BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 1521
A
AUTHOR: Jones
B
AMENDED: June 23, 2009
HEARING DATE: July 8, 2009
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CONSULTANT:
5
Park/
2
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SUBJECT
Health care coverage: solicitation
SUMMARY
Prohibits a health plan or health insurer (collectively,
carriers) from entering into an agreement with a solicitor,
broker, agent, or any other entity (collectively, agents)
engaging in the sale, offer or application for an
individual health plan contract or health insurance policy
(collectively, individual health coverage), that provides
for, or results in, variation of the agent's compensation
because of the health status, claims experience, industry,
or occupation of the individual, with specified exceptions.
Imposes requirements on carriers related to agent
compensation at the time of renewal of individual health
coverage and imposes specific disclosure requirements on
agents and carriers.
CHANGES TO EXISTING LAW
Existing law:
Existing state law provides for regulation of health plans
by the Department of Managed Health Care (DMHC) and for
regulation of disability insurers who sell health insurance
Continued---
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(health insurers) by the California Department of Insurance
(CDI).
Existing law 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.
Existing law prohibits carriers 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.
Existing federal law, under the Health Insurance
Portability and Accountability Act (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, including
commissions, bonuses, or other rewards.
This bill:
This bill would prohibit a carrier from, directly or
indirectly, entering into any contract, agreement, or
arrangement with an agent engaging in the sale or offer of,
or application for, individual health coverage that
provides for, or results in, the compensation paid to the
agent (for the sale or offer of, or application for,
individual health coverage) to be varied because of the
health status, claims experience, industry, or occupation
of the individual.
This bill would provide that a carrier may establish agent
payment rates that have the effect of either standardizing
commissions or providing a lower compensation level for the
sale of (or offer of, or application for) coverage of an
individual with a higher risk profile than the compensation
agents receive for an individual with a lower risk profile,
provided that the commission or compensation does not
directly or indirectly create an incentive based on the
health status, claims experience, industry, or occupation
of the individual.
The bill would require a carrier to base compensation for
the agent, at the time of renewal of individual health
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coverage, or the transfer to other individual health
coverage with the same carrier, on the individual health
coverage in which the individual will be enrolled after
renewal of the current health coverage, or transfer to
other health coverage with the same carrier. This bill
would require this provision to apply to a subsidiary or
affiliate of the carrier.
The bill would provide that, unless an individual is
applying for transfer to different health coverage with
equal or lesser benefits than the one the individual
currently has, without medical underwriting as allowed by
current law, the carrier, or any agent representing the
carrier, shall notify an individual applying to change
individual health coverage that the application may result
in a review of the applicant's medical history that could
result in an offer, an offer for a higher premium, or
denial of coverage entirely for the different coverage
being applied for. The bill would require such a notice to
be provided at the time of an individual's application to
change to different individual health coverage.
The bill would require the agent to identify the specific
health coverage the agent is offering.
FISCAL IMPACT
According to the Assembly Appropriations Committee, the
bill would have no direct fiscal impact to DMHC and CDI to
continue regulation of carriers.
BACKGROUND AND DISCUSSION
The author writes that AB 1521 is designed to address
concerns about how the health insurance market is operating
in this era of rapidly escalating costs. The author notes
that many individual and group policyholders are faced with
rising premiums that are perceived as unaffordable, and, in
response, they begin to search for less expensive options.
The author states that many of these consumers are not
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sufficiently informed about how the individual market
operates, and this measure will help inform these consumers
that an "independent agent" may not represent a broad range
of insurers, and may not be able to shop for the best
policy for that individual's consumer needs.
Additionally, the author writes that this measure addresses
the possibility that compensation structures carriers use
may cause agents to steer consumers into the more
profitable policies that might not be the best fit for that
consumer. The author believes that the measure would
eliminate agent compensation structures that encourage
agents to "churn" business, moving people from product to
product at renewal because the agents are currently paid
more for enrollment in a new product than for renewal of
existing coverage. The author notes that churning allows
those individuals who can pass a new round of medical
underwriting to move into newer products, but leaves those,
who are unable to change to a richer benefit plan because
of health issues or claims experience, in products where
the costs can continue to rise as only higher cost
consumers renew the coverage.
