/enrollees affected by each plan, the overall  
          annual medical trend factor assumptions in each rate filing  
          for all benefits and by aggregate benefit category (such as  
          hospital inpatient, hospital outpatient, physician  
          services, prescription drugs), the amount of the projected  




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          trend attributable to the use of services, price inflation,  
          or fees and risk for annual plan contract trends by  
          aggregate benefit category, any changes in enrollee  
          cost-sharing over the prior year, any changes in enrollee  
          benefits over the prior year, any changes in administrative  
          costs, and any other information required for rate review  
          by the federal health care reform law.

          Requires, for large employer contracts, health plans and  
          insurers to file with DMHC/CDI at least 60 days prior to  
          implementing any rate change all required rate information  
          for unreasonable rate increases.  Requires a plan/insurer  
          to also submit any other information required pursuant to  
          any regulation adopted by DMHC/CDI to comply with the rate  
          filing provisions of this bill.

          Requires health plans and insurers to also disclose the  
          following aggregate data for all rate filings in the  
          individual, small and large group markets:

           Number and percentage of rate filings reviewed by plan  
            year, segment type, product type, number of subscribers,  
            and number of covered lives affected.

           The plan's average rate increase by plan year, segment  
            type, and product type.

           Any cost containment and quality improvement efforts  
            since the plan/insurer's last rate filing for the same  
            category of health benefit plan.  Requires the  
            plan/insurer, to the extent possible, to describe any  
            significant new health care cost containment and quality  
            improvement efforts and to provide an estimate of  
            potential savings together with an estimated cost or  
            savings for the projection period.

          Requires a rate filing submitted under the rate filing  
          provisions of this bill to be actuarially sound.  Requires  
          a plan and insurer to contract with an independent actuary  
          or actuaries, and requires a filing submitted 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.  Requires rate filings submitted for large  




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          employer contracts to include a certification by an  
          independent actuary that the aggregate or average rate  
          increase is based on accurate and sound actuarial  
          assumptions and methodologies, unless PPACA requires a  
          certification of actuarial soundness for each large group  
          contract.

          Prohibits the rate filing provisions of this bill from  
          being construed to permit DMHC or CDI to establish the  
          rates charged subscribers and enrollees for covered health  
          care services.

          Requires all information submitted under this bill to be  
          made publicly available by DMHC or CDI, except that the  
          contracted rates between a health plan/insurer and a  
          provider are deemed confidential information that are  
          prohibited from being made public by DMHC or CDI.

          Requires the contracted rates between a health plan or  
          health insurer and a large group to be deemed confidential  
          information that are prohibited from being made public by  
          DMHC or CDI.

          Requires DMHC, CDI, and health plans and insurers, at a  
          minimum, to make the following information (except for  
          confidential information) readily available to the public  
          on their Internet Websites, in plain language and in a  
          manner and format specified by DMHC/CDI: 

           Justifications for any unreasonable rate increases,  
            including all information and supporting documentation as  
            to why the rate increase is justified.


           A plan/insurer's overall annual medical trend factor  
            assumptions in each rate filing for all benefits.


           A health plan/insurer's actual costs, by aggregate  
            benefit category (hospital inpatient, hospital  
            outpatient, physician services, prescription drugs and  
            other ancillary services, laboratory, and radiology).


           The amount of the projected trend attributable to the use  




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            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.  A health plan or  
            insurer that exclusively contracts with no more than two  
            medical groups in the state to provide or arrange for  
            professional medical services for the enrollees of the  
            plan (e.g., Kaiser) is required to instead disclose the  
            amount of its 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.


          Requires the above information to be made public for 60  
          days prior to the implementation of the rate increase.  
          Requires DMHC and CDI to accept and post to its Internet  
          Website any public comment on a rate increase submitted to  
          DMHC/CDI during the 60-day period.


          Requires all information submitted to DMHC or CDI under the  
          rate filing provisions to be submitted electronically in  
          order to facilitate review by DMHC/CDI and the public.

          Requires a plan and insurer to submit any other information  
          required under PPACA.  Requires a plan/insurer to also  
          submit any other information required pursuant to any  
          regulation adopted by DMHC/CDI to comply with the rate  
          filing provisions.

          Permits DMHC and CDI, notwithstanding any provision in a  
          contract between a health plan/health insurer and a health  
          care provider, to request from the health plan/insurer any  
          information required under the rate filing provisions of  
          this bill or PPACA.

          Permits DMHC and CDI, on or before July 1, 2012, to issue  
          guidance to health plans and health insurers regarding  
          compliance with the above provisions.  Exempts this  
          guidance from the Administrative Procedure Act.  Requires  
          DMHC and CDI to consult with each other in issuing  
          guidance, in adopting necessary regulations, in posting  




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          information on their respective Internet Websites, and in  
          taking any other action for the purpose of implementing the  
          above provisions.

          Permits DMHC and CDI, whenever it appears to DMHC/CDI that  
          any person has engaged, or is about to engage, in any act  
          or practice constituting a violation of the rate filing  
          provisions 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.  Permits DMHC and CDI to review other  
          filings.

