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 




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               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