Agent/Broker Compensation
According to a 2002 issue brief by the Center for Studying
Health System Change (The Center), entitled, The Role of
Health Insurance Brokers, which focused on the costs and
benefits of using brokers in the small group market, the
issue brief stated that, in the communities studied, health
plans typically pay brokers on a commission basis, which
varies within and across markets. The issue brief noted
that commissions can also vary significantly within a
specific market, because of various business strategies and
market conditions. For example, a health plan trying to
increase market share might compensate brokers at 10
percent, while other health plans in the same community are
paying 6 to 8 percent. According to the issue brief,
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 issue brief also noted that health plans occasionally
use commission rates to discourage brokers from referring
bad risks or market segments with above average
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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 issue brief noted that the attempt to
discourage business referrals based on the size of a group
is in violation of HIPAA, and that the Centers for Medicare
and Medicaid Services has condemned these practices.
Medicare Advantage producer rules
On November 10, 2008, the Centers for Medicare and Medicaid
(CMS) issued interim final rules to establish requirements
governing compensation structures in Medicare Advantage
(MA) plans and prescription drug plans (PDP) to ensure that
agents and brokers enroll individuals in the MA plan or PDP
that best meets their health care needs. This authority
was established by Medicare Improvements for Patients and
Providers Act. (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. The prescription drug
program refers to the Medicare Part D prescription drug
program, which allows beneficiaries enrolled in Part D to
choose a health plan to obtain that coverage.)
The CMS interim final rules include the following
requirements: a requirement that all compensation paid to
agents and brokers must reflect fair-market value, based on
the commissions paid in the past, adjusted for inflation
for similar products in the same geographic area; a
requirement that renewal compensation be no more, or no
less, than half of the compensation paid for that
beneficiary in the initial year of the six-year
compensation cycle; a requirement for plans to submit to
CMS their compensation structures for the previous three
years plus the compensation structure they are implementing
for 2009, information which is also required to be provided
to agents, brokers, and other third parties under contract
to sell their plans; a requirement for approval from CMS
prior to changing rates or structures; and a requirement
that plans initially pay renewal rate compensation, rather
than the initial year compensation amounts, for all plan
changes, to prevent churning. (Once CMS identifies an
initial commission was warranted, plans are to
retrospectively pay agents and brokers an additional amount
for a total payment of the initial compensation rate as
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filed with CMS.)
Related bills
AB 1449 (De Leon) would 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 (De
Leon), Chapter 604, Statutes of 2007, exclusively to
individual health care coverage. Pending in the Senate
Health Committee.
Prior legislation
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.
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.
Arguments in support
Health Access California, the sponsor of this bill, writes
that brokers and agents are sometimes paid more for signing
up healthier people or people in certain occupations or
industries, and that this practice, which is already
prohibited in the small employer group market, should be
prohibited in the individual market also. Health Access
also states that, unlike auto insurance where discounts are
given for customer loyalty, both health insurers and agents
benefit by moving consumers into new products. Health
Access points out that, by requiring broker compensation be
the same whether it is for renewal of a product or offer of
a different plan contract with the same plan or insurer,
the broker has no incentive to switch a consumer who has
coverage to a new product just to increase their own
compensation. Health Access notes that Medicare recently
adopted similar rules for Medicare Advantage plans.
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Finally, Health Access believes that, by requiring notice
to individual consumers that switching plans may result in
a denial, consumers will be protected from losing their
existing coverage, which is guaranteed renewable under
existing law.
The Service Employees International Union (SEIU) writes
that, insurance agents and brokers are middlemen in a
complicated system of health insurance, who make their
money off the confusion created by insurers that offer a
multiplicity of products with little standardization or
regulation of rates or products. SEIU believes that the
provisions of the bill will protect against steering and
churning of coverage.
The California Federation of Teachers writes that insurers
and insurance agents have considerable incentives to
encourage buyers to change carriers, since the agent gets a
higher share of premium during the first year of coverage,
and the insurer is able to renew medical underwriting so
that the purchasers in the first year of coverage are
typically healthier on average than those who renew their
coverage. Consumers Union writes that the measure will
provide basic consumer protections that address the health
insurance market. The California Labor Federation writes
that, by removing financial incentives for shifting
purchasers between plans and improving transparency, this
bill will give health care purchasers more information to
guide their decisions about coverage and the use of a given
broker.
