BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
2578 (Jones/Feuer)
Hearing Date: 7/15/2010 Amended: 5/28/2010
Consultant: Katie Johnson Policy Vote: Health 5-1
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BILL SUMMARY: AB 2578 would require health care service plans
and health insurers to file a rate application for a rate
increase that will become effective on or after January 1, 2012,
for review and approval by the Department of Managed Health Care
and the California Department of Insurance.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
CDI rate review $7,700
$15,400$15,400Special*
and approval
DMHC rate review $25,500
$23,400$23,400Special**
and approval
*Department of Insurance Health Rate Approval Fund
**Department of Managed Health Care Rate Approval Fund
***These amounts could be partially offset by federal grant
funds-see staff comments.
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
This bill would require health care service plans and health
insurers (carriers) to file a rate application for a rate
increase that will become effective on or after January 1, 2012,
for review and approval by the Department of Managed Health Care
(DMHC) and the California Department of Insurance (CDI) and
would specify rate review criteria for both the departments and
the carriers, timelines, and hearing requirements. Any
application not acted upon within 60 days of submission would be
deemed approved, unless subject to a hearing with an
administrative law judge. Rate increases by carriers that became
effective during the period January 1, 2010, and December 31,
2011, would also be subject to review by the departments for
compliance with these provisions.
Carriers would be permitted to submit only one rate application
each calendar year. Since "rate" is defined as including
premiums, copayments, coinsurance obligations, deductibles, and
other charges, staff recommends that the bill be amended to
clarify whether 1) the rate application is a single application
for all of the changes a carrier would like to make in a year,
or, 2) the rate application applies to each specific rate change
and that that specific rate may only be changed once in a
calendar year.
Funding and Administrative Costs
Both CDI and DMHC would require significant resources to
process, review, and approve rate increases, which would include
data collection, legal analysis, rate
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AB 2578 (Jones/Feuer)
enforcement, administrative law hearings, actuarial analysis,
and consumer services. There could be as many as several
thousand rates subject to review annually. It is estimated that
CDI would need $7.7 million in FY 2010-2011 and $15.4 million in
FY 2011-2012 and annually ongoing. It is estimated that DMHC
would need $25.5 million in FY 2010-2011 and $23.4 million in FY
2011-2012 and annually ongoing. This would increase CDI and
DMHC's total annual departmental budgets by about 15 percent and
50 percent, respectively. Costs beyond the January 1, 2014,
federal health reform implementation date are unknown, but could
be of similar magnitude.
The departments would be permitted to assess fees on carriers in
order to provide funding for the actual and reasonable costs of
implementing these provisions. Health insurer and health plan
fee revenues would be deposited in the Department of Insurance
Health Rate Approval Fund and the Department of Managed Health
Care Rate Approval Fund, respectively, which would both be
created by this bill and continuously appropriated.
Staff recommends that the monies within the respective funds be
appropriated by the Legislature annually, instead of
continuously appropriated, to ensure legislative oversight and
to be consistent with the operating budgets of both CDI and
DMHC, which are appropriated by the Legislature annually.
Federal Health Reform Rate Review Requirements
In March 2010, the federal government enacted the Patient
Protection and Affordable Care Act (PPACA) and the Health Care
and Education Reconciliation Act of 2010, collectively known as
the Affordable Care Act (ACA). Commencing in the 2010 plan year,
ACA requires the federal Secretary for Health and Human Services
(HHS) to work in conjunction with states to establish a process
for the annual review of health insurance premiums/rates to
identify unreasonable, unjustified, and/or excessive rate
increases. The additional approval/disapproval of rates is a
state option and would require statutory authority in
California; in addition to requiring the departments to review
rates, this bill would require DMHC and CDI to
approve/disapprove rates. Federal regulatory guidance on the
definition of "unreasonable" and whether or not such a rate is
"excessive or unjustified" is expected prior to January 1, 2011.
ACA also appropriates $250 million over a five year period to
assist states in conducting rate review. There will be at least
two grant funding cycles. In Cycle I, awards will be made prior
to the release of the Federal regulatory rate review guidance,
but will be subject to the requirements in the grant
solicitation packet. Each state is eligible for a grant of $1
million that would be disbursed on August 9, 2010. DMHC and CDI
jointly submitted an application on behalf of the state on July
7, 2010. The departments would use the Cycle I grant funds to
ensure that plan and insurer rate filings are done
electronically and to hire or contract with actuaries to enhance
their rate review capabilities.
In Cycle II, the grant solicitation will occur after the release
of the Federal regulatory rate review guidance in the fourth
quarter of calendar year 2010 and grant awards will be
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AB 2578 (Jones/Feuer)
made prior to January 1, 2011. States will be eligible for up to
$5 million annually through Federal Fiscal Year 2014.
These grant funds would support the departments in developing
and enhancing their rate review efforts and in reporting rate
increase patterns to HHS. They would be in addition to the fees
charged to health plans and insurers pursuant to this bill.
Awardees will not be required to provide matching funds, but, as
a Maintenance of Effort (MOE), states would not be permitted to
reduce the amount of state funds currently spent on rate review.
Existing CDI and DMHC Rate Review Processes
According to their grant application, DMHC currently conducts
limited rate review of small employer group and Health Insurance
Portability and Accountability Act (HIPAA) guaranteed-issue
products. CDI performs an actuarial analysis of individual
health insurance rate filings, and negotiates modifications to
rate proposals, as part of its regulation of loss ratios in the
individual market. Additionally, in response to inquiries into
proposed rate increases of 39 percent by Anthem Blue Cross in
February 2010, CDI contracted with an independent actuarial firm
to review the rates. Numerous accounting errors were found and
Anthem Blue Cross revised the proposed rate increases.