BILL ANALYSIS
SENATE HEALTH
COMMITTEE ANALYSIS
Senator Elaine K. Alquist, Chair
BILL NO: AB 2042
A
AUTHOR: Feuer
B
AMENDED: June 10, 2010
HEARING DATE: June 23, 2010
2
CONSULTANT:
0
Chan-Sawin
4
2
FOR VOTE ONLY
SUBJECT
Health care coverage: rate changes
SUMMARY
Prohibits health care service plans (health plans) and
health insurers from altering rates, as specified, or any
benefits more than once per calendar year, for individual
plan contracts and policies that are issued, amended, or
renewed on or after January 1, 2011, with certain
exceptions.
CHANGES TO EXISTING LAW
Existing law:
Provides for the regulation of health plans by the
Department of Managed Health Care (DMHC), and for the
regulation of health insurers by the California Department
of Insurance (CDI).
Prohibits health plans and insurers from changing premium
rates or coverage policies without prior written
notification of the change to the contract holder or
Continued---
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policyholder.
Prohibits health plans and insurers, during the term of a
group plan contract or policy, from changing the rate of
the premium, copayment, coinsurance, or deductible during
specified time periods.
Requires health plans and insurers providing coverage in
the individual market to allow an enrollee to transfer to
another individual health plan or policy of equal or lesser
benefits at least once a year, as determined by the plan or
insurer, without undergoing medical underwriting.
This bill:
Prohibits health plans and insurers from altering rates, or
any benefits, included in the individual plan contract or
policy, more than once per calendar year, for contracts or
policies that are issued, amended, or renewed on or after
January 1, 2011.
Defines "rates," for the purposes of this bill, to include,
but not be limited to, premiums, copayments, coinsurance
obligations, deductibles, out-of-pocket costs, and any
other charges for covered benefits.
Provides an exemption for health plans and insurers to
alter rates if an enrollee or insured changes geographic
region or family composition, but requires the change in
the rates offered to reflect only the change in region or
in family composition.
Clarifies that, in situations where coinsurance obligations
are based on a percentage of the cost of services, a change
in provider rates during the term of a contract or policy
is permissible, even if that change would increase the
charge for covered benefits to the enrollee or insured.
Specifies that if a brand name prescription drug becomes
available as a generic drug, and if the prescriber does not
specify the use of the brand name drug, that cost-sharing
for enrollees and insureds shall be based on the lower rate
for the generic drug. Also specifies that health plans and
insurers may not change the structure, tiers, or
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cost-sharing for generic and brand name drugs during the
course of the year.
Applies these provisions to any new contract or policy
issued when an individual chooses to transfer to another
individual health plan or policy of equal or lesser
benefits without undergoing medical underwriting.
Specifies that a new individual plan contract or policy may
only be issued annually.
Exempts contracts and policies issued through a publicly
funded state health care coverage program, including, but
not limited to, the Medi-Cal Program and the Healthy
Families program, and Medicare supplement contracts from
the provisions of the bill.
FISCAL IMPACT
According to the Assembly Appropriations Committee
analysis, minor absorbable workload to the DMHC and the CDI
to continue oversight of carrier product pricing.
BACKGROUND AND DISCUSSION
According to the author, there is no limitation under
current law on how frequently health plans or insurers may
alter rates and benefits for individual plan contracts or
individual health policies. This bill prohibits plans and
insurers from altering rates or benefits of individual
policies more than once a year. It also exempts plans or
policies issued through any publicly funded state health
care coverage program.
2010 health coverage rate increases
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 California Assembly Committee on Health held
an oversight hearing in late February 2010 on the rate
increases, as did the Congressional House Energy & Commerce
Subcommittee on Oversight and Investigations on February
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24, 2010.
Wellpoint (Anthem Blue Cross' parent company), in response
to an inquiry from Kathleen Sebelius, Secretary of the U.S.
Department of Health and Human Services (HHS) for a
detailed justification for the increases to the public,
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: a)
a less healthy risk pool; b) individuals moving to
lower-cost options; c) individuals aging into a higher age
category; and, d) "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
rates. In April, 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.
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)
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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, HealthNet,
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
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 Health Care
Service Plan Act, which sets rules for mandatory basic
services; financial stability; availability and
accessibility of providers; review of provider contracts;
cost sharing; on-site 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. DMHC does not have authority to regulate
rates except in a few specified circumstances.
