BILL ANALYSIS Ó
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 51
S
AUTHOR: Alquist
B
AMENDED: April 25, 2011
HEARING DATE: April 27, 2011
5
CONSULTANT:
1
Chan-Sawin
SUBJECT
Health care coverage
SUMMARY
Requires health plans and health insurers to meet federal
annual and lifetime limits and medical loss ratio (MLR)
requirements in specified provisions of the federal health
care reform law, as specified. Authorizes the Director of
the Department of Managed Health Care and the Insurance
Commissioner to issue guidance, as specified, and
promulgate regulations to implement requirements relating
to MLRs, as specified.
CHANGES TO EXISTING LAW
Existing federal law:
Prohibits, under the Patient Protection and Affordable Care
Act (Public Law 111 - 148) (PPACA), health care services
plans (health plans) and health insurers offering group or
individual health insurance coverage from establishing
lifetime limits or unreasonable annual limits on the dollar
value of benefits for any subscriber, enrollee or insured,
as specified.
Requires, under PPACA, beginning not later than January 1,
2011, health plans and insurers offering group or
individual health insurance coverage to provide an annual
Continued---
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rebate to each enrollee if the ratio of the amount of
premium revenue spent on clinical services and health
quality improvement activities to the total amount of
premium revenue for the plan year (MLR) is less than 85
percent for group coverage and 80 percent for individual
coverage, as specified.
Existing state law:
Provides for the regulation of health plans by the
Department of Managed Health Care (DMHC), and for the
regulation of health insurers by the California Department
of Insurance (CDI).
Prohibits a health plan from expending an excessive amount
of the payments received for providing health care services
to subscribers and enrollees for administrative costs, as
defined.
Limits administrative costs for health plans regulated by
DMHC to 15 percent and establishes a minimum MLR for
CDI-regulated health insurers for specified individual
indemnity dental and vision policies at 50 percent, and a
minimum MLR for individual health insurance, excluding
indemnity payout policies, at 70 percent.
Requires the Insurance Commissioner (Commissioner) to
withdraw approval of an individual or mass-marketed health
insurance policy if the Commissioner finds that the
benefits provided under the policy are unreasonable in
relation to the premiums charged, as specified.
This bill:
Requires a health plan or insurer that issues, sells,
renews, or offers contracts for health care coverage to
meet federal annual and lifetime limits in a specified
provision of PPACA, and any federal rules or regulations
issued under that section, to the extent required by
federal law. Requires health plans and health insurers to
meet any state laws or regulations that do not prevent the
application of those federal annual and lifetime limit
provisions, to the extent required by federal law.
Requires every health plan and insurer, including
grandfathered health plans or insurers (which are group or
individual health plan contracts or insurance policies in
STAFF ANALYSIS OF SENATE BILL 51 (Alquist) Page
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effect as of March 23, 2010), to comply with the following
minimum MLRs:
85 percent for large group products; and
80 percent for small group and individual market
products.
Requires every health plan and insurer, including
grandfathered health plans or insurers, who do not meet or
exceed the annual MLR, to provide an annual rebate to each
enrollee or insured, as specified.
Establishes a methodology for the calculation of annual
rebates, and requires that a health plan or insurer provide
any rebate owing to an enrollee no later than August 1 of
the year following the year in which the premium rate was
in effect.
Authorizes the Director or Commissioner, on or before July
1, 2013, to issue guidance to plans or insurers regarding
compliance with the provisions of this bill. Exempts such
guidance from the state Administrative Procedures Act
(APA).
Authorizes the director to promulgate regulations regarding
compliance with the provisions of this bill.
Requires DMHC and CDI to consult with each other in the
issuance of guidance, adoption of regulations, and in
taking any action related to implementation of this bill.
FISCAL IMPACT
This bill has not been analyzed by a fiscal committee.
BACKGROUND AND DISCUSSION
According to the author, MLR requirements are a way to
ensure that policyholders receive value for their premium
dollars. The current 70 percent lifetime anticipated loss
ratio standard in the individual market protects California
consumers by assuring that each policy returns at least 70
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cents benefit for each premium dollar. The author asserts
that SB 51 strengthens health insurance regulation in
California by expanding MLR requirements to all health
insurance, and by requiring rebates in conformity to
federal law.
By implementing broader protections to California consumers
by conforming California law to minimum MLR requirements
established in federal health reform, the author believes
that this bill achieves the mandate of current Insurance
Code section 10293 which states that benefits under a
policy be reasonable in relation to the premium charged,
while also removing a barrier to accessing coverage,
thereby making vital health care coverage available to
Californians.
