BILL ANALYSIS Ó
SB 161
Page 1
Date of Hearing: July 2, 2013
ASSEMBLY COMMITTEE ON HEALTH
Richard Pan, Chair
SB 161 (Ed Hernandez) - As Amended: June 25, 2013
SENATE VOTE : 32-4
SUBJECT : Stop-loss insurance coverage.
SUMMARY : Establishes regulatory requirements for stop-loss
insurance for small employers including on or after January 1,
2016, setting an individual attachment point of $40,000 or
greater and an aggregate attachment point of the greater of
$5,000 times the total number of group members, 120% of expected
claims, or $40,000. Exempts small employer stop-loss insurance
issued prior to September 1, 2013 from these attachment point
requirements. Specifically, this bill :
1)Prohibits a stop-loss insurance policy issued, reissued, or
renewed on or after January 1, 2014, and prior to 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 $35,000;
b) An aggregate attachment point for a policy year that is
less than the greater of the following:
i) $5,000 times the total number of group members;
ii) 120% of expected claims; or,
iii) $35,000; and,
c) A provision for direct coverage of an employee or
dependent of an employee.
2)Prohibits a stop-loss insurance policy issued, reissued or
renewed 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 group members;
ii) 120% of expected claims; or,
iii) $40,000; and,
c) A provision for direct coverage of an employee or
dependent of an employee.
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3)Exempts the application of 1) and 2) above when a stop-loss
insurer providing insurance to a small employer that had a
self-insured health plan prior to September 1, 2013, if the
stop-loss insurance policy is being renewed or reissued, or
issued by another stop-loss insurer to maintain continuity of
stop-loss coverage with the same or higher attachment points
that were included in the policy held by a small employer
prior to September 1, 2013.
4)Requires on April 1, 2014, and on April 1 annually thereafter,
a stop-loss insurer to report to the California Department of
Insurance (CDI) the number of small employer stop-loss
policies it had issued and in effect as of December 31 of the
previous year. Requires the information to include new
policies written and policies renewed in the previous year for
groups that have two to 50 employees and 51 to 100 employees.
5)Prohibits a stop-loss insurer from excluding any employee or
dependent on the basis of an actual or expected health
status-related factor, including but not limited to: health
status; medical condition, including both physical and mental
illness; claims experience; medical history; receipt of health
care; generic information; disability; evidence of
insurability, including conditions arising out of acts of
domestic violence of the employee or dependent; or, any other
health status-related factors as determined by CDI.
6)Requires a stop-loss insurer 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, except as follows:
a) For non-payment after notification, billing, and at
least a 30-day grace period, as specified;
b) Fraud or intentional misrepresentation of material fact
by the small employer;
c) Financial impairment of the stop-loss insurer as
determined by the Insurance Commissioner (IC); or,
d) Where the stop-loss insurer ceases to write, issue, or
administer new stop-loss insurance policies in this state
under certain conditions, as specified.
7)Authorizes the IC to adopt regulations as may be necessary to
carry out the purposes of this bill. Requires, in adopting
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regulations, the IC to comply with the Administrative
Procedures Act, as specified.
8)Subjects a stop-loss insurer that violates the provisions of
this bill to the remedies and administrative penalties
applicable to insurers, as specified.
9)Establishes several definitions including "attachment point"
which is the amount of health claims incurred by a small
employer in a policy year for its employees and their
dependents, and covered by a stop-loss insurance policy, above
which the stop-loss insurer incurs a liability for payment.
EXISTING LAW :
1)Establishes reforms, prior to the federal Patient Protection
and Affordable Care Act (ACA), in the California small group
health insurance market such as requiring carriers to fairly
and affirmatively offer, market, and sell all of the plan's
contracts that are sold to small employers to all small
employers in the state.
2)Establishes, under the ACA, as of January 1, 2014, the
following premium categories for rating purposes: age;
geographic region; and, family composition, plus the health
benefit plan selected by the small employer.
