BILL ANALYSIS Ó AB 1163 Page 1 Date of Hearing: April 14, 2015 ASSEMBLY COMMITTEE ON HEALTH Rob Bonta, Chair AB 1163 (Rodriguez) - As Introduced February 27, 2015 SUBJECT: Health care services plan and health insurers: agents and brokers: notice of contract changes. SUMMARY: Prohibits a health care service plan (plan) or health insurer (insurer) from making material changes to contracts with insurance agents or brokers without providing at least 120 days of notice. Specifically, this bill: 1)Prohibits a material change made by a plan or insurer to the terms and conditions of a contract with an agent or broker from becoming effective until the plan or insurer has provided at least 120 days of written or electronic notice indicating the change to the contract. 2)Defines "material" as a provision in a contract to which a reasonable person would attach importance in determining the action to be taken upon the provision. AB 1163 Page 2 3)Specifies that the notice requirement shall not apply if the change to the contract is mutually agreed upon by the plan or insurer and the agent or broker, or if the change is required by state or federal law. 4)Provides that violations of these provisions by a plan are exempt from disciplinary and criminal offense provisions in existing law. EXISTING LAW: 1)Establishes the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene), the body of law governing plans in the state, and provides for the licensure and regulation of plans by the Department of Managed Health Care (DMHC). 2)Authorizes the Director of the DMHC to suspend or revoke the license of a plan, or assess administrative penalties if the Director determines that the licensee has committed any acts or omissions constituting grounds for disciplinary action; provides that any person who violates provisions of Knox-Keene is liable for a civil penalty of up to $2,500 for each violation through a civil action; and, provides for other enforcement procedures, including provisions relating to criminal offenses. 3)Provides for the regulation of insurers and health insurance agents and brokers by the California Department of Insurance. 4)Defines a health insurance agent as a "life licensee," which is a person authorized to transact insurance coverage for sickness, bodily injury, or accidental death and may include benefits for disability income. AB 1163 Page 3 5)Prohibits, with certain exceptions, a property and casualty insurer from terminating or amending a contract with an agent or broker of property and casualty insurance that has been in effect for at least one year, unless 120 days of advanced written notice has been given by the insurer to the agent or broker. FISCAL EFFECT: None COMMENTS: 1)PURPOSE OF THIS BILL. According to the author, this bill responds to recent actions by a health insurance carrier that made substantial material changes to its contract with agents, providing only 48 hours' notice before those changes took effect. The author states that this bill will prevent this from occurring by requiring plans and insurers to provide their appointed agents with 120-days advance notice of any material changes in their contracts. The author states that the notice period is patterned on current property and casualty insurance agent notice agreements, and that this bill would require a delay of implementation of any substantive change made to a contract by a plan or insurer until proper notice is given to the agent. 2)BACKGROUND. a) Insurance agents. An insurance agent is a person who contracts with an insurance plan or insurer to sell their products. In doing so, agents assist individuals and employers purchase health insurance coverage that fits AB 1163 Page 4 their specific budget and health care needs. According to the California Association of Health Underwriters (CAHU), due to statutory and market pressures, health insurance has changed into an extremely complex product, and insurance agents review a wide variety of plans and compare them to the scope of what an individual or employer wants or needs to cover. This may include an analysis of a plan or insurer provider networks, and monthly premium costs and out-of-pocket cost sharing. Agents assist individuals and employers to make informed choices on coverage options and provide ongoing services and support, including assistance with claims, coverage issues, enrollment changes, coverage renewal, and others. b) Contracts. Contracts between agents and brokers and insurance carriers set forth the terms and conditions of their business relationship. Contracts between agents and carriers contain provisions regarding compensation, required levels of client service, reporting requirements, and other provisions. These contracts generally contain provisions outlining how changes to the contract may be made, and when they take effect. However, there is no standard contract required, and contract provisions vary among insurance carriers. For example, one major carrier's contract stipulates that the carrier may amend the contract, and any addenda or exhibits, with 30 days prior written notice to the contracting agent. Another contract issued by a major carrier stipulates that the company has the right to amend the contract, including commission schedules, as it deems appropriate and such amendments to the contract shall become effective on the date set forth in the amendment, or upon receipt of the amendment via certified mail. However, that same carrier issued an amendment to the commission schedule in the contract, and included in that amendment a stipulation that the carrier may presume the agent agrees and accepts the terms of the amendment unless the agent objects within 30-days. AB 1163 Page 5 c) Commissions. Plans and insurers set aside a portion of the premium to pay licensed agents a commission that generally covers the selling of the plan or insurance policy, as well as