BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 591
A
AUTHOR: De La Torre
B
AMENDED: April 15, 2010
HEARING DATE: June 30, 2010
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CONSULTANT:
9
Hansel
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SUBJECT
Health care coverage: premium rates
SUMMARY
Provides that health plans or insurers may not increase
premiums for a period of 90 days from the date this bill
becomes operative, with exceptions. Provides that health
plans and insurers may not increase premiums by more than
the average percentage increase in the medical care
component of the consumer price index, unless the plan or
insurer submits an application to the Department of Managed
Health Care (DMHC) or the Department of Insurance. (CDI),
and the application is approved based on a showing that the
plan or policy meets or exceeds a specified medical loss
ratio. Prohibits a health plan or insurer from increasing
the premium to an enrollee or subscriber during the
12-month period following the effective date of the last
premium increase applied by the plan to the subscriber.
CHANGES TO EXISTING LAW
Existing federal law:
Requires, under the Patient Protection and Affordable Care
Act (Public Law 111 - 148) (PPACA), beginning not later
than January 1, 2011, health plans and insurers offering
group or individual health insurance coverage to provide an
annual rebate to each enrollee if the ratio of the amount
Continued---
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of premium revenue spent on clinical services and health
quality improvement activities to the total amount of
premium revenue for the plan year (referred to as the
medical loss ratio or MLR) is less than 85 percent for
group coverage and 80 percent for individual coverage, as
specified.
Requires under the PPACA, the U.S. Secretary of Health and
Human Services, in conjunction with states, to establish a
process for the annual review, beginning with the 2010 plan
year, of "unreasonable increases in premiums" for health
insurance coverage. Under this process, health plans and
insurers must submit to the Secretary and the state a
justification for an unreasonable premium increase prior to
the implementation of the increase.
Existing state law:
Provides for the regulation of health plans by the
Department of Managed Health Care (DMHC), and for the
regulation of health insurers by the California Department
of Insurance (CDI).
Prohibits health plans and insurers from changing premium
rates or coverage policies without prior written
notification of the change to the contract holder or
policyholder.
Prohibits a health plan or insurer from changing premium
rates or applicable co-payments, coinsurances, or
deductibles for group health plan contracts or group health
insurance policies after the contract or policyholder has
delivered written acceptance of the contract or policy,
after the start of the open enrollment period, or after
receipt of the premium payment for the first month of
coverage, with the following exceptions:
Further provides that changes in the premium rates,
applicable co-payments, coinsurances, or deductibles of a
contract may only be changed:
When authorized or required in the contract or policy;
When the contract was agreed to under a preliminary
agreement that states that it is subject to execution of
a definitive agreement; or
When the plan or insurer and the contract or policyholder
mutually agree in writing.
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Limits administrative costs for health plans regulated by
DMHC to 15 percent and establishes minimum medical loss
ratios for health insurers regulated by CDI for specified
individual indemnity dental and vision policies (50
percent), and minimum loss ratios for individual health
insurance, excluding indemnity payout policies (70
percent).
Requires health plans and insurers providing coverage in
the individual market to allow an enrollee to transfer to
another individual health plan or policy of equal or lesser
benefits at least once a year, as determined by the plan or
insurer, without undergoing medical underwriting.
This bill:
Provides that health plans or insurers may not increase
premiums for a period of 90 days from the date this bill
becomes operative. Allows an exception to this for a plan
that increases premiums when the subscriber or enrollee
enters into a new or amended contract that includes
increased benefits, provided the increased premium is
equivalent to the premium charged by the plan for contracts
or policies providing similar increased benefits.
Provides that health plans and insurers shall not increase
premiums by more than the average percentage increase in
the medical care component of the consumer price index,
unless the plan or insurer submits an application to DMHC
or CDI, as applicable. Further provides that an
application shall not be approved unless the plan or
insurer completes an audit showing that the medical loss
ratio of the plan or insurer would meet or exceed the
applicable percentage provided for in Section 2718 of the
PPACA. Provides that DMCH and CDI will have six months
following the receipt of an application to approve or
disapprove it.
Prohibits a health plan or insurer from increasing the
premium to an enrollee or subscriber during the 12-month
period following the effective date of the last premium
increase applied by the plan to the subscriber.