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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 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
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.
California's individual health insurance market
The July 2009 California HealthCare Foundation (CHCF)
report, "Individual Health Insurance in California,"
indicated that roughly 2.5 million Californians purchase
health coverage through the individual market in 2008. CDI
oversees 39 percent of individual market policies in
California, compared to 11 percent of group policies. In
contrast, DMHC oversees 89 percent of the group policies
and 61 percent of individual policies.
According to a study published in the journal, Health
Affairs, in 2007, premiums for individual coverage in
California rose 23 percent between 2002 and 2006, from $211
to $259 per month, compared to premiums paid by employees
for small group coverage (2-50 employees), which increased
53 percent between 2003 and 2006, from $250 to $382 per
month. In addition to an increase in premiums, the share
of medical expenses paid by insurance, as opposed to
patients with individual insurance, declined from 2002 to
2006. In 2003, individual market policies paid 75 percent
of medical costs on average. That figure had dropped to 55
percent in 2006, compared to the small-group market, where
the proportion of claims paid by insurers for a
standardized population remained constant.
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The CHCF report also pointed out that a Californian
considering individual coverage may have 100 or more
product variations, with different benefits, exclusions,
provider networks, and cost-sharing requirements from which
to choose. Differences in covered benefits play out in
differences in premiums, but other factors, such as
provider network, influence premiums as well. Furthermore,
differing cost sharing arrangements make it difficult for
applicants to estimate how well their insurance policy
would protect them from high costs in the event of a
serious illness. The report indicated that the laws
governing DMHC-regulated contracts require more
comprehensive benefit plans and lower consumer cost-sharing
overall. The laws governing CDI-regulated policies allow
for a wider range of benefit designs and more low-benefit,
low-premium options.
Arguments in support:
According to the sponsor, Health Access, there is a great
deal of unpredictability that exists currently in the
individual market. While the federal health care reform
law will bring much more certainty to the market (through
health insurance exchanges, guaranteed issuance of health
coverage, and community rating), many of these elements
will not go into effect until 2014. Several plans and
insurers have proposed substantial rate hikes over the last
several months; most notably, Anthem Blue Cross proposed
fee increases that averaged around 25 percent and ranged up
to 39 percent. The effect of these types of dramatic
increases is to drive more and more people out of the
market, and thus, without health coverage. Health Access
cites findings from the UCLA Center for Health Policy
Research that indicates the number of California residents
without insurance increased by nearly two million over 2008
and 2009 (from 6.4 million to 8.2 million) due
substantially to a decrease in private health care
coverage. Given that California still has a significant
period of economic recovery ahead, it is essential that we
take appropriate actions to stabilize the individual market
and provide Californians with the predictability they
deserve.
The Congress of California Seniors writes that this bill is
a common-sense measure to give consumers a modicum of
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predictability for their health insurance by simply
requiring that consumers have an enrollment period when
they know what their premiums, benefits, copayments, and
deductibles will be for the next 12 months. Both the
California Chiropractic Association and JERICHO, an
interfaith, non-profit organization who advocates on behalf
of individuals and families living in poverty, concur with
the California Congress of Seniors and further states that
the recent rate hikes have driven more and more people out
of the insurance market, leaving them without any health
care coverage.
The American Federation of State, County and Municipal
Employees (AFSCME) support this bill, stating that during
this time of fiscal crisis, individuals cannot afford to be
driven out of the market without health insurance. AFSCME
contends that not only is it outrageous for insurance
companies to hand out double-digit premium increases, but
it is fundamentally deceitful to do so multiple times over
the course of a year.
Arguments in opposition:
Blue Shield of California writes in opposition, stating the
underlying cost of health care has continued to rise
annually and, under current practices, health plans can
break up increases due to aging, and those due to increased
provider costs, into smaller pieces, to help smooth the
financial impact on its members. This bill would prohibit
smaller increases from occurring and would result in
members receiving less frequent, but larger increases.
Blue Shield also states that the bill does nothing to alter
the amount of premiums paid by members, and instead, shifts
the timing of when rate alteration occurs.
Health Net writes that there are many legitimate reasons
why a product's cost-sharing arrangements may change during
a contract year. For instance, the age of an enrollee or
insured may change during the term of the coverage, or as
occasionally occurs, a lower cost generic drug comes onto
the market replacing a higher cost name brand drug.
