BILL ANALYSIS Ó
AB 1962
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Date of Hearing: April 30, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 1962 (Skinner) - As Amended: April 22, 2014
Policy Committee: HealthVote:15-3
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill requires dental plans and insurers to comply with
specified loss ratios (calculated as a ratio of premium revenue
spent on clinical services and improving dental quality to the
total amount of premium revenue) or to provide rebates to
customers if the loss ratio is less than a certain amount.
Specifically, the bill requires rebates if loss ratios are less
than 80% in the individual or small group market, or 85% in the
large-group market.
It also authorizes the Department of Managed Health Care (DMHC)
and the California Department of Insurance (CDI) to adopt
regulations, including emergency regulations, implementing these
provisions, and requires regulations to parallel those adopted
with respect to full-service plan contracts and policies.
FISCAL EFFECT
1)One-time costs to DMHC and CDI, combined, of approximately
$400,000 (Managed Care Funds and Insurance Fund, respectively)
to develop complex regulations.
2)One-time costs to DMHC of $200,000 (Managed Care Fund) to
modify IT systems and develop reporting requirements.
3)Ongoing costs to DMHC of $200,000 (Managed Care Fund) to
examine reports and review compliance. Costs to CDI are
likely to be minor and absorbable.
4)The fiscal impact of loss ratio enforcement is uncertain. The
actual costs would depend upon plan compliance with the
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measure, whether plans are meeting requirements or must issue
rebates, and the extent to which there is disagreement between
carriers and regulators over the details of the calculations,
including actuarial assumptions and the allocation of costs to
the appropriate categories.
5)Potentially significant, unknown cost pressure on dental plan
premiums paid by the state on behalf of state employees.
Depending on how far dental plans are from meeting mandated
loss ratios, dental plans may raise premiums as one strategy
to meet loss ratios. The state currently spends approximately
$10.5 million on dental HMO plan premiums, and $203 million on
dental PPO premiums. Large-group PPO plans are more likely to
meet the bill's specified ratios; thus, significant impacts
are not expected for the majority of state employee plans.
Dental HMO plans, which are lower-cost and have a smaller
premium base on which the loss ratio applies, are more likely
to be affected by this bill.
COMMENTS
1)Purpose . A federal ACA provision requiring health insurers to
spend a minimum amount of premiums collected on clinical
services has been promoted as increasing transparency, value,
and administrative efficiency of health plans. This bill
intends to provide the same benefits to consumers of dental
plans by establishing minimum dental loss ratios (DLRs).
2)Current Loss Ratios . According to the National Association of
Dental Plans 2009 Financial Operations Report, current DLRs as
defined in this bill appear to be in the range of 65% for
individual and small group markets, and around 75% for all
markets combined. Generally, PPO products with wide networks
of dentists from which patients can choose tend to have higher
premiums than HMO products with constrained networks and rules
related to specialist access. PPO plans generally have
higher premiums, so administrative costs comprise a smaller
proportion of the premium, leading to higher DLRs. Currently,
DMHC calculates loss ratio for dental plans based on other
reported financial information, but it is not based on
standardized calculation as required for health plans.
The Medi-Cal program requires a minimum loss ratio of 70% for
contracting dental plans, and the former Healthy Families
Program under the Managed Risk Medical Insurance Board
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required loss ratios of around 80%.
The National Association for Insurance Commissioners indicates
in model code that benefits are generally deemed reasonable in
relation to premiums provided the anticipated loss ratio is at
least 60% for specialized health plans.
3)Recent Report on DLR in California . A report commissioned by
the California Dental Association, the sponsors of this bill,
evaluates factors to consider in establishing a minimum loss
ratio for dental plans. It concludes:
a) Any DLR requirement should be evaluated in the context
of the current market and the changing landscape in a
post-ACA marketplace.
b) Additional data with respect to the actual loss ratios
for California dental plans is needed before a specific
value can be established.
c) Uniform data and reporting should be established in
order to gather the required data.
d) Given the potential for imposition of a loss ratio to
destabilize markets, careful monitoring and flexibility to
phase in requirements are desirable.
