BILL ANALYSIS Ó AB 52 Page 1 ASSEMBLY THIRD READING AB 52 (Feuer and Huffman) As Amended May 3, 2011 Majority vote HEALTH 12-7 APPROPRIATIONS 9-7 ----------------------------------------------------------------- |Ayes:|Monning, Ammiano, Atkins, |Ayes:|Fuentes, Blumenfield, | | |Bonilla, Eng, Gordon, | |Bradford, Campos, Davis, | | |Hayashi, | |Gatto, Hill, Lara, | | |Roger Hernández, Bonnie | |Mitchell | | |Lowenthal, Mitchell, V. | | | | |Manuel Pérez, Williams | | | | | | | | |-----+--------------------------+-----+--------------------------| |Nays:|Logue, Garrick, Mansoor, |Nays:|Harkey, Charles Calderon, | | |Nestande, Pan, Silva, | |Donnelly, Nielsen, Norby, | | |Smyth | |Solorio, Wagner | | | | | | ----------------------------------------------------------------- SUMMARY : Requires health care service plans (health plans) licensed by the Department of Managed Health Care (DMHC) and health insurers (collectively carriers) certificated by the California Department of Insurance (CDI) (collectively regulators), effective January 1, 2012, to apply for prior approval of proposed rate increases, under specified conditions, and imposes on regulators specific rate review criteria, timelines, and hearing requirements. Specifically, this bill : 1)Prohibits any rate from being approved or remaining in effect that is found to be excessive, inadequate, unfairly discriminatory, or otherwise in violation of the standards established by this bill. Prohibits carriers from implementing a rate for a new product or change the rate it charges, unless it submits an application and the application is approved by regulators. 2)Permits regulators to approve, deny, or modify any proposed rate for a new product or any rate change for an existing product, as specified. Requires the regulators to review for compliance, with the requirements in this bill, all rate increases which become effective January 1, 2011, to December 31, 2011. Requires regulators to order the refund of payments AB 52 Page 2 made pursuant to any such rate, to the extent DMHC or CDI find the rate to be excessive, inadequate, or unfairly discriminatory. 3)Requires that all information submitted in a rate application and all information submitted in support of the application be subject to the California Public Records Act, except for financial data, where the disclosure of which would be competitively injurious to the carrier, as determined by the regulator. 4)Requires regulators to notify the public of rate applications submitted by carriers through a posting on regulator Web sites and distribution to the major statewide media and to any member of the public who requests placement on a mailing list or electronic mail list to receive the notice. Requires the regulator, if it holds a hearing on the application, to issue a decision and findings within 100 days after the hearing. 5)Authorizes any person to initiate or intervene in any of the proceedings, establishes parameters for judicial review, and ensures the right of consumers to challenge final decisions by the regulator in court, as specified, and requires the regulator or the court to award reasonable costs, including witness fees, for persons meeting specified requirements, and requires the applicant to pay those fees. FISCAL EFFECT : According to the Assembly Appropriations Committee: 1)Annual fee-supported special fund costs of at least $30 million to DMHC and CDI, combined, to process, review, approve, post, and monitor activities related to rate increase approvals. Workload to DMHC and CDI includes data collection, actuarial analysis, consumer services, rate enforcement, legal analysis, administrative law hearings, and continued oversight. This estimate is subject to significant uncertainty, as workload would depend on plan behavior with respect to the timing and number of proposed rate increases. 2)A significant increase in fee-supported special funds may be required for several years and especially during major coverage expansions in several years per requirements of the federal Patient and Patient Protection and Affordable Care Act AB 52 Page 3 (PPACA). Actual costs may subside earlier, depending on patterns of health coverage expansions and related changes in insurance product pricing. 3)PPACA includes some support for states to conduct general rate review and report to the federal government about unjustified rates. California has received $3 million each year for the next three years, and may be eligible for an additional $2 million. This federal funding would offset any fee-supported special fund costs generated by this bill. COMMENTS : The author states that insurance rates continue to escalate at a remarkable pace: from 1999 to 2009, health insurance premiums for families rose 131%, while the general rate of inflation increased just 28% during the same period, according to a report by the Kaiser Family Foundation. The same report concluded that states with robust and transparent rate review and approval processes have greater power to protect consumers from large rate increases. The author states that this bill would bring California in line with 35 other states that require some form of prior health insurance rate approval by state regulators. Regulation and oversight of health insurance in California is split between two state departments, the DMHC and CDI. DMHC regulates health plans, including HMOs and some Preferred Provider Organization (PPO) plans. CDI regulates multiple lines of insurance, including disability insurers offering health insurance, generally PPO plans and traditional indemnity coverage. Although DMHC and CDI both regulate carriers providing health