BILL ANALYSIS Ó
SENATE COMMITTEE ON HEALTH
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 161
AUTHOR: Hernandez
AMENDED: April 25, 2013
HEARING DATE: May 1, 2013
CONSULTANT: Marchand
SUBJECT : Stop loss insurance coverage.
SUMMARY : Establishes minimum attachment points for stop-loss
policies issued to small employers. 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 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.
4.Establishes the federal Patient Protection and Affordable Care
Act (ACA), which imposes various requirements on states,
carriers, employers, and individuals regarding health care
coverage.
5.Establishes and specifies the duties and authority of the
California Health Benefit Exchange (Exchange).
6.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.
Continued---
SB 161 | Page 2
This bill:
1.Defines various terms for purposes of this bill, including the
following:
a. "Small employer" is defined, in part, as a business that
employees at least 2, but not more than 50, employees.
b. "Stop-loss insurer" is defined as an insurance company
providing individual or aggregate stop-loss insurance
coverage, or both, or any other assumption of risk, to a
small employer for the health claims it incurs for its
employees and their dependents.
c. "Stop-loss insurance policy" is defined as a policy,
contract, certificate, or statement of coverage between a
stop-loss insurer and small employer providing individual
or aggregate stop-loss insurance coverage, or both, or any
other assumption of risk, to a small employer for the
liability the small employer incurs related to the covered
claims of its employees and their dependents.
d. "Individual attachment point," also known as "specific
attachment point," is defined as the amount of health
claims incurred by a small employer in a policy year for an
individual employee or dependent of an employee, and
covered by a stop-loss policy, above which the stop-loss
insurer incurs a liability for payment, under individual
stop-loss coverage.
e. "Aggregate attachment point" is defined as the total
amount of health claims incurred by a small employer in a
policy year for all covered employees and their dependents,
and covered by a stop-loss insurance policy, above which
the stop-loss insurer incurs a liability for payment under
aggregate stop-loss coverage.
f. "Expected claims" means, for purposes of aggregate
stop-loss coverage, the total amount of health claims that
is projected to be incurred by a small employer for its
employees and their dependents in a policy year.
2.Prohibits a stop-loss insurance policy issued on or after
January 1, 2014, to a small employer from containing any of
the following provisions:
SB 161| Page
3
a. An individual attachment point for a policy
year that is less than $65,000;
b. An aggregate attachment point for a policy year that is
less than the greater of one of the following: $13,000
times the total number of covered employees and dependents;
120 percent of expected claims; or, $65,000; or,
c. A provision for direct coverage of an employee
or dependent of an employee.
3.Prohibits a stop-loss insurer from excluding any employee or
dependent on the basis of an actual or expected health
status-related factor. Specifies that health status-related
factors include, but are not limited to, any of the following:
health status; medical condition; claims experience; medical
history; receipt of health care; genetic information;
disability; evidence of insurability; or any other health
status-related factors as determined by CDI.
4.Requires a stop-loss-carrier to renew, at the option of the
small employer, all stop-loss insurance policies written,
issued, administered, or renewed on or after January 1, 2014,
and all small employer stop-loss insurance policies in force
on or after January 1, 2014, except as follows:
a. For non-payment of required premiums, and at least a
30-day grace period has elapsed since the date of
notification of nonpayment of premiums;
b. Where the stop-loss insurer demonstrates fraud or an
intentional misrepresentation of material fact by the small
employer under the terms of the stop-loss insurance policy;
c. Where the stop-loss insurer has been determined by the
Insurance Commissioner to be financially impaired; or,
d. Where the stop-loss insurer ceases to write, issue, or
administer new stop-loss insurance policies in this state,
provided that notice of this decision has been provided to
the Insurance Commissioner and small employer at least 180
days prior to discontinuation of coverage.
5.Permits the Insurance Commissioner to adopt regulations to
carry out the purposes of this bill.
6.Specifies that a stop-loss insurer that violates the
provisions of this bill is subject to specified existing
remedies and administrative penalties that apply to insurers,
which include administrative penalties of up to $2,500 for a
SB 161 | Page 4
first violation and up to $5,000 for subsequent violations.
For insurers that violate laws with a frequency indicating a
general business practice, or knowing violations, the penalty
can be up to $100,000 for each violation.
7.Exempts from the provisions of this bill the ongoing
operations of multiple employer welfare arrangements, as
defined, that provide health care benefits to their members on
a self-funded or partially self-funded basis and that comply
with small group health reforms.
FISCAL EFFECT : This bill has not been analyzed by a fiscal
committee
COMMENTS :
1.Author's statement. This bill will ensure that small employers
who choose to offer their employees health benefits through
self-insurance are truly "self-insuring" and bearing a
significant portion of the risk, and not simply using
self-insurance as a subterfuge to avoid regulation by passing
almost all of the risk to stop-loss insurers. This bill would
prohibit stop-loss insurance from being sold to employers with
very low "attachment points," which is the level at which the
stop-loss insurer begins paying medical bills. By ensuring
that small employers who are self-insuring truly have the
means to pay for their employee's medical costs, while still
allowing stop-loss insurance for catastrophic risk, this bill
will also protect the integrity of the small group insurance
market both in and out of the exchange by limiting the appeal
of self-insurance and thereby retaining a broad pool of small
employers in the small group insurance market.
