BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 1846 (Gordon) Hearing Date: June 13, 2012
As Amended: May 17, 2012
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor (05/29/12)51-26/Pass
Asm. Appr. (05/25/12)12-05/Pass
Asm. Health (04/24/12)13-06/Pass
SUMMARY Would create a licensing framework for consumer
operated and oriented health (CO-OP) plans that can offer health
coverage through the new California Health Benefit Exchange
(Exchange).
DIGEST
Existing law
1. The federal Patient Protection and Affordable Care Act (PPACA),
requires the Secretary of the United States Department of Health
and Human Services to establish the Consumer Operated and
Oriented Plan program for the purpose of fostering the creation
of qualified nonprofit health insurance issuers to offer
qualified health plans in the individual and small group markets
in the states in which they are licensed to offer those plans
and makes start-up and solvency loans available for those
purposes, as specified;
2. The Knox-Keene Health Care Service Plan Act of 1975, provides
for the licensure and regulation of health care service plans by
the Department of Managed Health Care and makes a willful
violation of that act a crime;
3. Also provides for the regulation of various forms of
insurance by the Insurance Commissioner and requires
insurers to obtain a certificate of authority from the
commissioner in order to be admitted to transact insurance
business in the state;
AB 1846 (Gordon), Page 2
4. Creates the California Health Benefit Exchange (Exchange)
to facilitate the purchase of qualified health plans by
qualified individuals and qualified small employers by
January 1, 2014;
5. Requires the Exchange to use a competitive process to
select carriers to participate in the Exchange;
6. Requires the state to reimburse local agencies and school
districts for certain costs mandated by the state. Statutory
provisions establish procedures for making that
reimbursement.
AB 1846 (Gordon), Page 3
This bill
1. Would authorize the Director of the Department of Managed
Health Care to issue a health care service plan license, and
the Insurance Commissioner to issue a certificate of
authority, to a consumer operated and oriented plan (CO-OP)
established consistent with PPACA, as specified;
2. Would specify that a CO-OP issued a license or a
certificate of authority is subject to all other provisions
of law relating to health care service plans or insurance,
respectively, and would further specify that a CO-OP insurer
and any solvency loan obtained by the CO-OP pursuant to
PPACA are subject to certain requirements imposed on mutual
insurers;
3. Would authorize the director and the commissioner to
request documentation relating to a CO-OP's solvency or
start-up loan;
4. Would prohibit a CO-OP from converting or selling to a
for-profit or nonconsumer-operated entity after receiving a
solvency loan, would require a CO-OP to comply with
specified governance standards, and would authorize the
director to revoke a CO-OP health care service plan's
license, and the commissioner to revoke a CO-OP insurer's
certificate of authority, for violating those prohibitions;
5. Would authorize the departments to enact regulations
implementing these provisions and would enact other related
provisions. Because a willful violation of the bill's
requirements by a health care service plan would be a crime,
the bill would impose a state-mandated local program;
6. Would specify that a CO-OP health care service plan or
insurer that enters into a contract to offer qualified
health plans in the Exchange is subject to the same
requirements, terms, and conditions imposed on other
carriers participating in the Exchange;
7. Would authorize the Exchange to impose terms, conditions,
and price on a CO-OP health care service plan or insurer if
an agreement cannot be reached and would also authorize the
Exchange to impose contract sanctions and take any other
actions authorized by federal law if a CO-OP health care
service plan or insurer fails to comply with any contractual
AB 1846 (Gordon), Page 4
provisions;
8. Would, to the extent permitted under federal law, authorize
the Exchange to limit enrollment in the qualified health
plans of a CO-OP health care service plan or insurer offered
in the Exchange if the carrier fails to comply with Exchange
contract specifications;
9. Would provide that no reimbursement is required by this act
for a specified reason.
AB 1846 (Gordon), Page 5
COMMENTS
1. Purpose of this bill To establish a licensing framework for
Consumer Operated and Oriented Plans (CO-OPs) as provided
under the Federal Affordable Care Act (ACA). A CO-OP is a
new type of non-profit health insurer that is directed by
its customers, uses profits for customers' benefit, and is
designed to offer individuals and small businesses
affordable, customer-friendly, and high-quality health
insurance options.
