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 File. 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 Fund). 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 employers. 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.