BILL ANALYSIS Ó
AB 1434
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Date of Hearing:
ASSEMBLY COMMITTEE ON HEALTH
Rob Bonta, Chair
AB 1434
(McCarty) - As Amended April 20, 2015
SUBJECT: Health insurance: prohibition on health insurance
sales: health care service plans.
SUMMARY: Deletes provisions that a person or entity subject to
regulation under the Knox-Keene Health Care Service Plan Act of
1975 (Knox-Keene Act) is not subject to the jurisdiction of the
California Department of Insurance (CDI). Specifically, this
bill:
1)Repeals existing statute providing that a person or entity
subject to regulation under the Knox-Keene Act is not subject
to the jurisdiction of CDI.
2)Prohibits an entity licensed under the Knox-Keene Act from
offering, marketing, or selling health insurance, as defined,
including a preferred provider organization (PPO) or other
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arrangement under which a health insurer (insurer) pays group
benefits for expenses incurred on the account of
hospitalization, or medical or surgical aid pursuant to an
amount of benefit provided by the insurance policy
arrangement, as specified.
3)Repeals existing statute applying to Anthem Blue Cross, that
provides that a nonprofit hospital corporation that
substantially indemnified subscribers and enrollees and was
operating in 1965 under the Insurance Code, as specified, and
which is regulated under Knox-Keene shall enjoy the privileges
under the act that would have been available to it had it been
registered under the Knox-Mills Health Plan Act (Knox-Mills)
and applied for a license under the Knox-Keene Act in 1976.
EXISTING LAW:
1)Establishes the Knox-Keene Act, 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)Provides for the regulation of insurers by CDI.
3)Subjects to the jurisdiction of CDI, any person or entity that
provides coverage, whether by direct payment or reimbursement,
for medical, surgical, chiropractic, physical therapy, speech
pathology, audiology, professional mental health, dental,
hospital, or optometric services, and that enters into an
agreement or contract with a preferred provider organization
(PPO) or other arrangement under which a disability insurer
pays group insurance benefits for expenses related to
hospitalization, medical, or surgical aid, as specified.
4)Exempts persons or entities subject to licensure under the
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Knox-Keene Act from CDI jurisdiction.
5)Defines health insurance as an individual or group disability
insurance policy that provides coverage for hospital, medical,
or surgical benefits, as specified.
6)Imposes an annual 2.35% gross premiums tax (GPT) on each
insurer doing business in California, as specified.
7)Defines a "health care service plan" (plan) as any person who
undertakes to arrange for the provision of health care
services to subscribers or enrollees, or to pay for or to
reimburse any part of the cost for those services, in return
for a prepaid or periodic charge paid by or on behalf of the
subscribers or enrollees.
8)Provides that a nonprofit hospital corporation that
substantially indemnified subscribers and enrollees, and was
operating in 1965 under the Insurance Code, and which is
regulated under the Knox-Keene Act, shall enjoy the privileges
under the act that would have been available to it had it been
registered under the Knox-Mills Health Plan Act and applied
for a license under Knox-Keene in 1976.
9)Establishes California's Medicaid program, Medi-Cal, through
which eligible low-income individuals receive health care
services.
10)Establishes a managed care organization (MCO) tax, as
specified.
FISCAL EFFECT: This bill has not yet been analyzed by a fiscal
committee.
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COMMENTS:
1)PURPOSE OF THIS BILL. According to the author, we need to
close the loophole that allows any insurer to move their
health insurance products to DMHC to avoid strong consumer
protections oversight of CDI and avoid paying the taxes. The
author states that the added tax revenue will strengthen and
expand Medi-Cal.
