BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 728 (Hernandez)
Hearing Date: 5/2/2011 Amended: 3/25/2011
Consultant: Katie Johnson Policy Vote: Health 5-2
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BILL SUMMARY: SB 728 would require the California Health Benefit
Exchange Board to develop a risk adjustment system for health
insurance products sold by health care service plans and
insurers in the individual and small group markets within and
outside of the Exchange.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
Exchange staff to develop likely in the hundreds of
Special*
risk adjustment system thousands to low millions of dollars
Exchange staff to likely in the hundreds of Special*
maintain the system thousands of dollars, ongoing
Payments to carriers likely in the millions of dollars
annually Special*
commencing January 1, 2014
Charges received likely in the millions of dollars
annually Special*
from carriers commencing January 1, 2014
OSHPD, CDI, DMHC potentially minor and absorbable to
theSpecial**
staff collaboration hundreds of thousands of dollars
*California Health Trust Fund-would consist of beneficiaries'
premiums, any available federal funds, fees assessed on health
plans and insurers
**California Health Data Planning Fund (OSHPD), Insurance Fund
(CDI), Managed Care Fund (DMHC)
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
This bill would require the California Health Benefit Exchange
Board (Board) to develop a risk adjustment system for health
insurance products that would be sold by health care service
SB 728 (Hernandez)
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plans and insurers (collectively referred to as "carriers"),
within and outside of the Exchange. It would direct the Board to
develop the system in collaboration with the Office of Statewide
Health Planning and Development (OSHPD), the California
Department of Insurance (CDI), and the Department of Managed
Health Care (DMHC). OSHPD, CDI, and DMHC would likely collect
from carriers and provide patient-level data to the extent
available. The cost of their participation is unknown, since the
role has yet to be defined. It could range from minor and
absorbable to the hundreds of thousands of dollars in special
funds.
Exchange and Risk Adjustment Federal Law
Existing federal law, the Patient Protection and Affordable Care
Act (Public Law 111-148), as amended by the Health Care
Education and Reconciliation Act of 2010 (Public Law 111-152),
(ACA) requires each state, by January 1, 2014, to establish an
American Health Benefit Exchange that makes qualified health
insurance products available to specified individuals and
employers. If a state chooses not to establish an Exchange, then
the federal government would administer it.
Section 1343 of the ACA requires states to implement risk
adjustment for health insurance products sold in the individual
or small group markets (excludes the large group market). A risk
adjustment process involves two steps:
1) A risk assessment, which requires predicting the
deviations of an individual's expected health care costs
from the average cost among all enrollees in the
marketplace; this would require patient-level data; and,
2) A risk adjustment, where the federal law requires the
state to assess a charge on carriers whose enrollees had
risk below the market average and would make a payment to
carriers whose enrollees had risk above the market average.
To develop and maintain a risk adjustment system, the Board
could need to: 1) hire or contract with actuaries to determine
the relative risk across health insurance products sold within
and outside of the Exchange, 2) develop a system and hire staff
to augment its patient-level data collection efforts and
analysis capabilities. These costs could be in the hundreds of
thousands to low millions of dollars annually.
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Staff notes that the federal law requires state, and not
specifically Exchanges, to develop and administer the risk
adjustment system. It does not provide for federal funds for
start-up and ongoing costs or payments to carriers with a higher
risk population. However, the Exchange is permitted to assess a
fee on carriers to fund development, operations, and a prudent
reserve.
Risk adjustment is a statistical process that uses patient-level
utilization information to even out, or to spread, the risk
across a marketplace so no carrier has an incentive to market
solely to a lower risk population. The system is assumed to need
to be in place by January 1, 2014, the date that the Exchange is
required to be operational. The federal government is expected
to release its first rules governing a risk adjustment system in
2011; the rules will likely require health plans and insurers to
furnish demographic, diagnostic, and prescription drug data.
Subsequent regulations will be released later and would further
define the risk adjustment system.
California Health Benefit Exchange Background
California's Exchange and Board were established by SB 900
(Alquist), Chapter 659, and AB 1602 (J. Perez), Chapter 655,
Statutes of 2010. It is estimated that approximately 4 million
Californians will purchase health insurance within the Exchange
commencing January 1, 2014. Federal law requires the Exchange to
be financially self-sustaining by January 1, 2015. AB 1602
established the continuously appropriated California Health
Trust Fund and provided that no General Fund monies could be
used to pay for eligible individuals' health care coverage or
for the Exchange unless a subsequent appropriation was approved
by the Legislature. AB 1602 permits the Exchange to assess a fee
on carriers with which to fund its development and operation.
In 2010, California was awarded a federal planning grant of $1
million to establish the Board and recruit key staff, analyze
the current public and private marketplace, convene
stakeholders, develop a multi-year planning strategy, and
collect demographic data, including estimates on how the ACA
would change the number of insured Californians, profiles of the
insurance markets in the state, and population numbers. At the
Board's first meeting April 20, 2011, the Board announced its
intention to seek a second federal establishment grant in order
to obtain federal start-up funds for the Exchange. The federal
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government is expected to release further guidance and rules in
2011 and early 2012.