Medical loss ratio
The amount of money that a health plan or health insurer
spends on medical care versus administrative expenses and
profit, is referred to in the health care industry as a
medical loss ratio, or a minimum loss ratio. California law
does not currently prescribe specific MLR requirements,
with the exception of individual health insurance policies.
The CDI sets a standard of "reasonableness" for the ratio
of medical benefits to the premium charged for individual
health insurance at 70 percent for new insurance policies
submitted after July 1, 2007, and for existing policies
that file rate increases.
For plans regulated by DMHC, existing regulations require
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. If the
administrative costs of an established health plan exceed
15 percent, or if the administrative costs of a plan in the
development phase exceed 25 percent, the plan is required
to demonstrate to the Director, if called upon to do so,
that its administrative costs are not excessive and are
justified under the circumstances, and/or that it has
instituted procedures to reduce administrative costs.
MLR requirements in federal health care reform
PPACA requires health plans and insurers offering coverage
in the large group market to meet a MLR of 85 percent, and
health plans and insurers offering coverage in the small
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group market or in the individual market to meet a MLR of
80 percent, or such higher percentage as a state may by
regulation determine. In addition, the federal Secretary
of Health and Human Services (HHS) may adjust the MLR with
respect to a state for the individual market, if the
Secretary determines that the application of the 80 percent
MLR may destabilize the individual market in such state.
The federal law requires health plans and insurers to
provide annual rebates on a pro rata basis if the plan does
not meet or exceeds the MLR requirement.
Federal guidance on MLR calculations
PPACA directed the National Association of Insurance
Commissioners (NAIC) to establish uniform definitions and
methodologies for the purposes of calculating the MLR by
December 31, 2010, for consideration by the federal
Secretary of HHS. The NAIC released such regulations in
October 2010, which were adopted by the federal Secretary
of HHS in November 2010 through interim federal guidance.
The guidance outlined disclosure and reporting
requirements, how insurance companies calculate MLR and
provide rebates, and how adjustments could be made to the
MLR standard to guard against market destabilization. It
also specified the types of services, fees and other
spending that health insurers may be able to count as
medical expenses under the new MLR requirements. Since
significant reforms will be implemented in 2014 that impact
MLR calculations, including reinsurance, risk corridors,
and risk adjustment, the federal guidance only addresses
years 2011 through 2013.
The Secretary also released a letter in September 2010,
which specified that limited-scope vision and dental
coverage (also referred to in California law as specialized
health plans and insurance products) are considered to be
"excepted benefits," and that the federal HHS does not
intend to use its resources to enforce PPACA provisions
with respect to those plans. It also stated that states
have primary enforcement authority regarding such plans.
State actions
On January 25, 2011, the Office of Administrative Law (OAL)
approved emergency regulations promulgated by CDI, giving
the Insurance Commissioner the authority to enforce MLR
requirements in the individual market established under
PPACA. These emergency regulations expire July 26, 2011.
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In addition to the emergency regulations, CDI is also
pursuing regulations related to implementing federal MLR
requirements.
Related bills
AB 52 (Feuer and Huffman) requires health plans and
insurers to, effective January 1, 2012, apply for prior
approval of proposed rate increases, under specified
conditions, and imposes on regulators specific rate review
criteria, timelines, and hearing requirements. Set for
hearing April 26, 2011 in the Assembly Health Committee.
Prior legislation
SB 890 (Alquist) of 2010 would have, among other things,
required health plans and insurers to meet federal annual
and lifetime limits and the medical loss ratio requirements
in federal health care reform law. Vetoed by the Governor.
SB 316 (Alquist) of 2009 would have, among other things,
broadened an existing MLR disclosure requirement that
currently applies to individuals and groups of 25 or fewer
individuals, to instead apply to individuals and groups of
50 or fewer individuals. An earlier version of the bill
contained similar MLR requirements to SB 51. Failed
passage out of Assembly Health Committee.
AB 812 (De La Torre) of 2009 would have required health
plans and health insurers to report to their respective
regulators the MLR of each health care plan product or
health insurance policy. Failed passage out of Assembly
Appropriations Committee.
SB 1440 (Kuehl) of 2008 was an identical measure to SB 316
as introduced. Vetoed by the Governor.
SB 48 (Perata) of 2007 contained similar provisions to ABX1
1 (Nunez) of 2007 and AB 8 (Nunez) of 2007 with regard to
the amount health plans and insurers would have been
required to expend on health care benefits. These
provisions were amended out of the bill.