2)BACKGROUND.
a) Types of insurance. There are various types of
full-service health coverage plans and policies available
to California consumers today. The two main types of
health plans and policies are:
i) Health maintenance organizations (HMOs), which
provide and arrange for health care for enrollees through
a network of providers. HMOs generally only cover health
services provided by provides in their networks; and,
ii) Preferred Provider Organizations (PPOs), plans in
which the health insurer contracts with a network of
medical providers who agree to accept lower fees and/or
to control utilization. Enrollees in a PPO plan have the
option to obtain care from a provider that is out of the
PPO network, but generally pay a higher cost in doing so.
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Other types of full-service plans include Point of
Service (POS) plans and Exclusive Provider Organizations
(EPO). POS plans combine the characteristics of an HMO
and PPO by designating a network of providers for
enrollees, but also allowing enrollees to go outside of
the network for health care services. EPOs are a network
of providers who have entered into written agreements
with a plan or insurer to provide services to
subscribers. EPO subscribers may not go outside of the
EPO network for care.
Additionally, specialized health plans are available that
cover only certain types of care. Examples of
specialized plans include dental, vision, behavioral
health, and chiropractic plans.
b) Insurance regulators. Regulation and oversight of health
insurance in California is split between two state
departments - DMHC and CDI. DMHC regulates health plans,
including HMOs and some PPOs. CDI regulates multiple lines
of insurance, including health insurers, generally PPO
plans and traditional indemnity coverage.
Although DMHC and CDI both regulate carriers providing health
coverage, each department approaches that regulation
differently. At the heart of the difference between health
plans and health insurers is the "promise to pay" versus
the "promise to deliver care." DMHC-licensed plans,
arrange for and organize the delivery of health care and
services through contracted or owned providers and
facilities and are required to cover all medically
necessary services. Health insurers protect against
(indemnify) the expense or charges (losses) associated with
illness or injury and typically provide coverage for
defined benefits that may be specifically limited in the
policy, such as number of visits or annual dollar limits.
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DMHC currently licenses all of the four types of health plans
previously described. The majority of plans regulated by DMHC
are HMOs. However, DMHC also regulates several full service
PPOs, including Anthem Blue Cross and Blue Shield of California.
DMHC also regulates several specialized PPO plans such as Delta
Dental, and Vision Service Plan. CDI primarily regulates PPOs
and EPOs.
According to the California Health Benefits Review Program
(CHBRP), in 2015, it is estimated that 23.4 million Californians
will be enrolled in state-regulated health insurance, 21.3
million of which will enroll in DMHC-regulated full-service
plans. According to CDI, in 2014, it had 1.7 million insureds
in major medical plans, down from 2.6 million from 2013. DMHC
reports that, in 2014, it had approximately 2.6 million
enrollees in Blue Shield and Blue Cross full-service PPOs and
EPOs. This number can be expected to rise due, in part, to the
fact that DMHC has licensed three new PPOs, and one EPO which
began enrollment in 2015.
c) The Knox-Keene Act has more consumer protections that
the Insurance Code. In recent years, efforts have been
made to bring parity between the Knox-Keene Act and the
Insurance Code with regard to consumer protections,
particularly with the implementation of the ACA and
accompanying efforts to apply its insurance market reforms
across all markets. Through the regulatory process, the
Insurance Commissioner recently established rules regarding
provider networks and timely access requirements, two
hallmarks of the Knox-Keene Act. However, disparities in
consumer protections between the two bodies of law remain.
Below is a description of some of the key differences:
i) Balance billing prohibitions for emergency services:
The Knox-Keene Act provides that an enrollee will not be
liable to the provider for any fees owed it by the health
care service plan. This prohibition protects enrollees
and subscribers from being caught in the middle of
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disputes between plans and providers. In addition,
pursuant to existing regulations, balance billing for
emergency services is defined as an "unfair billing
pattern" and is therefore illegal under the Knox-Keene
Act. In addition, the California Supreme Court in
Prospect Medical Group v. Northridge Emergency Medical
Group held that "billing disputes over emergency care
must be resolved solely between the emergency room
doctors, who are entitled to a reasonable payment for
their services, and the HMO, which is obligated to make
that payment. Emergency room doctors may not bill the
patient for the disputed amount." This decision applies
solely to emergency providers who have provided services
to Knox-Keene Act-regulated plan enrollees.
The Insurance Code prohibits in-network providers from
charging or collecting copayments that exceed what is
calculated as a part of the provider's contracted rate,
and, with regard to out-of-network emergency services,
prohibits copayments or coinsurance to exceed amounts
required for in-network emergency care. However, it does
not provide a prohibition on balance billing emergency
services such as that applied to DMHC-regulated plans.
ii) Definition of "basic health care services": The
Knox-Keene Act requires plans to contract to provide to
enrollees basic health care services defined as physician
services; hospital inpatient services and ambulatory care
services; diagnostic laboratory and diagnostic and
therapeutic radiologic services; home health services;
preventive health services; emergency health care
services, as specified; and, hospice care. These
services are further defined in implementing regulations.
The Insurance Code does not contain such a definition.
This is relevant because, although the ACA requires
individual and small group policies to cover 10
categories of essential health benefits, this requirement
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does not apply to in the large group market. As such,
large group policies regulated by CDI do not have the
same basic health care coverage requirements as plans
regulated by DMHC.
iii) Non-contracting provider payments: Regulations
implementing the Knox-Keene Act specify the way disputed
claims, such as claims for payment for out-of network
services, will be calculated. For out-of-network
providers, the payments should be the "reasonable and
customary value" based on specified information, and
taking into account factors that provide guidance for
providers and plans as a way to help determine a
reasonable payment amount. The Insurance Code does not
provide criteria for non-contracting provider
reimbursement, except for providers whose contract with
an insurer has terminated resulting in them becoming an
out-of-network provider. Without such criteria, insureds
could be held financially liable if the insurers and
providers are not able to come to an agreement on the
amount owed for non-contracted services.
Other key consumer protection areas that have differences
between the Knox-Keene Act and the Insurance Code include
grievances and appeals processes, plan and policy
compliance surveys, and the scope of independent medical
reviews.
d) MCO tax. Insurers are required to pay certain taxes.
DMHC-regulated plans pay corporate taxes. Additionally,
Medi-Cal managed care plans, all of which are regulated by
DMHC (with exception of County Organized Health Systems),
pay the MCO tax, which is a sales tax of 3.975% of gross
receipts. For 2015-16, the current MCO tax is projected to
generate $1.13 billion in non-federal funding for the
Medi-Cal program. These funds are matched with federal
funds to provide the Medi-Cal program over $2 billion.
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In July 2014, CMS issued guidance indicating that MCO tax
structures similar to California's were no longer
permissible for the purposes of funding the Medi-Cal
program, and required state with such taxes to make certain
modifications. Based on the July federal guidance and
federal regulations, any modified proposal for the MCO tax
would need to be generally broad-based and uniform, and not
contain hold harmless provisions. As a practical matter,
broad-based means that all plans, not just Medi-Cal plans,
must pay the tax. Another important federal requirement is
that although some of the plans paying the tax will get
their money and more in higher Medi-Cal rates, there must
be tax payers who lose, specifically plans that pay more in
tax than they get back in higher rates. This federal
requirement is in place so that states do not design taxes
where all providers get more money back than they put in,
once the match is included.
The Governor's budget proposes to replace the existing MCO
tax with a broad-based MCO tax that would satisfy federal
requirements. To meet federal requirements, the new
broad-based MCO tax will apply across all managed care
plans, including PPOs, regulated by DMHC. The
administration estimates that revenues from this tax will
offset General Fund (GF) spending for Medi-Cal by $800
million in 2014-15 and $1.1 billion in 2015-16.
