BILL ANALYSIS
AB 2578
Page 1
Date of Hearing: March 23, 2010
ASSEMBLY COMMITTEE ON HEALTH
William W. Monning, Chair
AB 2578 (Jones) - As Amended: March 18, 2010
SUBJECT : Health care coverage: rate approval.
SUMMARY : Requires health care service plans licensed by the
Department of Managed Health Care (DMHC) and health insurers
certificated by the California Department of Insurance (CDI),
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. Specifically, this bill :
1)Defines "rate" for purposes of this bill to include premiums,
copayments, coinsurance obligations, deductibles, and other
charges.
2)Prohibits health plans and health insurers (carriers) from
implementing a rate increase without regulatory approval,
except as specified in this bill, and requires carriers to
submit proposed rate increases to DMHC or CDI respectively
(regulators) for review and approval.
3)Prohibits any rate from being approved or remaining in effect
that is excessive, inadequate, unfairly discriminatory, or
otherwise in violation of the Knox-Keene Health Care Services
Plan Act of 1975 (Knox-Keene) in the case of health plans, or
the Insurance Code in the case of health insurers.
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 regulators from
considering the degree of competition.
5)Requires carriers to file any required rate application as a
complete application with the respective regulator for a rate
increase that will become effective on or after January 1,
2009, 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.
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6)Requires a rate application submitted pursuant to 5) 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 or health care services directly
to, or for the benefit of, the enrollee;
d) Salary and bonus compensation paid to the 10 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 carrier'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 carrier for the 100 most common medical
expenses incurred by enrollees during the previous calendar
year.
7)Imposes the burden of proof on carriers to provide the
regulators with evidence and documents establishing by a
preponderance of the evidence the carrier's compliance with
the requirements of this bill.
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8)Requires carriers to submit the rate applications
electronically and requires the regulators to post the
applications on the departmental Internet Web sites within 10
days of receipt.
9)Requires the regulators to review for compliance with the
requirements in this bill all rate increases which become
effective January 1, 2010 to December 31, 2011.
10)Requires that all information submitted in a rate application
and all information submitted in support of the application be
subject to the California Public Records Act, except for
financial data, where the disclosure of which would be
competitively injurious to the carrier, as determined by the
regulator.
11)Requires the regulators to notify the media and the public of
any rate application submitted by a carrier, as specified, and
requires the rate to be deemed approved within 60 days after
the date of the public notice, unless the regulator conducts a
hearing on any of the following grounds:
a) 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;
b) The regulator decides for any reason to hold a hearing
on the application; or,
c) The rate increase proposed exceeds 7% of the current
rate for the contract or policy.
12)Requires all hearings required by this bill to be conducted
in accordance with laws governing state administrative
hearings, including that the hearing be conducted by an
administrative law judge (ALJ) in the Department of General
Services Office of Administrative Hearings, 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.
13)Authorizes any person to initiate or intervene in any of the
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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.
14)Subjects health plans and insurers to penalties for violation
of the provisions in this bill, and 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)Limits administrative costs for health plans regulated by DMHC
to 15% and establishes minimum medical loss ratios for health
insurers regulated by CDI for specified individual indemnity
dental and vision policies (50%), and minimum loss ratios for
individual health insurance, excluding indemnity payout
policies (70%).
3)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.
4)Establishes the Consumer Participation Program (CPP) within
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 health maintenance organizations
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(HMO) and health insurance premiums in California are soaring
far above the rates of both general and medical cost
inflation. The majority of Californians with health insurance
fear that ongoing premium increases will cost them their
health insurance coverage. Unchecked premium increases hit
small businesses, the 3 million Californians purchasing health
insurance in the individual market and retirees not yet
eligible for Medicare, the hardest. 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. 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 outrageous
premium increases in which policyholders are funding record
corporate profits, high executive pay and excessive overhead
rather than medical care. 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 make it
more likely that uninsured Californians can afford coverage.