3)Authorizes pursuant to the ACA, among many other provisions,
states to establish health benefit exchanges for individuals
and small business to compare health insurance products and
purchase policies from among four categories: Bronze, Silver,
Gold, and Platinum, and for some purchasers, obtain subsidies
and tax credits. Includes requirements on individual and
small group insurers to offer essential health benefits
(EHBs), and participate in risk adjustment and risk pooling
activities.
4)Establishes, pursuant to federal law, the Employee Retirement
Income Security Act of 1974 (ERISA), which sets minimum
standards for most voluntarily established pension and health
plans in private industry to provide protection for
individuals in these plans. ERISA prevents states from
regulating employer health benefits directly but does allow
states to regulate health insurance purchased by employers.
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5)Limits states in their ability to regulate anything but the
reserve and contribution levels of fully insured plans, but
allows states to subject self-funded and partially self-funded
Multiple Employer Welfare Arrangements (MEWAs) to all state
insurance laws not inconsistent with ERISA. Confers limited
authority to regulate MEWAs on CDI. Includes in the
definition of "partially self-funded" that benefits are
reimbursable to the MEWA arrangement by stop-loss insurance
only to the extent that benefits exceed $50,000 per claim.
Requires the MEWA to maintain aggregate stop-loss insurance
with an attachment point not greater than 125% of annual
expected claims, and a specific attachment point which is not
greater than 5% of annual expected claims. Authorizes the IC
to define "expected claims" in accordance with sound actuarial
principles, as specified.
6)Provides for the regulation of health insurers by CDI under
provisions of the Insurance Code.
7)Defines a small employer as any person, firm proprietary or
nonprofit corporation, partnership public agency, or
association that is actively engaged in business or service,
that, on at least 50% of its working days during the preceding
calendar quarter or preceding calendar year, employed at least
two (one, commencing January 1, 2014), but no more 50,
eligible employees, the majority of whom were employed within
this state. Commencing on January 1, 2016, extends the number
of employed to at least one, but no more than 100 eligible
employees.
8)Establishes as California's EHBs the Kaiser Small Group Health
Maintenance Organization plan along with the following 10 ACA
mandated benefits:
a) Ambulatory patient services;
b) Emergency services;
c) Hospitalization;
d) Maternity and newborn care;
e) Mental health and substance use disorder services,
including behavioral health treatment;
f) Prescription drugs;
g) Rehabilitative and habilitative services and devices;
h) Laboratory services;
i) Preventive and wellness services and chronic disease
management; and,
j) Pediatric services, including oral and vision care.
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9)Establishes in state government the California Health Benefit
Exchange (Exchange) as an independent public entity not
affiliated with an agency or department. Establishes
requirements for health plans seeking certification as
qualified health plans (QHPs), including that carriers fairly
and affirmatively offer, market, and sell in the Exchange at
least one product within each of five specified levels.
Requires carriers that sell any products outside the Exchange
to fairly and affirmatively offer, market, and sell all
products made available in the Exchange to individuals and
small groups outside the Exchange.
10)Establishes the Exchange Small Business Health Options
Program, separate from activities of the Exchange Board of
Directors related to the individual market, to assist
qualified small employers in facilitating the enrollment of
their employees in QHPs offered through the Exchange in the
small employer market in a manner consistent with the ACA.
FISCAL EFFECT : According to the Senate Appropriations
Committee, one-time costs of about $90,000 per year for two
years for the CDI to adopt regulations (Insurance Fund). Minor
ongoing enforcement costs to the CDI (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.
COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, this bill will
ensure that small employers who choose to offer their
employees health benefits through self-insurance are truly
"self-insuring" and bearing a significant portion of the risk,
and not simply using self-insurance as a subterfuge to avoid
regulation by passing almost all of the risk to stop-loss
insurers. This bill would prohibit stop-loss insurance from
being sold to employers with very low "attachment points,"
which is the level at which the stop-loss insurer begins
paying medical bills. By ensuring that small employers who
are self-insuring truly have the means to pay for their
employee's medical costs, while still allowing stop-loss
insurance for catastrophic risk, this bill will also protect
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the integrity of the small group insurance market both in and
out of the Exchange by limiting the appeal of self-insurance
and thereby retaining a broad pool of small employers in the
small group insurance market.