Provides that the bill's provisions do not apply to health
plan contracts and insurance policies issued through
publicly funded health coverage programs, such as the
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Medi-Cal and Healthy Families programs, and to Medicare
supplemental policies.
FISCAL IMPACT
The current version of this bill has not been analyzed by a
fiscal committee.
BACKGROUND AND DISCUSSION
According to the author, Assembly Bill 591 will protect
consumers from skyrocketing health insurance costs by
imposing an immediate rate moratorium and establishing a
fair health insurance premium standard to prevent
outrageous rate increases in the future.
This bill will place a 90-day moratorium on any premium
hikes in California for all individual health insurance
policies (HMOs, PPOs and others). Rate increases will be
limited to match the cost of medical inflation (as
determined by the medical portion of the consumer price
index set by the US Bureau of Labor Statistics). Once the
moratorium is lifted, health insurers will be able to
increase rates up to the percentage of medical inflation.
If the proposed rate hike is higher than medical inflation,
the rate hike must undergo up to a six-month regulatory
audit prior to approval. Finally, the insurers will not be
able to increase rates more than once in a 12 month period.
Earlier in the year, Anthem Blue Cross informed their
customers that they would increase their rates by up to 39
percent with only a month's notice. While they have agreed
to postpone the increase pending an investigation by the
California Insurance Commissioner, they have stated their
intention to move forward with the rate hike. Furthermore,
Health Net increased premiums up to 34 percent while Blue
Shield has increased rates in the small group market up to
76 percent.
During her testimony at the Energy and Commerce's Oversight
and Investigations hearing, Anthem Blue Cross President,
Angela Braly, stated, "Rate increases reflect the
increasing underlying medical costs in the delivery system
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which are unsustainable." Yet, according to the medical
portion of the consumer price index, medical costs went up
only by 3.2 percent in 2009 and, as of March of 2010, had
only increased by 3.7%.
2010 health coverage rate increases
In February 2010, Anthem Blue Cross notified CDI of their
intention to raise rates up to 39 percent for policyholders
in the individual market. The decision by Anthem Blue
Cross to implement these premium increases after similar
increases in 2009 caused great concern, not only in
California, but across the nation, as reports of other
health plans and insurers raising rates similarly were made
public. The California Assembly Committee on Health held
an oversight hearing in late February 2010 on the rate
increases, as did the House Committee on Energy & Commerce
Subcommittee on Oversight and Investigations on February
24, 2010.
Wellpoint (Anthem Blue Cross' parent company), in response
to an inquiry from Kathleen Sebelius, Secretary of the U.S.
Department of Health and Human Services (HHS) for a
detailed justification for the increases to the public,
stated that an independent actuarial firm concluded that
their rates are actuarially sound and necessary, reflecting
the expected medical costs associated with the membership
in their plans, and that they satisfy or exceed the medical
loss ratio required by California law. The letter went on
to state that rate increases reflect the increasing
underlying medical costs in the delivery system which are
unsustainable. Specifically, Wellpoint explained that
rates in the individual market were rising faster than
medical inflation due to a number of factors, including: a)
a less healthy risk pool; b) individuals moving to
lower-cost options; c) individuals aging into a higher age
category; and, d) "deductible leveraging," when enrollee
deductibles and co-payments do not increase with medical
inflation, and medical costs increase disproportionately
fall on the premiums.
At the request of Insurance Commissioner Steve Poizner,
Anthem Blue Cross agreed to delay the increases until May
1, 2010 to allow an independent actuary to review their
rates. In April, the independent actuarial review found
numerous errors in the methodology used by Anthem to
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project total lifetime loss ratios, which is a projection
of the amount of services that is potentially used.
Specifically, mathematical errors in the double counting of
aging in the calculating medical trend caused Anthem to
overstate the initial medical trends used to project costs
for known risk factors. Once these numerous mathematical
errors were fixed, the average rate increase across Anthem
products was reduced from 25.4 percent to 15.2 percent,
reducing the initial rate increase on average by 10.2
percent.
Federal health care reform
The PPACA makes several fundamental changes to the private
health insurance market, including requiring the DHHS
Secretary, in conjunction with states, to establish a
process for the annual review, beginning with the 2010 plan
year, of "unreasonable increases in premiums" for health
insurance coverage. This process must require health plans
and insurers to submit to the Secretary and the relevant
state a justification for an unreasonable premium increase
prior to the implementation of the increase. Health plans
and insurers must prominently post such information on
their Internet websites.
The Secretary of DHHS is required to carry out a program to
award grants to states during the five-year period
beginning with fiscal year 2010 to assist states in
carrying out the annual review of unreasonable increases in
premiums for health insurance coverage. As a condition of
receiving a grant, a state, through its Commissioner of
Insurance, must provide the Secretary with information
about trends in premium increases in health insurance
coverage, in premium rating areas in the state; and make
recommendations, as appropriate, to the state Exchange
about whether particular health insurance issuers should be
excluded from participation in the Exchange based on a
pattern or practice of excessive or unjustified premium
increases.
The PPACA appropriated to the Secretary $250 million to be
available for expenditure for grants to states. The
Secretary is required to establish a formula for
determining the amount of any grant to a state that
considers the number of plans of health insurance coverage
offered in each state, and the population of the state. No
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state qualifying for a grant can receive less than $1
million or more than $5 million for a grant year.
Federal regulatory guidance is currently under development
to establish the process of annual rate review for health
insurance, as required under PPACA. The federal
regulations are expected to include factors to be used in
determining whether or not a proposed rate increase is
"unreasonable" and the criteria for evaluating if an
unreasonable rate is "excessive or unjustified." As part
of the criteria to receive such a federal grant, states
must describe their current rate review practices,
including a description of the grounds for rate approval,
modification and rejection. This description must include
a discussion of the factors that are considered in rate
review, including medical loss ratios, the costs of medical
care, and the financial history of the company and previous
rate changes
Medical loss ratio
The amount of money that a health plan or health insurer
spends on medical care, versus administrative expenses and
profit, is referred to in the health care industry as a
medical loss ratio (MLR), or a minimum loss ratio.
California law does not prescribe specific medical loss
ratio requirements per se, with the exception of individual
health insurance policies. The CDI sets a standard of
"reasonableness" for the ratio of medical benefits to the
premium charged for individual health insurance at 70
percent for new policy forms submitted after July 1, 2007,
and for existing policy forms that file rate increases.
Health plans regulated under DMHC are required by
regulation to hold administrative costs, as defined, to 15
percent of premiums, with certain exceptions. This leaves
the amount spent on medical care at the discretion of the
plan, provided this limit is maintained.
Federal health care reform requires health insurers
offering coverage in the large group market to have a MLR
of 85 percent, or a higher percentage as a state may, by
regulation, determine. With respect to a health insurance
issuer offering coverage in the small group market or in
the individual market, the MLR must be 80 percent, or such
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higher percentage as a state may by regulation determine,
except that the Secretary may adjust such percentage with
respect to a state if the Secretary determines that the
application of the 80 percent MLR may destabilize the
individual market in such state. The federal law requires
annual rebates to enrollees on a pro rata basis if the plan
does not meet the minimum ratio.
The National Association of Insurance Commissioners is
required to establish uniform definitions for purposes of
calculating the MLR. Federal law also permits the
Secretary to adjust the MLR rates, if the Secretary
determines appropriate, on account of the volatility of the
individual market due to the establishment of state
Exchanges.
Grandfather rule in federal health reform
The PPACA establishes requirements pertaining to
grandfathering of existing health plans and policies.
Under recent federal guidance, plans can keep their
grandfathered status so long as they only make routine
changes. These routine changes allow adjustments to cost
sharing arrangements to keep pace with medical inflation,
adding new benefits, making modest adjustments to existing
benefits, voluntarily adopting new consumer protections
under the new law, or making changes to comply with state
or other federal laws. Plans will lose their "grandfather"
status if they choose to significantly cut benefits or
increase out-of-pocket spending for consumers - and
consumers in plans that make such changes will gain new
consumer protections. The grandfathering regulations are
silent on premium increases.