Additionally, not all of the possible changes occur at the
same time in a calendar year, making compliance with this
bill difficult.
The California Association of Health Plans asserts that
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health plans are preparing to implement the most important
and expansive health care reform bill in decades and
advancing piecemeal legislation at the state level in the
midst of major reform is counterproductive. Anthem Blue
Cross concurs, stating that, with the passage of federal
health care reform and its subsequent implementation,
health plans and insurers will need to be flexible as
possible to implement these changes, particularly in cases
where timelines will largely be out of their control.
Related bills
AB 1759 (Blumenfield) prohibits health plans and insurers
from using a change in enrollment as the basis for a
premium rate change during the length of a contract in the
group market. This bill is set to be heard in the Senate
Health Committee on June 23, 2010.
AB 2170 (Bonnie Lowenthal) prohibits health plans and
insurers covering prescription drug benefits and using a
formulary from changing the applicable copayments or
deductibles or coinsurances for prescription drug benefits
for the length of the contract or policy. Failed passed in
Assembly Appropriations Committee.
AB 2578 (Jones and Feuer) requires health plans and
insurers, effective January 1, 2012, to apply for prior
approval of proposed rate increases, under specified
conditions, and imposes on DMHC and CDI specific rate
review criteria, timelines and hearing requirements. This
bill is set to be heard in the Senate Health Committee on
June 23, 2010.
Prior legislation
AB 1218 (Jones), Statutes of 2009, would have required
health plans and insurers to annually submit for prior
approval to the respective regulator any increase in the
rate charged to a subscriber or insured, as specified, and
would have imposed on DMHC and CDI specific rate review
criteria, timelines, and hearing requirements. Failed
passage in Assembly Health Committee.
AB 1554 (Jones) of 2008 was substantively similar to AB
1218 (Jones) of 2009. Failed passage in Senate Health
Committee.
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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 AB 1218 of 2009.
Failed passage in Senate Health Committee.
AB 2889 (Frommer), Chapter 826, Statutes of 2006, requires
health plans and insurers to permit an individual who has
been covered for at least 18 months under an individual
contract or policy to transfer, without medical
underwriting, to any other individual contract or policy,
as specified.
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. Failed passage in Senate Insurance
Committee.
AB 2052 (Goldberg), Chapter 336, Statutes of 2002,
prohibits a health care service plan or insurer from making
any change in premium rates or cost sharing after
acceptance of a contract or after the open enrollment
period.
PRIOR ACTIONS
Assembly Health Committee: 13-6
Assembly Appropriations Committee:12-5
Assembly Floor: 48-27
COMMENTS
1. This bill is set for vote only. AB 2042 was heard in
the Senate Health Committee on June 16, 2010. Testimony
was taken, and the author agreed to take amendments to
address comment 2 of this analysis, as well as the
technical amendments in comment 5. The measure will be
taken up for vote only at the committee's June 23, 2010
hearing, and the vote will be on the bill with the
amendments agreed to by the author. The amendments to
address comment 2 are as follows:
(a) On page 2, delete lines 3-16, and insert:
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Section 1374.255. (a) For the purposes of this
section, the following definitions shall apply:
( 1 ) "Cost sharing" includes, but is not limited to,
copayments, coinsurance obligations, deductibles,
out-of-pocket costs, and any other charges for
covered benefits other than premiums.
(2) "Rate" includes, but is not limited to,
premiums and cost sharing, as defined in subsection
(a) (1).
(b) On page 2, delete lines 11-12, and insert:
(1) Alter in any manner the rates that apply to
individual plan contracts, except that a plan may
lower the premium if it does not otherwise alter
cost sharing or any benefits, and if the reduction
in premium is consistent with other provisions of
state and federal law.
(c) On page 3, delete lines 29-32, and insert:
Section 10199.49. (a) For the purposes of this
section, the following definitions shall apply:
( 1 ) "Cost sharing" includes, but is not limited to,
copayments, coinsurance obligations, deductibles,
out-of-pocket costs, and any other charges for
covered benefits other than premiums.
(2) "Rate" includes, but is not limited to,
premiums and cost sharing, as defined in subsection
(a) (1).
