BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 703
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          Date of Hearing:   August 17, 2011

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                Felipe Fuentes, Chair

                   SB 703 (Hernández) - As Amended:  July 12, 2011 

          Policy Committee:                             HealthVote:13-5

          Urgency:     No                   State Mandated Local Program: 
          Yes    Reimbursable:              No

           SUMMARY  

          This bill implements the Basic Health Program (BHP) state option 
          contained in the federal health care reform law, to provide 
          health care coverage to individuals under 200% of poverty who do 
          not qualify for Medi-Cal.  Specifically, this bill: 
           
          1)Requires the Managed Risk Medical Insurance Board (MRMIB) to 
            enter into a contract with the United States Secretary of the 
            Department of Health and Human Services (DHHS) to implement 
            the BHP to provide coverage to eligible individuals. Permits 
            enrollment on January 1, 2014.

          2)Provides MRMIB authority to take actions to administer the 
            BHP, including the following:

             a)   Determine eligibility criteria, requirements for 
               coverage and health plan participation, premiums, and 
               cost-sharing amounts.
             b)   Collect premiums and provide or make available 
               subsidized coverage through participating health plans.
             c)   Processing applications and enroll eligible individuals.
             d)   Determine and approve the benefit designs and cost 
               sharing required by health plans.  
             e)   Maintain enrollment and expenditures to ensure that 
               expenditures do not exceed amounts available in the fund, 
               and, if sufficient funds are not available to cover the 
               estimated cost of program expenditures, institute 
               appropriate measures to reduce costs.
             f)   Issue rules and regulations, and until January 1, 2016, 
               provide emergency regulation authority.
             g)   Make application assistance payments to individuals who 
               successfully complete the requirements of a Certified 








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               Application Assistant in HFP and who successfully enroll 
               eligible individuals in BHP.

          3)Authorizes MRMIB to determine benefits, in addition to the EHB 
            packages required by the federal Patient Protection and 
            Affordable Care Act (ACA) (Public Law 111-148), including 
            benefits provided through specialized health care service 
            plans and specialized health insurance policies, to the extent 
            ACA authorizes the inclusion of such plans or policies in the 
            BHP.

          4)Requires MRMIB to coordinate with DHCS and the California 
            Health Benefits Exchange (Exchange) with respect to 
            eligibility, enrollment, and outreach efforts.

          5)Requires MRMIB to meet various conditions with respect to 
            provision of linguistically and culturally appropriate 
            services, plan choice, provider networks, and coordination of 
            enrollment with other public health care programs.

          6)Requires MRMIB to designate a community provider plan (CPP) in 
            each geographic area that is the participating health plan 
            with the highest percentage of traditional and public and 
            private safety net providers in its network, and provide a 
            premium discount to enrollees in the CPP.  

          7)Continues enrollment for an eligible individual enrolled in 
            the BHP for a period of 12 months from the month eligibility 
            is established, to the extent permitted by federal law.

          8)Authorizes MRMIB to disenroll an eligible individual enrolled 
            in BHP after two consecutive months of nonpayment of premiums, 
            and a reasonable written notice period of not less than 30 
            days.  Authorizes MRMIB to conduct or contract for collection 
            actions.

          9)Requires health plan contracts entered into shall require the 
            participating health plan to assume full risk for the cost of 
            care for the contract period.

          10)Except for a specifically authorized start-up loan, prohibits 
            state GF money from being used for any purpose related to the 
            administration of the BHP.

          11)Requires MRMIB, in the event MRMIB expects the cost of BHP 








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            will exceed the available funds, to transfer individuals at 
            annual redetermination to coverage in the Exchange.
              
          12)Requires MRMIB to request an evaluation of the BHP by July 1, 
            2017.

           FISCAL EFFECT  

          1)Unknown one-time administrative start-up costs, likely in the 
            range of low millions of dollars.  These costs would be funded 
            initially via a General Fund loan authorized in the bill. 

