BILL ANALYSIS
AB 1218
Page 1
Date of Hearing: April 28, 2009
ASSEMBLY COMMITTEE ON HEALTH
Dave Jones, Chair
AB 1218 (Jones) - As Introduced: February 27, 2009
SUBJECT : Health care coverage: rate approval.
SUMMARY : Requires health care service plans (health plans)
licensed by the Department of Managed Health Care (DMHC) and
health insurers certificated by the California Department of
Insurance (CDI), effective July 1, 2009, to annually submit for
prior approval to the respective regulator any increase in the
rate charged to a subscriber or insured, as specified, and
imposes on DMHC and CDI specific rate review criteria,
timelines, and hearing requirements. Specifically, this bill :
1)Defines "rate" for purposes of this bill to include premiums,
copayments, coinsurance obligations, deductibles, and other
charges.
2)Prohibits a health plan or health insurer (applicant), seeking
to increase the rate it charges its subscribers or
policyholders, from increasing the rate unless the applicant
submits an application to DMHC or CDI respectively
(regulators), and the application is approved.
3)Prohibits any rate from being approved or remaining in effect
that is excessive, inadequate, unfairly discriminatory, or
otherwise in violation of the provisions of this bill.
4)In applying the standard in 3) above, requires regulators to
consider whether the rate mathematically reflects the health
plan or insurer's investment income and is reasonable in
comparison to coverage benefits. Prohibits the regulators
from considering the degree of competition in making the
determination required in 3) above.
5)Exempts from the rate review requirements in this bill any
rate increase of less than 5% if the health plan or health
insurer's medical loss ratio (MLR) during each of its three
most recently completed reporting years is 90% or higher, as
defined in regulations. Exempts Medicare supplement coverage
and contracts issued through a state program, including the
Medi-Cal program and the Healthy Families Program.
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6)Requires health plans and health insurers to file a complete
rate application with the regulator for a rate increase that
will become effective on or after January 1, 2011, allows for
no more than one rate filing per year, and requires officers
of the company, specifically the chief executive and chief
financial officers, to certify the data, information, and
representations in the rate filing.
7)Requires a rate application submitted pursuant to 6) above to
include:
a) The rate of return that will result if the rate
application is approved;
b) The average rate change per affected enrollee, insured,
or group, that will result from approval of the
application;
c) The overhead loss ratio, reserves, excess tangible net
equity, and surpluses that will result if the application
is approved. Defines "overhead loss ratio" as the ratio of
revenue dedicated to all nonmedical expenses and
expenditures, including profit, to revenue dedicated to
medical expenses. Defines "medical expense" as any payment
to a hospital, physician, or other provider for the
provision of medical care directly to or for the benefit of
an enrollee;
d) Salary and bonus compensation paid to the ten highest
paid officers and employees of the applicant for the most
recent fiscal year;
e) Dollar amounts of shareholder dividends paid, financial
or capital disbursements to affiliates, and management
agreements and service contracts;
f) A statement setting forth all of the applicant's
nonmedical expenses for the most recent fiscal year
including administration, dividends, rate of return,
advertising, and salaries; and,
g) A line-item report of medical expenses, including
aggregate totals paid to hospitals and physicians, and the
amount paid by the applicant for the 100 most common
medical expenses incurred by enrollees during the previous
calendar year.
8)Imposes the burden of proof on applicants to provide the
regulators with evidence and documents establishing by a
preponderance of the evidence the applicant's compliance with
the requirements of this bill.
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9)Requires applicants to submit the rate applications
electronically and requires the regulators to post the
applications on the departmental Internet Web sites within ten
days of receipt.
10)Requires the regulators to review for compliance with the
requirements in this bill all rate increases which become
effective on or after January 1, 2009 to December 1, 2010.
11)Makes all information submitted in a rate application and all
information submitted in support of the application subject to
the California Public Records Act, except for financial data
where the disclosure of which would be competitively injurious
to the applicant, as determined by the regulators.
