BILL ANALYSIS Ó SB 161 Page 1 Date of Hearing: August 14, 2013 ASSEMBLY COMMITTEE ON APPROPRIATIONS 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 SUMMARY 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 claims. 1)Exempts stop-loss policies already in effect and subsequently SB 161 Page 2 renewed from restrictions in (3), above. 2)Authorizes the Insurance Commissioner (IC) to adopt regulations. 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. COMMENTS 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 SB 161 Page 3 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 law. 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 SB 161 Page 4 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