BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                  SB 161
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          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  
             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  

          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  

          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  

           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.  

            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  

           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"



          American Federation of State, County and Municipal Employees,  
          Bay Area Council
          Blue Shield of California
          California School Employees Association, AFL-CIO
          Health Access California
          Kaiser Permanente

          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