12)Requires the regulators to notify the media and the public of
any rate application submitted by an applicant, as specified,
and requires the rate to be deemed approved within 60 days
after the date of the public notice, as follows:
a) For a proposed rate increase of less than 5% proposed by
an applicant with a medical loss in the three most recently
completed reporting years of at least 88%, and during one
of those years less than 90%, the rate increase is deemed
approved within 60 days.
b) For a proposed rate increase of 5% or greater, or for an
applicant with a MLR during any of the three most recently
completed reporting years of less than 88%, the rate
increase is deemed approved within 60 days, unless the
regulator conducts a hearing on the application on any of
the following grounds:
i) A consumer or his or her representative requests a
hearing within 45 days of the date of the public notice
provided and the regulator grants the request. Requires
the regulator when it does not grant the hearing request
to issue written findings in support of the decision;
ii) The regulator decides for any reason to hold a
hearing on the application; or,
iii) The rate increase proposed exceeds 7% of the current
rate for the contract or policy.
13)Requires all hearings required by this bill to be conducted
in accordance with laws governing state administrative
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hearings, including that the hearing be conducted by an
administrative law judge (ALJ) in the Department of General
Services Office of Administrative Hearings (OAH), that the
regulators be subject to required notices and discovery and
that the decision of the ALJ is subject to review by the
regulators. Requires the right to discovery to be liberally
construed and requires discovery disputes to be determined by
the ALJ.
14)Authorizes any person to initiate or intervene in any of the
proceedings, establishes parameters for judicial review, and
ensures the right of consumers to challenge final decisions by
the regulator in court, as specified, and requires the
regulator or the court to award reasonable costs, including
witness fees, for persons meeting specified requirements, and
requires the applicant to pay those fees.
15)Invests with DMHC and CDI responsibility to jointly develop
any regulations, rate review standards, staff training,
policies, and procedures, in order to ensure maximum
coordination and consistency of implementation of provisions
of this bill and vests with each department all necessary and
proper powers to implement this bill and requires DMHC and CDI
to adopt regulations by January 1, 2011, including definitions
of MLR and reporting year.
16)Subjects health plans and insurers to penalties for violation
of the provisions in this bill, authorizes the regulators to
charge fees to cover costs of applications filed, and
establishes two new state special funds to receive those
revenues for the sole purpose of implementing this bill.
EXISTING LAW :
1)Provides for the regulation of health plans by DMHC and
regulation of disability insurers who sell health insurance by
CDI.
2)Requires, pursuant to state and federal law, health plans and
insurers to annually file for approval rates and rating
schedules for Medicare supplement policies and to demonstrate
to the regulator compliance with specified MLR standards such
that the policy or contract returns to subscribers or
policyholders, in the form of aggregate benefits, is at least
75% of the total charges or premium in the case of group
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contracts or policies, and 65% in the case of individual
contracts or policies.
3)Requires health plans and insurers to include in writing at
the point of sale to any individual or representative of a
group of 25 or fewer individuals the health plan's or
insurer's MLR for the prior calendar year.
4)Limits administrative costs for health plans regulated by DMHC
to 15% and establishes minimum MLRs for health insurers
regulated by CDI for specified individual indemnity dental and
vision policies (50%), and, effective July 1, 2007, minimum
loss ratios for individual health insurance, excluding
indemnity payout policies (70%).
5)Authorizes DMHC and CDI to charge fees associated with
regulatory filings and, in addition, requires that the
regulatory enforcement programs be entirely paid for by health
plan and insurer fees and assessments.
6)Establishes the Consumer Participation Program (CPP) within
the DMHC, which allows for the awarding of reasonable advocacy
and witness fees to any person who meets specified criteria
and who has made a substantial contribution on behalf of
consumers to the adoption of a regulation, order, or decision
made by the director.
