BILL ANALYSIS
AB 812
Page 1
Date of Hearing: April 28, 2009
ASSEMBLY COMMITTEE ON HEALTH
Dave Jones, Chair
AB 812 (De La Torre) - As Amended: April 14, 2009
SUBJECT : Health care coverage: medical loss ratio.
SUMMARY : Requires health plans and health insurers to annually
report to their respective regulators the medical loss ratio
(MLR) of each plan product or policy form issued by the plan or
insurer in California, and requires the regulators to make this
information available to the public. Specifically, this bill :
1)Requires health care service plans, commencing January 1,
2010, to annually report to the director of the Department of
Managed Health Care (DMHC) the MLR of each health care service
plan product issued, amended, or renewed by the plan in
California.
2)Requires health insurers, commencing January 1, 2010, to
annually report to the commissioner of the California
Department of Insurance (CDI) the MLR of each health insurance
policy form issued, amended, or renewed by the insurer in
California.
3)Requires the director of DMHC and the Commissioner of CDI to
make the information reported above available to the public.
EXISTING LAW :
1)Regulates health care service plans under the Knox-Keene
Health Care Service Plan Act of 1975 (Knox-Keene) through
DMHC, and regulates health insurers under the Insurance Code
through CDI.
2)Requires health plans and health insurers and any of their
agents or employees, when presenting a plan for examination or
sale to any individual purchaser or the representative of a
group consisting of 25 or fewer individuals, to disclose in
writing the ratio of premium costs to health services paid for
plan contracts with individuals and with groups of the same or
similar size for the plan's preceding fiscal year.
3)Prohibits a health plan regulated by DMHC from expending for
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administrative costs in any fiscal year an excessive amount of
the aggregate dues, fees, and other periodic payments received
by the plan for providing health care services.
4)Defines for purposes of 3) above the term "administrative
costs," to include costs incurred in connection with the
solicitation of subscribers or enrollees for the plan.
5)Prohibits 3) and 4) above from precluding a plan from
expending additional sums of money for administrative costs,
provided such money is not derived from revenue obtained from
subscribers or enrollees of the health plan.
6)Prohibits the Insurance Commissioner from approving any group
disability insurance policy if the benefits of the policy as a
whole are not sufficient to be of real economic value to the
insured.
7)Requires the Insurance Commissioner, after notice and hearing,
to withdraw approval of an individual or mass-marketed policy
of disability insurance if, after consideration of all
relevant factors, the Commissioner finds that the benefits
provided under the policy are unreasonable in relation to the
premium charged. Requires the Insurance Commissioner, from
time to time, after notice and hearing, to promulgate such
reasonable rules and regulations as necessary to establish the
standard or standards by which the Insurance Commissioner is
required to withdraw approval of any such policy.
FISCAL EFFECT : This bill has not been analyzed by a fiscal
committee.
COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, this bill will
provide vital information to consumers that will allow them to
compare different health plans or health insurance policies.
Unemployment has reached its highest in 25 years and an
estimated 500,000 people in California have lost health
coverage once provided by their employer. Families will need
to seek health coverage during a time when health premiums are
rising. The author contends that by disclosing the MLR, this
bill will ensure that families are getting the most care for
their dollar. The author states health plans are required to
report their medical loss ratio to DMHC, which then makes the
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information available to the public and allows the public to
hold the health plans accountable. However, the MLR health
insurers report to CDI is not made available to the public, so
it is not possible for consumers to compare policies and hold
insurers accountable.
2)MEDICAL LOSS RATIO . The MLR is the percentage of total
premium revenue that health plans spend on health care
services. Knox-Keene contains an administrative cost cap that
prohibits a health plan from expending an excessive amount for
administrative costs but does not include profit in the
calculation of administrative costs. Regulations implementing
this provision require the administrative cost incurred by a
plan to be reasonable and necessary, taking into consideration
such factors as the plan's stage of development.
If the administrative costs of an established plan exceed 15%,
or if the administrative costs of a plan in the development
phase exceed 25%, the plan is required to demonstrate to the
director of DMHC, if called upon to do so, that its
administrative costs are not excessive and are justified under
the circumstances and/or that it has instituted procedures to
reduce administrative costs which are proving effective.