Additionally, the MCO tax will be sufficient to raise the
funding necessary to eliminate a 7% reduction in in-home
supportive services hours.
e) GPTs. Insurance companies regulated by CDI are subject
to a GPT equal to 2.35% of all premiums written. This tax
is in lieu of all other taxes except property taxes and
vehicle license fees. Thus, insurers do not pay tax on
other forms of income, such as investment income, or income
earned from other trades or businesses. According to the
LAO, the GPT appears, in most years, to raise more revenue
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than would be raised by applying the corporate taxes to
insurers' net income. Insurers under CDI cannot be subject
to the MCO tax.
If a PPO is shifted from DMHC to CDI, as proposed by this
bill, that PPO would no longer pay corporate or MCO taxes.
Instead, it would pay GPTs. The author and sponsors assert
that $300 million in annual revenue would be generated for
the General Fund.
The California Department of Finance (DOF) recently
released a preliminary fiscal analysis of this bill, and
determined that if PPOs and EPOs were shifted to CDI
jurisdiction, there would be a net revenue gain of
approximately $240 million in General Fund revenues ($300
million increase in GPT, less $60 million in corporate
taxes that would no longer be paid). However,
approximately $130 million of this revenue would be subject
to Proposition 98 minimum guarantees (to fund education),
and $3.6 million would be subject to Proposition 2 "rainy
day fund" obligations. Thus, $106.4 million would be left
as net General Fund revenue. DOF estimates that the impact
of this bill on the MCO tax proposal would result in
decreased General Fund revenue of $30 million resulting
from fewer lives under DMHC's jurisdiction.
The administration also asserts that this bill could be
interpreted in that it would apply to all commercial plans,
including HMOs, under DMHC's jurisdiction. Under this
scenario, DOF estimates a net revenue gain of $1.6 billion
in GF revenues, reduced down to $726 million after
Proposition 98 and 2 guarantees are applied. However, DOF
estimates that the impact under this scenario on the MCO
tax would be decreased GF revenue of approximately $1.35
billion, and because of the decreased number of lives under
DMHC's jurisdiction, the administration's MCO tax proposal
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would likely be infeasible. Neither the author nor
sponsors have expressed intent for the bill to apply to any
plans other than PPOs and EPOs.
f) Recent litigation. According to the Assembly Committee
on Revenue and Taxation, the issue of GPTs is currently the
subject of ongoing litigation pending before the California
Court of Appeal. Specifically, on July 3, 2013, Michael D.
Myers filed a taxpayer action alleging that the Insurance
Commissioner, the State Board of Equalization, and the
State Controller have all failed to perform their duties
under California law to assess and collect the gross
premiums tax from Blue Shield and Blue Cross. Blue Shield
and Blue Cross, in turn, filed demurrers asserting, among
other things, that neither entity is an "insurer" subject
to the gross premiums tax. The trial court sustained the
demurrers and noted that it was undisputed that neither
Blue Shield nor Blue Cross is licensed by the Insurance
Commissioner. Mr. Myers has appealed the trial court
judgment. Additionally, the Insurance Commissioner argues
that the Myers trial court erred in mechanically concluding
that because Blue Shield and Blue Cross are denominated as
HCSPs under Knox-Keene, and regulated by the DMHC, they are
exempt from the gross premiums tax. The Insurance
Commissioner contends that Blue Shield and Blue Cross's
DMHC-regulated products are subject to the gross premiums
tax, and that legislative changes permitting Blue Shield
and Blue Cross to sell indemnity products under DMHC
jurisdiction did not change the character of those products
from "insurance" to something else.
3)SUPPORT. According to the California Insurance Commissioner
Dave Jones, and the California Medical Association (CMA),
co-sponsors of this bill, and other supporters, existing law
allows Anthem Blue Cross and Blue Shield of California to
choose the regulator with which to file their PPO products.
Supporters state that these companies were granted special
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separate exceptions which allowed them to sell regulated PPO
business under DMHC licenses, thereby creating an uneven
playing field among PPOs as they compete in the marketplace.