AB 1554 (Jones) of 2007, among other things, would have
exempted any proposed rate increase by a health plan or
insurer of less than five percent if their MLR during each
of its three most recently completed reporting years is
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ninety percent or higher, as defined by the respective
regulators. The bill would have also required regulators
to promulgate regulations to determine reasonable rates for
medical and all non-medical expenses, including rate of
return, surplus, overhead, and administration, and to
review applications pursuant to these regulations, as
specified. Failed passage out of Senate Health Committee.
ABX1 1 (Nunez) of 2007 among its provisions, would have, on
and after July 1, 2010, required full-service health plans
and health insurers to expend no less than 85 percent of
the after-tax revenues they receive from dues, fees,
premiums, or other periodic payments, on health care
benefits. The bill would have allowed plans and insurers
to average their administrative costs across all of the
plans and insurance policies they offer, with the exception
of Medicare supplement plans and policies and certain other
limited benefit policies, and would have allowed DMHC and
CDI to exclude any new contracts or policies from this
limit for the first two years they are offered in
California. "Health care benefits" would have been broadly
defined to include the costs of programs or activities
which improve the provision of health care services and
improve health care outcomes, as well as disease management
services, medical advice, and pay-for-performance payments.
Failed passage out of Senate Health Committee.
AB 8 (Nunez) of 2007 contained similar provisions to ABX1 1
with regard to the amount health plans and health insurers
would have been required to expend on health care benefits.
Vetoed by the Governor.
SB 1591 (Kuehl) of 2006 would have prohibited health
insurers from spending on administrative costs in any
fiscal year an excessive amount of aggregate dues, fees, or
other periodic payments received by the insurer. Provides,
for purposes of the bill, that administrative costs include
all costs identified in current regulations applying to
health plans. Would have required CDI to develop
regulations to implement the bill by January 1, 2008, and
provided that the bill is to take effect on July 1, 2008.
These provisions were amended out of the bill.
Arguments in support
CDI, the sponsor of SB 51, states that this bill
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incorporates the federal loss ratio requirements into
California law so that CDI can enforce these additional
requirements. The Insurance Commissioner asserts that MLR
minimum requirements are a way to ensure that policyholders
receive value for their premium dollars. By implementing
broader protections to California consumers by conforming
state law to federal health care reform, this bill helps
make vital health care coverage more available to
Californians.
Health Access California argues that SB 51 is a dramatic
improvement over earlier California law which allowed
CDI-regulated insurance products to cover as little as 70
percent of the estimated lifetime medical costs, well below
a 70 percent annual MLR.
Writing in support, the California Labor Federation argues
that the health insurance industry has seen record profits,
while skyrocketing health care costs have hurt workers,
employers and public health, and individuals and employers
struggle to afford coverage. The California Labor
Federation also cites a recent federal report that found
health insurance industry profits increased by 250 percent
between 2000 and 2009, 10 times faster than inflation, and
that the 5 largest health insurance companies took in
combined profits of $12.2 billion in 2009, up 56 percent
over 2008.
CALPIRG asserts that California consumers currently have no
guarantee that they are getting a fair return on their
health care dollar, ensuring that their premiums do not go
disproportionately to administrative overhead. While some
administrative costs are inevitable, insurers spend
billions of dollars attempting to shift costs onto
providers and administering duplicative, overly complex
paperwork requirements.
The Greenlining Institute points out that, according to the
Obama Administration, an anticipated 9 million Americans
could be eligible for rebates starting in 2012, worth up to
$1.4 billion. Such rebates could average $164 in the
individual market which, for underserved communities could
influence whether that person purchases coverage or has the
ability to pay for other basic necessities.
Arguments in opposition
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The California Association of Health Plans (CAHP) opposes
SB 51, arguing that the bill potentially conflicts with
evolving federal requirements. CAHP argues that, while the
federal interim final rules contain an extensive framework
for the calculation of MLRs and the requirements to issue
enrollee rebates, the federal requirements will continue to
evolve over the following months as interim final rules
issued by federal regulators are refined. CAHP asserts
that it makes little sense to require plans and carriers
answer to both state and federal regulators on the same
matter of public policy, and that any state bill
instituting federal MLR standards should be consistent with
federal law and regulations with respect to the process and
timelines associated with delivery of rebates.
