BILL ANALYSIS                                                                                                                                                                                                    Ó



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          SENATE THIRD READING
          SB 639 (Ed Hernandez)
          As Amended September 6, 2013
          Majority vote

           SENATE VOTE  :28-11  
           
           HEALTH              12-3                                        
           
           -------------------------------- 
          |Ayes:|Pan, Ammiano, Atkins,     |
          |     |Bonilla, Bonta, Gomez,    |
          |     |Roger Hernández,          |
          |     |Lowenthal, Mitchell,      |
          |     |Nazarian,                 |
          |     |V. Manuel Pérez,          |
          |     |Wieckowski                |
          |     |                          |
          |-----+--------------------------|
          |Nays:|Maienschein, Mansoor,     |
          |     |Wilk                      |
          |     |                          |
           -------------------------------- 
           SUMMARY  :  Places in California law provisions of the Patient  
          Protection and Affordable Care Act (ACA) relating to  
          out-of-pocket limits on health plan enrollee and insured  
          cost-sharing, health plan and insurer actuarial value coverage  
          levels and catastrophic coverage requirements, and requirements  
          on health insurers with regard to coverage for out-of-network  
          emergency services.  Applies health plan enrollee and insured  
          out-of-pocket limits to specialized products that offer  
          essential health benefits (EHBs).  Allows carriers in the small  
          group market to establish an index rate no more frequently than  
          each calendar quarter.  Specifically,  this bill  :  

          1)Allows a carrier at least each calendar year, and no more  
            frequently than each calendar quarter to establish an index  
            rate for the small employer market based on the total combined  
            claims costs for providing EHBs within the single risk pool  
            required under the ACA.
           
           2)Requires nongrandfathered individual, small and large group  
            health care service plan contracts and health insurance  
            policies that provide coverage for EHBs, and that are issued,  








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            amended, or renewed on or after January 1, 2015, to provide  
            for a limit on annual out-of-pocket expenses for all covered  
            benefits that meet the definition of EHBs, including  
            out-of-network emergency care consistent with existing law.   
            Exempts specialized health plans and insurance policies.

          3)Requires the limits in 2) above not to exceed the limit  
            described in the ACA and to result in a total maximum  
            out-of-pocket limit for all EHBs equal to the dollar amounts  
            in effect under the Internal Revenue Code with dollar amounts  
            adjusted, as specified in the ACA.

          4)Requires for an EHB offered or provided by a specialized  
            health care service plan or insurer the total annual  
            out-of-pocket maximum for all covered EHBs from exceeding the  
            limit in 2) and 3) above.  Exempts a specialized health care  
            service plan or insurer that does not offer an EHB.

          5)Requires, for 2014, for nongrandfathered health care service  
            plan contracts or health insurance policies, except  
            specialized health plan contracts and health insurance  
            policies, in the individual, small, and large group market and  
            to the extent allowed by federal law, regulations and  
            guidance, to provide for a limit on annual out-of-pocket  
            expenses for all covered benefits that meet the definition of  
            EHBs, including out-of-network emergency care, as specified.  

          6)Limits, when a nongrandfathered health care service plan or a  
            health insurer in the individual or small group market  
            provides a pediatric oral care benefit meeting the definition  
            as specified in the ACA, the out-of-pocket maximum for the  
            pediatric oral care benefits to $1,000 for one child and  
            $2,000 for more than one child.  

          7)Prohibits, for a small employer health care service plan  
            contract or health insurance policy offered, sold, or renewed  
            on or after January 1, 2014, the deductible under the plan or  
            policy from exceeding $2,000 for a single individual and  
            $4,000 in the case of any other plan contract or policy.   
            Requires the dollar amounts to be indexed consistent with the  
            ACA and any federal rules or guidance.  Requires this  
            limitation to be applied in a manner that does not affect the  
            actuarial value of any small employer health care service plan  
            contract.  Exempts multiple employer welfare arrangements that  








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            provide health care benefits to their members and that comply  
            with small group health reforms unless otherwise required by  
            federal law or guidance from these provisions.

          8)Establishes levels of coverage for the nongrandfathered  
            individual and small group market consistent with the ACA.