2004 RAND study on premium regulation
In 2004, the California HealthCare Foundation (CHCF)
commissioned a RAND study to analyze the likely effect of
premium regulation on the California health insurance
market. RAND researchers found no compelling need to
regulate health insurance premiums in California and noted
that such regulation could have unintended, adverse
consequences on consumers, such as reduction in the quality
or quantity of care, stricter utilization management, and
discouraging expensive technologies from coming to market
while motivating the introduction of cost-saving
technologies. The study recommended a number of steps to
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mitigate the potential adverse consequences of rate
regulation by:
Monitoring coverage and the quality of health care that
enrollees and insureds receive;
Using objective indicators, such as insurers' profits,
over a two- or three-year period to judge whether premium
increases are appropriate;
Monitoring market participation among insurers; and,
Monitoring technology adoption in California and in
states without premium regulation.
Related bills
SB 890 (Alquist), among other things, establishes limits on
the annual premium rate increases of a health plans and
insurers by requiring, after taking into account a change
in premium because of an increase in an individual's age,
that rates not vary by more than 10 percent above or below
the weighted average premium rate increase calculated
across all of the plan or insurer's health benefit plan
designs. Establishes limits on the maximum permissible
rate variation between a plan's or insurer's highest
standard premium rate and lowest standard premium rate for
a standard benefit plan design offered in the individual
market by the health plan or as specified. Requires health
plans and insurers to meet applicable requirements of PPACA
related to medical loss ratios (MLR).
SB 1163 (Leno) extends requirements related to coverage
denials by health plans and insurers. Requires health
plans and insurers, on or before June 1, 2011, and for each
rate filing thereafter, to disclose DMHC and CDI, for each
rate filing in the individual, small employer, and large
group health plan markets, specified information. Requires
DMHC and CDI to review each rate filing for consistency
with applicable state and federal law and regulations as
specified.
AB 2042 (Feuer) prohibits health care service plans (health
plans) and health insurers from altering rates, as
specified, or any benefits more than once per calendar
year, for individual plan contracts and policies that are
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issued, amended, or renewed on or after January 1, 2011,
with certain exceptions. In Senate Appropriations
Committee.
AB 2578 (Jones and Feuer) requires health care service
plans (health plans) and health insurers, effective January
1, 2012, to apply for prior approval of proposed rate
increases, under specified conditions, and imposes on DMHC
and CDI specific rate review criteria, timelines and
hearing requirements. Any proposed rate that is not acted
on by DMHC or CDI on its own discretion within 60 days
would be deemed approved. Currently in Senate
Appropriations Committee.
AB 1759 (Blumenfield) prohibits health plans and insurers
from using a change in enrollment as the basis for a
premium rate change during the length of a contract in the
group market. This bill is set to be heard in the Senate
Health Committee on June 30, 2010.
AB 2170 (Bonnie Lowenthal) prohibits health plans and
insurers from covering prescription drug benefits and using
a formulary from changing the applicable copayments or
deductibles or coinsurances for prescription drug benefits
for the length of the contract or policy. Failed passed in
Assembly Appropriations Committee.
Prior legislation
AB 1218 (Jones), Statutes of 2009, would have required
health plans and insurers to annually submit for prior
approval to the respective regulator any increase in the
rate charged to a subscriber or insured, as specified, and
would have imposed on DMHC and CDI, specific rate review
criteria, timelines, and hearing requirements. Failed
passage in Assembly Health Committee.
AB 1554 (Jones) of 2008 was substantively similar to AB
1218 (Jones) of 2009. Failed passage in Senate Health
Committee.
SB 425 (Ortiz) of 2006 would have required health plans and
insurers to obtain prior approval for a rate increase,
defined in a similar manner to rates under AB 1218 of 2009.
Failed passage in Senate Health Committee.
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SB 26 (Figueroa) of 2004 would have required health plans
and health insurers to obtain prior approval of rate
increases from DMHC and CDI, as specified, and would have
potentially required significant refunds of premiums
previously collected. Failed passage in Senate Insurance
Committee.
AB 2052 (Goldberg), Chapter 336, Statutes of 2002,
prohibits a health care service plan or insurer from making
any change in premium rates or cost sharing after
acceptance of a contract or after the open enrollment
period.
Arguments in support
Health Access California states that the provisions of AB
591 that would prohibit an increase in premiums for health
insurance for 90 days and limit the rate of increase to the
rate of medical inflation, are needed to address runaway
premium increases.