          2)Ongoing costs to administer the BHP, conservatively in the 
            range of $50 million annually (federal funds/premium 
            revenues), based on current projections of BHP enrollment of 
            approximately 720,000.  At this time, it is uncertain whether 
            the federal Department of Health and Human Services (HHS) will 
            allow federal subsidy payments to be used to cover BHP 
            administrative costs, though it seems likely.

          3)Program costs in the range of $3 to 4 billion annually 
            (federal funds/premium revenues), based on current projections 
            of BHP enrollment and federal subsidy amounts.  

          4)Although the bill states no GF money shall be used for the BHP 
            aside from a loan for start-up costs, there is potential for 
            GF risk and/or cost pressure to the state to fund program 
            costs to the extent that federal funds are insufficient to 
            cover these costs.  Even a relatively small shortfall in a 
            program of this size could pose significant fiscal risk to the 
            state under certain circumstances.  In addition, 
            notwithstanding the GF prohibition, program costs could be 
            funded through non-GF sources (for example, Proposition 99 
            revenues) that could otherwise be used to offset GF costs.  If 
            this occurred, it would result in indirect GF costs.  

            The following are specific areas of GF risk and/or cost 
            pressure.  

              a)   Administrative Costs.   As noted above, federal 
               regulations have not yet specified whether the estimated 
               $50 million in state administrative costs related to the 
               BHP can be funded through with federal BHP payments.  

              b)   Reconciliation with Federal Government  .  Section 1331 








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               (d)(3)(B) of the ACA may expose the state to fiscal risk 
               based on errors in the determination of federal BHP 
               payments to the state for the previous fiscal year.  These 
               payments may be adjusted based on year-end reconciliation 
               of individual enrollees' income. The magnitude and 
               likelihood of downside risk to the state related to 
               reconciliation is not clear, as the operational details of 
               this process have not yet been specified. 

              c)   Cost Pressure to Maintain Coverage and Benefit Levels  . 
               This bill specifies that MRMIB shall transition individuals 
               to the Exchange at the end of their benefit year if the 
               board reasonably expects cost of the BHP will exceed 
               available funds.  In this instance, and in other 
               circumstances where the board would need to roll back 
               benefits or increase costs to enrollees in order to 
               maintain balance between revenues and expenditures, there 
               would be pressure on the state to provide funds to maintain 
               benefits and cost-sharing levels.  

          1)In addition to direct program implementation costs and fiscal 
            risks identified above, the BHP could have a number of 
            secondary potential fiscal impacts.  These impacts are 
            speculative, through plausible, and difficult to estimate 
            precisely at this time.  

              a)   Potential increased administrative costs related to 
               "churning  ," i.e., individuals transitioning between the BHP 
               and the Exchange.  

              b)   Potential for increased GF costs related to larger 
               Medi-Cal enrollment.  If BHP coverage is more attractive 
               than Exchange coverage for the BHP-eligible population, the 
               state could expect a larger proportion of this population 
               to enroll in coverage than would enroll in the absence of 
               BHP. In this case, a larger pool of individuals would go 
               through an annual redetermination of eligibility for BHP 
               than for subsidies through the Exchange, leading a larger 
               number of individuals enrolled in Medi-Cal at annual 
               redetermination.

              c)   Potential for reduced GF costs in the share of cost 
               (SOC) Medi-Cal program  .  SOC Medi-Cal requires an 
               individual to spend a certain amount on health care each 
               month before Medi-Cal begins covering costs.  Assuming SOC 








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               Medi-Cal remains the same, BHP-eligible individuals dually 
               enrolled in SOC Medi-Cal may incur lower health care costs 
               if they were enrolled in BHP than if they were enrolled in 
               the Exchange (the BHP plan would presumably cover more of 
               their costs).  The longer it takes an enrollee to meet 
               his/her SOC, the less Medi-Cal would be liable to pay.

