BILL ANALYSIS
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THIRD READING
Bill No: AB 1759
Author: Blumenfield (D), et al
Amended: 8/2/10 in Senate
Vote: 21
SENATE HEALTH COMMITTEE : 6-2, 6/30/10
AYES: Alquist, Cedillo, Leno, Negrete McLeod, Pavley,
Romero
NOES: Strickland, Aanestad
NO VOTE RECORDED: Cox
SENATE APPROPRIATIONS COMMITTEE : 7-2, 8/9/10
AYES: Kehoe, Alquist, Corbett, Leno, Price, Wolk, Yee
NOES: Ashburn, Emmerson
NO VOTE RECORDED: Walters, Wyland
ASSEMBLY FLOOR : 44-28, 5/6/10 - See last page for vote
SUBJECT : Health care coverage: premium rates
SOURCE : Pacific Federal
DIGEST : This bill requires health plans and insurers to
provide separate, enhanced disclosures to companies and
other large group purchasers at the point of sale. The
enhanced disclosures must explain the circumstances under
which a change in premium rates or applicable copayments,
coinsurance or deductibles may occur. The enhanced
disclosures must include defined terms and specific
examples of the circumstances under which changes in rates
CONTINUED
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may occur.
ANALYSIS :
Existing law:
1. Provides for the regulation of health plans and insurers
by the Department of Managed Health Care (DMHC) and the
Department of Insurance (CDI), respectively.
2. Prohibits a health plan or insurer from changing premium
rates or applicable copayments, coinsurances, or
deductibles for group health plan contracts or group
health insurance policies after the contract or policy
holder 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.
3. Specifies that changes in the premium rates, applicable
copayments, coinsurances, or deductibles of a contract
may be changed when (a) authorized or required in the
contract or policy, (b) the contract was agreed to under
a preliminary agreement that states that it is subject
to execution of a definitive agreement, or (c) the plan
or insurer and the contract or policy holder mutually
agree in writing.
4. Defines "small employers" as (a) any person, firm,
proprietary or nonprofit corporation, partnership,
public agency, or association that is actively engaged
in business or service, that, on at least 50 percent of
its working days, as specified, employed at least two,
but no more than 50, eligible employees, as specified,
or (b) any "guaranteed association," as defined in
Section 1357(n) of the Penal Code, that purchases health
coverage for members of the association.
This bill requires health plans and insurers to provide
separate, enhanced disclosures to companies and other large
group purchasers at the point of sale. The enhanced
disclosures must explain the circumstances under which a
change in premium rates or applicable copayments,
coinsurance or deductibles may occur. The enhanced
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disclosures must include defined terms and specific
examples of the circumstances under which changes in rates
may occur.
Background
2010 Health Coverage Rate Increases in the Individual
Market
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 Assembly Health Committee held an oversight
hearing in late February 2010 on the rate increases, as did
the Congressional House Energy and 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
United States Department of Health and Human Services,
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 (1)
a less healthy risk pool, (2) individuals moving to
lower-cost options, (3) individuals aging into a higher age
category, and (4) "deductible leveraging," when enrollee
deductibles and copayments do not increase with medical
inflation, and medical costs increases 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
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rates. In April 2010, the independent actuarial review
found numerous errors in the methodology used by Anthem to
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.
While the rate hikes were rescinded by the insurer, Anthem
indicated premiums may be adjusted "more frequently." Some
employers have interpreted these recent rate hikes as a
cautionary warning for future hikes in the group market.
As noted in the February 2010 congressional hearing, while
working families struggled with rising health care costs
and a recession, the five largest health insurance
companies - WellPoint, Cigna, UnitedHealth Group, Aetna and
Humana - had combined profits of $12.2 billion, up 56
percent from a year earlier. Health insurance company
profits grew while the gross domestic product decreased by
one percent over same period.
Health Plan and Health Insurance Regulation in California
California's regulatory agencies, DMHC and CDI, oversee
roughly 200 health plans and insurers, which collectively
provide coverage for 27 million people. DMHC regulates
health plans, including Health Maintenance Organizations
(HMOs) and some Preferred Provider Organization (PPO)
plans. CDI regulates multiple lines of insurance,
including disability insurers offering health insurance,
which are generally PPO plans and traditional indemnity
coverage. Five HMOs - Kaiser, Blue Cross, Health Net,
PacifiCare, and Blue Shield - currently account for 76.0
percent of health plan enrollment in the state.
