BILL ANALYSIS Ó
SENATE COMMITTEE ON HEALTH
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 1431
AUTHOR: De León
AMENDED: April 9, 2012
HEARING DATE: April 11, 2012
CONSULTANT: Trueworthy
SUBJECT : Stop-loss insurance coverage.
SUMMARY : Establishes minimum attachment points for stop-loss
policies issued, as defined, to employers in the small group
health insurance (small group) market. Requires guarantee issue
for all employees and dependents and guarantee renewability of
the policy for the small employer.
Existing law:
1.Provides for the regulation of health insurers (insurers) by
the California Department of Insurance (CDI) under the
Insurance Code.
2.Prohibits a person from transacting any class of insurance
business, including health insurance, in this state without
first being an admitted insurer.
3.Prohibits an insurer from issuing any health insurance policy
once CDI notifies the health insurer that the filed form does
not comply with specified requirements.
4.Prohibits a health insurance policy from being issued or
delivered to any person in this state unless specified
requirements have been met, including that a copy of the form
and premium rates are filed with the Commissioner.
5.Prohibits a group health plan and a health insurance issuer
offering group or individual health insurance coverage from
imposing any pre-existing condition exclusion with respect to
the plan or coverage commencing January 1, 2014.
6.Establishes the federal Patient Protection and Affordable Care
Act (PPACA), which imposes various requirements on states,
carriers, employers, and individuals regarding health care
coverage.
Continued---
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7.Establishes and specifies the duties and authority of the
California Health Benefit Exchange (Exchange).
8.Requires carriers that sell any products outside the Exchange,
as a condition of participation in the Exchange, to fairly and
affirmatively offer, market, and sell all products made
available in the Exchange to individuals and small employers
purchasing coverage outside of the Exchange.
This bill:
1.Establishes the following definitions:
a. Attachment point means the total number of health
claims incurred by a small employer in a policy year for
its employees and their dependents above which the
stop-loss carrier incurs a liability for payment.
b. Individual attachment point means the total number of
health claims incurred by a small employer in a policy
year for an individual employee or dependent of an
employee above which the stop-loss carrier incurs a
liability for payment.
c. Aggregate attachment point means the total number of
health claims incurred by a small employer in a policy
year for all covered employees and their dependents above
which the stop-loss carrier incurs a liability for
payment.
d. Direct coverage means that an insurance company
assumes a direct obligation to an employee under an
insurance policy to pay or indemnify the employee for
health claims incurred by the employee or the employee's
dependents.
e. Expected claims means the total number of health
claims that, in the absence of a stop-loss insurance
policy or other insurance, are projected to be incurred by
a small employer for its employees and their dependents.
f. Policy year means the 12-month period that is
designated as the policy year for the stop-loss insurance
policy. If the stop-loss insurance policy does not
designate a policy year, the policy year is the year in
which the total number of health claims incurred by a
small employer for an individual employee or dependent of
an employee, or the aggregate amount for all covered
employees and their dependents, are added together for the
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purposes of determining whether the claims have exceeded
the attachment point.
g. PPACA means the federal Patient Protection and
Affordable Care Act (Public Law 111-148), as amended by
the federal Health Care and Education Reconciliation Act
of 2010 (Public Law 111-152), and any rules, regulations,
or guidance issued pursuant to that law.
h. Stop-loss carrier means an insurance company or other
entity providing individual or aggregate stop-loss
insurance coverage, or any other assumption of risk, to a
small employer for the health claims of its employees and
their dependents.
i. Stop-loss insurance policy means a policy, contract,
certificate, or statement of coverage between a stop-loss
carrier and small employer providing individual or
aggregate stop-loss insurance coverage, or any other
assumption of risk, to a small employer for the health
claims of its employees and their dependents.
2.Requires a stop-loss carrier to offer coverage to all
employees and dependents of a small employer to which it
issues a stop-loss insurance policy.
