BILL ANALYSIS
AB 1521
Page 1
Date of Hearing: April 14, 2009
ASSEMBLY COMMITTEE ON HEALTH
Dave Jones, Chair
AB 1521 (Jones) - As Introduced: February 27, 2009
SUBJECT : Health care coverage: solicitation.
SUMMARY : Establishes a fiduciary duty on the part of health
insurance agents and brokers to the persons who are offered or
purchase health insurance, and requires health insurance agents
and brokers to disclose to them any compensation or remuneration
the agent or broker will receive related to the offer or sale of
coverage. Specifically, this bill :
1)Imposes a fiduciary duty on an agent, broker, solicitor,
solicitor firm, representative, or any other entity (health
insurance agent) that submits an application to a health plan
or health insurer, that results in the offer, sale, or
purchase of a health plan contract or health insurance policy,
to the offeree or purchaser of that coverage.
2)Requires a health insurance agent to disclose, to the offeree
or purchaser of a health plan contract or health insurance
policy, prior to the offer or purchase, any compensation
received by the agent involved in the transaction as fees,
commissions, or any other remuneration or thing of value, and
limits compensation to the agent to the amounts disclosed.
3)Requires the disclosure pursuant to 1) above to provide an
estimate of the percentage of premium to be paid by the
offeree or purchaser as compensation to the agent and to
include the percentage of premium to be paid in the first year
of coverage, and in future years.
4)Permits a health plan or health insurer to make the disclosure
required by this bill, as specified.
EXISTING LAW :
1)Provides for regulation of health plans by Department of
Managed Health Care under the Knox-Keene Health Care Service
Plan Act of 1975 and for regulation of disability insurers who
sell health insurance (health insurers) by the California
Department of Insurance under the Insurance Code.
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2)Requires anyone who solicits, negotiates, or effects contracts
of insurance to be licensed for that purpose by the
Commissioner of Insurance, and to meet specified testing and
training requirements.
3)Establishes the licensing category of a life licensee,
authorized to act on behalf of life or disability insurers,
and further defines one type of life licensee as an accident
and health insurance licensee, authorized to transact
insurance coverage for sickness, bodily injury, or accidental
death.
4)Prohibits health plans and health insurers from directly or
indirectly varying agent compensation for health coverage sold
to small employer firms (2-50 employees) based on the health
status, claims experience, industry, occupation, or geographic
area of the small employer.
5)Under the federal Health Insurance Portability and
Accountability Act of 1996 (HIPAA), prohibits health insurers
from deflecting or in any way avoiding the issuance of a
policy to a HIPAA eligible person or a small employer group by
reducing agent compensation (commissions, bonuses, or other
rewards).
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
would lend transparency to the process of purchasing health
insurance through an agent. The author acknowledges that many
individual consumers and smaller businesses rely on insurance
agents to help them find the right health insurance coverage.
However, the author points out that, by contract, an insurance
agent is often acting on behalf of the insurer, not the
purchaser, and is paid by the insurer who ultimately sells the
coverage. Many agents represent multiple insurers, and the
first duty of the agent is to the insurers, not the purchaser.
According to the author, when consumers buy a house, the
realtor's compensation and the cost of title insurance are
disclosed. When consumers buy a car, all of the costs are
listed on the bill of sale. The author argues that, in
contrast, when individual consumers and small business owners
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buy health coverage, they have no idea what share of the
premium dollar is going to the insurer or health plan and what
share is paid to the agent. Many consumers do not even
realize that the agent is going to be paid by the health
insurance company.
2)BACKGROUND . Although the terms are often used
interchangeably, the National Association of Insurance
Commissioners identifies three categories of insurance
sellers: a) Brokers, act on behalf of the consumer and can be
compensated by the customer. They can also receive
compensation from the insurance company; b) Agents, are loyal
to the insurance company and are authorized on behalf of
insurers. They are compensated by the insurance company only.
A "captive agent" is loyal to a single company, while an
"independent agent" is affiliated with more than one company;
and, c) Producer, is a broader term that encompasses both
agents and brokers. A producer is defined as someone who
sells, solicits, or negotiates insurance.
Black's Law Dictionary describes a fiduciary relationship as
"one founded on trust or confidence reposed by one person in
the integrity and fidelity of another." A fiduciary has a
duty to act primarily for the client's benefit in matters
connected with the undertaking and not for the fiduciary's own
personal interest. Scrupulous good faith and candor are
always required. Fiduciaries must always act in complete
fairness and may not ever exert any influence or pressure,
take selfish advantage, or deal with the client in such a way
that it benefits themselves or prejudices the client.
Business shrewdness, hard bargaining, and taking advantage of
the forgetfulness or negligence of the client are totally
prohibited by a fiduciary duty.
