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 --