The author indicates that with the passage of the ACA, there are
certain changes coming to the small group market in 2014 that
are likely to incentivize more small employers to self-insure
rather than purchase traditional fully-insured health plans.
First, health insurance premiums are likely to rise when the
ACA's requirement for EHBs takes effect next year. Small
employers will no longer be able to purchase a health
insurance plan with a limited scope of benefits to keep costs
down. However, the ACA's EHBs requirement does not apply to
self-insured plans. Additionally, self-insurance is also a
way for small employers with predominantly healthy employees
to enjoy the lower costs associated with health underwriting,
since under the ACA all health insurance premiums are required
to be based on a geographic region, with sick and healthy
mingled together.
Given that stop-loss can currently be purchased at very low
attachment points to minimize risk, there is a very real
concern that small employers with healthy employees will
increasingly choose to self-insure to keep costs down, meaning
that the small group health insurance market both in and out
of the Exchange will slowly become disproportionately
populated by those with a history of higher medical claims,
making the cost of insurance more expensive for everyone.
Exacerbating this situation is the fact that there is no
waiting period for purchasing insurance in the Exchange, so
small employers can choose to be self-insured until one or
more of their employees becomes too expensive, and then
purchase insurance in the Exchange at any time.
2)STOP-LOSS INSURANCE . Stop-loss insurance is commonly sold to
large employers that self-insure their employees' health care
coverage but there are also small employers (currently
businesses having two to 50 employees) who self-insure.
Self-insurance involves greater risk to the employer since
employee health care costs could exceed expected estimates.
Stop-loss coverage limits the employers' liability for very
large health care claims. According to the Kaiser Family
Foundation and Health Research and Education Trust Employer
Health Benefits 2012 Annual Survey, three in five covered
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workers are in a self-funded health plan. Three in five
covered workers in self-funded plans are in plans with
stop-loss protection. In order for employers to minimize the
risk involved with self-insurance, insurance carriers sell
stop-loss insurance which covers claims in excess of a maximum
dollar amount of liability incurred by an employer with regard
to employee health care expenses. This value is referred to
as an attachment point. It can be based on the health care
claims of an individual employee or dependent, or the
aggregate health care claims for all covered employees and
dependents, or based on both: individual and aggregate claims.
3)ACA . The ACA [Public Law (P.L.) 111-148] was signed into law
on March 23, 2010. On March 30, 2010, the ACA was amended by
P.L. 111-152, the Health Care and Education Reconciliation Act
of 2010. The federal law makes several significant changes to
the group and individual insurance markets such as
prohibitions against health insurers imposing lifetime benefit
limits and preexisting health condition exclusions. These
reforms impose new requirements on states related to the
allocation of insurance risk, prohibit insurers from basing
eligibility for coverage on health status-related factors,
allow the offering of premium discounts or rewards based on
enrollee participation in wellness programs, impose
nondiscrimination requirements, require insurers to offer
coverage on a guaranteed issue and renewal basis, and
determine premiums based on adjusted community rating (age,
family, geography, and tobacco use). The ACA creates three
programs to eliminate incentives for health insurance plans to
avoid insuring people with pre-existing conditions or those
who are in poor health, and to reduce uncertainty that could
increase premiums in 2014. This risk will likely be greatest
in the first three years of the Exchange; however, risk should
decrease as the new market matures and issuers gain actual
claims experience with this new population. As a result of
some of these insurance requirements, some small employers
(with lower risk/lower cost employees) may have an incentive
to offer self-insured plans to avoid having to pay higher
premiums associated with spreading risk across products and
markets.
