BILL ANALYSIS Ó
AB 1425
Page 1
Date of Hearing: April 21, 2015
ASSEMBLY COMMITTEE ON HEALTH
Rob Bonta, Chair
AB 1425
(Travis Allen) - As Introduced February 27, 2015
SUBJECT: Small employers: health reimbursement arrangements
SUMMARY: Prohibits a health care service plan (plan) or health
insurer (insurer) from disallowing the pairing of a small group
plan or insurance policy with a health reimbursement arrangement
(HRA) or other employer-sponsored method to reimburse employees
for out-of-pocket cost-sharing or medical expenses.
Specifically, this bill:
1)Prohibits a plan or insurer from disallowing the pairing an
HRA or other employer-sponsored method for reimbursing
employees for all or part of their deductibles, copayments, or
other out-of-pocket expenses with a health insurance product
issued to a small employer.
2)Prohibits plans, insurers, solicitors, agents, or brokers from
performing any of the following actions because the small
employer is or will implement an HRA to supplement the
benefits of the plan contract for its employees:
a) Encouraging or directing small employers to refrain from
filing an application for coverage or renewal of coverage;
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or,
b) Directing small employers to seek coverage from another
plan or insurer, or coverage through the California Health
Benefits Exchange (Exchange) or other state-administered
employer purchasing pool.
3)Prohibits plans and insurers from varying the compensation
paid to a solicitor, agent, or broker for the sale of a plan
or insurance policy contract because the small employer is or
will implement an HRA to supplement the benefits of the plan
contract for its employees.
4)Prohibits a benefit plan design of a health coverage product
issued by a health insurer to a small employer from
prohibiting the pairing of the product with an HRA or other
employer-sponsored method to reimburse employees for all or
part of their deductibles, copayments, or other out-of-pocket
medical expenses.
5)Defines "HRA" as an employer-sponsored method for reimbursing
employees for all or part of their deductibles, copayments, or
other out-of-pocket medical expenses, and specifies that HRAs
include flexible spending accounts (FSAs), and health savings
accounts (HSAs), as defined in federal law.
6)Declares legislative intent that this bill protects access to
alternative coverage options for small businesses and supports
employers offering employer-sponsored coverage in the
commercial marketplace.
EXISTING LAW:
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1)Establishes, under federal law, the federal Patient Protection
and Affordable Care Act (ACA), which sets forth various
requirements on states; plans and insurers; employers; and
individuals regarding health care coverage.
2)Establishes the Knox-Keene Health Care Service Plan Act of
1975, 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.
3)Provides for the regulation of health insurers, and health
insurance agents and brokers, by the California Department of
Insurance (CDI).
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, and defines a health plan
"solicitor" as any person who, on behalf of a plan,
advertises, or presents information regarding the plan, or
services offered and related charges, for the purpose of
inducing a person to enroll in the plan.
5)Prohibits a plan, insurer, solicitor, agent, or broker from
encouraging or directing small employers to refrain from
filing an application for coverage, or to seek coverage from
another plan, because of the health status, claims experience,
industry occupation of the employer, or geographic location.
Also prohibits plans and insurers from varying the
compensation of a solicitor, agent, or broker to be varied
based on these factors.
6)Defines a small employer as any person, firm, proprietary or
nonprofit corporation, partnership, public agency, or
association that employs up to 50 eligible employees.
7)Requires health plans and insurers to fairly and affirmatively
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offer, market, and sell all of the plan's small employer plan
and policy contracts to all small employers in each service
area in which the plan provides or arranges for the provision
of health care services.
8)Requires plans and insurers, for the purposes of rating in the
small employer market, to consider the claims experience of
all enrollees in all small employer health benefit plans
offered in the state, whether offered as plans, insurance
policies, or inside or outside of the Exchange, as a single
risk pool.
9)Requires plans and insurers to meet specified actuarial value
requirements in the small group market, and requires employer
contributions toward HRAs and HSAs to count toward the
actuarial value of the product, as specified.
FISCAL EFFECT: This bill has not yet been analyzed by a fiscal
committee.
