BILL ANALYSIS Ó SENATE COMMITTEE ON HEALTH Senator Ed Hernandez, O.D., Chair BILL NO: AB 1846 AUTHOR: Gordon AMENDED: June 14, 2012 HEARING DATE: June 20, 2012 CONSULTANT: Trueworthy SUBJECT : Consumer operated and oriented plans. SUMMARY : Creates the licensing framework under the California Department of Insurance (CDI) and the Department of Managed Health Care (DMHC) to establish consumer operated and oriented plans (CO-OP) which are permitted under the federal Patient Protection Affordable Care Act (ACA). Existing federal law: 1.Establishes the ACA, which among other provisions, imposes new requirements on individuals, employers, and health insurance issuers; restructures the private health insurance market; sets minimum standards for health coverage; provides financial assistance to certain individuals, and small employers; and authorizes states to establish health benefit exchanges for individuals and small business to compare health insurance products and purchase policies from among four categories: Bronze, Silver, Gold, and Platinum, and for some purchasers, obtain subsidies and tax credits. 2.Requires, under the ACA, the Secretary of the United States Department of Health and Human Services (HHS) to establish the CO-OP program for the purpose of fostering the creation of qualified nonprofit health insurance issuers to offer qualified health plans in the individual and small group markets in the states in which they are licensed to offer those plans and makes start-up and solvency loans available for those purposes. 3.Requires, under the ACA, any reference to a Qualified Health Plan (QHP) to be deemed to include a QHP offered through the CO-OP program or a multistate plan, unless specifically provided for otherwise. Existing state law: 1.Provides for the regulation of health insurers by the CDI under the Insurance Code and provides for the regulation of Continued--- AB 1846 | Page 2 health plans (collectively referred to as carriers) by the DMHC, pursuant to the Knox-Keene Health Care Service Plan Act of 1975. 2.Establishes the California Health Benefit Exchange (Exchange) as an independent public entity to purchase health insurance on behalf of Californians, including those with income up to 400 percent of the federal poverty level (FPL), and small businesses. Requires the use of a competitive process to select carriers to participate in the Exchange. Establishes a five-member governing board. 3.Requires the Exchange to determine the minimum requirements a carrier must meet to be considered for participation in the Exchange, and the standards and criteria for selecting QHPs to be offered through the Exchange that are in the best interest of qualified individuals and qualified small employers. 4.Requires the Exchange board to consistently and uniformly apply these requirements, standards, and criteria to all carriers. Requires the board, in the course of selectively contracting for health care coverage through the Exchange, to seek to contract with carriers so as to provide health care coverage choices that offer optimal combination of choice, value, quality, and service. This bill: 1.Authorizes the director of DMHC to issue a health care service plan license, and the Insurance Commissioner to issue a certificate of authority, to a CO-OP that has been organized as a nonprofit member organization or nonprofit member corporation or to a foreign CO-OP that has been organized as a nonprofit member organization or nonprofit member corporation under the laws of another state, provided that the entity meets the requirements governing CO-OPs. 2.Requires a CO-OP seeking or maintaining a license to be subject to the same fees that are imposed on other carriers. 3.Requires domestic and foreign CO-OPs to be subject to all applicable rules and regulations including, but not limited to, the issuance of a license, the operation and renewal provisions, and the financial responsibility, and shall be subject to any state laws. 4.Requires a CO-OP to be subject to the same requirements, AB 1846 | Page 3 terms, and conditions as those imposed on other carriers participating in the Exchange. 5.Authorizes, if a CO-OP is unable to reach agreement with the Exchange on terms, conditions, or price, the Exchange to impose terms, conditions, or price on the CO-OP health care service plan. Permits, if a CO-OP fails to comply with any of the provisions of its contract with the Exchange, the Exchange to impose contract sanctions, including monetary penalties. Allows, to the extent permitted under federal law, the Exchange to limit enrollment in the CO-OP offered through the Exchange if the CO-OP fails to comply with Exchange contract specifications. 6.Authorizes DMHC and CDI to request any documentation relating to a CO-OP's start-up loan or solvency loan. 7.Requires a CO-OP to be subject at all times to the prohibitions in the ACA against converting or selling to a for-profit or nonconsumer-operated entity at any time after receiving a solvency loan. 8.Requires a CO-OP to do all of the following: a. Implement policies and procedures to foster and ensure member control of the organization. Requires a CO-OP to meet the following requirements: i. The CO-OP shall have governing documents that incorporate governing rules that ensure that the directors of the operational board are elected by a majority vote of a quorum of the CO-OP members; ii. All members of the CO-OP shall be eligible to vote for each director on the CO-OP's operational board; iii. Each member of the CO-OP shall have one vote in the election of each director of the