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--- STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 2 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 3 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 4 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 5 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 6 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 7 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 8 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 9 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 10 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 11 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. STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 12 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 13 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 STAFF ANALYSIS OF SENATE BILL 1163 (Leno) Page 14 California Retired Teachers Association California Teachers Association Oppose: Consumer Watchdog (unless amended) -- END --