For health insurers regulated by CDI, the Insurance Commissioner
is required to withdraw approval of individual policies if the
commissioner finds that the benefits provided under the policy
are unreasonable in relation to the premium charged. CDI
regulations implementing this provision state that benefits
provided by a hospital, medical, or surgical policy are deemed
to be reasonable in relation to premiums if the lifetime
anticipated medical loss ratio is not less than 70%.
CDI uses "lifetime anticipated loss ratio," an actuarial method
that recognizes that the loss experience of policies,
particularly individual health policies that undergo medical
underwriting, changes over the life span of the policy.
According to guidance from CDI, the medical expenses in a new
policy would be expected to be low in the first few years,
because subscribers are subject to underwriting that is
designed to eliminate those likely to generate a large number
of claims. As a consequence, in the early years, the MLR
might be lower than 70%. But as the predictive force of
medical underwriting declines over time, the benefits paid out
typically increase, so that the MLR in later years could
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exceed 70%. The lifetime anticipated MLR used by CDI takes
this "durational effect" into account and, in combination with
other factors, combines the low and high MLR years so that the
overall MLR during the anticipated life span of the insurance
product may meet the 70% target, even if it dips below the
target in a particular year.
Existing law also contains a disclosure requirement that health
plans and insurers and their employees/agents must meet.
Plans and insurers must disclose in writing the ratio of
premium costs to health services paid for plan contracts with
individuals and with groups of the same or similar size for
the plan's preceding fiscal year when presenting a plan for
sale to any individual purchaser, or a group consisting of 25
or fewer individuals. This provision has been interpreted by
CDI to not require the disclosure of a product specific MLR,
as this bill proposes.
3)Medical loss ratios OF the five largest health plans .
According to data from DMHC, the following five largest
DMHC-licensed health plans reported the following MLR for 2002
through 2008:
--------------------------------------------------------------------
| Medical Loss Ratios of Five Largest DMHC Regulated Health Plans |
|--------------------------------------------------------------------|
| 2002 Through 2008 |
--------------------------------------------------------------------
|---------------------+------+------+------+------+------+------+------|
| | | | | | | | |
|---------------------+------+------+------+------+------+------+------|
| Health Plan | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---------------------+------+------+------+------+------+------+------|
|Blue Cross of |80.81%|80.81%|80.14%|80.87%|81.54%|80.43%|83.38%|
|California | | | | | | | |
|---------------------+------+------+------+------+------+------+------|
|California |83.68%|82.74%|83.41%|84.57%|84.14%|83.13%|84.10%|
|Physicians' Service | | | | | | | |
|---------------------+------+------+------+------+------+------+------|
|Health Net of |85.64%|84.03%|89.58%|85.86%|85.04%|85.15%|88.13%|
|California, Inc. | | | | | | | |
----------------------------------------------------------------------
|Kaiser Foundation |98.65%|93.70%|91.45%|94.23%|93.59%|91.72%|99.44%|
|Health Plan, Inc. | | | | | | | |
|---------------------+------+------+------+------+------+------+------|
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|PacifiCare of |88.06%|83.82%|85.01%|86.15%|85.52%|86.76%|86.98%|
|California | | | | | | | |
----------------------------------------------------------------------
4)CALIFORNIA HEALTHCARE FOUNDATION STUDY . In October 2008, the
California HealthCare Foundation published "How Much is Too
Much - An Analysis of Health Plan Profits and Administrative
Costs in California" written by two RAND researchers that
concluded that the absence of readily available financial
performance data for CDI-regulated insurers makes it
impossible to analyze historical trends or estimate the
potential impact of MLR regulation for a small but important
part of California's health insurance market. The report
further states, among DMHC-regulated health plans, profits and
administrative costs increased substantially between 2002 and
2006, but RAND concluded it was increases in medical costs
that drove premium growth during that time. The RAND
researchers state that making an assessment of the
reasonableness of current levels of administrative costs and
profits is highly dependent on the benchmark by which health
plans are judged. Therefore, the RAND researchers state, it
is unclear whether there is a strong case to be made for
regulating MLRs. However, if MLR regulations are implemented,
the report recommended the state establish uniform reporting
requirements that assure publicly accessible financial data
and medical loss ratios for all of the state's insurance
carriers. Additionally, the RAND researchers argue state
regulatory agencies should also take steps to monitor a range
of potential effects of the regulation, including consumer
satisfaction, medical care cost growth, health plan entry and
exit, and the regulatory burden on insurance carriers and the
state.