CO-OP's operational board; iv. The first elected directors of the CO-OP's operational board shall be elected no later than one year after the effective date on which the CO-OP provides coverage to its first member; the entire operational board shall be elected no later than two years after the same date; v. Elections of the directors on the CO-OP's operational board shall be contested so that the total number of candidates for vacant positions on the operational board exceeds the number of vacant AB 1846 | Page 4 positions, except in cases where a seat is vacated midterm due to death, resignation, or removal; and vi. A two-thirds majority of the voting directors on the operational board shall be members of the CO-OP. b. Have an operational board of directors that meets the following requirements: i. Each director is required to have one vote unless he or she is a nonvoting director; ii. Positions on the board of directors are permitted to be designated for individuals with specialized expertise, experience, or affiliation and prohibits those positions from constituting a majority of the operational board; iii. Representatives of any federal, state, or local government, are prohibited from serving on the CO-OP's formation board or operational board; and iv. Each member of the formation or operational board of a CO-OP is required to publicly disclose on the website of the CO-OP his or her financial interest in any health-related entity in excess of $1,000, including, but not limited to, his or her ownership of stocks or bonds of a health-related entity in excess of $1,000. c. Have governing documents that incorporate ethics, conflict of interest, and disclosure standards. Requires at a minimum, these standards to include the following: i. A mechanism to identify potential ethical or other conflicts of interest; ii. A duty on the CO-OP's executive officers and directors to publicly disclose all potential conflicts of interest pursuant to the same standards required for state boards or commissions; iii. A process to determine the extent to which a conflict exists; iv. A process to address any conflict of interest; and v. A process to be followed in the event a director or executive officer of the CO-OP violates the standards described in this paragraph. 9.Requires a CO-OP to at all times be in full compliance with the requirements of the ACA governing CO-OPs. 10.Authorizes DMHC and CDI to request the federal government's certification that a CO-OP is in compliance as well as the status of the CO-OP's compliance with its obligations under AB 1846 | Page 5 any loan or loan modification agreement. 11.Authorizes DMHC and CDI to develop regulations to implement this bill. 12.Establishes definitions including that a CO-OP means a nonprofit member organization or corporation consistent with the ACA and remains in full compliance of the ACA requirements. 13.Makes legislative findings and declarations including that a CO-OP be subject to all state requirements applicable to health insurers, that a CO-OP adhere to the standards of the Exchange and be subject to the Exchange's selective contracting requirements and that all insureds in a CO-OP be afforded the consumer protections available to other individuals covered by health insurance. FISCAL EFFECT : According to the Assembly Appropriations Committee analysis, CDI and DMHC will incur one-time administrative costs, likely in the range of $100,000 (special fund) to promulgate regulations, review federal requirements, and establish policies and procedures specific to CO-OP licensure. CDI and DMHC will also experience ongoing oversight costs to the extent more CO-OPs become licensed. Most of this workload would be required in absence of this bill if either department received an application for licensure from a CO-OP. By clarifying CO-OP licensure rules, this bill may streamline the licensure process and avoid administrative costs related to legal questions that may otherwise arise. PRIOR VOTES : Assembly Health: 13- 6 Assembly Appropriations:12- 5 Assembly Floor: 51- 26 COMMENTS : 1.Author's statement. The ACA anticipates the establishment of consumer driven health coverage. Specifically, the ACA describes CO-OPs and provides for the licensing of at least one CO-OP in each state as a health insurer or Health Maintenance Organization. CO-OPs are a new type of health issuer that is directed by its customers, uses profits for its customers' benefit, and is AB 1846 | Page 6 intended to offer individuals and small businesses affordable, customer-friendly, high-quality health insurance options. California currently lacks the necessary statutory framework for the licensing and regulating of CO-OPs. AB 1846 clarifies the CO-OP licensure rules, and streamlines the licensure process. This bill would define a CO-OP as a non-profit, member-run health plan that would be licensed under California law to offer qualified health plans in the individual and small group market. AB 1846 would also require CO-OPs to be subject to the same requirements as other carriers that contract with the state's Health Benefit Exchange. 