3.Prohibits a carrier from excluding any employee or dependent
on the basis of actual or expected health status-related
factors.
4.Requires a stop-loss carrier to renew, at the option of the
small employer, all stop-loss insurance policies, with the
following exceptions:
a. For nonpayment of the required premiums by the small
employer;
b. If the stop-loss carrier demonstrates fraud or an
intentional misrepresentation of material fact by the small
employer under the terms of the stop-loss insurance policy;
c. If the stop-loss carrier has been determined by the
Commissioner to be financially impaired; and
d. If the stop-loss carrier ceases to write, issue, or
administer new stop-loss insurance policies in this state.
1.Prohibits a stop-loss carrier from issuing a stop-loss
insurance policy to a small employer that contains certain
individual or aggregate attachment points, described below,
for a policy year or provides direct coverage of an employee's
health claims.
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a. Contains an individual attachment point of $95,000;
and
b. Contains an aggregate attachment point for a policy
year that is lower than the greater of one of the
following:
i. $19,000, times the total number of
covered employees and dependents;
ii. 120 percent of expected claims; or
iii. $95,000.
2.Allows CDI, by regulations, to amend the dollar amounts six
months prior to their effective dates.
3.Establishes that a stop-loss carrier in violation of these
provisions is subject to administrative penalties and directs
those fine and penalty moneys received to the General Fund to
be available upon appropriation by the Legislature.
4.Limits the provisions of this bill to small employers.
FISCAL EFFECT : This bill has not been analyzed by a fiscal
committee.
COMMENTS :
1.Author's statement. According to the author, SB 1431 will
protect consumers in California's small group market as the
ACA is implemented. The ACA puts in motion a number of
significant small group market reforms and creates a
competitive marketplace through the Exchange. However, as
federal health care reform goes into full effect, there will
be incentives for some small employers to self-insure and to
purchase stop-loss coverage. The author states this situation
could lead to a significant exodus of small employers from the
small group market, specifically those employers with young
and healthy employees. If this situation occurs, adverse
selection could leave in its wake a majority of the state's
small businesses in an insurance pool increasingly subject to
skyrocketing premiums, both inside and outside of the
Exchange. The author states that even those that self-insure
and buy a stop-loss product may soon end up in this pool if
the stop-loss carrier decides to drop them.
According to the author, without this bill, stop-loss insurers
would continue to consider health status and medical history
in the offering of its products. This means that a stop-loss
carrier is able to "cherry-pick" both which small businesses
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to sell to and even which individuals to exclude within a
small group to which it is offering its product, leaving
certain individuals without health insurance coverage. SB
1431 is necessary to prevent the state's small group market
from falling victim to adverse selection and unsustainable
premium levels and protecting California's small businesses,
its employees, and the success of the post-ACA insurance
market.
2.Self-insured health plans. Self-insurance is an arrangement
where the employer assumes direct financial responsibility for
the cost of providing health or disability benefits to
employees with its own funds. Employers sponsoring self-funded
plans typically contract with a third-party administrator or
insurer to provide administrative services for the self-funded
plan. The terms of eligibility and coverage are set forth in
a plan document which includes provisions similar to those
found in a typical group health insurance policy. Such plans'
rights and obligations are governed under the Employee
Retirement Income Security Act of 1974 (ERISA). Under ERISA,
self-funded plans are exempt from state insurance laws,
including reserve requirements, mandated benefits, premium
taxes, and consumer protection regulations. ERISA plans are
also exempt from the ACA requirements on establishing
essential health benefits. In some cases, the employer may buy
stop-loss coverage from an insurer to protect the employer
against very large claims.
3.Stop-loss insurance. Stop-loss insurance is sold to employers
that self-insure their employee's health care coverage to
limit the employer's financial exposure. Stop-loss insurance
is available in two forms:
a. Specific stop loss where coverage is initiated when a
claim reaches the threshold selected by the employer.