Arguments in opposition
While several groups wrote in opposition to a prior version
of the bill, those groups have registered no opposition
with the current version.
PRIOR ACTIONS
Assembly Floor: 48-28
Assembly Appropriations:11-4
Assembly Insurance: 7-3
Assembly Health: 10-6
COMMENTS
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1. Recommended clarifying amendments.
The author proposes (and staff recommends) the
following amendments to clarify which compensation
practices are allowed by the bill.
1359.1. (a) A plan shall not, directly or indirectly,
enter into any contract, agreement, or arrangement
with a solicitor that provides for or results in the
compensation paid to the solicitor for the sale or
offer of, or application for, an individual health
care service plan contract to be varied because of the
health status, claims experience, industry, or
occupation of the individual. A health plan may
establish solicitor payment rates that have the effect
of standardizing or tiering compensation for the sale
or offer of, or application for, coverage of an
individual, provided that the standardized or tiered
compensation does not directly or indirectly create an
incentive for the solicitor to recommend, offer or
sell based on the health status, claims experience,
industry, or occupation of the individual, or any
combination thereof.
However, a health plan may establish solicitor payment
rates that have the effect of either standardizing
commissions or providing a lower solicitor
compensation level for the sale or offer of, or
application for, coverage of an individual with a
higher risk profile than the compensation solicitors
receive for an individual with a lower risk profile,
provided that the commission or compensation does not
directly or indirectly create an incentive based on
the health status, claims experience, industry, or
occupation of the individual.
(b) At the time of renewal of an individual health
plan contract or the transfer to another individual
health plan contract with the same plan, a plan shall
base compensation for the solicitor at the renewal
rate for on the health plan contract in which the
individual will be enrolled after renewal of the
STAFF ANALYSIS OF ASSEMBLY BILL 1521 (Jones) Page
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current contract or transfer to another contract with
the same health plan. This subdivision shall also
apply to a subsidiary or affiliate of the health plan.
10119.4. (a) A health insurer shall not, directly or
indirectly, enter into any contract, agreement, or
arrangement with an agent, broker, solicitor, or any
other entity engaging in the sale or offer of, or
application for, individual health insurance that
provides for or results in the compensation paid to
the agent, broker, solicitor, or other entity for the
sale of a health insurance policy to be varied because
of the health status, claims experience, industry, or
occupation of the individual. A health insurer may
establish payment rates for an agent, broker,
solicitor, or any other entity that have the effect of
standardizing or tiering compensation for the sale or
offer of, or application for, coverage of an
individual, provided that the standardized or tiered
compensation does not directly or indirectly create an
incentive for the agent, broker, solicitor, or any
other entity to recommend, offer or sell based on the
health status, claims experience, industry, or
occupation of the individual, or any combination
thereof.
However, a health insurer may establish payment rates
for agents, brokers, solicitors, or the other entities
that have the effect of either standardizing
commissions or providing a lower compensation level
for the sale or offer of, or application for, coverage
of an individual with a higher risk profile than the
compensation the agents, brokers, solicitors, or other
entities receive for an individual with a lower risk
profile, provided that the commission or compensation
does not directly or indirectly create an incentive
based on the health status, claims experience,
industry, or occupation of the individ .
(b) At the time of renewal of an individual health
insurance policy or the transfer to another individual
health insurance policy with the same insurer, an
insurer shall base compensation for the agent, broker,
solicitor, or other entity at the renewal rate for on
the health insurance policy under which the individual
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will be covered after renewal of the current policy or
after transfer to another policy with the same
insurer. This subdivision shall also apply to a
subsidiary or affiliate of that insurer.
POSITIONS
Support: Health Access California (sponsor)
American Federation of State, County and Municipal
Employees
California Alliance for Retired Americans
California Federation of Teachers
California Labor Federation
California Teachers Association
Congress of California Seniors
Consumers Union
Jericho
Pacific Community Ventures
Service Employees International Union
Oppose: None received
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