COMMENTS:
1)PURPOSE OF THIS BILL. According to the author, his office has
been inundated with letters from small businesses who claim to
have been discriminated against because plans and insurers are
not permitting them to establish an HRA or FSA, even though
they allow them for large employers. The author states that
high-deductible health plans (HDHPs) are available and most
feature benefits in which an employee's out-of-pocket exposure
for high health claims increases dramatically. The author
states that, in an effort to compromise, many small employers
are willing to purchase HDHPs and wrap them with an HRA or FSA
as a way to cut costs without reducing benefits. The author
asserts that the current prohibition on HRAs by insurance
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carriers specifically targets small employers who are already
paying more than large employers for their health care
benefits. The author states that this bill provides for good
public policy by prohibiting plans and insurers from
disallowing small businesses from having HRAs or FSAs,
encouraging more small employers to offer coverage rather than
dropping it and pushing employees into the individual market
or public health programs.
2)BACKGROUND.
a) Coverage requirements in the small group market. This
bill would apply to both grandfathered plans, which are not
required to comply with ACA requirements, as well as to
non-grandfathered plans, which pursuant to the ACA and
California law are required to comply with specified
insurance market reforms as described below.
Health plans and insurance policies offered in the small
group market are required to offer a comprehensive package
of benefits knows as essential health benefits (EHBs).
Pursuant to current federal law, EHBs include items and
services from at least the following 10 categories:
ambulatory patient services; emergency services;
hospitalization; maternity and newborn care; mental health
and substance use disorder services, including behavioral
health treatment; prescription drugs; rehabilitative and
habilitative services and devices; laboratory services;
preventive and wellness services and chronic disease
management; and, pediatric services, including oral and
vision care.
Additionally small group plans and policies are required to meet
specified actuarial value requirements. Actuarial value is the
percentage of health care expenses the plan or policy will cover
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for a typical group of enrollees. These plans or policies
cannot be sold in the small group market if they do not meet the
following actuarial values:
i) Bronze - 60% (represents minimum creditable coverage
allowed under the law);
ii) Silver - 70%;
iii) Gold - 80%; and,
iv) Platinum - 90%.
Under state law, a plan or insurer's actuarial value may
not to vary more than plus or minus 2%. Additionally,
pursuant to state law, any employer contributions toward
HRAs and HSAs must be counted toward the actuarial value of
the product as specified in federal rules and guidance.
In terms of rates, plans, and insurers in the small group
market may only vary rates on age, geographic region, and
whether the plan or policy is for an individual or family.
Additionally, once a plan or policy is issued or renewed,
the rate for that plan or policy may not change for at
least 12 months.
Health coverage requirements for the large group market (50
or more employees) differ from those governing the
non-grandfathered small group market. For example, large
group plans are not required to meet actuarial value
requirements, or to cover all EHBs. Additionally, the ACA
imposes a penalty on large employers which do not offer
coverage to employees. Small employers are not required to
offer coverage under the ACA, and are not subject to
penalties if they do not offer coverage.
b) HRAs, FSAs, and HSAs. An HRA is an employer-funded
health benefit plan that allows employers to make
contributions to an employee account to help employees pay
for medical expenses, including premiums, deductibles,
co-pays, or qualified services not covered by insurance.
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Employees are not allowed to contribute to HRAs, and
employers are able to limit the types of health care
expenses that can be reimbursed. There is no maximum to
the amount an employer may contribute to the HRA, and
employer contributions are tax deductible. Employers have
the option to keep any unused amount left in an HRA at the
end of the year, or allow it to carry forward for
reimbursement in later years. Employee reimbursements for
qualified medical expenses from an HRA are tax-free.
HRAs are often offered in conjunction with HDHPs. This
arrangement is often marketed to employers as a way to
contain costs through lower premiums, and assisting
employees with funds to use toward out-of-pocket expenses.
An FSA is also an employer-established benefit plan that is
usually funded by an employee who elects to have an amount
voluntarily withheld from his or her pay on a pre-tax basis
to be deposited into the FSA. Employers may also
contribute to the FSA. Withdrawals are generally tax-free
if used to pay qualified medical expenses. Contributions
to FSAs are currently capped at $2500 per year, and
contributions that are not spent by the end of the year
generally are forfeited. However, the plan can provide for
a grace period or a carryover of funds.