2)HEALTH INSURANCE REGULATION IN CALIFORNIA . Regulation and
oversight of health insurance in California is split between
two state departments, the DMHC and CDI. DMHC regulates
health care service plans (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
differently. At the heart of the difference between health
plans and health insurers is the "promise to pay" versus the
"promise to deliver care." DMHC-licensed plans, often
referred to as 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
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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.
In California, 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 medical loss
ratios (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 individual products. The
MLR requirements do not apply to 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 RATE INCREASES . According to a study
published in the journal Health Affairs in 2007, premiums paid
by employees for small group coverage (2-50 employees) in
California increased 53% between 2003 and 2006, from $250 to
$382 per month, and premiums for individual coverage rose 23%
between 2002 and 2006, from $211 to $259 per month. 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. In
addition to an increase in premiums, for individual insurance,
the share of medical expenses paid by 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 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.
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4)ANTHEM BLUE CROSS 2010 RATE INCREASES . In November 2009, the
state's largest health insurer in the individual market,
Anthem Blue Cross, notified CDI of their intention to raise
rates by up to 39% for policyholders in the individual market.
The decision by Anthem Blue Cross to implement these premium
increases after similar increases during last year caused
great concern not only in California, but across the nation.
The Assembly Committee on Health held an oversight hearing on
February 23, 2010 on the rate increases, as did the House
Energy & Commerce Subcommittee on Oversight and Investigations
on February 24, 2010. Kathleen Sebelius, Secretary of the
U.S. Department of Health and Human Services (HHS), wrote to
the president of Anthem Blue Cross asking for a detailed
justification for the increases to the public. Secretary
Sebelius also requested that Anthem Blue Cross make public
information on the percent of the company's individual market
premiums that is used for medical care versus the percent that
is used for administrative costs.
Wellpoint (Anthem Blue Cross' parent company) sent a response to
Secretary Sebelius on February 11, 2010, stating 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 co-payments 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 has agreed to delay the increases until May 1, 2010
to allow an independent actuary to review their rates.
5)HEALTH CARE SPENDING . The 2009 edition of the California
HealthCare Foundation's "Healthcare Costs 101" (based on the
latest health spending information available from the U.S.
Department of HHS, Centers for Medicare and Medicaid Services)
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stated that although there has been some moderation in health
spending growth in recent years, its share of the economy
continues to grow. In 2007, national health care spending
reached $2.2 trillion ($7,421 per person). If left unchecked,
health care spending is projected to reach 20% of the
country's gross domestic product (GDP) by 2018. The report
also highlighted the following trends:
a) Health spending grew 6.1% in 2007, the smallest increase
since 1998, extending a five-year decelerating trend.
Nevertheless, health spending continues to outpace
inflation and is projected to reach $2.5 trillion this
year.
b) Projections indicate that the recession will more than
offset the recent moderation in health spending. Health
care's share of the GDP is expected to rise rapidly, to
17.6% of GDP this year.
c) Nationally, per-person costs for health care increased
81% between 1997 and 2007.
6)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
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best practices in the nation with regard to auto insurance
regulation.
7)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 the Office of
Administrative Hearings (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
decision is made or a hearing request is denied.
8)PREVIOUS LEGISLATION . AB 1218 (Jones) of 2009 and AB 1554
(Jones) of 2008 would have required health plans licensed by
DMHC and health insurers certificated by CDI, 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. AB
1218 failed passage in the Assembly Health Committee and AB
1554 failed in the Senate Health Committee.
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. SB 425
did not have a hearing, at the author's request, and died in
the Senate Health Committee.
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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.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation
Consumer Federation of California
Consumers Union
Glendale City Employees Association
Organization of SMUD Employees
San Bernardino Public Employees Association
San Luis Obispo County Employees Association
Santa Rosa City Employees Association
Opposition
Anthem Blue Cross
Association of California Life and Health Insurance Companies
Blue Shield of California
California Association of Health Plans
Health Net
Analysis Prepared by : Melanie Moreno / HEALTH / (916)
319-2097