1)Support . The California Dental Association (CDA) is the
sponsor of this bill and argues that a minimum DLR will ensure
dental consumers are afforded value for dental premiums in the
same way that the MLR for health coverage protects consumers
and has returned millions in rebates for consumers from health
plans that exceed the limit. CDA states that the DLR
requirement will encourage administrative efficiency, allow
for greater transparency, increase the overall value of the
benefit and possibly reduce premium costs.
2)Opposition . Health and dental plans write in opposition that
this bill will dramatically increase dental premiums for
Californians because a DLR requirement would not change the
costs to administer the dental benefits. To comply, dental
plans would either have to increase premiums or reduce
administrative costs, which include customer service,
grievances and appeals, prevention, clinical review, timely
claims processing, fraud prevention, consumer education,
regulatory compliance, and other core functions of the dental
plans. Opponents point out that the ACA did not impose a DLR
and federal law recognizes dental coverage as different from
medical in terms of the way benefits are offered and premium
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levels set. Opponents state that dental plans face
disproportionately higher administrative costs (typically
4-6%) and typically lower margins. Since dental coverage is a
voluntary purchase, dental plans incur additional marketing
and outreach costs because purchasers are generally not buying
coverage for hundreds or thousands and so the market must be
reached group by group, individual by individual. Plans state
that the voluntary nature of the market also forces dental
plans to be efficient in order to keep premiums affordable and
competitive.
In addition, the California Chamber of Commerce opposes this
bill, indicating they expect it will increase dental provider
rates and increase the costs of coverage.
3)Staff Comment: Impact of Minimum Loss Ratio. As defined in
this bill, the numerator of the loss ratio is the amount of
premium revenue expended on costs for reimbursement for
clinical services and for activities that improve dental
quality. The denominator is the total premium revenue,
excluding taxes and licensing fees, adjusted for various
payments such as reinsurance. Assuming dental plans
currently operate with lower loss ratios than required by this
bill, there are two main strategies plans could use to
increase loss ratios.
One strategy is to reduce administrative costs, including
profit, in order to ensure more premium dollars are spent on
clinical services. The second strategy is to raise premiums
and direct extra dollars to clinical services. Given the
limited data available about current DLRs among California
dental plans, it appears that many would be in violation of
this bill's standards. If this bill were to become law, and
if plans are indeed far from meeting the required loss ratios,
it is reasonable to assume a two-pronged strategy of reduced
administrative expenses, coupled with increased premiums and
payments for clinical services would be necessary in order to
comply. In this way, premium pressure could result across
all dental markets, although competitive pressure could
mitigate the increase.
If loss ratios were deemed too high to meet while maintaining
a worthwhile profit margin, particularly for very low cost
dental plans in the individual and small-group markets, it is
reasonable to assume the level of loss ratio required by this
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bill would lead to some level of reduced competition in these
markets. This may reduce availability of low-cost dental
plans.
Given apparent consensus that dental plans differ from health
plans in important ways, the fact that no standardized loss
ratio calculations are available to serve as a basis by which
to assess the current California market, the potential for
market disruption, and, most importantly for this committee,
the potential for premium cost increases in order to meet a
minimum loss ratio threshold designed for comprehensive health
care plans, staff suggests considering options other than
immediate imposition of numerical thresholds specified in the
bill including, potentially, lower numerical thresholds,
standardization of loss ratio reporting, flexibility to exempt
very low-premium plans, phasing in of a minimum loss ratio, or
other ways to set achievable goals that further the consumer
interest in transparency and accountability while mitigating
unintended consequences.
Finally, significant concern has been voiced by dental plans
regarding the requirement to send rebates to consumers if
their dental plan fails to meet DLR requirements. They argue
they would be forced to allocate significant administrative
resources to issue de minimis rebates, given the low very cost
of some plans. If a minimum threshold is imposed, alternative
enforcement mechanisms should be considered in order to avoid
significant administrative costs and burden to mail de minimis
rebates.
4)Previous Legislation . AB 18 (Pan) of 2013 initially focused
on pediatric oral care offered in the California Health
Benefit Exchange and was amended to impose a dental loss
ratio, rate filing and review requirements and other specific
standards on dental plans offering that coverage. AB 18 was
referred to this committee but was not heard at the request of
the author.
Analysis Prepared by : Lisa Murawski / APPR. / (916) 319-2081