HSAs differ from HRAs and FSAs in that they are tax-exempt
accounts owned and funded by the employee. Employers have
the option to contribute to an employee's HSA. The
contributions roll over from one year to the next and in
the account until they are used, and HSAs are portable,
meaning that they stay with the employee even if the
employee changes employers or leaves the workforce. In
order to qualify for an HSA, an individual must be covered
under an HDHP. According to the IRS, an employee covered
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by an HDHP and an FSA or HRA generally cannot also make
contributions to an HSA. Employees may open an HSA at any
time and independently of their employer.
Some plans and insurers integrate HRAs, FSAs, or HSAs with
a plan product to market and sell in the small and large
group markets. For example, given that an individual must
have an HDHP in order to have an HSA, some plans offer
products that integrate the HDHP with the HSA and sell it
as one product. However, an HRA, FSA, or HSA may be sold
separately from a plan or insurance policy, and employers
may choose to separately purchase HRAs or FSAs as a
supplement to an existing plan it already offers its
employees. This is commonly referred to as "wrapping" an
HRA or FSA product.
Some plans and insurers disallow HRA wrapping in the small
group market due to concerns over changes to actuarial
value, utilization increases, and challenges with rate
setting.
c) CDI regulations. In 2012, CDI issued proposed
regulations regarding HRA wrapping in the small group
market. According to CDI, despite requirements for
insurers to offer, market, and sell all of their small
employer products to all small employers, many insurers
were prohibiting the sale of policies to employers who wrap
them with HRAs. CDI also specified that existing law
limits the ability of insurers to vary rates among
different insureds, and if some employers wrap, increased
medical claim costs would likely be passed on to all small
employers. CDI stated this would likely result in small
employers who do not use wrapping to subsidize those that
do. The proposed regulations would have required the
insurers to set forth wrapping restrictions in their
benefit design plans filed with the department, and provide
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actuarial evidence that wrapping would result in increased
claims payments. The proposed regulations were not
promulgated.
d) Coverage in the small group market. According to a
California HealthCare Foundation (CHCF) report published in
March 2015 entitled "California Employer Health Benefits:
Rising Costs, Shrinking Coverage," the percentage of
employers offering coverage continues to decline in
California, with many covered workers seeing reduced
benefits and increased cost sharing. In 2014, California
firms with three to 49 workers accounted for 92% of all
employers, but just 20% of workers with health coverage.
CHCF reports that insurance coverage rates among California
employers offering health coverage have been fairly stable
since 2006. However, coverage rates for small employers
decreased from 69% to 62% between 2006 and 2014. The
report indicates that, in 2014, employees of small firms
were much more likely to pay more than half of the premium
for family coverage than employees of large firms.
Additionally, about 1/3 of workers in small firms had an
annual deductible of $1,000 or more for single coverage in
2014, up from 21% in 2009.
According to CHCF, 65% of all California employers offered
an HDHP in 2014. Of these employers, 11% offered an HDHP
with an HRA, while 33% offered an HDHP with an HSA account.
According to research conducted by the RAND Corporation and
published in 2012, health care spending by those enrolled
in HDHPs with a deductible of at least $1,000 was 14% lower
than those enrolled in other plans, and as families reduced
medical spending, they also cut back on preventive care
even though the care was not subject to a deductible.
Additionally, utilization rose when employers made
contributions to workers' HSAs of over half of the
deductible.
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RAND research also indicated differences in spending
depending on whether an HSA was paired with an HDHP versus
and HRA. Specifically, families in HDHPs paired with HSAs
reduced spending by about 30%, while families with HRAs
attached to their HDHPs reduced spending by 13%.
