BILL ANALYSIS                                                                                                                                                                                                    Ó

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          SB 161 (Ed Hernandez)
          As Amended August 6, 2013
          Majority vote

           SENATE VOTE  :  32-4

           HEALTH              16-3        APPROPRIATIONS      14-3        
          |Ayes:|Pan, Ammiano, Atkins,     |Ayes:|Gatto, Bocanegra,         |
          |     |Bonilla, Bonta, Chesbro,  |     |Bradford,                 |
          |     |Gomez,                    |     |Ian Calderon, Campos,     |
          |     |Roger Hernández,          |     |Eggman, Gomez, Hall,      |
          |     |Lowenthal, Maienschein,   |     |Holden, Linder, Pan,      |
          |     |Mitchell, Nazarian,       |     |Quirk, Wagner, Weber      |
          |     |Nestande, V. Manuel       |     |                          |
          |     |Pérez, Wagner, Wieckowski |     |                          |
          |     |                          |     |                          |
          |     |                          |     |                          |
          |Nays:|Logue, Mansoor, Wilk      |Nays:|Harkey, Bigelow, Donnelly |
          |     |                          |     |                          |
           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 (after 2016, less than $40,000);

             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  


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               claims; or, iii) $35,000 (after 2016, $40,000); and,

             c)   A provision for direct coverage of an employee or  
               dependent of an employee. 

          2)Exempts a stop-loss insurer providing insurance to a small  
            employer that had a self-insured health plan prior to  
            September 1, 2013.  Allows a stop-loss insurance policy that  
            was in effect prior to September 1, 2013, to be renewed or  
            reissued, or a policy to be issued by another stop-loss  
            insurer at the same or higher attachment points that were  
            included in the policy held by a small employer prior to  
            September 1, 2013.

          3)Establishes stop-loss insurer report requirements to the  
            California Department of Insurance (CDI) and employee and  
            employer protections, as specified.

          4)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  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 than 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  

           FISCAL EFFECT  :  According to the Assembly Appropriations  
          Committee, potential one-time costs not likely to exceed  
          $150,000 (Insurance Fund) to the CDI if regulations are  
          necessary.  Ongoing costs to receive required reports should be  
          minor and absorbable.

           COMMENTS  :  According to the author, this bill will ensure that  
          small employers who choose to offer their employees' health  


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          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 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 Patient Protection and  
          Affordable Care Act (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.  

          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 ACA 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 establishes  
          Health Benefit Exchanges, and 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  


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          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. 

          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.

          About 10 states have enacted some version of stop-loss reform  
          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.  

          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 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.  


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          The American Association of Preferred Provider Organizations,  
          the California Chapter of the American Fence Association, the  
          California Fence Contractors' Association, California Metals  
          Coalition, Coalition of Small and Disabled Veteran Businesses,  
          Engineering Contractors' Association, Flasher Barricade  
          Association, and others remain opposed and indicate that the  
          so-called compromise reduced the attachment point to a level  
          that remains far too costly for small businesses.  The  
          California Asian Pacific Chamber of Commerce believes the  
          pricing of stop-loss coverage should be market-driven and not  
          mandated by regulation.

          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.

           Analysis Prepared by  :    Teri Boughton / HEALTH / (916) 319-2097  

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