FISCAL EFFECT : This bill has not yet been analyzed by a fiscal
committee.
COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, this bill is
necessary because private HMO and health insurance premiums in
California are soaring far above the rates of both general and
medical cost inflation. The author asserts that due to
consolidation in the health maintenance organization (HMO) and
health insurance markets, insurer overhead, including profit,
advertising, administration and executive salaries, has become
the fastest-growing portion of health care costs. As a
result, businesses are being forced to cut back or eliminate
health insurance coverage for their employees. Consumers,
particularly those buying coverage on their own, must often
choose between purchasing coverage with higher deductibles,
co-pays, and coinsurance obligations, or going without care.
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The author states that this situation is occurring at a time
when HMOs and health insurers are experiencing record profits
and unprecedented reserves. The author claims that the
current lack of health insurance regulation has resulted in up
to 50% of the premiums paid by policyholders funding record
corporate profits, high executive pay, and excessive overhead
rather than medical care. As an illustration, the author
points out that, in 2007, Blue Cross of California transferred
$950 million to its out-of-state parent company, Anthem
Wellpoint, while it continued to raise premiums on California
policyholders, and that other health insurers have also
transferred hundreds of millions out of the state. By
comparison, the author points out, federal Medicare spends at
least 98% of its revenue on care. The author argues that rate
regulation will not only save money for those who have
insurance, but it will also make it more likely that uninsured
Californians can afford coverage.
2)BACKGROUND . Presently, group health insurance is generally
not subject to rate regulation, with few exceptions. Medicare
supplement policies and contracts sold by both health plans
and insurers are subject to prior approval and regulation of
their MLRs, the ratio of benefits to premium. Health plans
and insurers are subject to specific marketing, underwriting,
and rating rules relating to health coverage sold to small
employer groups of 2-50. Both regulators ensure compliance
with the small group rating rules primarily in response to
complaints. CDI-regulated insurers are subject to filing and
review of rates, referred to as "file and use" and must meet
minimum MLR standards, but only for specific individual
products. The MLR requirements do not apply to Knox-Keene
Health Care Service Plan Act of 1975 (Knox-Keene) plans.
Knox-Keene plans are limited to no more than 15%
administrative costs, but DMHC does not include profit as an
administrative cost.
3)HEALTH INSURANCE RATES . The California HealthCare Foundation
reports that premiums paid by employees for small group
coverage (2-50 employees) in California increased 53% between
2003 and 2006, from $250 to $382, and premiums for individual
coverage rose 23% between 2002 and 2006, from $211 to $259.
In 2006, a single person age 32-52 earning the median income
who purchased individual insurance spent on average 16% of
income on premiums and out-of-pocket medical expenses. For
individual insurance, the share of medical expenses paid by
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insurance as opposed to patients declined from 2002 to 2006.
In 2003, individual market policies paid 75% of medical costs
on average; that figure had dropped to 55% just three years
later. In the small-group market, premiums rose more than 50%
from 2003 to 2006, but the proportion of claims paid by
insurers for a standardized population remained constant.
Small group market policies retained their actuarial value,
paying for roughly 83% of medical expenses across a similar
period.
4)PROPOSITION 103 . This bill proposes to confer direct rate
regulation authority for health coverage on both regulators,
using language similar to that enacted when the voters passed
Proposition 103 (Prop 103) in 1988. Prop 103 currently
applies to auto, homeowners, and other forms of
property/casualty insurance and, generally speaking, requires
extensive examination of any rates proposed by insurers.