Collectively, these plans cover 20 million Californians.
Although DMHC and CDI both regulate health plans and
insurers providing health coverage, each regulator employs
a different approach, based on historical differences. At
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the heart of the difference is the "promise-to-pay" versus
the "promise-to-deliver care." DMHC-licensed 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
become blurred over time because of the historical
exceptions made for two large PPO health plans and
insurers, 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.
DMHC enforces the provisions of the Knox-Keene Act, which
sets rules for mandatory basic services, financial
stability, availability and accessibility of providers,
review of provider contracts, cost sharing, onsite medical
surveys, including review of patient medical records, and
consumer disclosure and grievance requirements. Knox-Keene
licensed plans must submit for review and approval all of
the types of contracts it will offer, as well as its
standard provider contracts and payment methods, audited
financial statements, administrative structure, financial
viability, actuarial analyses, proposed advertising and
marketing materials, and proposed service areas. However,
DMHC does not have authority to regulate rates except in a
few specified circumstances.
CDI requires premium rates to be filed for individual
health insurance, and rating plans to be filed by small
groups, but does not approve the rates per se. For
individual health insurance, CDI reviews rates after they
are filed, and may disapprove policies that provide no
economic benefit to the consumer and require that benefits
be reasonable in relation to use. The Insurance
Commissioner can also withdraw an individual health
insurance policy upon a finding that rates are unreasonable
in relation to the benefits.
Medicare supplement policies and contracts sold by both
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health plans and insurers are subject to prior approval and
regulation of their medical loss ratios. Some other types
of health insurance are subject to rating restrictions, but
generally are not subject to rate regulation. Health plans
and insurers are subject to rating rules relating to health
coverage sold to small employer groups of 2 to 50 eligible
employees, but these rules do not limit the rate, per se,
that may be charged.
CDI oversees 11 percent of group policies in California,
compared to 39 percent of individual market policies. In
contrast, DMHC oversees 89 percent of the group policies
and 61 percent of individual policies.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
DMHC filing reviews $50-$60 $0
$0Special*
* Managed Care Fund
SUPPORT : (Verified 8/2/10 - prior version of bill)
Pacific Federal (source)
American Federation of State, County and Municipal
Employees
Association of California Water Agencies
California Chapter of the American College of Emergency
Physicians
California Chiropractic Association
California Communities United Institute
California Medical Association
California Psychological Association
California School Employees Association
California Teachers Association
Consumer Attorneys of California
Neighborhood Legal Services of Los Angeles County
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Valley Industry and Commerce Association
OPPOSITION : (Verified 8/2/10 - prior version of bill)
Anthem Blue Cross
Association of California Life and Health Insurance
Companies
Blue Shield of California
California Association of Health Plans
Health Net
Kaiser Permanente
ASSEMBLY FLOOR :
AYES: Ammiano, Arambula, Beall, Blumenfield, Bradford,
Brownley, Buchanan, Caballero, Charles Calderon, Carter,
Chesbro, Coto, Davis, De Leon, Eng, Evans, Feuer, Fong,
Fuentes, Furutani, Galgiani, Hayashi, Hernandez, Hill,
Huffman, Jones, Lieu, Bonnie Lowenthal, Ma, Monning,
Nava, V. Manuel Perez, Portantino, Ruskin, Salas,
Saldana, Skinner, Solorio, Swanson, Torlakson, Torres,
Torrico, Yamada, John A. Perez
NOES: Adams, Anderson, Bill Berryhill, Tom Berryhill,
Blakeslee, Conway, DeVore, Emmerson, Fletcher, Fuller,
Gaines, Garrick, Hagman, Harkey, Huber, Jeffries, Knight,
Logue, Miller, Nestande, Niello, Nielsen, Norby, Silva,
Smyth, Audra Strickland, Tran, Villines
NO VOTE RECORDED: Bass, Block, Cook, De La Torre, Gilmore,
Hall, Mendoza, Vacancy
CTW:mw 8/10/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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