BILL ANALYSIS                                                                                                                                                                                                    Ó

                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair

          SB 161 (Hernandez) - Stop-loss insurance coverage.
          Amended: April 25, 2013         Policy Vote: Health 7-2
          Urgency: No                     Mandate: No
          Hearing Date: May 13, 2013      Consultant: Brendan McCarthy
          This bill may meet the criteria for referral to the Suspense  
          Bill Summary: SB 161 would impose certain requirements on  
          "stop-loss" insurance policies used by small employers that  
          self-insure for employee health benefits.

          Fiscal Impact: 
              One-time costs of about $90,000 per year for two years for  
              the Department of Insurance to adopt regulations (Insurance  

              Minor ongoing enforcement costs to the Department of  
              Insurance (Insurance Fund.)

              Unknown impact on Medi-Cal costs (General Fund and federal  
              funds). It is possible that some small businesses that  
              self-insure will elect to drop coverage for their employees  
              under this bill. To the extent that happens and those  
              employees are eligible for Medi-Cal, there could be an  
              increase in state costs. See below.

          Background: Beginning in 2014, the federal Affordable Care Act  
          requires health plans and health insurance policies sold to  
          individuals and small businesses to cover essential health  
          benefits. Federal guidance allows the states to select a health  
          plan to function as the benchmark plan for essential health  
          benefits. The Affordable Care Act prohibits health plans and  
          health insurers from denying coverage due to preexisting  
          conditions and limits the criteria that health plans and  
          insurers can consider when setting rates.

          The above provisions of the Affordable Care Act do not apply to  
          businesses that self-insure for health care coverage.


          SB 161 (Hernandez)
          Page 1

          "Stop-loss" insurance is used by self-insurers to protect  
          against large liabilities. Under a stop-loss policy, the  
          employer assumes the risk for health care costs (from individual  
          employees and/or in the aggregate) up to a certain point. Above  
          that point (known as the attachment point) the insurer agrees to  
          accept further liability for the cost of claims.

          Proposed Law: SB 161 would impose certain requirements on  
          insurance carriers that provide stop-loss coverage to  
          self-insured customers with less than 50 employees. 

          Specifically, the bill would:
              Require stop-loss carriers to offer coverage to all  
              employees and dependents of a small employer;
              Prohibit the stop-loss carrier from excluding any employee  
              or dependent based on actual or expected health factors;
              Prohibit stop-loss carriers from issuing policies to  
              self-insured employers with an individual attachment point  
              below $65,000;
              Prohibit a policy with an aggregate attachment point less  
              than $13,000 times the number of covered employees, 120  
              percent of covered claims, or $65,000. 

          Related Legislation: SB 1431 (de Leon, 2012) was substantially  
          similar to this bill. The final version of that bill required  
          individual attachment points of at least $45,000. That bill was  
          not taken up for a vote on the Assembly Floor.

          Staff Comments: Federal law preempts state regulation of  
          self-insured employers and does not apply most of the coverage  
          requirements of the Affordable Care Act to self-insured  

          Concerns have been raised that stop-loss insurance policies with  
          low attachment points may allow small employers (who often have  
          young, healthy employees) to use self-insurance as a way to  
          avoid the small group market, with its coverage requirements  
          under the Affordable Care Act. This would allow small employers  
          the ability to offer a lesser benefit package than would  
          otherwise be required, reducing costs for such small employers.  
          It also has the potential to remove young, healthy people from  
          the small group market risk pool. This could, in turn, drive up  
          overall premiums in the small group market. 


          SB 161 (Hernandez)
          Page 2

          Because the bill puts limitations on the ability of small firms  
          to use stop-loss insurance as part of their self-insurance  
          strategy, the bill may reduce the likelihood that small  
          employers self-insure. It is possible that if self-insurance  
          becomes less attractive to small employers, some may elect to  
          drop coverage for their employees altogether. In that case, some  
          low-income employees may qualify for Medi-Cal. The extent to  
          which this will occur is unknown. The RAND Corporation made  
          projections in 2010 that elimination of self-insurance by small  
          employers would increase nationwide Medicaid enrollment by 1.6  
          million. However, the RAND study included firms with 100 or less  
          employees (whereas this bill only impacts firms with 50  
          employees or less) and that study assumed that no self-insurance  
          would be allowed. Thus, drawing conclusions about reactions by  
          small employers to this bill is difficult.