          Requires DMHC and CDI to report to the Legislature at least  
          quarterly on all unreasonable rate filings.

          Requires DMHC and CDI to post on its Internet Website any  
          changes submitted by the plan/insurer to the proposed rate  
          increase, including any documentation submitted by the  
          plan/insurer supporting those changes.

          Requires DMHC and CDI, if it finds that an unreasonable  
          rate increase is not justified or that a rate filing  
          contains inaccurate information, to post its findings on  
          its Internet Website.

          Prohibits this bill from being construed to impair or  
          impede DMHC's or CDI's authority to administer or enforce  
          any other provision of their existing regulatory statutes.

          Requires DMHC and CDI to do all of the following in a  
          manner consistent with applicable federal laws, rules, and  
          regulations:

           Provide data to the Secretary on health plan rate trends  
            in premium rating areas.

           Provide to the Exchange such information as may be  
            necessary to allow compliance with federal law, rules,  
            regulations, and guidance (commencing with the creation  
            of the Exchange).

          Permits DMHC and CDI to require all plans and insurers to  
          submit all rate filings to the National Association of  
          Insurance Commissioners' System for Electronic Rate and  




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          Form Filing (SERFF).  Requires submission of the required  
          rate filing to SERFF to be deemed to be filed with DMHC/CDI  
          for purposes of compliance with the above-described rate  
          filings.

           Small Group Law - Exemption from Marketing Requirements for  
          Grandfathered Plans

           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 and  
          affirmatively offer, market and sell all of the benefit  
          plan designs they make available to small employers (known  
          as the "all products" requirement) with respect to  
          grandfathered plan contracts as provided for under PPACA,  
          as long as the following requirements are met:

           The plan/insurer offers to renew the grandfathered plan  
            contract, unless the plan withdraws the plan  
            contract/policy from the small employer market; 

           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, 

           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.

           Changes to Notice Requirements 
           
          Requires a health plan or health insurer that declines to  
          offer coverage, denies enrollment of a large group applying  
          for coverage, or offers small group coverage at a rate that  
          is higher than the standard employee risk rate, to provide  
          the applicant with a written decision that provides the  
          specific reason for the decision in clear, easily  
          understandable language.

          Increases the written advance notice before a premium rate  
          change can take effect from 30 to 60 days prior to the  




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          contract renewal effective date for group and individual  
          coverage, requires the written notice to be in 12-point  
          type and requires it to include the actual dollar amount  
           and  the percentage premium increase, instead of the dollar  
          amount  or  the percentage increase in current law.  

                                  FISCAL IMPACT  

          This bill in its current form has not been analyzed by a  
          fiscal committee.

                            BACKGROUND AND DISCUSSION  

          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 percent 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 of this 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. 

          Current law pertaining to premium levels
          In California, health insurance is generally not subject to  
          premium rate regulation, with some exceptions, such as for  
          individuals eligible under continuation coverage under  
          state or federal law.  Existing law establishes  
          requirements for health plans that provide coverage to  
          small employers, including restricting a plan's ability to  




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          set initial and renewal premium rates to a group of  
          specified risk categories (age, region, family size, and  
          health benefit plan), and allows only a limited premium  
          variance of plus or minus 10 percent from a standard rate  
          based on health status.  The limitation on premium variance  
          is referred to as "rate bands."  

          CDI-regulated insurers must meet minimum medical loss ratio  
          standards for individual products.  The MLR requirements do  
          not apply to Knox-Keene plans regulated by DMHC.   
          Knox-Keene plans are subject to an administrative cost cap,  
          but DMHC does not include profit as an administrative cost.
          
          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.  

          Section 2794 of PPACA requires the Secretary of DHHS, 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 requires health insurance to submit  
          to the Secretary and the state a justification for an  
          unreasonable premium increase prior to the implementation  
          of the increase.  Health plans and health insurers must  
          prominently post such information on their Internet  
          websites, and the Secretary must ensure the public  
          disclosure of information on such increases and  
          justifications for all health insurers.  The federal  
          Secretary of DHHS indicated in June 2010 that DHHS will  
          issue regulations regarding the review of unreasonable  
          premium increases and the determination of unjustified  
          and/or excessive premium increases in the coming months.  

          PPACA makes available $250 million to states in grants for  
          health insurance premium review from 2010 through 2014.   
          The federal government announced earlier this month that  
          California was receiving an award of $1 million in the  
          first round of federal grants.  California is using its  
          funding to pursue additional legislative authority across  
          DMHC and CDI, to expand the scope of and improve the review  




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          process, to increase transparency and accessibility, and to  
          develop and upgrade technology.

          Grandfathered health plan provision
          Under PPACA, "grandfathered" plans (defined as plans in  
          effect as of March 23, 2010), are not required to comply  
          with specified provisions of the federal health care reform  
          law.  Plans that are not grandfathered must comply with the  
          provisions of PPACA.  California's small group health  
          insurance law requires health plans and insurers to sell  
          all products to any small employer willing to purchase  
          coverage.  This bill provides an exemption from this  
          California small group law requirement for grandfathered  
          products sold to small employers, which would be allowed to  
          be "closed" to new enrollment.  