coverage, each department approaches that regulation very differently. In general, DMHC has greater authority and responsibility to review and approve health plan products and benefit designs than CDI has to review health insurance products under its purview. In California, health insurance is generally not subject to rate regulation, with few exceptions. This bill proposes to confer direct rate regulation authority for health coverage on both regulators, using language similar to that enacted when the voters passed Proposition 103 (Prop 103) in 1988. Prop 103 currently applies to auto, homeowners, and other forms of property/casualty insurance and, generally, requires extensive examination of any rates proposed by AB 52 Page 4 insurers. CDI will find that proposed rates meet the one test that they are not excessive, inadequate, or unfairly discriminatory if the rates produce a return on surplus (generally analogous to Tangible Net Equity for health plans and insurers) of between -7% and +15%. The regulations implementing Prop 103 were just finalized in 2006, nearly 20 years after passage of Prop 103. During that time, CDI regulated rates under draft regulations that were the subject of persistent legal challenges and litigation by insurers. Consumer advocates point out that during the decade after Prop 103 was adopted, auto insurance rates in California went down by 4% while auto insurance products remain broadly available and competitive, and the uninsured motorist population declined by 38%. Nationally, auto insurance rates rose over 25% during this period. In 2001, the Consumer Federation of America selected Prop 103 as resulting in the best practices in the nation with regard to auto insurance regulation. On March 23, 2010, President Obama signed the PPACA. Among other provisions, the new law makes statutory changes affecting the regulation of and payment for certain types of private health insurance. In August 2010, DMHC and CDI received federal funds available under PPACA for rate review activities (DMHC received $607,998 and CDI received $392,002) to enhance the DMHC's and CDI's information technology infrastructure to support data collection and public disclosure of premium rates through the National Association of Insurance Commissioners' System for Electronic Rate and Form Filing, and hire actuaries or obtain contractual actuarial services to develop premium rate review process and review rate filings. According to DMHC, the grant funds will allow both departments to improve the collection of premium rate information; to enhance the depth and breadth of current rate reviews; and, to build the infrastructure necessary to enable each department to perform the expanded range and significantly greater volume of rate reviews required by PPACA. Recent high profile rate increases proposed by major California insurers have resulted in increased public and state scrutiny into the actuarial analysis of those increases and has resulted in withdrawal of those rate increases. This bill is supported by a number of consumer, labor, and business groups. Supporters write that health insurers are continuously increasing rates on individual and group policyholders, and the uninsured often come AB 52 Page 5 from the most vulnerable communities of the state. Currently seven million Californians still struggle to maintain their health without insurance, and this demonstrates an urgent need to pass state-level legislation that ensures strict regulation of health insurance rates in the state. Supporters contend that in order to keep costs down it is imperative that regulators have the power to deny unreasonable rate increases. Supporters further state that the increases in health insurance premiums for individuals and small businesses revealed in recent months have capped years of steady increases in overall premiums. Anthem Blue Cross writes that because insurance rates are a function of insurance costs, adding an additional layer of regulation will only increase the cost of delivering health care to Californians. The Civil Justice Association state that the most troubling part of this bill allows any person to intervene in any proceeding to "enforce any action of the department under this article, and enforce any provision of this article on behalf of him or herself or members of the public." Kaiser Permanente Medical Program (KPMP) writes that supporters of this bill assert that Prop 103 has lowered auto insurance rates - by an astonishing $23 billion in 10 years - as a reason to impose rate regulation on health insurance. KPMP believes the evidence for this claim is dubious because proponents give no consideration to the much more likely causal factors of dramatically reduced accident rates and decreased liability costs after the California Supreme Court prohibited third-party bad faith lawsuits. Previous legislation: AB 2578 (Jones and Feuer) of 2010, AB 1218 (Jones) of 2009, and AB 1554 (Jones) of 2008 would have required health plans licensed by 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 2578 failed passage on the Senate Floor, AB 1218 failed passage in the Assembly Health Committee, and AB 1554 failed in the Senate Health Committee. SB 1163 (Leno), Chapter 661, Statutes of 2010, requires carriers to file, with regulators, specified rate information for individual and small group coverage at least 60 days prior to implementing any rate change, and in the case of large group AB 52 Page 6 contracts only in the case of unreasonable rate increases, as defined by the PPACA, prior to implementing any such rate change. Analysis Prepared by : Teri Boughton / HEALTH / (916) 319-2097 FN: 0001038