BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 728| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 728 Author: Hernandez (D) Amended: 5/31/11 Vote: 21 SENATE HEALTH COMMITTEE : 5-2, 04/13/11 AYES: Hernandez, Alquist, De León, DeSaulnier, Rubio NOES: Strickland, Anderson NO VOTE RECORDED: Blakeslee, Wolk SENATE APPROPRIATIONS COMMITTEE : 6-2, 05/26/11 AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg NOES: Walters, Runner NO VOTE RECORDED: Emmerson SUBJECT : Health care coverage SOURCE : Author DIGEST : This bill requires the board of the California Health Benefit Exchange to develop a risk adjustment system for health insurance products sold in and outside of the Exchange in the individual and small group insurance market, as specified. ANALYSIS : Existing federal law: 1.Requires, under the federal Patient Protection and Affordable Care Act (PPACA), as amended by the Health Care Education and Reconciliation Act of 2010, each CONTINUED SB 728 Page 2 state, by January 1, 2014, to establish an American Health Benefit Exchange that makes qualified health insurance products available to qualified individuals and qualified employers. If a state does not establish an Exchange, the federal government administers the Exchange. 2.Requires states to implement risk adjustment with regard to health insurance products sold in the individual or small group market, inside and outside of the Exchange, with the exception of grandfathered plans. 3.Defines risk adjustment as the process by which: A. The state assesses a charge on health care service plans and health insurers if the actuarial risk of the enrollees of such plans or coverage for a year is less than the average actuarial risk of all enrollees in all health plans or insurance coverage products in the state for the year. B. The state provides a payment to health plans and insurers if the actuarial risk of the enrollees of such plans or coverage for a year is greater than the average actuarial risk of all enrollees in all health plans or insurance coverage products in the state for the year. 1.Requires states to use criteria and methods established by the federal Secretary of Health and Human Services when carrying out risk adjustment activities. 2.Exempts grandfathered plans from risk adjustment. A "grandfathered plan" is any group or individual health insurance product that was in effect on March 23, 2010. Existing state law establishes the California Health Benefit Exchange within state government, and specifies the duties and authority of the Exchange. This bill: 1.Requires the Exchange board, in collaboration with the Office of Statewide Health Planning and Development, the CONTINUED SB 728 Page 3 Department of Insurance, and the Department of Managed Health Care, to develop a risk adjustment system for health insurance products sold in and outside of the Exchange, pursuant to federal law. 2.Requires the board to comply with criteria and methods specified in PPACA, and subsequent regulations adopted pursuant to that law. 3.Directs the board to consider various data collection processes for the purposes of the risk adjustment system. 4.Defines risk adjustment in accordance with PPACA. Background Risk adjustment is used by Medicare to adjust payments to health plans participating in Medicare Advantage and Medicare Part D prescription drug plans, and by state Medicaid programs to adjust payments to health plans covering Medicaid managed care members. Commercial insurers also use risk adjustment payment systems to adjust provider reimbursement. There are also emerging uses for risk adjustment in new delivery models, including accountable care organizations and patient-centered medical homes. California's Medicaid program, Medi-Cal, risk adjusts capitation payments for Medi-Cal managed care plans, under the two-plan and geographic managed care models to develop county average capitation rates. Medi-Cal uses a risk adjustment model specifically designed for Medicaid programs using pharmacy data to classify individuals by diagnosis categories in order to measure anticipated risk. Pharmacy data was determined to be the most accurate and complete source of claims-level information for the Medi-Cal managed care program. Adjustments based on member demographics (age and gender) are also made. In 1995 and 1996, the California Managed Risk Medical Insurance Board developed a risk-adjustment mechanism that was applied to group health insurance plans selling to small employers in the Health Insurance Plan of California (HIPC), the first statewide health insurance purchasing CONTINUED SB 728 Page 4 cooperative for small employers (those with 3 to 50 employees). The risk-adjustment mechanism was used by HIPC in its 1996 and 1997 rate negotiations with participating health plans and insurers and was based on demographic information (gender, family size, health condition, and age), and also reflected the presence of higher-cost diagnoses. When an insurer's aggregated risk varied more than five percent from the average, funds were collected and redistributed from the lowest risk plans to high risk plans. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee: 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 systemthousands 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 the Special** staff collaborationhundreds of thousands of dollars * California Health Trust Fund-would consist of beneficiaries' premiums, any available federal funds, CONTINUED SB 728 Page 5 fees assessed on health plans and insurers **California Health Data Planning Fund, Insurance Fund, Managed Care Fund Note: No General Fund monies will be used. SUPPORT : (Verified 5/27/11) Health Access ARGUMENTS IN SUPPORT : According to the author's office, this bill implements a provision in federal health reform that requires all states to risk adjust across all individual and small group health insurance products. Risk adjustment is a mechanism which adjusts payments to health plans and insurers to reflect the actual health status or recent medical experience of enrollees. By equalizing risk and fostering productive competition between plans and insurers, in other words, removing the incentive for health plans and insurers to compete by attracting healthier enrollees and discouraging enrollment by less healthy enrollees, risk adjustment ensures that plans have a financial incentive to serve all populations. The author's office argues that risk adjustment could create an insurance market where plans and insurers compete to offer better health care at lower cost, which is particularly important in the context of building a successful state health benefits exchange. For exchanges to function effectively, the exchange must fairly adjust payments to plans and insurers participating in the exchange based on the health status of the members each plan or insurer attracts. Otherwise, plans and insurers may shy away from participating in the exchange because of concerns about adverse selection, or may design their products to only attract the healthiest people. CTW:nl 5/31/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED SB 728 Page 6 CONTINUED