3)SUPPORT. The Coalition for Business Healthcare Choices (CBHC)
states that this bill is needed to help small businesses as
they struggle to provide health care for their employees, and
to stop major insurers from prohibiting small employers from
establishing HRAs or FSAs. The CHBC states that this bill
will allow small businesses to incorporate HRAs or FSAs with
their health plan, and will ensure that no retaliation takes
place against employers or their insurance agents who do so by
prohibiting them from reducing their compensation. The CBHC
argues that small businesses should have the same coverage
options currently available to large employers. The CBHC
cites research from the U.S. Government Accountability Office
which compared data from 2005 and 2007 regarding changes in
health spending and utilization of two large employers that
introduced an HRA option, and found that spending and
utilization for enrollees in HRAs generally increased by a
smaller amount or decreased compared with those in traditional
plans. CBHC also cites a 2012 study by a third party
administrator, which found that 98% of the employers with
wrapped HRAs saved money, and that changes to risk factors
were minimal.
Over 100 small businesses support this bill, stating that they
have reduced coverage costs through the use of HRAs, and that
with HRAs, they are able to provide better benefits with lower
out-of-pocket costs for employees. They argue that under the
law, employers of any size are permitted to establish HRAs and
FSAs. Other supporters state that mid-sized businesses with
51-100 employees will soon be defined as small businesses come
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January 2016, and with this change, thousands of businesses
will become subject to this prohibition by plans and insurers.
4)OPPOSITION. Health Access California (HAC) states that HRAs
generally benefit the more affluent given that they benefit
most from tax savings and the healthy that are unlikely to
need an HRA for medically necessary care. HAC states that
HRAs are problematic because the employer owns the account,
not the employee, and unless the employer opts to allow the
employee to keep unspent funds in the account, the employer
sweeps the money at the end of each tax year back into the
employer's bottom line. HAC concludes by stating that HRAs
change the functional actuarial value of small group coverage,
and if an employer wishes to provide more generous coverage,
they can do so by purchasing a higher actuarial value product
for their employees. HAC states that premiums for small
employers are based on age, geographic region, and actuarial
value tier, not the use of tax avoidance devices; because the
rating rules in the small market do not allow health plans and
insurers to take into account such tax avoidance devices,
employers who offer HRAs shift the effect of higher premiums
to other employers who purchase bronze or silver tier coverage
without offering HRA.
Plans and insurers state that wrapping an HRA or FSA with a
health care service product is a practice that is inconsistent
with state law and would conflict with specific requirements
relating to actuarial value. They argue that the actuarial
value of a health plan is based in part on the cost sharing
between the plan or insurer and the enrollee, and that state
law requires them to factor employer contributions for
employer cost sharing in the actuarial value calculation.
They state that the addition of a wrapped HRA or FSA to a
traditional health product reduces the costs to the member,
which increases the actuarial value of the plan, putting it
out of compliance with what the regulator previously approved.
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The plans and insurers also argue that this bill would allow
small employers to offer richer benefits within their health
plans, increasing utilization without the plan or insurer
being able to accurately reflect those costs within their
rates. They state this will lead to higher premiums for the
entire small group market. Plans and insurers also contend
that they are required to meet standard benefit design
requirements and to mirror plans sold inside and outside of
the Exchange, and adding an HRA or FSA to a product would
change the overall benefit design, putting it out of
compliance with standard benefit design requirements.
5)RELATED LEGISLATION. AB 1163 (Rodriguez) prohibits a material
change made by a health care service plan or a health insurer
to the terms and conditions of a contract between the plan or
insurer and an agent or broker from becoming effective until
the plan or insurer has provided at least 120 days of notice
of the change. AB 1163 was passed by the Assembly Health
Committee on April 14, 2015, and will be referred to the
Assembly Insurance Committee.
6)PREVIOUS LEGISLATION.
a) SB 639 (Ed Hernandez), Chapter 316, Statutes of 2013,
codifies provisions of the ACA relating to out-of-pocket
maximums on cost-sharing, plan and insurer actuarial value
coverage levels.
b) AB 1083 (Monning), Chapter 852, Statutes of 2012, makes
conforming changes to state law governing the sale of small
group health insurance products to implement the ACA.