Supporters assert that Blue Shield had its 2014 products
disapproved by CDI for non-compliance with the Affordable Care
Act and non-compliance with the network adequacy law; and,
rather than amending those filings in order to comply with the
law, they instead filed the products with DMHC. Supporters
argue that Anthem is similarly moving their PPO products to
regulation under DMHC. Supporters also state that these
special exceptions in law also prevent Anthem Blue Cross and
Blue Shield from paying their fair share of taxes;
specifically, companies that file their PPO policies with DMHC
pay corporate income tax on their net income instead of the
gross premium tax of 2.35% on all premiums received that all
insurers pay under the state's Constitution, resulting in the
GF forgoing more than $1 billion from 2004-2011. Supporters
state that California should eliminate these special
exceptions allowing these two companies to regulator shop, and
in doing so, they will pay their fair share of taxes and
generate approximately $300 million in annual revenue that the
Legislature could dedicate to improving Medi-Cal provider
reimbursement rates.
4)OPPOSITION. Health Access California (HAC) and the Western
Center on Law and Poverty oppose this bill unless amended to
provide at least the same level of consumer protections that
are provided under the Knox-Keene Act, and unless it produces
more ongoing revenue dedicated to Medi-Cal than the proposed
MCO tax. Health Access states that recent amendments to the
bill delete the statement of intent that the funding raised as
a result of its enactment should be used to improve Medi-Cal
funding, thus clarifying that the GPT would go to the GF and
be subject to Proposition 98 which protects education funding,
approved ballot measures which create budget reserves, and
other provisions of the California Constitution governing GF
expenditures. HAC and WCLP state that, by moving a
significant share of covered lives from DMHC to CDI, this bill
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reduces the base for the MCO tax, thus resulting in fewer
funds for the Medi-Cal program. The organizations also cite
several consumer protections in the Knox-Keene Act that are
not similarly in the Insurance Code, including balance billing
prohibition, a definition of basic health services, routine
medical surveys of plans, broader grievance and appeals
provisions, and others. HAC and WCLP state that without equal
protections between the two departments, consumers' plans
should not be moved to CDI.
Anthem Blue Cross states that that this bill seeks to strip
the DMHC of its regulatory authority over PPO products.
Anthem Blue Cross states that with the implementation of the
ACA, all plan products, regardless of the regulator, must have
the same benefit structure, making product filings with two
regulators redundant and inefficient. Anthem Blue Cross
asserts that there is a lack of justification to arbitrarily
move products between regulators, and that further
consolidation of its products under DMHC ensures better
consumer protections, including a ban on balance billing that
is not afforded under CDI. Blue Shield of California (BSC)
states this bill reduces funding for Medi-Cal, and would
impose hundreds of millions of dollars in taxes on PPO
products without any material benefit to consumers. BSC also
states that it is striving to break the inefficient
fee-for-service model of delivery and establish plans with
risk-sharing innovations that would not be allowed at CDI.
BSC cites examples of accountable care organizations it has
launched which align incentives among plans, providers, and
hospitals to reduce waste and deliver better care to its
members. BSC states that CDI has no jurisdiction over medical
groups or oversight of risk-bearing organizations, and under
this bill, these types of system reforms would be imperiled.
Delta Dental states that it provides coverage to approximately
14,000 employer groups statewide through its dental HMO and
PPO products, and having its dental plans licensed under the
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same regulatory framework, thus meeting the same standards for
quality, access, grievances, appeals, claims payments and
audits makes compliance by the plan and its contracting
dentists more efficient.
5)PREVIOUS LEGISLATION. SB 78, Chapter 33, Statutes of 2013,
establishes the MCO tax beginning July 1, 2013 through July 1,
2016.
