BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 161| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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, Wolk 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: CONTINUED SB 161 Page 2 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, 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: CONTINUED SB 161 Page 3 (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. Comments 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 CONTINUED SB 161 Page 4 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, CONTINUED SB 161 Page 5 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 CONTINUED SB 161 Page 6 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 CONTINUED SB 161 Page 7 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 Counties 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 Transamerica UnitedAg 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 CONTINUED SB 161 Page 8 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 CONTINUED SB 161 Page 9 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 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 CONTINUED SB 161 Page 10 attachment points. JL:d 5/15/13 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED