BILL ANALYSIS                                                                                                                                                                                                    Ó


          |SENATE RULES COMMITTEE            |                        SB 161|
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                                    THIRD READING

          Bill No:  SB 161
          Author:   Hernandez (D)
          Amended:  4/25/13
          Vote:     21

           SENATE HEALTH COMMITTEE  :  7-2, 5/1/13
          AYES:  Hernandez, Beall, De León, DeSaulnier, Monning, Pavley,  
          NOES:  Anderson, Nielsen

           SENATE APPROPRIATIONS COMMITTEE  :  4-1, 5/13/13
          AYES:  De León, Lara, Padilla, Steinberg
          NOES:  Hill
          NO VOTE RECORDED:  Walters, Gaines

           SUBJECT  :    Stop-loss insurance coverage

           SOURCE  :     Author

           DIGEST  :    This bill prohibits a stop-loss insurer from  
          excluding any employee or dependent on the basis of a health  
          status-related factor.  Requires a stop-loss insurer to renew  
          all stop-loss insurance policies written, issued, administered,  
          or renewed on or after January, 1, 2014, with exceptions.   
          Prohibits specified provisions on any stop-loss policy issued on  
          or after January 1, 2014.

           ANALYSIS  :    

          Existing law:


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           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, now known as  
             Covered California). 

           6. Requires carriers that sell any products outside Covered  
             California, as a condition of participation in Covered  
             California, to fairly and affirmatively offer, market, and  
             sell all products made available in Covered California to  
             individuals and small employers purchasing coverage outside  
             of Covered California.

          This bill:

          1. Defines various terms for purposes of this bill.

          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:

             A.    An individual attachment point for a policy year that  
                is less than sixty-five thousand dollars ($65,000).

             B.    An aggregate attachment point for a policy year that is  
                less than the greater of one of the following:



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                (1)      Thirteen thousand dollars ($13,000) times the  
                   total number of covered employees and dependents.

                (2)      120% of expected claims.

                (3)      Sixty-five thousand dollars ($65,000).

             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. 

          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, with exceptions, as defined.

          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.  

          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.

           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  



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          administrative services for the self-funded plan.  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.  ERISA  
          plans are also exempt from the 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% of all workers with  
          covered health benefits are in a self-funded plan.  

           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:

             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.

             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 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 national  
          average.  Almost 30% 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% compared to 23%).  This  
          bill is limited to small employers defined in California law as  
          having between 2 and 50 employees.

          National Association of Insurance Commissioners (NAIC) model  .   
          The NAIC adopted the Stop Loss Insurance Model Act in 1995,  



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          revised in 1999, which states that an insurer shall not issue a  
          stop-loss insurance policy that:

             Contains an individual attachment point of $20,000 and

             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:

              o     $4,000 times the number of group members;

              o     120% of expected claims; or

              o     $20,000.

           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.

           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.  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. 

           Prior legislation  . 

          SB 1431 (De Leon) was substantially similar to this bill.  As  



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          introduced, SB 1431 had an individual attachment point of  
          $95,000, which was eventually 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 SB 2X1 and
          AB 2X1 to implement reforms in California's individual market in  
          accordance with federal health reform.  SB 961 was vetoed by  
          Governor Brown. 

          SB 900 (Alquist, Chapter 659, Statutes of 2010), and AB 1602  
          (John A. Pérez, Chapter 655, Statutes of 2010) established  
          Covered California.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

          According to the Senate Appropriations Committee:

             One-time costs of about $90,000 per year for two years for  
             CDI to adopt regulations.

             Minor ongoing enforcement costs to CDI.

             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.

           SUPPORT  :   (Verified  5/14/13)

          Blue Shield of California
          California Association of Physician Groups
          California Department of Insurance
          Consumers Union
          Health Access California
          Kaiser Permanente
          Small Business Majority



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           OPPOSITION  :    (Verified  5/14/13)

          American Association of Preferred Provider Organizations
          Association General Contractors of California, Inc.
          Association of California Life and Health Insurance Companies
          Brea 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
          Camarillo Chamber of Commerce
          Chambers of Commerce Alliance of Ventura and Santa Barbara  
          CIGNA Life and Health Insurance Company
          Delta Health Systems
          Fullerton Chamber of Commerce
          Greater Conejo Valley Chamber of Commerce
          Greater Fresno Area Chamber of Commerce
          HCC Life Insurance Company
          HealthCare Administrators Association
          Independent Insurance Agents and Brokers of California
          Irvine Chamber of Commerce
          National Association of Insurance and Financial Advisors
          National Federation of Independent Business
          Palm Desert Area Chamber of Commerce
          Redondo Beach Chamber of Commerce
          San Gabriel Valley Regional Chamber of Commerce
          Santa Clara Chamber of Commerce
          Self-Insurance Institute of America, Inc.
          Simi Valley Chamber of Commerce
          South Bay Association of Chambers of Commerce
          Southwest California Legislative Council
          The Independent Insurance Agents and Brokers of California
          Valley Industry & Commerce Association

           ARGUMENTS IN 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  



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          self-insure and pay all of its employees' claims, instead of  
          buying insurance.  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 states in support 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.  

          The California Insurance Commissioner (Commissioner) states in  
          support that the ACA 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 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.

           ARGUMENTS IN 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  



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          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. 

          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.  Cal Chamber  
          states that this bill would essentially eliminate self-insurance  
          as an option or small employers.

          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  
          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.

          The Association of California Life and Health Insurance  
          Companies (ACLHIC), Transamerica, and HCC Life Insurance Company  
          are all opposed unless amended.  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  



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          attachment points.  

          JL:d  5/15/13   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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