6)POLICY COMMENTS.
a) Consumers will lose some protections if PPOs are shifted
to CDI. Despite ongoing efforts by the legislature,
administration, and Insurance Commissioner to bring parity
between the Knox-Keene Act and the Insurance Code, there
are still significant differences between the two when it
comes to consumer protections. As a matter of public
policy, ensuring the strongest consumer protections is of
the utmost importance, particularly in light of current
individual coverage mandates under the ACA. It is
important to weigh the practical effects of this bill on
consumers, one of which is that PPO consumers would lose
access to key protections they currently benefit from as
enrollees of Knox-Keene licensed plans. It would be
prudent for more work to be done to bring complete parity
with the Knox-Keene Act with respect to consumer
protections before shifting millions of consumers to the
CDI.
b) Bill would result in less funding for Medi-Cal. By
moving all PPOs under the jurisdiction of CDI, this bill
would reduce MCO tax revenues and result in less funding
for Medi-Cal. The author and sponsors state that this bill
would generate $300 million for the GF, and that those
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funds could be used to boost Medi-Cal provider
reimbursement. However, once the revenues go to the GF,
they will be subject to Proposition 98 funding guarantees
for education, as well as Proposition 2, which establishes
the state's rainy day fund. Once these obligations are
met, while Medi-Cal could receive some proportion of the
remaining revenues after Propositions 98 and 2 are applied,
what is left of the revenues could not be guaranteed to be
used for the Medi-Cal program. While funding for Medi-Cal
is a top priority of many when it comes to health policy,
Medi-Cal would have to compete with many other interests to
secure the additional funding from the GF. This bill does
not provide any provisions or safeguards to assure that the
funding would be secured for the Medi-Cal program.
In contrast, the MCO tax generates a direct source of
funding for the Medi-Cal program. Further, the MCO tax
provides the state with the opportunity to draw down
matching federal funds for Medi-Cal. For every MCO tax
dollar lost, there will be a matching federal dollar
forgone. And, as stated in the analysis, the
administration is working to broaden the MCO tax base by
including all DMHC-regulated plans, including PPOs, so as
to meet federal requirements and allow the MCO tax to
remain operative. Shifting PPOs to CDI would remove
millions of covered lives away from DMHC, thus reducing the
MCO tax base and funds for Medi-Cal, and potentially
undermining the proposed MCO tax structure.
c) Bill would not apply solely to Anthem Blue Cross and
Blue Shield of California. While the author and sponsors
highlight Anthem Blue Cross and Blue Shield of California
PPO products as the two main insurers subject to this bill,
the bill applies to all full-service PPO plan, specialized
PPO plans, and EPOs. As such, the bill would result in not
only Anthem Blue Cross and Blue Shield of California's 2.6
million lives being shifted to CDI, but also millions of
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covered lives currently in DMHC-regulated specialized PPO
and EPO plans. For example, according to data provided by
DMHC, Delta Dental alone had over 3 million covered lives
in 2014, and Vision Service Plan ha 11,970,172. While
specialized plans lives tend to overlap, as some
individuals have full-service, dental, and vision plans, or
some combination thereof, these numbers provide context to
the sheer numbers of consumers who may be impacted by this
bill. The scope of the bill exacerbates the aforementioned
concerns over consumer protections, and to some degree the
MCO tax (specialized plans are not subject to the MCO tax
and it is unknown how many lives other DMHC-regulated
full-service PPO products will enroll in 2015 and beyond).
Additionally, it also raises questions as to the capacity
of CDI to readily absorb the impact of such a significant
increase in the number of covered lives under its
jurisdiction.
REGISTERED SUPPORT / OPPOSITION:
Support
California Insurance Commissioner Dave Jones (sponsor)
California Medical Association (co-sponsor)
California Nurses Association
Congress of California Seniors
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Consumer Federation of California
Opposition
Anthem Blue Cross
California Association of Health Plans
Delta Dental
Health Access California
Western Center on Law and Poverty
Analysis Prepared by:Kelly Green / HEALTH / (916) 319-2097
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