BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 161
                                                                  Page  1

          Date of Hearing:   August 14, 2013

                                  Mike Gatto, Chair

                  SB 161 (Hernandez) - As Amended:  August 6, 2013 

          Policy Committee:                             HealthVote:16-3

          Urgency:     No                   State Mandated Local Program:  
          No     Reimbursable:              No


          This bill establishes rules governing the sale of stop-loss  
          insurance to small employers.  Specifically, this bill:

          1)Prohibits a stop-loss carrier from excluding any employee of a  
            small employer or dependent on the basis of actual or expected  
            health status-related factors, and guarantees renewability of  
            stop-loss coverage, subject to specified criteria. 

          2)Defines "attachment point" as the total amount of health  
            claims incurred by a small employer in a policy year for its  
            employees and their dependents, above which the stop-loss  
            carrier incurs a liability for payment.  

          3)Prohibits stop-loss insurance policies issued, reissued, or  
            renewed on or after January 1, 2014 to a small employer from  
            containing any of the following provisions.  The bill  
            establishes different amounts after January 1, 2016, as shown  
            in parentheses:

             a)   An individual attachment point for a policy year that is  
               lower than $35,000 ($40,000 in 2016).
             b)   An aggregate attachment point for a policy year that is  
               lower 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)   $ 35,000 ($40,000 in 2016).
             a)   A provision for direct coverage of an employee's health  

          1)Exempts stop-loss policies already in effect and subsequently  


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            renewed from restrictions in (3), above.

          2)Authorizes the Insurance Commissioner (IC) to adopt  

          3)Requires stop-loss insurers to report to the California  
            Department of Insurance (CDI) the number of small employer  
            stop-loss policies they have issued, and whether policies are  
            for group of 2-50 or 51-100 employees. 

           FISCAL EFFECT  

          Potential one-time costs not likely to exceed $150,000  
          (Insurance Fund) to the California Department of Insurance (CDI)  
          if regulations are necessary.  Ongoing costs to receive required  
          reports should be minor and absorbable.


           1)Rationale  . Many insurance reforms instituted by the federal  
            Patient Protection and Affordable Care Act (ACA) limit or  
            eliminate adverse selection from the health insurance  
            marketplace, and this bill intends to further that aim.  This  
            bill is intended to protect the small-group health insurance  
            market from adverse selection by requiring small businesses  
            that self-insure for health benefits to take on a meaningful  
            level of risk.  The bill does this by eliminating the ability  
            of insurers to offer self-insurance coupled with very low  
            attachment-point stop-loss products as a low-cost alternative  
            to the fully insured, regulated market.  The author believes  
            this will reduce the ability of insurers to "cherry-pick"  
            low-risk groups for self-insurance/stop-loss products.  If  
            stop-loss products are not regulated, he contends, businesses  
            with low-risk, low-cost employees may choose to self-insure in  
            greater numbers, leaving only businesses with higher-cost  
            employees in the fully insured market to face rising premiums.  

          2)Background  . Small businesses have choices about whether and  
            how to offer health insurance to their employees.  Generally,  
            businesses can choose to fully insure (purchase insurance from  
            a third party) or self-insure. Self-insurance is governed by  
            the federal Employee Retirement Income Security Act of 1974  


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            and is not regulated by states.   
            Self-insured businesses directly pay for the health care of  
            their employees, and often purchase stop-loss coverage to  
            guard against the small possibility of extremely high medical  
            costs.  With a stop-loss plan, the employer pays claims up to  
            a specified threshold or attachment point (defined as a  
            per-participant amount or an aggregate plan amount), after  
            which the stop-loss policy pays any excess claims.    

          3)NAIC Model Act  . The National Association of Insurance  
            Commissioners (NAIC) developed the Stop-Loss Insurance Model  
            Act (Model Act) in 1995, in order to prevent insurers from  
            avoiding laws regulating the health insurance marketplace by  
            structuring their products as stop-loss coverage sold to  
            employers that were purportedly self-insured, but did not  
            actually retain a significant portion of the plan's risk.   
            This bill is based loosely on the 1995 Model Act, which  
            outlaws individual attachment points lower than $20,000 and  
            aggregate attachment points of $4,000 times the number of  
            group members.  An NAIC working group began a process of  
            updating the Model Act to reflect more modern claims  
            experience, but last year voted against updating the model  
            4)Impact of Self-Insurance On Insurance Markets  . It is possible  
            that very low stop-loss attachment points could undermine the  
            integrity of a broader risk pool of small business employees,  
            if small employers begin to use self-insurance as a way to  
            avoid buying coverage within the broader small-group market.   
            Plans in the small-group market are subject to stringent  
            minimum coverage requirements and other rules that do not  
            apply to self-insured arrangements, and rules will become even  
            more stringent with full implementation of the ACA in 2014.   
            One example of marketing materials from a stop-loss insurer  
            targets healthier-than-average employee groups and emphasizes  
            the ability to " to create a self-funding plan that lets you  
            stop subsidizing other groups and reap the savings of your  
            group's good health." 

            A rapid expansion of self-insurance may increase average  
            premiums in the small-group health insurance market by  
            removing young, healthy people from the risk pool. There are  
            concerns that this may undermine the risk pool of participants  
            in the Small Business Health Options Program (SHOP) that will  


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            be administered by the California Health Benefit Exchange  
            beginning in 2014.  This bill removes the ability of insurers  
            to offer very low attachment-point products that are meant to  
            compete with health insurance products and are effectively  
            "self-insurance in name only."

           5)Prior Legislation  .  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 per  
            individual and the greater of $15,000 times the total number  
            of covered employees and dependents, 130% of expected claims,  
            or $60,000 in the aggregate.  SB 1431 died on the inactive  
            file on the Assembly Floor.

           6)Opposition  . Some insurers and some small business groups  
            oppose this bill, citing their belief that the attachment  
            point required by this bill is too high. 

           Analysis Prepared by :    Lisa Murawski / APPR. / (916) 319-2081