BILL ANALYSIS Ó
AB 1163
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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.
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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.
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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
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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.
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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
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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.
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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.
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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
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Association of California Life and Health Insurance Companies
California Association of Health Plans
Analysis Prepared by:Kelly Green / HEALTH / (916) 319-2097