3)PRODUCER COMPENSATION . According to a 2002 issue brief by the
Center for Studying Health System Change (The Center), The
Role of Health Insurance Brokers, insurance brokers (used in
the report as the generic reference to agents and brokers)
play an important role in helping small employers find
affordable health care coverage for workers and their
dependents. The Center conducted site visits and key
informant interviews in 12 communities, including one
California community, Orange County. In Orange County, health
plans reported that brokers provided more than 90% of business
referrals from the small employer market. The study found
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that health plans typically pay brokers on a commission basis,
which vary within and across markets from 2%-8% of the
premium. The Center also found that commissions can also vary
significantly within a specific market. For example, a health
plan trying to increase market share might compensate brokers
at 10% while other health plans in the same community were
paying 6%-8%. The study also found that most health plans
build broker commissions into the premium, for example,
premiums for small employers, whether the firm uses a broker
or not.
Commissions are typically highest the first year of the sale,
but continue to accrue as long as the consumer stays with the
insurer. Some health insurance companies also provide agents
with bonuses and other incentives for meeting productivity
goals, placing new business with a carrier, and re-signing
current enrollees. According to The Center, health plans pay
higher rates during the phase of what is known as the
"underwriting cycle" when they are trying to attract new
business, and lower rates during the phase where they are
seeking to restore profitability. The Center also found that
health plans occasionally use commission rates to discourage
brokers from referring bad risks or market segments with above
average utilization. For example, some health plans pay no or
lower commissions for business sold to the smallest groups,
which often have the highest potential for adverse selection.
The Center also found that in addition to helping employers
select a health insurance product, most brokers will also then
assist them in explaining benefits options to employees,
completing enrollment forms, and ensuring enrollees receive
the necessary documentation, such as member enrollment cards.
The Center also found that services may continue after
enrollment, especially for small employers without staff to
handle benefits issues. The Center suggested that reducing or
eliminating broker commissions might not result in lower
premiums because health plans would probably take over many of
the services currently provided by brokers and pass along the
cost to purchasers.
4)MEDICARE ADVANTAGE PRODUCER RULES . On November 14, 2008, the
Centers for Medicare and Medicaid (CMS) issued interim rules
to address what CMS identified as unscrupulous behaviors by
brokers in the Medicare Advantage (MA) and prescription drug
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programs. MA offers Medicare beneficiaries the opportunity to
choose to enroll in a private health plan, usually a health
maintenance organization (HMO), instead of the Medicare
fee-for-service program, and beneficiaries enrolled in the
Medicare Part D prescription drug program also choose a Part D
health plan to obtain that coverage. Producer abuse and
fraud are significant problems in the MA market, where it is
not unheard of for producers enrolling beneficiaries into a
new plan to earn first year commissions of $800-$1,000. Most
of the abusive behavior stems from the fact that MA health
plans offer varying commission rates, and the producer
continues to receive their commission for the entire plan year
even if the beneficiary switches plans within the first few
months. This system of paying producers may entice "churning"
where producers switch beneficiaries from plan to plan,
regardless of their medical needs, to gain more commissions,
or "twisting" where producers target new prospects to replace
their existing coverage and collect commission.
The CMS interim final rules dictate that the commission paid to
MA or Part D agents and brokers must reflect fair-market value
based on both the broker compensation structures in previous
years and the geographical area where the MA or Part D plan is
offered. Moreover, the rules include specific provisions
intended to stop producers from "churning" beneficiaries
between different plans in order to receive higher
commissions. To provide producers with a financial incentive
to enroll beneficiaries in plans that best meet their needs,
the new rules stated that the first year's commission cannot
exceed two hundred percent of the producer's commission for
the next five years. Additionally, producer compensation for
renewing a policy must be exactly half of the compensation
paid for that beneficiary in the initial year of the
compensation cycle. To prevent churning, CMS requires that
for all plan changes, the insurance company initially pay
producers the renewal compensation rate rather than the
initial year compensation amount. Once CMS identifies a
first-year commission was warranted, plans must
retrospectively pay agents and brokers the additional amount.
The CMS rules also require MA and Part D plans to submit to
CMS their agent compensation structures for the previous three
years, plus the compensation structure they are implementing
for 2009, and to also provide the information to agents,
brokers, and other third parties under contract to sell their
plans. The rates or structures cannot be changed without
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prior CMS approval.
5) OTHER STATES . Several states have enacted laws that
increase transparency of producer compensation, and help to
ensure that consumers are enrolled in the health insurance
plans that best fit their needs. In Maryland, Texas, and
Utah producer compensation must not vary in small group
markets unless related to the group size. Oklahoma has a
law similar to California's limits on commissions in the
small employer market which prohibits insurers from varying
producer commissions based on the health status and claims
history of the group. Georgia and Oregon have enacted laws
that require producers who receive compensation from both
the consumer and insurance company to disclose the amount
and form of all compensation received from the insurance
company.
6)SUPPORT . Consumer and labor organizations support this bill.