5)MANAGED RISK MEDICAL INSURANCE BOARD . The Managed Risk
Medical Insurance Board (MRMIB) administers the Healthy
Families Program (HFP) which provides low-cost health coverage
to low-income children. HFP enrollees receive care through
health plans that contract with MRMIB. MRMIB currently
requires its HFP-contracting health plans to meet a
contractual requirement that each plan spend 85% of premiums
received on total covered benefit and services costs. MRMIB
uses this data, among other data, when conducting rate
negotiations with health plans to determine if health plan
rate increase requests are warranted based on the previous
year's claims history.
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6)SUPPORT . The California Medical Association (CMA) writes it
has long been concerned that health plans are allowed to spend
insufficient amounts on health care, in violation of the law.
CMA states MLR is not a mere mathematical formula but a direct
reflection of the health insurance company's level of
commitment to actually do what it is licensed to do - provide
medical care to those who need it. CMA argues this bill will
shed light on how many of the plans and policies are actually
complying with the law. Health Access California (HAC) writes
in support that hearings by former Insurance Commissioner John
Garamendi five years ago on MLRs revealed that some products
had a MLR of 50% or less, but that the hearing and information
requests were a one-time event. HAC states this will require
health plans and insurers to report the MLR every year on
every product, and the information reported would provide
regulators and policymakers better information about the
insurance market.
7)OPPOSITION . The California Association of Health Plans (CAHP)
writes in opposition that this bill would impose a substantial
and costly new filing requirement that CAHP believes would be
confusing, misleading, and of little value to consumers. CAHP
argues the MLR does not accurately measure efficiency and
quality. Anthem Blue Cross argues an MLR reported by product
is not an effective indicator of value and would be confusing
to consumers, and is likely to do nothing to reduce health
care costs for consumers. Health Net argues MLRs vary for
reasons that have nothing to do with the quality of coverage
the plan provides. Additionally, Health Net argues it may
offer a product unique to one employer, and it considers the
disclosure of product specific MLR in such an instance to
require the disclosure of proprietary information that a
competitor could use to determine a company's pricing
strategy.
8)RELATED LEGISLATION . SB 316 (Alquist), currently on the
Senate Appropriations Committee suspense file, would require
full service health plans and health insurers to spend on
average at least 85% of premiums on health care benefits,
beginning January 1, 2011. Additionally, SB 316 would require
annual reporting of MLR information, commencing January 1,
2011, of each individual and small group health care service
plan product in California, and would require plans/insurers
and their employees or agents to disclose this information
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when presenting a plan for examination or sale to any
individual or the representative of a group consisting of 50
or fewer individuals.
9)PREVIOUS LEGISLATION .
a) SB 1440 (Kuehl) of 2008 would have required health plans
and health insurers to spend at least 85% of premiums on
health care benefits. SB 1440 was vetoed by Governor
Schwarzenegger. In his veto message, the Governor stated:
This bill represents exactly what I did not want
to see this year - a one-sided, piecemeal
approach to health care reform. Californians
deserve a financially sustainable and
comprehensive health care reform plan that
promotes prevention; shares responsibility
between individuals, employers, providers and
government; covers all Californians; contains
cost; and keeps our emergency rooms open and
operating.
My comprehensive health care reform contained a
similar provision to what is proposed in this
bill. However, my plan also contained a great
deal more. I cannot support individual reform
efforts that do not include the other essential
components.
Taken in its isolated and singular fashion, this
bill may weaken our already-broken system.
b) AB 8 (N??ez) of 2008, a comprehensive reform bill, among
other things, would have required the state's two health
insurance regulators, the DMHC and the CDI, to each adopt a
regulation that would require at least 85% of revenue the
plan or insurer receives be spent on health care services.