              d)   Potential for reduced GF costs related to state benefit 
               mandates.  The ACA specifies that if a state mandates 
               benefits that go beyond the minimum essential health 
               benefits (EHBs) required to be covered in the Exchange, the 
               state will have to bear the increased costs related to 
               these benefit mandates for the population receiving 
               subsidies through the Exchange.  Assuming benefit mandates 
               are retained as under current law, if a BHP could offer a 
               richer benefit package, including some state-mandated 
               benefits that go beyond the EHBs, the state could avoid 
               costs related to benefit mandates for the BHP-eligible 
               population. 

           COMMENTS  

           1)Rationale  .  The author indicates SB 703 will create affordable 
            health care coverage for hundreds of thousands of people with 
            no funding from California's taxpayers.  The intent of the BHP 
            is to provide low-income Californians with equal or better 
            benefit levels, and less expensive health plan premiums and 
            lower cost-sharing than would be available to them in the 
            Exchange, using exclusively federal dollars.  The author 
            contends that adopting the BHP option will lead to more 
            individuals receiving health care coverage as a result of 
            lower premiums, greater ability of individuals to access 
            health care because of the lower cost-sharing, increased 
            compliance with the federal individual mandate, and a 
            reduction in uncompensated care for health care providers.  
            This bill is sponsored by the Local Health Plans of 
            California, an association of public non-profit health plans 
            that provide coverage to Medi-Cal and Healthy Families Program 
            enrollees.

          2)Health Care for Low-Income Individuals Post-2014  . Starting in 
            2014, the ACA provides federal tax credits and subsidies to 
            Californians with incomes between 133 and 400 % of the federal 
            poverty level (FPL) (approximately $29,000 to $88,000 for a 
            family of four) who do not receive employer-provided health 








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            benefits.  The ACA also authorizes states to establish Health 
            Benefit Exchanges to provide an organized marketplace for 
            individuals buying insurance using the federal tax credits. 
            Individuals and small employers meeting federal citizenship 
            requirements may enroll in the exchanges. 

            Plans offered in the Exchange will have to cover minimum EHBs 
            and will have to be offered in platinum, gold, silver, bronze, 
            and catastrophic levels.  These levels correspond to actuarial 
            value, which measures the generosity of a plan for a standard 
            population.  The premium credits will be tied to the 
            second-lowest-cost silver-level plan in the area and will be 
            set on a sliding scale such that the premium contributions are 
            limited to percentages of income for specified income levels 
            (e.g., for incomes at 133% FPL, the premium contribution will 
            be limited to 2% of income).  Per ACA, a standard silver plan 
            will, on average, cover about 70% of health care costs.  

            Standard plans offered for sale in the Exchange will also have 
            an out-of-pocket maximum currently set at around $6,000, a 
            significant sum for low-income populations.  Thus, under the 
            ACA, individuals with incomes under 250% of poverty are 
            eligible for subsidies that reduce their out-of-pocket costs 
            in addition to the premium tax credit amounts. 

           3)ACA offers states the option to implement a BHP  to serve a 
            portion of the population who would otherwise be eligible for 
            tax credits and subsidies in the Exchange.  If a state chooses 
            to implement the BHP, the federal government provides directly 
            to states 95 % of what it otherwise would have spent on tax 
            credits and subsidies for the individuals enrolled in BHP to 
            purchase coverage in the Exchange. The following two groups 
            are eligible for BHP:  
                
             a)   Adults with income between 133 and 200 % of the FPL.    
              b)   Legally resident immigrants with incomes below 133 % of 
               the FPL whose immigration status disqualifies them from 
               federally matched Medicaid.  