Generally speaking, CDI will find that proposed rates meet the
one test that they are not excessive, inadequate, or unfairly
discriminatory if the rates produce a return on surplus
(generally analogous to Tangible Net Equity for health plans
and insurers) of between -7% and +15%. Importantly, the
regulations implementing Prop 103 were just finalized in 2006,
nearly 20 years after passage of Prop 103. During that time,
CDI regulated rates under draft regulations that were the
subject of persistent legal challenges and litigation by
insurers. Consumer advocates point out that during the decade
after Prop 103 was adopted, auto insurance rates in California
went down by 4% while auto insurance products remain broadly
available and competitive, and the uninsured motorist
population declined by 38%. Nationally, auto insurance rates
rose over 25% during this period. In 2001, the Consumer
Federation of America selected Prop 103 as resulting in the
best practices in the nation with regard to auto insurance
regulation.
5)HEALTH INSURANCE REGULATION IN CALIFORNIA . 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 Preferred Provider Organization
(PPO) plans. CDI regulates multiple lines of insurance,
including disability insurers offering health insurance,
generally PPO plans and traditional indemnity coverage.
Although DMHC and CDI both regulate carriers providing health
coverage, each department approaches that regulation very
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differently. At the heart of the difference between health
plans and health insurers is the "promise to pay" versus the
"promise to deliver care." Knox-Keene health 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.
Disability 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. The distinction between the two
regulatory frameworks has blurred over time because of the
historical exceptions made for two large PPO carriers, Blue
Cross and Blue Shield, who offer PPO products under both DMHC
and CDI, but fundamental differences remain in the
expectations and regulatory oversight by each regulator. In
general, DMHC has greater authority and responsibility to
review and approve health plan products and benefit designs
than CDI has to review health insurance products under its
purview.
6)STATE ADMINISTRATIVE HEARINGS . This bill establishes
standards for judicial review and administrative hearings
related to the rate filings required by this bill. For the
Committee's general background, this bill requires hearings on
rate filings to be conducted consistent with state
administrative hearing procedures, using OAH. The OAH is a
quasi-judicial tribunal that hears administrative disputes for
over 150 state and 800 local government agencies. Independent
ALJs preside over OAH proceedings in a manner similar to civil
court trials with each party given an opportunity to make an
opening statement, call witnesses, offer other relevant
evidence, and make closing arguments. State law establishes
the options for an agency after a proposed decision is
received from OAH. The agency may adopt the proposed decision
in its entirety, make technical and minor changes, or reduce
the proposed penalty and adopt the balance of the proposed
decision. Alternatively, the agency may reject the proposed
decision and decide the case upon the record, with or without
taking additional evidence, or refer the case back to the ALJ
to take additional evidence. The judicial review included in
this bill seeks to ensure consumers the right to challenge the
final decision of the DMHC or CDI, but sets some parameters.
For example, a person cannot go to court in the middle of a
rate proceeding, but can go to court after a final rate
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decision is made or a hearing request is denied.
7)SUPPORT . Consumer and labor organizations write in support of
this bill that in this age of skyrocketing health care costs,
the majority of Californians with health insurance fear that
ongoing premium increases will cost them their health
insurance coverage. Supporters claim that while medical care
costs are part of the increases in premiums, overhead in the
form of administration, profit, advertising, and executive
salaries, is the fastest growing component of health care
spending. Supporters point to the success of Prop 103 and
note that insurance companies subject to Prop 103 have managed
to maintain profits and have not been driven out of business.
Consumer Watchdog (Watchdog) argues that the results of Prop
103 suggest that rate controls can coexist with a competitive
market. Watchdog also states that Californians needs Prop
103-styled rate regulation for health insurance because,
without it, many small businesses and individuals will
increasingly be priced out of the market. Watchdog points out
that just five HMOs control approximately 80% of California's
health insurance market allowing them to raise prices while
cutting back on coverage. The Greenlining Institute
(Greenlining) argues that this bill does not prevent insurers
from making reasonable profits and would encourage health
insurers to invest premium dollars into health care for
California ratepayers rather than funneling hundreds of
millions of dollars to out-of-state parent companies.
