BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



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          |SENATE RULES COMMITTEE            |                        SB 161|
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                                    THIRD READING


          Bill No:  SB 161
          Author:   Hernandez (D)
          Amended:  5/28/13
          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 an 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.

           Senate Floor Amendments  of 5/28/2013 (1) clarify that the  
          definition of "small employer" is consistent with an existing  
          law definition of "small employer" that will increase from the  
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          current limit of up to 50 employees to up to 100 employees  
          beginning January 1, 2016; (2) reduce the minimum individual  
          attachment point for stop-loss policies issued on or after  
          January 1, 2014, from $65,000 to $35,000; (3) reduce the minimum  
          aggregate attachment point for stop-loss policies issued on or  
          after January 1, 2014, from the greater of $13,000 times the  
          total number of covered employees and dependents, 120% of  
          expected claims, or $65,000, to instead be the greater of $5,000  
          time the total number of covered employees and dependents, 120%  
          of expected claims, or $35,000; and (4) establish a new set of  
          attachment points that apply to stop-loss policies issued on or  
          after January 1, 2016, that require a minimum individual  
          attachment point of $40,000, and an aggregate attachment point  
          of the greater of the following: $5,000 times the total number  
          of covered employees and dependents, 120% of expected claims, or  
          $40,000.

           ANALYSIS  :    

          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  
             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  

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             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, including  
             the following:

             A.    "Small employer" is defined as being consistent with  
                an existing law definition of "small employer" that will  
                increase from the current limit of up to 50 employees,  
                up to 100 employees beginning on January1, 2013.

             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 number 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.

          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 $35,000;

             B.    An aggregate attachment point for a policy year that  
                is less than the greater of one of the following: $5,000  
                times the total number of covered employees and  
                dependents; 120 % of expected claims; or, $35,000; or,

             C.    A provision for direct coverage of an employee or  
                dependent of an employee.

          3. Prohibits a stop-loss insurance policy issued on or after  
             January 1, 2016, to a small employer from containing any of  
             the following provisions:

             A.    An individual attachment point for a policy year that  
                is less than $40,000.


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


                 (i)       $5,000 times the total number of covered  
                    employees and dependents.


                 (ii)           120 % of expected claims.

                 (iii)          $40,000.

             C.    A provision for direct coverage of an employee or  
                dependent of an employee.

          4. 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.

          5. Requires a stop-loss-carrier to renew, at the option of the  

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             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.

          6. Permits the Insurance Commissioner to adopt regulations to  
             carry out the purposes of this bill.

          7. 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  
             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.

          8. 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

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           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.  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  

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          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,  
          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  

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          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  
          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  5/29/13)

          Blue Shield of California

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          California Association of Physician Groups
          Consumers Union
          HCC Life Insurance Company
          Health Access California
          Kaiser Permanente
          Small Business Majority

           OPPOSITION  :    (Verified  5/29/13)

          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 Hotel and Lodging Association
          California Lodging Industry 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
          HealthCare Administrators Association
          Irvine Chamber of Commerce
          National Federation of Independent Business
          Redondo Beach Chamber of Commerce
          San Gabriel Valley Regional 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
          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  
          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  

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          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.  

          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) writes 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 asserts 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. 

          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.


          JL:d    5/29/13                    Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE


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