             If California implements BHP, these two groups of consumers 
            would not participate in the Exchange, but instead would 
            receive coverage through a state BHP that resembles the 
            Healthy Families Program. Per the ACA, the state would 
            contract with health plans or providers to provide coverage 
            that included at least the minimum essential benefits package 








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            (to be defined by DHHS).  In addition, the state would have to 
            ensure out-of-pocket costs would be the same or lower as those 
            in the Exchange, and consumers could not be charged premiums 
            higher than what they would pay in the Exchange for the 
            second-lowest-cost silver-level plan.  

            Detailed federal regulations implementing the BHP have not yet 
            been released by DHHS, but may be released this fall.  
           
            1)Studies of BHP Feasibility  . To date, several studies have been 
            conducted on the feasibility of implementing the BHP.  Key 
            findings include the following.  

              a)   Modeling studies performed by Mercer and by the Urban 
               Institute indicate the BHP could, using 100% federal funds, 
               offer a relatively generous benefit package with very low 
               premiums (around $10-20 per month), with provider rates 
               15-25% higher than Medi-Cal rates.  These studies estimate 
               that approximately 700,000 to 800,000 individuals will 
               enroll in a BHP.

             b)   Studies agree that BHP will significantly reduce the 
               size of the Exchange.  The Urban Institute study estimates 
               that the BHP would reduce the size of California's Exchange 
               by 500,000 lives (from 3.6 million to 3.1 million) and the 
               size of the subsidized population by half (from 1.2 million 
               to 600,000).  

             c)   The modeling studies mentioned above indicate that 
               despite removing a significant number of lives from the 
               state's Exchange, the somewhat reduced Exchange population 
               should not significantly change the ability of the Exchange 
               to selectively contract.  The Urban Institute study points 
               out that a BHP would increase per capita administrative 
               costs in the Exchange.

             d)   A recent study by the Institute for Health Policy 
               Solutions raises several concerns related to the BHP option 
               in California, including potential impacts on Exchange 
               viability, lower federal revenues than projected in the 
               other studies, and fiscal risk to the state from 
               reconciliation with projected federal tax-credit spending. 

             e)   Studies generally agree that any findings are 
               preliminary and subject to change for many reasons, 








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               including uncertainties in federal interpretation of 
               various provisions of ACA, uncertainties about consumer 
               behavior, and operational and structural details of a BHP.
             
          1)Specific Areas of Uncertainty that Impact State Fiscal Risk  . 
            Notwithstanding modeling exercises that have projected 
            adequate revenues for a robust BHP, there are a number of 
            additional factors that could impact state fiscal risk and the 
            viability of a BHP.  As explained below, this uncertainty is 
            largely due to the lack of specific federal rules related to 
            BHP and the lack of pricing and risk experience in the 
            Exchange that will begin full operation in 2014.   
           
              a)   Sensitivity of Federal Subsidy Revenues to Benchmark 
               Plan  . As described above, federal subsidy revenues to the 
               state for the BHP are calculated based on the cost of a 
               benchmark plan-the second-lowest priced silver-level plan 
               offered through the Exchange.  Thus, the actual federal 
               subsidy amounts that would be available for the BHP are 
               highly sensitive to the price of these benchmark plans.  
               The participation of lower-cost plans in the Exchange could 
               significantly decrease federal subsidy amounts available 
               for BHP. 

              b)   Start-up Volatility  .  Because the precise risk 
               composition of the Exchange population is unknown, there 
               may be some level of volatility in prices as the market 
               readjusts in the first several years based on experience.  
               Initial price volatility of benchmark plans would affect 
               the federal subsidy revenues available for BHP.   For 
               example, if the plans initially overestimate the risk and 
               the benchmark plan price is set too high, the initial 
               federal subsidy revenues available for BHP will also be 
               higher than the level that will be sustainable over time.  
               Risk adjustment mechanisms in the ACA may moderate this 
               volatility, but uncertainty around the operational details 
               and timing of risk adjustment exposes the state to some 
               fiscal risk.

              c)   Flexibility to Control Costs  . The less flexibility the 
               state has to control costs, the greater the potential state 
               fiscal liability.  Although the bill provides general 
               authority for the board to "institute appropriate measures" 
               to reduce costs if available funds are insufficient to 
               cover the costs of estimated program expenditures, 








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               forthcoming federal rules defining the structure of the BHP 
               may clarify the circumstances in which the state can 
               implement cost-saving changes in BHP.  Other public federal 
               health care programs such as Medicaid and Children's Health 
               Insurance Program (CHIP) have strict rules requiring 
               federal approval of changes to benefits, cost-sharing, and 
               provider payment levels that would be necessary to reduce 
               costs.  

              d)   Number of BHP Eligibles  .  The income eligibility range 
               for BHP is fairly narrow (138%-200% of the FPL).  The 
               number of people who enter this income range at some point 
               during the year is large compared to the number of people 
               who earn income in this range based on a year-end tax 
               return.  Depending upon the details of how income is 
               counted for eligibility determination purposes, the BHP 
               could be larger, and the Exchange population smaller, than 
               projected in some recent models.

              e)   Regional Effects  .  Although studies of the viability of 
               the Exchange have assumed that the size of the Exchange 
               population is large enough to foster a robust marketplace 
               irrespective of a BHP, it is plausible that regional 
               variation in plan offerings as well as the relative size of 
               BHP-eligible populations in different regions could impact 
               the viability of the Exchange in some areas of the state.   


           1)Policy Issues  .  Assuming the BHP is fiscally viable and is 
            able to offer generous coverage at a low price, as some models 
            have indicated, the choice of whether to establish a BHP or to 
            allow BHP-eligible individuals to obtain coverage through the 
            Exchange has significant policy implications and tradeoffs. In 
            a BHP, rates paid to providers are likely to be lower than 
            those in a commercial plan, leading to reduced access and 
            smaller provider networks that are more heavily reliant on 
            traditional and safety net providers.  On the other hand, if 
            BHP was able to offer lower cost-sharing and premiums as 
            compared to the Exchange, it would presumably attract more 
            eligible individuals in to coverage, leading to fewer 
            uninsured and a better risk pool.

            Specifically, this bill raises the following key policy 
            questions: 









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             a)   Does improved affordability for low-income consumers 
               compensate for potentially lower reimbursement rates and 
               smaller provider networks?
             b)   What is the impact on the Exchange of removing a large 
               portion of the population receiving federal subsidies?  
             c)   Will coverage be seamless, or will the existence of 
               another state health program provide another point of 
               discontinuity and further fragment access to care?
             d)   Who is the optimal entity administer the BHP-MRMIB, as 
               envisioned in the bill as currently drafted, DHCS, or the 
               Exchange?  
             e)   Do other alternatives exist to address the issue of 
               affordability for low-income consumers?
             f)   Is there urgency to establishing the BHP this year?

           1)Prior Legislation  .

             a)   SB 900 (Alquist), Chapter 659, Statutes of 2010, 
               established the California Health Benefit Exchange 
               (Exchange) as an independent public entity within state 
               government, and established the governance structure of the 
                                                                          Exchange board.  

             b)   AB 1602 (J. Perez), Chapter 655, Statutes of 2010, 
               specified the powers and duties of the Exchange relative to 
               determining eligibility for enrollment in the Exchange and 
               arranging for coverage through qualified health plans, 
               required the Exchange to provide health plan products in 
               all five of the federal benefit levels (platinum, gold, 
               silver, bronze and catastrophic), required health plans 
               participating in the Exchange to sell at least one product 
               in all five benefit levels in the Exchange, required health 
               plans participating in the Exchange to sell their Exchange 
               products outside of the Exchange, and required health plans 
               that do not participate in the Exchange to sell at least 
               one standardized product designated by the Exchange in each 
               of the four levels of coverage, if the Exchange elects to 
               standardize products.


           Analysis Prepared by  :    Lisa Murawski / APPR. / (916) 319-2081 












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