(d) On page 9, delete lines 37-38, and insert:
(1) Alter in any manner the rates that apply to
individual health insurance policies, except that
an insurer may lower the premium if it does not
otherwise alter cost sharing or any benefits, and
if the reduction in premium is consistent with
other provisions of state and federal law.
2. The bill could prevent a health plan or insurer from
STAFF ANALYSIS OF ASSEMBLY BILL 2042 (Feuer) Page
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lowering rates. AB 2042 specifies that health plans and
insurers shall not "alter in any manner the rates that
apply to individual plan contracts [or policies]."
However, there could be situations in which a plan or
insurer would offer to lower its rates. For instance, a
health plan or insurer may wish to offer discounts to
enrollees or insureds that have a gym membership, or are
enrolled and participate in wellness or nutrition classes.
The author states that his intent is to provide
predictability regarding rate and benefit changes for
insureds and enrollees in the individual market, and that
discounts can be abused by plans and insurers as a risk
selection mechanism.
3. Effect of the bill on enrollee's ability to change
insurance products. Current law requires health plans and
insurers in the individual market to allow enrollees and
insureds to transfer to another individual health plan or
policy of equal or lesser benefits at least once a year.
AB 2042 would have the practical effect of limiting this
option to no more than once a year. The author contends
that, although this limits the frequency of portability for
consumers, the other provisions of this bill provides
predictability and certainty for consumers, which provide a
larger benefit than a loss in portability of coverage.
4. What approach, if any, should California take to
regulate rates and/or benefits? This bill is one of three
Assembly Bills aimed at addressing the substantial rate
hikes levied by health plans and health insurers earlier
this year. The other two bills will be heard on June 23,
2010 in Senate Health Committee, and offer two different
approaches:
(a) AB 1759 (Blumenfield) prohibits health plans
and insurers from using a change in enrollment as
the basis for a premium rate change during the
length of a contract. This bill is limited to the
contracts and policies in the group market, and
would be complementary to AB 2042.
(b) AB 2578 (Jones/Feuer) directly regulates
premiums, in both the individual and group market,
by requiring plans and insurers to apply for prior
approval of proposed rate increases with DMHC and
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CDI. AB 2578 may have the same effect in the
individual market as AB 2042, and takes the further
step of directly regulating rates.
5. Suggested technical amendments:
(a) On page 2, between lines 14 and 15, insert:
(3) Nothing in this section shall prevent a plan
from providing coverage for newly approved
treatments, therapies and prescription drugs
related to an existing benefit or service provided
under the contract. Nothing in this section shall
be construed to provide any limitation on medically
necessary services.
(b) On page 3, line 5, insert after contract
between the enrollee and the health care service
plan
(c) On page 3, strike out lines 7-10 and replace
with:
(3) If a generic version of a brand name
prescription drug becomes available, the
application of a lower cost sharing rate for the
generic drug than that of the brand name version
shall not constitute an alteration in benefits. If
a generic equivalent of a brand name prescription
drug becomes available, the placement of the brand
name drug into another formulary tier, or
increasing the copayment for that brand name drug,
shall not constitute an alteration in benefits or a
rate increase. Nothing in this paragraph shall
(d) On page 3, after line 40, insert:
(3) Nothing in this section shall prevent a n
insurer from providing coverage for newly approved
treatments, therapies and prescription drugs
related to an existing benefit or service provided
under the contract. Nothing in this section shall
be construed to provide any limitation on medically
necessary services.
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(e) On page 4, line 8, insert after policy
between the insured and the health insurer
(f) On page 4, strike out lines 10-13 and replace
with:
(3) If a generic version of a brand name
prescription drug becomes available, the
application of a lower cost sharing rate for the
generic drug than that of the brand name version
shall not constitute an alteration in benefits. If
a generic equivalent of a brand name prescription
drug becomes available, the placement of the brand
name drug into another formulary tier, or
increasing the copayment for that brand name drug,
shall not constitute an alteration in benefits or a
rate increase. Nothing in this paragraph shall
POSITIONS
Support: Health Access (sponsor)
American Federation of State, County and
Municipal Employees
California Chiropractic Association
California Teachers Association
California School Employees Association
Congress of California Seniors
Consumers Union
Jericho
Oppose: Anthem Blue Cross
Association of California Life & Health Insurance
Companies
Blue Shield of California
California Association of Health Plans
California Association of Health Underwriters
Health Net
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