4)RAND STUDY . The U.S. Department of Labor sponsored RAND
Health to conduct the study to answer questions around
self-insurance and the ACA. RAND found little evidence that
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self-insured plans differ systematically from fully insured
plans in terms of benefit generosity, price, or claims denial
rates. However, RAND indicates that there is good data on
plan benefits available from the Kaiser Family
Foundation/Health Research and Educational Trust Annual Survey
of Employer Benefits, but data on claims denial and premiums
are potentially less reliable. RAND found that although data
are limited, they found no evidence that claims denial rates
are higher for self-insured firms, but consumer recourse
options in the event of denied claims are more limited for
self-insured than for fully insured patients. With regard to
concerns about adverse selection in health insurance exchanges
due to regulatory exemptions for self-insured plans, RAND
found that their Comprehensive Assessment of Reform Efforts
(or COMPARE) Project microsimulation model predicts a sizeable
increase in self-insurance only if comprehensive stop-loss
policies become widely available after the ACA takes full
effect, and the expected cost of self-insuring with stop-loss
is comparable to the cost of being fully insured in a market
without rating regulations. RAND indicates that even with
stop-loss coverage, self-insurance remains risky for small
firms. Under the microsimulation, comprehensive stop-loss
increases in self-insurance are associated with slightly
higher premiums in the exchanges. For firms with 100 or fewer
workers, the option to self-insure with comprehensive
stop-loss coverage would result in a 3.3% increase in
platinum-plan premiums in the exchanges. Additionally, RAND
finds that limiting the ability for small employers to
self-insure is associated with a decline in the total number
of individuals enrolled in health insurance coverage. RAND
indicates, in general, regulatory reforms increase prices for
lower-risk enrollees while decreasing prices for higher-risk
enrollees. Because low-risk enrollees tend to have more
elastic demand for health insurance than high-risk enrollees
the net effect is a small decline in coverage and a small
decline in exchange premiums. The RAND study identified data
gaps including that data are not available on the pricing,
prevalence, availability, and contracting terms of stop-loss
insurance policies. RAND states that it would be useful to
better understand the terms of policies that are bought and
sold in the current market before setting minimum standards
for stop-loss insurance contracting terms.
5)NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS MODEL ACT .
The Stop-Loss Insurance Model Act (SLIM) was developed in 1995
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by the National Association of Insurance Commissioners (NAIC),
a standard setting and regulatory support organization for
state insurance regulators. According to a 2012 Health
Affairs article "Regulating Stop-Loss Coverage May Be Needed
to Deter Self-Insuring Small Employers from Undermining Market
Reforms," SLIM limits attachment points to a minimum of
$20,000 per person. For groups of 50 or fewer employees, SLIM
limits aggregate attachment points to the greater of $4,000
times the number of group members, 120% of expected claims, or
$20,000. For groups over 50, the aggregate attachment point
can be as low as 110% of expected claims. These levels were
set more than a decade ago, at a time when $20,000 was a
logical dividing point, because most employers with fewer than
100 workers had stop-loss attachment points at or below that
level and larger employers had higher levels. Medical costs
and insurance premiums have increased considerably since then.
The logic behind setting these levels is because if the
attachment point is too low the policy becomes "subterfuge"
for primary health insurance that facilitates "gaming" to
avoid state regulation of health coverage.
A subgroup of the NAIC engaged Milliman to perform an update to
the 1994 study that was used to develop the SLIM. The
recommendation of the subgroup was to limit aggregate
attachment points to the greater of $15,000 times the number
of group members, 130% of expected claims, or $60,000. The
recommendation was defeated on a 10-8 vote of the NAIC's ERISA
Working Group. The working group agreed to ask the NAIC's
Regulatory Framework Task Force to "develop a white paper
analyzing the potential impact of small employer
self-insurance on the small group market beginning in 2014."
6)OTHER STATES . About 10 states have enacted some version of
SLIM with attachment points ranging from $10,000 to $25,000,
and about 10 more states regulate employer stop-loss coverage
in some manner. Delaware, New York, and Oregon prohibit
stop-loss insurance. New York and North Carolina also
prohibit insurers from serving as third party administrators
for self-funded small employers. North Carolina also
regulates stop-loss insurance as if it were typical small
group health insurance.