7)POLICY COMMENT. Although the premise of this bill appears
simple - prohibiting industry policies that disallow HRA and
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FSA wraps in the small group market - the potential impact of
wrapping HRAs and FSAs with small group products could have
broader implications in the small group market. Specifically,
if utilization rises as a result of employees having
additional funds to apply toward their cost sharing, rates
would likely also rise. Given the rules governing how rates
are set in the small market, rate increases would likely have
to be absorbed across the market, potentially resulting in
employers and employees without HRAs paying higher rates to
cover higher costs of employees with HRAs. Additionally,
plans and insurers are required to count employer
contributions to HRAs and HSAs in order to calculate actuarial
value when they submit a product for review and approval from
regulators, and it is unclear how they can adjust their
actuarial value for a wrap after the product has been approved
for issuance and changes the value of the plan.
REGISTERED SUPPORT / OPPOSITION:
Support
Coalition for Business Healthcare Choices (sponsor)
360 Systems Broadcast
Above the Line, Homes for Kids
Aegir Systems
American River Bank
Anacal Engineering Co
Apex Auto Glass
Azteca Landscape
Barbara McClaskey Insurance Services
Boyett Farms
Catron Contracting Inc.
Central Petroleum Maintenance Co.
City of Soledad
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California Association for Micro Enterprise Opportunity
California Asian Pacific Chamber of Commerce
California Automotive Wholesalers Association
California Small Business Association
California Wire Cloth
Capital City Benefits
Central Coast Federal Credit Union
Chambers & Chambers Wine Merchants
CommTrac Floors, Inc.
Con J. Franke Electric, Inc.
CS Marine Constructors, Inc.
Davis Waste Removal Co., Inc.
Dedicated Media, Inc.
Delano Growers Grape Products
Dupree, Inc.
Falcon Trading Company, Inc.
Fear Insurance Services
Finance& Thrift
Follmer Development, Inc.
Fork Lift Specialties, Inc.
Ganduglia Trucking, Inc.
Grace Hospice, Inc.
Hal Crumly, Inc.
Halby Financial & Insurance Services
Hands on Fresno, Inc.
Helistrand, Inc.
Honor Plastics, Inc.
JHC Benefits
J.L. Fisher Inc.
Keeney Truck Lines, Inc.
Kiwi Transport
Kwan Henmi Architecture & Planning, Inc.
La Hacienda Nursery & Landscape, Inc.
LaFollette Enterprises Incorporated
Lambesis, Inc.
Mercotac Inc.
Michael Strmiska Consulting dba Advanced Nut Crop Sciences
Microcorre Diagnostic Laboratory
Mitchell-Duckett Corp. dba M&M Machine
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Motorsports Technical Center, Inc.
MultiMedical Systems, Inc.
Mulvaney Barry Beatty Linn & Mayers LLP
National Federation of Independent Business
NetEnrich, Inc.
Northwest Hydraulic Consultants
NVB Equipment, Inc.
Oliva & Associates, ALC
OmniUpdate, Inc.
Parilla & Ettinger, LLP
Patrick James Multichannel, Inc.
Poolsafe, Inc.
Poms & Associates
Redi-Gro Corporation
Reliable Monitoring Services
Taylor Brothers, Inc. dba RES*COM
Rita Gibson Insurance & Investment Services Inc.
R.J. McGlennon Co. Inc.
Rossi Building Materials, Inc.
Russell Harris Farms Land Management
San Diego Cardiac Center
San Joaquin Imagine
Small Business California
Small Business Majority
Scott Laboratories, Inc.
Shepler & Fear General Agency
Silicon Valley Dream Homes, Inc.
Skyline Flower Growers
Specialty Sales LLC
STAr-KVD Technologies, Inc.
SunbriteTV
TAM+CZ Architects
Thermo King
Trowbridge Insurance Agency
TV Santa Barbara
Valley Preparatory Academy
Valley Transport Refrigeration
Visalia Chamber of Commerce
VistaraIT, Inc.
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Visual Terrain, Inc.
Weworski & Associates
Opposition
Anthem Blue Cross
Association of California Life and Health Insurance Companies
Health Access California
Analysis Prepared by:Kelly Green / HEALTH / (916) 319-2097