2.CO-OPs. Beginning in 2014, the ACA creates a new CO-OP program, which will allow new nonprofit, member-run health cooperatives to be eligible for grants and loans. As part of the CO-OP program, the federal government will make $6 billion available to foster the creation of new nonprofit, member-run health insurance issuers that will offer qualified insurance in the individual and small group markets. The funds will be distributed as loans, which may be repaid, for start-up costs and grants for meeting solvency requirements. To date, a total of 12 non-profits offering coverage in 12 states have been awarded $982,472,104. Priority for the funds will go to applicants that offer a QHP on a statewide basis that uses an integrated care model, and has significant private support. The HHS Secretary will ensure that there is sufficient funding to establish at least one nonprofit issuer in each state. However if no one applies to be a CO-OP within a state, the Secretary may use amounts appropriated under the ACA for the awarding of grants to encourage the establishment of a CO-OP or the expansion of a CO-OP from another state. Under the ACA CO-OPs: a. Must be a nonprofit, member corporation under state law; b. Not be an existing organization, affiliate, or successor organization that provides insurance as of July 16, 2009; c. Must have substantially all of its activities must consist of issuing QHPs; d. Not be sponsored by a state, county, or local government or any government instrumentality; e. Incorporate ethics and conflict of interest standards protecting against insurance industry involvement; f. Have its governance subject to majority vote of its AB 1846 | Page 7 membership; g. Must operate with strong consumer focus and accountability to members in accordance with regulations to be promulgated by the federal Secretary; h. Use profits to lower premiums, improve benefits, or other programs to improve quality of care; i. Must meet all licensure and solvency requirements, rules on payment to providers, network adequacy standards, rate and form filing rules and any other applicable state law; and, j. Must coordinate with state insurance reforms by not offering a health plan in the state until that state has in effect the market reforms required under the law. 3.Double referral. This bill was heard in the Senate Insurance Committee on June 13, 2012, and passed with a 5-3 vote. 4.Related legislation. SB 951 (Hernandez) selects the Kaiser Small Group HMO as California's benchmark plan to define essential health benefits (EHB). The Kaiser Small Group HMO covers all state mandates and will ensure the state does not defray additional costs. SB 951 is currently pending before the Assembly Health Committee. AB 1453 (Monning) selects the Kaiser Small Group HMO as California's benchmark plan to define EHB. The Kaiser Small Group HMO covers all state mandates and will ensure the state does not defray additional costs. AB 1453 is currently pending before the Senate Health Committee. 5.Prior legislation. SB 900 (Alquist) of 2010, Chapter 659, and AB 1602 (Perez) of 2010, Chapter 655, established the Exchange. 6.Support. CDI, the sponsor of this bill, writes that AB 1846 helps give options and resources to California consumers. CO-OPs provide value to consumers by returning surplus revenue to members in the form of lower premiums, lower cost sharing, or expanded benefits. Furthermore, CO-OPs provide a critically important opportunity to inject new choices into the individual and small group insurance markets. Such competition can and should help bring down prices, generate competition based on quality and value, and encourage innovation in provider reimbursement strategies. AB 1846 | Page 8 7.Support with amendments. Health Access California (HAC) writes that that the idea behind the CO-OP was that in many states, there is a single dominant insurer. For example, in Maine, prior to various reforms that included the creation of a public option, a single insurer had over 90 percent of the market. This is also true in many other small states. However, it is not true in California where there are five or more carriers in both the individual and small group market. A CO-OP is not necessary to create a minimum level of market competition in California: that already exists. If CO-OPs are allowed to be licensed in California at all, protections are needed to assure that CO-OPs play on a level playing field rather with an unfair advantage. HAC believes many of the amendments taken to date provide many of those protections but continue to seek further amendments to assure that any CO-OP licensed in California meets high standards. HAC argues AB 1846 should add further specificity to the requirements of federal law with respect to conflict of interest for the board of directors and senior management of the CO-OP. 8.Policy comment. Does California need to develop a statutory framework for CO-OPs? If a CO-OP is to be licensed to provide health insurance or act as a health care service plan in California, existing licensing structures are already in place and it is unnecessary to establish a separate framework. If however, the state wishes to develop standards for CO-OPs beyond standard licensure for health insurers and health plans to put federal CO-OP standards in California law or to establish additional state standards, then legislation would be necessary to do this. This appears to be the sponsor's and author's intent with this bill. 9.Amendments. a. The author may wish to add conflict of interest language requirements for the board of directors and senior management of the CO-OP and may wish to also require public disclosure of financial interests the board of directors and senior management of the CO-OP. b. The author may wish to update the Legislative intent language to reflect the addition of DMHC licensed plans to the provisions of this bill. SUPPORT AND OPPOSITION : Support: California Department of Insurance (sponsor) Hacia Salud Health Insurance CO-OP AB 1846 | Page 9 Oppose: None received. -- END --