Health Access California, sponsor of this bill, writes in
support that insurance agent compensation is one major reason
why the overhead for individual insurance is almost 30% of the
premium, while major employers are estimated to pay overhead
at only 5%-7% of the premium. Health Access argues that,
despite this, individuals and smaller businesses have no means
of obtaining the most basic information about how much of the
premium is going to the agent. Health Access and Consumers
Union argue that disclosure of compensation in the first and
subsequent years of coverage is intended to reduce the
incentive to "churn" coverage, the practice of moving
individuals from one product to another. Supporters state
that currently in the individual health insurance market, it
is advantageous for both insurers and agents to churn business
because the agent gets a higher compensation for new business
and the insurer gets the opportunity to conduct a new round of
medical underwriting for the new product. For healthier
individuals who can pass underwriting, they can move to a
different, possibly cheaper product, but those with claims
history or pre-existing conditions are denied the chance to
change, so that if they want to stay insured, they must stay
in coverage that costs them more and more over time, because
only high risk individuals stay with that product. The
Congress of California Seniors states that the dizzying array
of choices for individual insurance leads people to rely on
agents to help them and this bill would ensure that the
consumer can expect agents to be honest and give them reliable
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information. The California Labor Federation (Cal-FED)
supports this bill because they argue that to the dismay and
often misfortune of purchasers, brokers are under no legal
obligation to act in the best interest of those who are
purchasing the coverage. Cal-FED states that this bill will
rebalance the playing field in health care purchasing by
mandating disclosure of financial incentives.
7)OPPOSITION . Health insurers and agent groups oppose this
bill. The Nation Association of Insurance and Financial
Advisors of California (NAIFA-California) writes in opposition
that this bill would result in drawing consumer attention away
from what is most important: their insurance needs and an
insurance policy's ability to meet those needs.
NAIFA-California argues that disclosure could result in
consumers choosing policies with fewer benefits or more
restrictive provisions to look for the lowest commission.
NAIFA-California also opposes this bill as discriminatory
against the agency distribution system by requiring them to
make the disclosure but states that this bill fails to
acknowledge the professional services that agents provide to
consumers. Opponents point out that commissions are not just
profit for agents. Independent agents, for example, must
cover their costs of rent, payroll, benefits and advertising.
Opponents argue that commissions are only one of the many
selling expenses incurred by health insurers which include the
salesperson's advice, required product information, the
product itself, and continued service of the product over
time. NAIFA-California states that the insurance transaction
is more analogous to the purchase of a typical consumer item
where the cost of the salesperson's advice and service are
built into the bottom-line price of the item. Norwood
Associates, on behalf of multiple organizations representing
agents and brokers, argues this bill is inconsistent with
existing law, and provides no consumer benefit, but
discriminates against small- and medium-sized businesses that
have provided beneficial services to their customers for many
years. Health insurance industry representatives argue that
consumers need only to be aware of the total cost of a policy
and the type of coverage included in the policy before making
a purchasing decision. The Association of Life and Health
Insurance Companies argues consumers should not be encouraged
to shop for health insurance on the basis of what a company
pays its agents. Anthem Blue Cross says this bill is
impossible to administer because compensation can be based on
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a number of factors and be paid on a tiered basis. Many
opponents object to the imposition of a fiduciary duty on
brokers of health insurance because it would require agents to
put the interests of purchasers ahead of their own. Health
Net opposes this bill because they interpret the fiduciary
obligation as applicable to Health Net employees selling
coverage, which would place the employee in an impossible
legal position.
8)RELATED LEGISLATION . AB 1449 (De Leon) will apply the duty
for agents and brokers selling health coverage products to
assist applicants in providing answers to health questions
accurately and completely, as established in AB 2569,
exclusively to individual health care coverage. AB 1449 is
set for hearing in the Assembly Health Committee on April 21,
2009.
9)PREVIOUS LEGISLATION .
a) AB 720 (De Leon), Chapter 270, Statutes of 2007,
establishes two new insurance agent types, a life-only
agent license, and an accident and health insurance agent,
in place of the current life agent license; defines the
scope of each license type; and specifies the requirements
for licensure and post-licensure continuing education.
b) AB 2569 (De Leon), Chapter 604, Statutes of 2008,
requires health plans and health insurers to offer new
coverage, or continue existing coverage, for individuals
covered in a contract or policy where the coverage was
rescinded, as specified; and, establishes a duty for agents
and brokers selling health coverage products to assist
applicants in providing answers to health questions
accurately and completely, as specified.
10)AUTHOR AMENDMENTS . The author plans to offer amendments in
committee to do the following: a) revise the fiduciary duty in
this bill to instead be a duty of " honesty, good faith and
fair dealing ;" and, b) make the compensation disclosure
requirements in this bill applicable to persons selling health
insurance as employees of a health insurer.
11)DOUBLE REFERRAL . This bill has been double-referred. Should
this bill pass out of this committee, it will be referred to
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the Assembly Insurance Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Health Access California (sponsor)
California Federation of Teachers
California Labor Federation
Congress of California Seniors
Consumers Union
Service Employees International Union
Opposition
Anthem Blue Cross
Association of California Life and Health Insurance Companies
California Association of Health Plans
California Insurance Wholesalers Association
Civil Justice Association of California
Health Net
Insurance Brokers and Agents of the West
National Association of Insurance and Financial Advisors of
California
Surplus Line Association of California
12 individuals
Analysis Prepared by : Deborah Kelch / HEALTH / (916) 319-2097