After the threshold is reached, the stop-loss policy would
pay claims up to the lifetime limit per employee.
b. Aggregate stop loss where coverage is initiated when
the employer's self-insurance total group health claims
reach a stipulated threshold selected by the employer.
According to the Kaiser Family Foundation's 2011 Annual
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Employer Health Benefits Survey, 58 percent of workers in
self-funded health plans are enrolled in plans covered by
stop-loss insurance. Workers in self-funded plans in small
firms are more likely than workers in self-funded plans in
larger firms to be in a plan with stop-loss protection (72
percent compared to 57 percent). About 81 percent of workers
in self-funded plans that have stop-loss protection are in
plans where the stop-loss insurance limits the amount the plan
spends on each employee. The report's executive summary states
the average per employee claims cost, at which stop-loss
insurance begins paying benefits, is $78,321 for workers in
small firms (3 to 199) with stop-loss plans, and $208,280 for
workers in larger firms with self-funded plans.
According to the California HealthCare Foundation 2011
California Employer Health Benefits Survey, one-third of
Californians were enrolled in a partly or completely
self-insured plan in 2011, which is nearly half of the
national average. Almost 30 percent of California employers
with a self-insured plan purchased stop-loss insurance in 2011
to protect them against large claims. Large firms were
significantly more likely than small firms to do so (84
percent compared to 23 percent). SB 1431 is limited to small
employers defined in California law as having between 2 and 50
employees.
4.National Association of Insurance Commissioners (NAIC) model.
The NAIC adopted the Stop Loss Insurance Model Act in 1995,
revised in 1999, which states that an insurer shall not issue
a stop-loss insurance policy that:
a. Contains an individual attachment point of $20,000 and
b. Contains an aggregate attachment point for a policy
year, for groups of 50 or fewer, that is lower than the
greater of one of the following:
i.$4,000 times the number of group members;
ii.120 percent of expected claims; or
iii.$20,000.
The NAIC is currently in the process of updating their Stop
Loss Insurance Model Act and a report is expected in August of
2012.
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1. Stop-loss regulations in other states. Nineteen states
have laws, regulations, or guidance on the books pertaining
to stop-loss insurance. Fifteen states regulate minimum
attachment points in stop-loss policies in some fashion,
with six of those states adopting a law or regulation that
is similar to the NAIC Stop Loss Insurance Model Act.
Delaware, New York, and Oregon prohibit the sale of
stop-loss insurance to small employers. New York and North
Carolina also prohibit insurers from serving as third-party
administrators for self-funded small employers.
2.ACA. According to a February 2012 article in Health Affairs
by Mark A. Hall, "Regulating stop-loss coverage may be needed
to deter self-insuring small employers from undermining market
reforms," the ACA will fundamentally reshape individual and
small group markets, prompting many changes in how employers
participate in these markets. Some employers will drop
insurance altogether, others will purchase insurance through
the new exchanges, and still others will consider
self-insuring their workers' health coverage. Self-insuring
has been a common practice to avoid mandated benefits and
other state regulations. The author writes that self-insuring
enables small employers to avoid the ACA's requirement that
insurers cover essential health benefits. There is also
concern that self-insuring can result in healthy individuals
being removed from the community rating group.
The ACA requires insurance sold in the small group be
community rated rather than allowing insurers to base premiums
on the documented health risks of each group. According to the
author of the article, community rating, along with other ACA
market reforms, will founder or fail if younger or healthier
groups can easily avoid reforms by self-insuring. Community
rating can successfully spread risks across the small group
market if self-insuring is unattractive or too expensive for
most small employers. Currently, that is the case for most
small employers because of the inherent risks of
self-insuring. A catastrophic injury or illness of one or more
employees could run into millions of dollars of health care
costs, which could bankrupt all but the largest firms. The ACA
creates several market changes that could drive small
employers to self -insure.
