BILL ANALYSIS Ó SENATE INSURANCE COMMITTEE Senator Ronald Calderon, Chair AB 2138 (Blumenfield) Hearing Date: June 27, 2012 As Amended:June 18, 2012 Fiscal: Yes Urgency: No VOTES: Asm. Floor(05/29/12)71-02/Pass Asm. Appr. (05/25/12)12-0/Pass Asm. Ins. (04/18/12)13-0/Pass SUMMARY: Would grant the Insurance Commissioner the authority to raise the special purpose assessment that funds investigations and prosecution of fraudulent disability insurance claims up to 20 cents annually per insured. DIGEST Existing law 1. Provides for the regulation of disability insurers by the Insurance Commissioner; 2. Requires a disability insurer or other entity liable for any loss due to health insurance fraud doing business in California to pay an annual fee that does not exceed $0.10 per year for each insured in order to fund increased investigation and prosecution of fraudulent disability insurance claims; 3. Requires that 50% of those funds be distributed to the Fraud Division of the Department of Insurance for enhanced investigative efforts and that the other 50% be distributed to local district attorneys for the investigation and prosecution of disability insurance fraud cases, as specified. This bill 1. Would authorize the Commissioner to increase the fee to AB 2138 (Blumenfield), Page 2 no more than $0.20 per year for each insured and would require that 30% of those funds go to the Fraud Division of the department and that 70% go to the local district attorneys; 2. Would require the Commissioner to adopt regulations to implement these provisions; 3. Would authorize an insurer to recoup this fee by way of a surcharge on premiums or by including the fee within the insurer's rates, as specified. AB 2138 (Blumenfield), Page 3 COMMENTS 1. Purpose of the bill . According to the author, this bill would add 10 cents to the current annual assessment of 10 cents paid by health and disability insurers today for each insured under an insurance policy issued in the state. This increase will principally go to local district attorneys and also the California Department of Insurance (CDI) to support workload increases related to investigating and prosecuting health and disability fraud in the State. 2. Background and Discussion . According to CDI's website, although there are no precise figures, it is believed that fraudulent activities account for billions of dollars annually in added health care costs nationally. Health care fraud causes losses in premium dollars and increases health care costs unnecessarily. a. Disability and Healthcare Fraud Program. CDI also states that from 2007 to 2010, it received complaints of over 6,000 health and disability suspected fraudulent claims statewide, with only a fraction of those claims referred to the local district attorneys (DAs). The DAs were only able to conduct 656 investigations, resulting in 221 arrests, 184 convictions by local DAs, and an annual average of $233 million in chargeable fraud. This only represents a small portion of total fraudulent activity currently being perpetuated within the state because most cases go unreported to CDI. Due to limited resources, CDI closes some claims and only a fraction of those claims are turned over to the DAs for further investigation and prosecution. b. Disability and Healthcare Fraud Program. Insurance Code section 1872.85 requires every admitted insurer that sells disability and health insurance to contribute to the Disability Insurance Fraud Account. The insurer pays an annual fee, determined by the Insurance Commissioner, up to 10 cents per each policy it issues. Half of the fee collected is distributed to CDI's Fraud Division and the other half to local district attorneys for investigation and prosecution of fraud cases. According to the author, the annual collection is estimated at $4,080,000 annually with $2,040,000 allocated to CDI's AB 2138 (Blumenfield), Page 4 Fraud Division and $2,040,000 to local district attorneys. c. SB 2138 Will Permit the Commissioner to Increase the Fee and Shifts More Funds to DAs. This bill would allow the Commissioner to increase the fee from the current 10 cents per policy to up to 20 cents per policy. The author estimates that this will provide an increase of $4,080,000 for both local district attorneys and CDI's investigation and enforcement units, totaling $8,160,000. It also shifts a greater share to the local district attorneys, 30 percent to the Fraud Division and 70 percent to qualifying district attorneys. d. Recoupment of Costs. Recent amendments also provide that the insurer may, within the year the assessment is paid, recoup these costs by way of a surcharge on the premium as specified. e. Potential Chaptering Problem with AB 1431. This bill and AB 1431 (Accountability and Administrative Review Committee) amends Section 1872.87 of the Insurance Code. AB 1431 would eliminate a report requirement in subdivision (c). The author has advised the Committee that his office has contacted and will work with the Assembly Accountability and Administrative Review Committee to address this problem as both bills move forward in the process. 1. Summary of Arguments in Support a. CDI states that additional funding would provide local assistance with the resources they need to increase investigations, arrests, and convictions, as well as extend their reach to other counties. b. CDI believes that with the implementation of the federal Patient Protection and Affordable Care Act, it is crucial to ensure that district attorneys receive additional funds necessary to aggressively investigate and AB 2138 (Blumenfield), Page 5 prosecute disability and healthcare insurance fraud. 1. Summary of Arguments in Opposition None received. 2. Prior and Related Legislation a. AB 1401 (Aghazarian) (enacted as Chp. 335, Statutes of 2007) increased the maximum per company general assessment CDI may annually charge insurance companies to combat insurance fraud from $1,300 to $5,100. b. AB 1183 (Vargas) (enacted as Chp. 717, Statutes 2005) extended the sunset date for fees imposed on insurers that are used to fund consumer functions, DOI's Fraud Division, and the Organized Automobile Fraud Activity Interdiction Program; and allows DOI and the Department of Motor Vehicles (DMV) to propose that up to $0.05 of the $0.10 fee levied against insurers be used for the purpose of informing consumers about the existence of any low cost automobile insurance program. POSITIONS Support California Department of Insurance / Sponsor California District Attorneys Association California State Sheriffs Valley Industry and Commerce Association District Attorneys Alameda County Kern County Monterey County Orange County Riverside County Sacramento County San Bernardino County San Diego County AB 2138 (Blumenfield), Page 6 Santa Clara County San Diego County Shasta County District Yolo County Opposition None received. Consultant: Hugh Slayden, (916) 651-4773