          9)Defines a catastrophic plan as a health care service plan  
            contract or health insurance policy that provides no benefits  
            for any plan year until the enrollee has incurred cost-sharing  
            expenses in an amount equal to the annual limit on  
            out-of-pocket costs as specified in 3) above, except requires  
            the plan provide coverage for at least three primary care  
            visits. 

          10)Prohibits a carrier that is not participating in the  
            California Health Benefit Exchange (Exchange) from offering,  
            marketing, or selling a catastrophic plan in the individual  
            market.

          11)Requires a group or individual health insurance policy  
            issued, amended, or renewed on or after January 1, 2014, that  
            provides or covers any benefits with respect to service in an  
            emergency department of a hospital to cover emergency services  
            consistent with the ACA.

           FISCAL EFFECT  :  According to the Assembly Appropriations  
          Committee, one-time costs in the range of hundreds of thousands  
          of dollars each to the California Department of Insurance (CDI)  
          (Insurance Fund) and the Department of Managed Health Care  
          (DMHC) (Managed Care Fund).  Costs will be incurred for  
          rulemaking, as well as review and enforcement related to  
          adoption of the definition of out-of-pocket maximum established  
          in the bill.  Both CDI and DMHC report activities related to the  
          federal requirements codified in this bill are already being  
          undertaken, so codifying these requirements should not result in  
          additional costs.  Unknown potential costs related to state  
          employee benefit plans (General Fund/federal funds/special  
          funds).  Federal law and this bill impose maximum out-of-pocket  
          costs on covered EHBs in the large-group market.  Beginning in  
          2015, this bill applies to health, dental, and vision plans  
          administered by the state, to the extent they offered one or  
          more EHBs.  This bill essentially protects individuals from  
          paying more than approximately $6,350 combined for all covered  








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          EHBs, including health coverage as well as pediatric vision and  
          dental coverage.  The establishment of an out-of-pocket maximum  
          that combines health, dental, and vision coverage, for benefits  
          offered in the large-group market, goes further than federal law  
          requires.  It also imposes requirements for administrative  
          coordination between health, dental, and vision plans.

          It is unclear whether this bill would apply to state employee  
          plans because it is unclear whether such plans offer EHBs as  
          defined by this bill.  This could be elucidated through  
          regulation.
          If the out-of-pocket maximums established by this bill do apply  
          to state employee plans, total costs could range from negligible  
          to benefit costs in the millions of dollars annually (General  
          Fund/federal funds/special funds), depending how the state  
          decides to design its benefit plans to respond to the new  
          requirements.  Currently, the state's out-of-pocket maximum for  
          health coverage is far below the combined out-of-pocket maximum  
          established by this bill, but there is no out-of-pocket maximum  
          for state employee pediatric dental or vision coverage.

           COMMENTS  :  According to the author, the DMHC and the CDI are  
          currently reviewing and approving Exchange products with no  
          statutory authority to enforce the requirements of the ACA with  
          respect to cost sharing.  As such, this bill codifies several  
          provisions of the ACA related to cost sharing, coverage tiers,  
          and emergency services.  The author states that the ACA limits  
          maximum out-of-pocket costs for all health insurance to $6500  
          for an individual and about $13,000 for a family:  these limits  
          are consistent with those for health savings accounts.  This  
          bill specifies that the maximum out-of-pocket limits apply to  
          EHBs as defined in state and federal law.  All cost sharing,  
          including not only the deductible but any copays, coinsurance,  
          or other cost sharing applies toward the maximum out-of-pocket  
          limit.  In addition, consistent with federal law, this bill  
          codifies the requirement that deductibles for small employer  
          products are limited to $2,000 for an individual and $4,000 for  
          a family, consistent with the ACA provisions.  This bill  
          codifies the precious metal tiers of the ACA.  The ACA  
          categorizes coverage in the individual and small employer  
          markets into five tiers (Bronze, Silver, Gold, Platinum,  
          Catastrophic) based on actuarial value, that is, the percent of  
          health costs covered across a population.  According to the  
          author, states have the opportunity to adopt a state-specific  








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          actuarial value calculator:  because utilization is different in  
          California (such as shorter hospital stays), a  
          California-specific calculator is important. This bill permits  
          DMHC and CDI to adopt a California-specific calculator.