3.Related legislation. SB 961 (Hernandez) would reform
California's individual market in accordance with federal
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health care reform and apply its provisions to health plans
and disability insurers in the individual market. SB 961
passed the Senate Health Committee on April 18, 2012 on a vote
of 6-2 and is now pending before the Senate Appropriations
Committee.
AB 1461 (Monning) is identical to SB 961. AB 1461 passed the
Assembly Health Committee on April 17, 2012 on a vote of 13-6
and is now pending before the Assembly Appropriations
Committee.
4.Prior legislation. SB 900 (Alquist), Chapter 659, Statutes of
2010, and AB 1602 (John A. Pérez), Chapter 655, Statutes of
2010, established the Exchange.
5.Support. Insurance Commissioner Dave Jones (Commissioner)
writes in support that SB 1431 would protect the state's small
businesses from skyrocketing health premiums by specifying
minimum attachment points in stop-loss insurance policies sold
to small employers. Though self-insurance is more common
among large employers, there are some small employers that
make the decision to self-insure, a decision that involves
greater risk since the health care costs of their employees
could end up costing more than expected. The Commissioner
argues SB 1431 is necessary to prevent the state's small group
insurance market from falling victim to adverse selection and
unsustainable premium levels and protecting California's small
businesses, its employees, and the success of the post-ACA
insurance market.
Blue Shield of California writes in support that by increasing
the minimum attachment point for stop-loss coverage in the
small group market, SB 1431 will send a strong signal to the
market that illusory self-insurance to small groups will not
be permitted. SB 1431 is largely based upon model legislation
from the NAIC, which has been adopted in some form by 16
states. Blue Shield states they are a strong supporter of the
ACA and believes the state must adopt policies that promote
the success of the Exchange and health reform.
The California Association of Physician Groups writes in
support that SB 1431 will require appropriate attachment
points for stop-loss insurance sold to small employers and
that SB 1431 prohibits discrimination against an individual
based on health status. Consumer Federation of America writes
in support that SB 1431 will help ensure that the small group
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health market, both inside and outside of the Exchange, is
successful and sustainable for the state's small employers and
their employees in the post-ACA insurance market. SEIU
California supports SB 1431 writing it will protect the small
group market from higher premiums and adverse selection as
federal health care reform is implemented.
6.Support with amendments. Health Access California (Health
Access) supports SB 1431 stating it will provide important
protections for small employers. Health Access seeks three
additional amendments to improve the measure. First, Health
Access argues that stop-loss insurance should be subject to
rate review. Health Access also seeks an amendment to require
clear disclosure to the small employer regarding their
financial risk. And finally, while Health Access supports an
automatic escalator of the attachment point dollar figures
contained in SB 1431 but contends it should be tied to the
higher of the mean or median of the rate increases in the
small group market.
7.Oppose. The California Chamber of Commerce and the National
Federation of Independent Business write in opposition to SB
1431 that it will severely limit small employers opportunity
to select the most appropriate, affordable health care
coverage to their employees as self-insurance. They argue
that many small businesses in California struggle to provide
health care coverage for their employees, and it is imperative
that affordable choices are available. Self-insurance combined
with stop-loss coverage for excessive, unexpected claims,
offers an option for some small employers. According to the
opposition, this bill seeks to create an unreasonably high
level at which the stop-loss coverage would apply. The
opposition also cites an August 2011 study by RAND, "Employer
self-insurance decisions and the implications of the Patient
Protection and Affordable Care Act as modified by the Health
Care and Education Reconciliation Act of 2010 (ACA)," which
concluded that limiting small employers' ability to
self-insure is associated with a decline in the total number
of individuals enrolled in health insurance coverage. The RAND
model predicts that allowing self-insurance mitigates this
effect, so that total enrollment is higher in scenarios where
self-insurance is allowed.