2.Self-insurance. 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
SB 161| Page
5
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.
According to the Kaiser Family Foundation's 2012 Employer Health
Benefits Annual Survey (KFF Survey), 60 percent of all workers
with covered health benefits are in a self-funded plan. When
divided by employer size however, only 15 percent of workers
with health benefits in firms of between 3 and 199 employees
were in a self-funded plan, while 81 percent of those in firms
with 200 or more employees were in a self-funded plan.
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 for an individual employee or dependent 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 KFF Survey, 59 percent of workers in
self-funded health plans are enrolled in plans covered by
stop-loss insurance. About 89 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 KFF Survey found that the average
individual attachment point in firms of between 3 and 199
workers (the smallest unit breakdown in the survey) was about
$140,000, but noted that because very few small employers that
self-fund were represented in the survey, one firm that
reported a very high individual attachment point ($2,000,000)
resulted in the average increasing by almost 100 percent. For
all large firms (those with more than 200 employees), the
average individual attachment point was more than $227,000.
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
SB 161 | Page 6
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 161 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.
During the NAIC 2012 Fall National Meeting, a proposal to
amend the Stop Loss Insurance Model Act to increase the
minimum individual attachment point from $20,000 to $60,000,
and to increase the aggregate attachment point from $4,000
times the number of people in the plan to $15,000 times the
number of people in the plan, was defeated on a 10-8 vote of
the NAIC's ERISA Working Group. The working group agreed to
ask the NAIC's Regulatory Framework Task Force to "develop a
white paper analyzing the potential impact of small employer
self-insurance on the small group market beginning in 2014."
1.Stop-loss regulations in other states. At least 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.
SB 161| Page
7
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 flounder 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. SBX1 2 (Hernandez), andABX1 2 (Pan) are
substantially similar bills that reform California's
individual market in accordance with federal health care
reform and implement provisions prohibiting pre-existing
condition exclusions, requiring guaranteed issuance of
products, establishing statewide open and special enrollment
periods, and limiting premium rating factors to age, geography
and family size. SBX1 2 is pending on the Senate Concurrence
File, and ABX1 2 is pending on the Assembly Concurrence File.
4.Prior legislation. SB 1431 (De Leon) was substantially
similar to this bill. As introduced, SB 1431 had an
individual attachment point of $95,000, which was eventually
SB 161 | Page 8
reduced to $45,000 when the bill was approved by the Assembly
Appropriations Committee. SB 1431 was not taken up for a vote
on the Assembly Floor.
SB 961 (Hernandez) 2012 was substantially similar to this
year's SBX1 2, and ABX1 2 to implement reforms in California's
individual market in accordance with federal health reform.
SB 961 was vetoed by the Governor.
SB 900 (Alquist), Chapter 659, Statutes of 2010, and AB 1602
(John A. Pérez), Chapter 655, Statutes of 2010, established
the Exchange.
5.Support. Kaiser Permanente states in support that stop-loss
insurance is a product that is generally offered to large
employers who have the financial wherewithal to self-insure
and pay all of its employees' claims, instead of buying
insurance. The stop-loss policy protects the company against
an unforeseen outlier claim that could be financially
devastating to the business. However, Kaiser states that new
stop-loss products are being more aggressively marketed to
smaller and smaller employers, and this could severely harm
California's small group market and undermine the important
market reforms of the ACA. Blue Shield of California states in
support that this bill will put in place modest requirements
on the sale of stop-loss insurance. Blue Shield states that
in the absence of the protections in this bill, insurance
companies will increasingly exploit self insurance as a
loophole to lure away good risk and evade the consumer
protections of the ACA. Blue Shield states that they do this
through a practice called underwriting, which establishes
premiums based upon the health status, age, occupation,
gender, etc., of a company's employees, a practice which is
banned by the ACA. Blue Shield notes that this is good for the
stop-loss insurers and businesses with a young and healthy
workforce, but bad for the rest of the market place, who will
be forced to buy more expensive insurance.
The California Insurance Commissioner (Commissioner) states in
support that as federal health reform goes into full effect,
there will be incentives for some small employers to
self-insure and to purchase stop-loss coverage with low
attachment points. The Commissioner states that this could
lead to a significant exodus of small employers from the small
group insurance market, specifically those employers with
young and healthy employees. If this happens, the
SB 161| Page
9
Commissioner states that adverse selection could leave a
majority of the state's small businesses in a smaller group
insurance pool increasingly subject to skyrocketing premiums.