          The September 6, 2013, amendments revise provisions from AB 2 X1  
          (Pan), Chapter 1, Statutes of 2013-14 First Extraordinary  
          Session and SB 2 X1 (Ed Hernandez), Chapter 2, Statutes of  
          2013-14 First Extraordinary Session, which require health  
          insurance carriers to establish "an index rate" (singular) for  
          its small group business "each calendar year" rather than more  
          frequently.  The index rate is based on the total combined  
          claims costs for providing EHBs within the single risk pool  
          required by the ACA.  Existing law requires the index rate to be  
          adjusted on a market wide basis based on the total expected  
          market wide payments and charges under the risk adjustment and  
          reinsurance programs established for the state under the ACA.  

          Without this bill, under existing law in AB 2 X1 and SB 2 X1 the  
          index rate will be updated once for the entire 12 month period.   
          According to the DMHC, a change to quarterly indexing is  
          necessary because otherwise carriers will apply the same base  
          rate for all small employers.  When a carrier has to project too  
          far in advance, uncertainty is created, causing carriers to  
          price products higher.  According to DMHC, DMHC and CDI  
          actuaries estimate that the current law (if not changed) will  
          result in January 1 premium rates that are about 3-5% higher  
          than if quarterly updates are permitted.

          DMHC indicates that proposed federal rule and subsequent  
          pronouncements allow for quarterly updates, as well as  
          instructions contained in Covered California's Small Group  
          Option Program (SHOP).  The solicitation instructed issuers to  
          bid under the assumption that rates could be updated quarterly.   
          Rates that have been advertised by Covered California's SHOP  
          assume quarterly indexing.  Failure to amend the current law  
          could result in increases to the small group rates negotiated  
          with SHOP participants and already published by Covered  
          California.

          Proponents, including Blue Shield of California, describe this  
          bill as implementing and improving upon the federal ACA.  Today  
          some health insurance provides no limit on out-of-pocket costs  
          and consumers end up owing tens of thousands of dollars for  








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          necessary health care even when they have insurance.  Health  
          Access California indicates that this bill says that if a  
          specialized plan offers any of the EHBs, then it is subject to  
          the consumer protections provided under this bill. This is  
          because, for many years, it has been routine in California to  
          exempt specialized health plans from consumer protections on the  
          grounds that the benefits offered were incidental or  
          supplemental or just not that important but in 2014, pediatric  
          dental and pediatric vision will be part of the EHBs required  
          under state and federal law. 

          The National Multiple Sclerosis (MS) Society supports this bill  
          because it will establish cost sharing limits on health  
          insurance and will help people living with chronic diseases like  
          MS who are frequent users of the health care system and rely on  
          expensive medicines.  Four of the disease modifying therapies  
          used to treat MS are routinely placed on specialty tiers and  
          require patients to pay coinsurance, which can force patients  
          with chronic conditions to make desperate choices between vital  
          medical care and mortgage and groceries.  The Western Center on  
          Law and Poverty says that California has already implemented  
          many elements of the ACA, but the state must still codify  
          cost-sharing.  The California HealthCare Foundation found in  
          2011 that 70% of California's uninsured are low to moderate  
          income.  This bill helps provide peace of mind to consumers for  
          what they are purchasing and how much they will pay for it,  
          regardless of if they get coverage in or out of the Exchange.

          The California Association of Health Plans (CAHP) has removed  
          its opposition based on substantial amendments taken to this  
          bill and because of the amendment that allows quarterly  
          adjustments according to the latest available actuarial data.  
          According to CAHP, these adjustments impact renewals and new  
          market entrants and in no way weaken the annual premium  
          guarantee employers enjoy under state and federal law. Without  
          this fix, small employers could initially pay higher than  
          necessary premiums. This is an important provision of this bill  
          supported by the health plans and will help make the launch of  
          the Small Employer Health Options Program in the Exchange a  
          success.  Furthermore, CAHP indicates that some provisions of  
          this bill conflict in specific ways with recent federal guidance  
          allowing a one-year safe harbor for employer sponsored coverage.  
          Non-conformity distracts health plans from the work of  
          implementing reform.








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           Opponents argue that this bill contains provisions that conflict  
          with or go beyond requirements of the ACA and federal guidance.   
          They believe that certain other provisions differ from the  
          out-of-pocket requirements in federal law or restrict the use of  
          incentives.  
           
           
           Analysis Prepared by  :    Teri Boughton / HEALTH / (916) 319-2097  



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