BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   SB 728|
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                                 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 
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            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 

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            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 

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          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, 

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            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

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