Self-Insurance Institute of America (SIIA) writes that the
cost of health insurance premiums has spiked for all
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California employers and especially for smaller employers. SB
1431 would make this problem worse by effectively eliminating
the self-insurance option for many companies within the state
that otherwise must choose between absorbing increased costs
every year or to drop health coverage altogether. SIIA argues
that while self-insurance may not be a viable option for many
smaller employers, an increasing number of such employers are
operating successful self-insured group health plans that
provide cost containment advantages and are customized to meet
the specific needs of the plan participants.
The California Association of Health Underwriters (CAHU)
writes in opposition that SB 1431 forces small employers to
take on significantly increased risk that is not actuarially
supported. For a small employer to take on $95,000 of risk
per person will have no other result than to force small
employers to purchase fully insured plans. CAHU argues the
unfortunate consequence will be that small employers will be
forced to either pay higher costs or drop coverage altogether.
8.Concerns. CIGNA writes that they are concerned SB 1431 would
regulate stop-loss insurance policies in an excessive and
unprecedented manner. CIGNA contends that small employers
value self-funding because it provides greater flexibility to
design benefits and align them across state lines. CIGNA is
concerned that SB 1431 would deprive self-insured small
employers the ability to have stop-loss policies they can
afford and that appropriately protect them from financial
risk.
The Association of California Life and Health Insurance
Companies (ACLHIC) writes they are concerned about the
methodology used to determine the statutory individual and
aggregate attachment points that are currently in the bill.
These particular attachment points appear to come from a
market survey that simply aggregated different types of
coverage and was not conducted using any sort of actuarial
analysis. ACLHIC recommends that appropriate actuarial
science be utilized to establish appropriate attachment points
to ensure that those attachment points are viable and provide
adequate reinsurance value to a small business.
9.Policy discussion.
a. Attachment point figures. The NAIC model has an
individual attachment point of $20,000; the Kaiser Family
Foundation 2011 Employer Health Benefits survey executive
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summary cites $78,321 as the average individual attachment
point for firms who have between 3 and 199 workers. SB 1431
has an individual attachment point of $95,000. According to
2011 CHCF California Employer Health Benefits Survey, the
national average family coverage premium increase was 9.5
percent in 2011. Using the Kaiser Family Foundation average
attachment point and then applying the national average
family coverage premium increase of 9.5 percent, the
$95,000 individual attachment point reflects the projected
national average attachment point in 2014, the year the ACA
is fully implemented. Is this the appropriate methodology
to develop the attachment point figures?
a. Should changes to the attachment point dollar figures be
changed through regulations? SB 1431 allows the
Commissioner, by regulations, to amend the dollar amounts
six months prior to their effective dates. SB 1431 only
requires the Commissioner to consider the medical
components of the Consumer Price Index before adjusting the
dollar figures. Should other factors be required to be
considered? Should the Legislature weigh in on any changes?
b. What happens to existing employers that self-fund and
have a stop-loss attachment point below the requirements of
SB 1431? SB 1431 would require all small employers to
comply with the new attachment points. An employer with an
existing stop-loss insurance policy would be required to
find a new policy.
1.Committee amendments.
a. Existing products. The Committee recommends adding
language to exempt existing employers with an existing
stop-loss product from the new requirements imposed by SB
1431.
b. Changes to dollar figures. The Committee recommends
deleting the provision to allow CDI, by regulations, to
amend the dollar amounts six months prior to their
effective dates (page 5, lines 33-37). The Legislature
should consider and approve any policy changes related to
stop-loss insurance including changing the attachment point
dollar figure.
c. Technical amendments to address drafting errors.
SUPPORT AND OPPOSITION :
Support: Insurance Commissioner Dave Jones (sponsor)
Blue Shield of California
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California Association of Physician Groups
Consumer Federation of America
Health Access California (if amended)
SEIU California
Oppose: California Association of Health Underwriters
California Chamber of Commerce
National Federation of Independent Business
Self-Insurance Institute of America, Inc.
Southwest California Legislative Council
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