The Association of California Life and Health Insurance
Companies (ACLHIC) points out that the bill uses undefined
concepts, such as "activities that improve health care
quality," and contains no guarantee that these concepts
would mirror the definitions in the final federal
regulations. ACLHIC further points out that the rebate due
date is confusing and creates a discrepancy between federal
reporting/rebating timeframes and the state proposed
timeframe.
America's Health Insurance Plans (AHIP) also opposes the
bill, citing that the informal rulemaking authority
provides minimal opportunity for public comment in the
administrative process and circumvents the role of
stakeholders and interested parties embodied in
California's standards for formal administrative
rulemaking. AHIP further points out that SB 51 is in
conflict with the APA which does not allow for "underground
regulations" issued through bulletins or guidance.
COMMENTS
1.Recent amendments. The latest amendments to SB 51 do the
following:
Exempt specialized health plan contracts and
insurance policies from the provisions related to MLR;
and
Delete provisions that: (1) require every health
plan and insurer to submit its rates to the Director
or Commissioner, respectively, pursuant to current
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state requirements pertaining to rate review; and (2)
specify that it is unlawful for the plan or insurer to
implement a rate in the event the Director or
Commissioner notifies a plan or insurer, respectively,
that a filed rate does not comply with requirements in
state law.
2.Relationship to federal law. This bill largely parallels
provisions in PPACA, except for two issues: 1) the
timeframe for when health plans and insurers must provide
any rebate owed to an enrollee or insured, and 2) the
Director's and Commissioner's authority to issue of
guidance and regulations.
3.Undefined terms in the bill. In its provisions related
to MLR, terms such as "activities to improve health care
quality" are not defined in the bill. The author may
wish to consider an amendment that cross-references the
definitions adopted in the federal interim guidance.
4. Discrepancy in rebating timeframes. The federal
interim final regulations specify that rebates must be
paid annually by June 30 of the year following the plan
year. SB 51 specifies a different timeframe based on the
date the premium rate was in effect. The author may wish
to amend the bill to reflect the federal requirement.
5. Future changes in federal law. The current federal
interim guidance on MLR only applies to the time period
of 2011-2013, and additional federal guidance will be
issued to address MLR requirements in 2014 and
thereafter. Given that the bill codifies the provisions
in PPACA related to MLR, while simply referencing the
section in PPACA related to lifetime or annual limits,
any changes in federal guidance or regulations relating
to the MLR provisions may put any MLR provisions in state
law in conflict with federal law. The author may wish to
consider an amendment that cross-references the bill's
MLR provisions to the appropriate section in federal law
and subsequent federal guidance issued in relation to
that section.
6. Guidance authority should be replaced with emergency
regulations authority. State agencies and departments
have general authority to provide stakeholders with
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technical assistance and informal guidance to ensure
public understanding of implementation of state laws.
Such information is not subject to the APA process. For
more formal rulemaking, state agencies issue regulations,
and in cases where timing is problematic, California law
also provides for an expedited emergency regulation
process. CDI argues that formal guidance authority is
necessary to quickly implement the new law, and to
provide flexibility to make adjustments to match federal
regulations as they are promulgated. CDI also asserts
that the department's guidance process includes a public
comment period, and that the draft guidance is sent to
stakeholders soliciting comments during a specified
comment period. These comments are considered by CDI
prior to final guidance being developed and issued.
Given that guidance authority is not a defined term in
state law, it may be more appropriate to provide
regulators with appropriate authority to promulgate
emergency regulations.
7. Suggested technical amendments:
(a) On page 4, strike out lines 13-14 and insert:
"Code)."
(b) On page 4, between lines 14 and 15 insert:
"(e) The director may promulgate regulations
regarding compliance with this section."
(c) On page 6, strike out lines 5-7 and insert:
"Division 3 of Title 2 of the Government Code)."
(d) On page 6, between lines 7 and 8 insert:
"(e) The commissioner may promulgate regulations
regarding compliance with this section."
POSITIONS
Support: California Department of Insurance (sponsor)
American Federation of State, County and
Municipal Employees
California Academy of Family Physicians
California Children's Health Initiatives
California Communities United Institute
STAFF ANALYSIS OF SENATE BILL 51 (Alquist) Page
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California Labor Federation
California Teachers Association
CALPIRG
Children Now
Children's Defense Fund California
Children's Partnership
Congress of California Seniors
Consumers Union
Greenlining Institute
Health Access California
PICO California
Oppose: America's Health Insurance Plans
Anthem Blue Cross
Association of California Life and Health
Insurance Companies
California Association of Health Plans
Health Net
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