7)SUPPORT . Proponents, including Blue Shield of California,
believe this bill puts in place modest requirements on the
sale of stop-loss insurance in California and in the absence
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of the protections added by 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 Bay Area Council argues that in order to preserve a
functioning small risk group insurance market, its risk pool
must be robust and well-balanced, and this bill seeks to limit
creative incentives for small employers to exit the small
group market if they have lower risk employees, which leads to
an adverse selection death spiral resulting in sky rocketing
premiums and a destabilized market. The Bay Area Council
believes this bill maintains a proper balance by continuing to
allow small firms to self-insure but placing limits on what
types of stop-loss insurance can be sold. Kaiser believes
this bill provides critical consumer protection guardrails
around the sale of stop-loss insurance in the state.
8)OPPOSITION . The American Association of Preferred Provider
Organizations indicates that the so-called compromise reduced
the attachment point to a level that remains far too costly
for small businesses that choose this program to provide
health care coverage for their employees and their dependents,
many of whom have special needs, including cancer, HIV,
asthma, autism, heart, kidney, or other major ailments. Other
types of health care coverage are either too expensive or lack
the flexibility to provide the appropriate level of coverage
for workers and their dependents. The California Asian
Pacific Chamber of Commerce believes the pricing of stop-loss
coverage should be market-driven and not mandated by
regulation.
9)OPPOSE UNLESS AMENDED . CIGNA Life and Health Insurance
Company believes small employers value self-funding because it
provides them with greater flexibility to design benefits and
align those benefits across state lines. CIGNA would not
oppose a bill with a reasonable aggregate attachment point by
reducing the $5,000 to $4,000 and defining group members based
on the contract for coverage.
10)PREVIOUS LEGISLATION .
a) SB 1431 (De Leon) of 2012 would have set the stop-loss
insurance attachment point for small employers on policies
issued on or after January 1, 2012, at $45,000 for
individuals and the greater of $15,000 times the total
number of covered employees and dependents, 130% of
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expected claims, or $60,000. SB 1431 died in the inactive
file on the Assembly Floor.
b) AB 1453 (Monning), Chapter 854, Statutes of 2012, and SB
951 (Ed Hernandez), Chapter 866, Statutes of 2012,
establish California's EHBs.
c) AB 1602 (John A. Pérez), Chapter 655, Statutes of 2010,
establishes the Exchange as an independent public entity to
purchase health insurance on behalf of Californians,
including those with incomes of between 100% and 400% of
the federal poverty level and small businesses. Clarifies
the powers and duties of the Board governing the Exchange
relative to the administration of the Exchange, determining
eligibility and enrollment in the Exchange, and arranging
for coverage under qualified insurers.
d) SB 900 (Alquist), Chapter 659, Statues of 2010,
establishes the Exchange and requires the Exchange to be
governed by a five-member Board, as specified.
11)CLARIFYING AMENDMENTS . The committee may wish to adopt the
following amendments to clarify the following provisions of
this bill.
a) On pages 5-6, section 10752.43:
10752.43. Sections 10752.3 and 10752.4 do not apply if
a to a stop-loss insurer insurance policy provided is
providing insurance to a small employer that had a
self-insured health plan was in effect prior to
September 1, 2013 . , if the stop-loss insurance policy
is being A stop-loss insurance policy that was in
effect prior to September 1, 2013 may be renewed or
reissued, or a stop-loss insurance policy may be issued
by another stop-loss insurer to maintain continuity of
stop-loss coverage for a small employer who had a
stop-loss insurance policy in effect prior to September
1, 2013, provided that a stop-loss policy issued to
maintain continuity of coverage shall have attachment
points that are with the same as or higher than the
attachment points that were included in place in the
policy held by the small
employer prior to September 1, 2013.
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b) On page 6, line 7, strike "written" and replace with
"issued" and add "reissued," in front of "renewed"
c) On page 6, line 8, strike "two" and replace with "one"
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
Bay Area Council
Blue Shield of California
California School Employees Association, AFL-CIO
Health Access California
Kaiser Permanente
Opposition
American Association of Preferred Provider Organizations
California Asian Pacific Chamber of Commerce
California Chapter of the American Fence Association
California Fence Contractors' Association
California Metals Coalition
Coalition of Small and Disabled Veteran Businesses
Engineering Contractors' Association
Flasher Barricade Association
Marin Builders Association
National Federation of Independent Business
Analysis Prepared by : Teri Boughton / HEALTH / (916) 319-2097