Health Access states in support that today, nothing prevents an
insurer from selling a stop-loss product with an attachment
point of $10,000 or $1,000 and evading all of the requirements
of guaranteed issue, guaranteed renewability and modified
community rating that have existed in California law for more
than 15 years. Health Access states that this bill corrects
this by regulating stop-loss products, providing guaranteed
issue, guaranteed renewability, requiring coverage of all
employees, and setting an attachment point at a high enough
level that most small employers will face significant exposure
if they attempt to self-insure, using stop-loss as a back-up
as it was intended and not as primary coverage.
6.Opposition. The California Association of Health Underwriters
(CAHU), the Independent Insurance Agents and Brokers of
California (IIABCal) and the National Association of Insurance
and Financial Advisers of California (NAIFA California) write
in opposition that this bill severely restricts the ability of
small employers in California to self-insure for health care
coverage by unreasonably changing the limits and requirements
of stop-loss insurance policies. CAHU, IIABCal and NAIFA
assert that self insurance combined with stop-loss coverage
for excessive, unexpected claims frequently offers the best
option for small employers seeking to find any way to provide
affordable health coverage for their employees. CAHU, IIABCal
and NAIFA state that this bill makes it nearly impossible to
provide reasonably priced catastrophic stop-loss insurance for
small employers, most notably by requiring the small employer
to bear an unreasonable level of claims costs before stop-loss
coverage applies.
The California Chamber of Commerce (Cal Chamber) states in
opposition that employers who are self-insured have the
ability to develop meaningful disease management and wellness
programs that address the specific needs of their employees.
For employers that engage with their employees and provide
tools to manage their health, self insured employers can see
significant savings as employees enjoy stable and improved
health. Cal Chamber states that this bill would essentially
eliminate self-insurance as an option or small employers.
SB 161 | Page 10
The American Association of Preferred Provider Organizations
(AAPPO) states in opposition that small businesses that opt
for self-insurance do so because other types of health care
coverage are either too expensive or lack the flexibility to
provide the appropriate coverage for their workers and
dependents. AAPPO strongly believes that the pricing of
stop-loss coverage should be market-driven and not mandated by
statute. AAPPO states that the level of attachment points in
this bill are simply unaffordable for small businesses who
already take on the calculated risk in administering a complex
stop-loss self-insurance program.
7.Oppose Unless Amended. The Association of California Life and
Health Insurance Companies (ACLHIC), Transamerica, and HCC
Life Insurance Company are all opposed unless amended. ACLHIC
states that its membership has concerns regarding the
methodology used to determine the statutory individual and
aggregate attachment points, stating that these attachment
points were not based on any sort of actuarial analysis, and
would essentially render stop-loss insurance of no value to
small employers in California. ACLHIC, citing an analysis by
Heartland Actuarial Consulting, suggests that an appropriate
individual attachment point would be $35,000 (rather than the
$65,000 that is currently in the bill) and that dollar
limitations on the aggregate attachment point should be
removed so that the aggregate attachment point is based only
on 120 percent of expected claims.
Transamerica states that the issue of most concern is the high
attachment points, and that it would like to work on reaching
agreement on an attachment point that would address the intent
of the bill while still preserving the option of self-insuring
for small employers. Transamerica also states that are also a
few other workability issues in the bill, including an issue
related to how existing self-insured plans are "grandfathered
in."
HCC Life Insurance Company also opposes this bill unless
amended, with similar concerns, and also proposes an
individual attachment point of $35,000, additional
grandfathering language, and removal of the specific dollar
limitations on the aggregate attachment points.
SUPPORT AND OPPOSITION :
Support: Blue Shield of California
California Association of Physician Groups
SB 161| Page
11
California Department of Insurance
Consumers Union
Health Access California
Kaiser Permanente
Small Business Majority
Oppose: American Association of Preferred Provider
Organizations
Association of California Life and Health Insurance
Companies
Association General Contractors of California, Inc.
Brea Chamber of Commerce
Camarillo Chamber of Commerce
California Asian Pacific Chamber of Commerce
California Association of Health Underwriters
California Business Properties Association
California Chamber of Commerce
California Hotel and Lodging Association
California Lodging Industry Association
California Manufacturers and Technology Association
Chambers of Commerce Alliance of Ventura and Santa
Barbara Counties
CIGNA Life and Health Insurance Company
Fullerton Chamber of Commerce
Greater Conejo Valley Chamber of Commerce
Greater Fresno Area Chamber of Commerce
HCC Life Insurance Company
Independent Insurance Agents and Brokers of California
Irvine Chamber of Commerce
National Federation of Independent Business
National Association of Insurance and Financial
Advisors
Palm Desert Area Chamber of Commerce
Redondo Beach Chamber of Commerce
San Gabriel Valley Regional Chamber of Commerce
Santa Clara Chamber of Commerce
Simi Valley Chamber of Commerce
South Bay Association of Chambers of Commerce
Southwest California Legislative Council
The Independent Insurance Agents and Brokers of
California
Transamerica
UnitedAg
Valley Industry & Commerce Association
SB 161 | Page 12
-- END --