          The health plan and health insurance trade associations  
          (the California Association of Life and Health Insurance  
          Companies (ACLHIC) and the California Association of Health  
          Plans (CAHP) seek this change, arguing there is no process  
          by which a small employer plan can be "closed" to new  
          enrollment as a product must either be actively marketed  
                                                                                     and sold or withdrawn from the market.  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 required by law.  The small group law  
          has 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  
          that body of law dealing with renewals involving withdrawn  
          plans apply.  ACLHIC and CAHP expressed concern that  
          current state law will prevent employers from being able to  
          keep their current plan, as promised under PPACA.

          Related bills
          AB 2578 (Jones) requires health plans and insurers to file  
          a complete rate application with DMHC and CDI for a rate  
          increase that will become effective on or after January 1,  
          2012.  AB 2578 would prohibit a health plan or health  
          insurer premium rate (defined to include premiums,  
          co-payments, coinsurance obligations, deductibles, and  
          other charges) from being approved or remaining in effect  
          that is excessive, inadequate, unfairly discriminatory, or  
          otherwise in violation of the provisions of AB 2578.  





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          Arguments in support
          This bill is sponsored by Health Access California (HAC),  
          which is seeking to require public disclosure of health  
          insurance rate increases.  HAC states that no one outside  
          the insurance industry knows why individuals and businesses  
          are paying more and getting less in health benefits.  HAC  
          states that when Anthem Blue Cross proposed to hike rates  
          39 percent for individuals earlier this year, existing  
          California law expressly made the notice of the rate hikes   
          "private and confidential communication" to the individual  
          consumer.  HAC states that the DMHC is not required to  
          check rates for actuarial soundness, and neither CDI or  
          DMHC has the statutory authority to make rates public, or  
          to demand the justification for rate hikes. 

          HAC states this bill would correct this sad state of  
          affairs by requiring 60 days notice of rate hikes to  
          consumers and small businesses, and by requiring rate hikes  
          and justifications for rate hikes to be posted on the  
          websites of health plans, health insurers, and the DMHC and  
          CDI.  HAC states this bill will also require health plans  
          and insurers to give their regulators notice of rate hikes  
          and detailed information about rate changes, including  
          average rate increase, aggregate increases by benefit  
          category, rates of change over time, changes in co-payments  
          and deductibles, changes in benefits, and the number of  
          consumers and employers affected by each rate increase.   
          Finally, this bill would require rates to be actuarially  
          sound, would require a report on unreasonable rate  
          increases to the federal government, and would make all of  
          this public information, with only a narrow exemption for  
          contracted provider rates, and contracts between a health  
          plan/insurer and a large group.

          Arguments in opposition
          Consumer Watchdog (CW) writes that it is opposed unless  
          amended to this measure, arguing this bill does nothing to  
          advance the cause of protecting consumers from  
          unreasonable, excessive and unjustified premium rates.  CW  
          states premium regulation relies on the duty of a regulator  
          to be able to reject an excessive premium, while this bill  
          simply requires information to be filed by insurers without  
          any authority being given to regulators to block rate hikes  
          based on that information.  Additionally, CW objects to the  
          requirement that rates be actuarially sound, arguing this  




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          standard is a major step in the direction of allowing  
          higher premiums because it allows a wide range of  
          acceptable rates.  CW also objects to having agreements  
          with health care providers be exempt from public  
          disclosure.  Finally, CW criticizes the penalty provision  
          of requiring the regulator to post 
          on the Internet if it finds an unreasonable rate of  
          increase to not be justified as inadequate.  


                                     COMMENTS
           
          1.  Assembly amendments
            As previously passed by the Senate, this bill required  
            health plans and insurers to give 180 days written notice  
            of changes in the premium rate or coverage before such  
            change takes effect.  The Assembly amendments shorten  
            this timeframe to 60 days.  In addition, the Assembly  
            amendments make other changes, including deleting  
            provisions that would have required health plans and  
            insurers to provide data and demographic information on  
            individual and large group denials of coverage.  The  
            Assembly amendments add the rate filing provisions  
            described in the bill summary above.

                                  PRIOR ACTIONS

           Senate Health:           5-0
          Senate Appropriations:7-3
          Senate Floor:            23-12
          Assembly Health          15-1
          Assembly Appropriations:      12-5
          Assembly Floor:          56-21

                                    POSITIONS  

          Support:  Health Access California (sponsor)

          Prior version:
          Alliance of Californians for Community Empowerment
          American Federal of State, County and Municipal Employees
          California Pan-Ethnic Health Network
          Consumers Union     
          Congress of California Seniors
          California Chiropractic Association




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          California Retired Teachers Association
          California Teachers Association

          Oppose:   Consumer Watchdog (unless amended)


                                   -- END --