Greenlining argues that the rising cost of health insurance is
draining the lifeblood from California's economy, small
employers, who must face ever rising health insurance costs as
a cost of doing business in this state. California Labor
Federation (Cal-Fed) supports this bill and states that even
when employers pay for health care coverage, working families
end up bearing the brunt of cost increases either through
higher cost-sharing or by foregoing wage increases. Cal-Fed
states that this bill will be a key tool for working families
and employers alike as they struggle to maintain coverage in
the face of rising costs. The California Psychological
Association applauds the author's efforts to bring much-needed
transparency into the individual insurance purchasing market.
The California Dental Association points out that while dental
plan premiums have increased, annual maximums for paid
benefits haven't significantly increased for over twenty
years.
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8)OPPOSITION . Health plans, health insurers, physicians, and
some business groups oppose this bill. The California Medical
Association (CMA) is opposed to this bill because CMA believes
that health plans will simply force lower rates on doctors and
suggests that an alternative to the rate regulation framework
in this bill is enforcement of an 85% MLR by product and
policy. CMA states that enforcement of MLR requirements will
ensure that 85 cents of every premium dollar goes to medical
care. Health plans and health insurers oppose this bill
because they believe prior approval of rates does not address
the underlying cost drivers in the system, and will likely
have unintended, counterproductive consequences. Blue Shield
of California (BSC) points out that many studies have shown
that hospital and pharmaceutical costs, new technologies, and
an aging and overweight population are the primary drivers of
premium increases. BSC also objects to the new "cottage
industry for interveners," and the financial incentives in
this bill for special interests and their attorneys to protest
filings because this bill requires health plans to reimburse
their legal and advocacy costs. Kaiser Permanente (KP) writes
in opposition to this bill that California premiums are
already below most rate-regulated states, with premiums
ranking 26th in the nation for individual coverage and 32nd
for family coverage. KP is also concerned that rate
regulation will undermine KP's ability to build facilities for
the future and to support the community as a nonprofit,
including grants to safety net hospitals and clinics. Health
Net argues that rate regulation will retard innovation in
product design and limit choice in the marketplace. The
California Association of Life and Health Insurance Companies
(ACLHIC) is concerned that by defining rate increases to
include copayments and deductibles, as well as overall premium
increases, this bill would greatly limit an individual's or
business' ability to choose a health insurance product best
suited to their needs and create a regulatory nightmare of
rate hearings for small adjustments in health insurance
products. Finally, health plans argue that rate regulation in
other states has resulted in marketplace distortions and
health plan financial solvency problems.
9)PRIOR LEGISLATION .
a) AB 1554 (Jones) of 2007, substantially similar to this
bill, would have required health plans and health insurers
to apply for prior approval of rate increases, as
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specified. AB 1554 failed passage in the Senate Health
Committee.
b) AB 1806 (Committee on Budget), Chapter 69, Statutes of
2006, extended the CPP at DMHC until January 1, 2012.
c) 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 this bill. SB
425 did not have a hearing, at the author's request, and
died in the Senate Health Committee.
d) 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. SB 26 died in the Senate Insurance
Committee.
e) SB 1092 (Sher), Chapter 792, Statutes of 2002,
establishes the CPP within DMHC.
10)TECHNICAL AMENDMENT . Page 3, line 32, after "coverage"
insert "and."
REGISTERED SUPPORT / OPPOSITION :
Support
California Dental Association
California Labor Federation
California School Employees Association
California Teachers Association
California Psychological Association
Congress of California Seniors
Consumer Federation of California
Consumer Watchdog
Greenlining Institute
Health Access California
Service Employees International Union
Opposition
America's Health Insurance Plans
Anthem Blue Cross
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Association of California Life and Health Insurance Companies
Blue Shield of California
California Association of Dental Plans
California Association of Health Plans
California Association of Joint Powers Authorities
California Chamber of Commerce
California Medical Association
Health Net
Kaiser Permanente
Analysis Prepared by : Deborah Kelch / HEALTH / (916) 319-2097