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  

          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.


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          This bill:
          1.Defines various terms for purposes of this bill, including the  

             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:


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                  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  


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            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  

           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  


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            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  


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            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  
          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

            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.  


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          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  

          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  


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            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  


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            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.


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          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  

          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:  Blue Shield of California
                    California Association of Physician Groups


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                    California Department of Insurance
                    Consumers Union
                    Health Access California
                         Kaiser Permanente
                    Small Business Majority

          Oppose:   American Association of Preferred Provider  
                    Association of California Life and Health Insurance  
                    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  
                    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  
                    Valley Industry & Commerce Association


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