Arguments in opposition
The California Medical Association (CMA) states that
physicians are very concerned about the unintended
consequences of this bill. CMA has historically opposed
rate regulation bills. They state that health insurers are
already reimbursing physicians at unconscionably low levels
and physicians and their patients will likely take the
brunt of the impact of state agency rate-setting, even in
the form it takes in this bill. The state this bill's
benefit to consumers and patients is also dubious, as it
gives health plans and health insurers carte blanche to
raise rates regularly based on medical inflation, whether
they need to or not. Furthermore CMA states that, while
the bill uses medical inflation as a reason to raise rates,
there is no requirement for the health plans and insurers
to reinvest those newfound revenues into patient care.
The Association of California Life and Health Insurance
Companies (ACLHIC) states that adding more costs to
premiums to pay for an entirely new regulatory scheme at
two different departments will do little to address the
well-documented factors contributing to increasing premiums
in California and nationwide. Further they state, health
insurance rate regulation has proven to be a failure in
states that have gone that route. They assert there is
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simply no way to artificially lower premiums outside of
getting at the root causes of medical inflation. ACLHIC
additionally argues the new federal health reform law will
require that most benefit packages be resubmitted with
changes to the regulators, and this bill could
significantly delay the approval of those policy forms.
PRIOR ACTIONS
Not relevant.
COMMENTS
1. Bill has been amended since its last hearing in
committee. As heard by the committee on July 15, 2009, AB
591 dealt with disclosure to enrollees and insureds of
information about how to file grievances with DMHC and CDI.
The bill was held under submission in Senate
Appropriations Committee and was then amended on April 15,
and referred to Senate Health Committee in its present
form.
2. Bill overlaps with other bills heard by committees. As
drafted, AB 591 overlaps with or conflicts with a number of
other bills the committee has heard:
SB 890 (Alquist), which the committee heard on
April 21, among other things, requires health plans
and insurers to meet federal MLR requirements. AB 591
would require plans and insurers to justify proposed
rate increases by showing that they comply with these
requirements.
SB 1163 (Leno), which the committee heard on April
21, would, beginning on June 1, 2011, require plans
and insurers to annually submit information to DMHC
and CDI related to their rates, including earned
premiums, incurred claims, medical trend factors,
changes in enrollee cost sharing and benefits, and
procedures for determining standard rates. SB 1163
would also require DMHC and CDI to review each rate
filing, and post summary information and documentation
regarding rate changes.
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AB 2578 (Jones), which the committee heard and
passed on June 23, 2010, would prohibit any rate from
being approved or remaining in effect that is
excessive, inadequate, unfairly discriminatory. AB
2578 would also apply its provisions to changes in
deductibles, coinsurance, deductibles and other
charges. AB 591 would prohibit a rate increase from
being approved unless the plan or insurer shows that
the medical loss ratio of the applicant, taking into
account the proposed premium rate increase, meets or
exceeds the federal MLR requirements, and would only
apply to premiums.
AB 2042 (Feuer), which the committee heard on June
16 and passed on June 23, would prohibit a health care
service plan or health insurer from raising or
lowering the rates that apply to individual health
care service plan contracts or individual health
insurance policies more than once each calendar year,
with exceptions. AB 591 would prohibit plans and
insurers from raising premiums more than once
following the preceding increase.
To avoid conflicting with these bills, the author may wish
to consider amending the bill to require health plans and
insurers to submit to DMHC or CDI justification for rate
increases and to prohibit a plan from implementing a
"unreasonable premium increase" as defined in regulations
implementing the PPACA, prior to the implementation of the
increase.
3. Drafting issues.
a. The bill allows the applicant to complete an audit
showing that the rate increase meets the bill's
requirements. A suggested amendment would be to require
the plan/insurer or the regulators commission an
independent analysis.
b. The author's intent is for the rate review and
limitation provisions to apply to rate increases in the
individual market; however, the bill as drafted would apply
to both individual and group plan and insurer filings.
POSITIONS
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Support: Health Access California
Oppose: California Association of Health Plans
California Medical Association
California Association of Life and Health
Insurance Companies
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