Additionally, plans and insurers would have been required
to disclose to prospective purchasers their medical loss
ratio, instead of only to individuals and groups of 25 or
fewer employees as required under existing law. AB 8 was
vetoed by Governor Schwarzenegger. In his veto message,
the Governor stated the bill did not achieve coverage for
all, it left Californians vulnerable to loss or denial of
coverage when they need it most, and sustainable
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comprehensive reform cannot place the majority of the
financial burden on any one segment of our economy.
c) AB 1 X1 (N??ez) of 2009, a comprehensive health care
reform bill, among other things, would have required the
state's two health insurance regulators, DMHC and CDI, to
each adopt a regulation that would require at least 85% of
revenue the plan or insurer receives be spent on health
care services. AB 1 X1 defined specified benefits as
health care services, and would have: allowed averaging
across products and regulators; required the regulators to
jointly adopt regulations; and, allowed the regulators to
exempt products from the loss ratio requirements for up to
the first two years of sale if the contracts are
substantially different from those currently offered. In
addition, AB 1 X1did not require plans and insurers to
disclose to prospective purchasers their MLR.
d) SB 1591 (Kuehl) of 2006 would have prohibited health
insurers from spending on administrative costs in any
fiscal year an excessive amount of aggregate dues, fees, or
other periodic payments received by the insurer. SB 1591
would have required CDI to develop regulations to implement
the bill by January 1, 2008. These provisions were amended
out of the bill.
e) SB 337 (Figueroa) of 1999 would have prohibited health
plans from spending more than 15% of their gross revenues
for administrative costs, with exceptions, and would have
included net profits in administrative costs. SB 337 would
have also required the Commissioner of Corporations to
annually report the administrative costs of health plans to
the Legislature and the public. SB 337 was never heard in
committee.
10)QUESTIONS AND COMMENTS .
a) Is the MLR a meaningful measure ? In 1997, UC Berkeley
health economist James C. Robinson published in the journal
Health Affairs "Use and Abuse of the Medical Loss Ratio To
Measure Health Plan Performance." In the article,
Professor Robinson argues that in the traditional world of
indemnity insurance, the MLR provided a reasonable
approximation of the division of revenues between the
delivery of care, on the one hand, and insurance functions
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on the other, but with the advent of managed care and
integrated delivery systems, the clear distinction between
plan and provider has become blurred.
Professor Robinson argues today, health plans' loss ratios
reflect differences among plans in their structure and
business models including: the organizational form (the
relationship between the plan and its providers); the
networks and utilization management systems each offers;
the range of buyers plans market services to; and, the
number of states in which the plan operates. For example,
the costs of marketing vary substantially depending upon
whether plans can gain large numbers of enrollees through a
single contract (in the large employer market) as compared
to the individual and small employer market, where selling
costs are much higher. Professor Robinson argues the MLR
is an accounting tool that was never intended to measure
quality or efficiency, and he concludes that informed
choice and sophisticated purchasing of health care must
rely on a more extensive set of performance measures than
the loss ratio.
b) Should a minimum MLR of 85% be required, or should the
MLR requirement be limited to a product-specific report, as
this bill proposes ? Last session, several bills proposed a
minimum MLR of 85% but allowed, in calculating the MLR,
averaging across products and across regulators in
calculating whether the plan or insurer met the 85%
requirement. This session, SB 316 (Alquist) contains
similar provisions, and requires the MLR of each individual
and small group product to be disclosed to the regulator
and to prospective purchasers. This bill requires the MLR
of each product to be reported to each respective
regulator, and requires the regulator to make this
information available to the public, but does not establish
a minimum MLR standard beyond what exists in existing law.
c) Should the regulators be required to jointly adopt
regulations to establish uniform reporting ? SB 316, AB 1
X1, and SB 1440 all would have required DMHC and CDI to
jointly adopt and amend regulations to implement the MLR
provisions to ensure uniform reporting by health plans and
insurers. Should this bill require CDI and DMHC to jointly
adopt regulations to ensure uniform reporting of MLR
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information?
REGISTERED SUPPORT / OPPOSITION :
Support
California Medical Association
Health Access California
Opposition
Anthem Blue Cross
Association of California Life and Health Insurance Companies
California Association of Health Plans
Health Net
Analysis Prepared by : Scott Bain / HEALTH / (916) 319-2097