ongoing servicing. Contracts between agents and plans and insurers contain a commission schedule outlining the amount of commissions an agent will be paid, the timing of payment of commissions, and other provisions. Plans and insurers sometimes use commissions to drive agents to sell certain products by increasing commissions for products they wish to aggressively market. Conversely, they may lower commissions to deter agents from selling certain products. For example, if a plan or insurer has saturated a market with a certain product, or determines that a product is creating losses, they may opt to lower commissions, thus decreasing financial incentives for agents to sell the product. Changes to commissions may impact agents, not only in the amount of ongoing compensation for a certain product, but also in terms of time and resources invested in selling and servicing a product. For example, agents may spend days or weeks working up a policy for a client based on the assumption of a certain commission. For larger clients, such as large employers, it may take a team of agents to work up a policy, and agents may make investments in additional staff to provide ongoing servicing of a policy after it is sold. According to CAHU, if the commission rate for a certain product is changed, agents may need time to lay out other options for the client to consider or select. In the case cited by the author as the impetus for this bill, a carrier sent notice to its agents informing them that the carrier had made a decision to significantly reduce commissions in California new business related to a certain product. In doing so, the carrier informed agents that they had two days to submit any new business to the carrier in order to get paid at the prior higher commission rate. Any new business submitted after that two day period would be compensated at the lower AB 1163 Page 6 commission. 3)SUPPORT. CAHU, Independent Insurance Agents and Brokers Association of California, and the National Association of Insurance and Financial Advisors, the cosponsors of this bill, state that not only does this bill respond to recent actions by a health insurance carrier that made material changes to a contract with only 48 hours' notice, it also levels the playing field and provides fair and reasonable notice to licensed agents when their contract is substantially changed. The sponsors state that most contracts contain provisions that address how and when notice of changes to the contract can be implemented, however, many contracts contain separate clauses that allow carriers to make substantial changes to the agreement without any notice at all. The sponsors state that agents understand that business needs can sometimes drive a need for a material change, and this bill ensures that a change desired by the carrier can take effect as soon as proper notice is given. 4)OPPOSITION. The Association of California Life and Health Insurance Companies (ACLHIC) and the California Association of Health Plans (CAHP) oppose this bill, stating that it would unnecessarily interfere with private party contracts and seeks to offer a legislative remedy to an issue better handled through the course of contractual negotiations and agreements. ACLHIC and CAHP state that this bill usurps current contract negotiation practices which already have self-imposed time frames and notification agreements, and where violations are treated as a breach of contract. The opposition argues that a vast majority of their member companies currently have a 30-day notification agreement built into their existing contract frameworks and deviation from that would result in significant expense and confusion. Lastly, ACLHIC and CAHP state that the definition of "material" change under this bill is vague and may introduce further confusion into the contractual negotiation process. AB 1163 Page 7 5)RELATED LEGISLATION. AB 1425 (Allen) would prohibit a plan or insurer from entering into a contract with a solicitor, or an agent or broker, that varies the compensation paid to the agent or broker for the sale of a plan based on whether a small employer implements a health reimbursement arrangement to supplement the benefits of the plan. 6)POLICY COMMENT a) Is the 120-day notice timeframe set forth in this bill too long? A 30-day notice period is commonly used in contracts between insurers and agents. This bill, although introduced in response to an incident involving a two day notice of contract changes, would quadruple that notice period. This bill is based the 120-day period on existing law governing property and casualty insurance. However, due to the dynamic nature of the health insurance market, a shorter notice timeframe may be merited to allow insurers the ability to respond to market changes in a timely way. b) Definition of "material" change is unclear. The bill would define "material" as a provision in a contract to which a reasonable person would attach importance in determining the action to be taken upon the provision. This definition defines the contract provision as material, rather than the change to the contract, and the language regarding the attachment of importance could be widely interpreted. The Committee may wish to make clarifying amendments to the definition of "material" currently in the bill. 7)DOUBLE REFERRED. This bill is double referred, upon passage in this Committee, it will be referred to the Assembly Committee on Insurance. AB 1163 Page 8 REGISTERED SUPPORT / OPPOSITION: Support California Association of Health Underwriters (cosponsor) Independent Insurance Agents and Brokers Association of California (cosponsor) National Association of Insurance and Financial Advisors (cosponsor) Opposition AB 1163 Page 9 Association of California Life and Health Insurance Companies California Association of Health Plans Analysis Prepared by:Kelly Green / HEALTH / (916) 319-2097