This program requires enabling legislation. AB 1846
establishes the necessary framework for authorization and
future regulation that would allow California to participate
in the CO-OP program and receive federal funding.
2. Background
a. Federal Affordable Care Act (ACA). The Federal
Affordable Care Act anticipates the establishment of
consumer driven health coverage. Section 1322 of the ACA
anticipates the licensing of at least one CO-OP in each
state as a health issuer (either as an insurer or an
HMO).
CO-OPs may operate locally, statewide, or in multiple
states, but must be licensed as issuers in each state in
which they operate and are subject to state laws and
regulations that apply to all similarly-situated issuers.
b. Federal Financial Assistance. According to the
author, the CO-OP loan program has a one-time $3.8
billion appropriation to support low-interest start-up
and solvency loans which must be repaid over 5 and 15
years, respectively. Applicants can include small
business coalitions, physician and hospital providers and
associations, agricultural organizations, unions, and
community-based sponsors. Nearly $1 billion has been
awarded in loans so far to CO-OPs in 10 states. Existing
insurers and government entities are barred from
applying. To apply for a loan under the CO-OP program,
AB 1846 (Gordon), Page 6
a group must first form a nonprofit, not-for-profit, or
public benefit member organization that is organized
under state law and intends to become a CO-OP.
Non-profit organizations may apply for two types of
low-interest loans:
i. Start-up Loans : Funding to assist with the
start-up activities associated with developing a
CO-OP. Start-up Loans are intended to be repaid in
five years.
ii. Solvency Loans : Funding to assist with state
reserve requirements. Solvency loans are intended to
be repaid, with interest, in 15 years from the date of
disbursement. (SB 1846 provides that a solvency loan
shall be treated as a surplus note and subject to the
same requirements imposed on mutual insurers, that is,
insurers owned by the policyholders).
a. Licensing Framework. AB 1846 places similar
language in both the Health and Safety Code, for the
establishment of health care service plans regulated by
the Department of Managed Health Care, and the Insurance
Code for CO-OP insurer regulated by the CDI. Health care
service plans are not indemnity agreements. This
analysis only addresses CO-OP insurers regulated under
the Insurance Code.
This bill would define a CO-OP as a non-profit member-run
or nonprofit member corporation established according to
federal law. Specifically, this bill:
i. Provides the Insurance Commissioner with the
authority to issue certificates of authority to
domestic and foreign (organized in another state)
CO-OP insurers. Foreign CO-OP insurers must comply
with federal and applicable California law.
AB 1846 (Gordon), Page 7
ii. Requires CO-OPs to be subject to the same
"paid-in capital" requirements, that is the lower of
the following amounts:
(A) The value of its assets in excess of
the sum of its liabilities for losses reported,
expenses, taxes, and all other indebtedness and
reinsurance of outstanding risks as provided by
law.
(B) The aggregate par value of its issued
shares of stock, including treasury shares.
i. Requires both foreign and domestic CO-OP
insurers to be subject to licensing requirements,
examination, risk-based capital requirements, and
financial statement filings.
ii. Requires CO-OP insurers to be subject to the
same requirements as other carriers that contract with
the state's Health Benefit Exchange.
iii. Permits the Exchange to impose sanctions if a
CO-OP insurer fails to comply with any of the
provisions of its contract.
iv. Requires CO-OPs to ensure member control of
the organization and provides for voting rights of
members.
v. Provides qualifications for the operational
board of directors.
vi. Requires governing documents that incorporate
standard of ethics, conflicts of interest, and
disclosure, as well as a process prepared in the event
a director violates those standards.
AB 1846 (Gordon), Page 8
vii. Defines insolvency as when a CO-OP insurer's
surplus becomes less than the amount of paid-in
capital required of a capital stock company to qualify
to transact the class of disability and health
insurance. Applies the conservation and liquidation
provisions of Chapter 14 of the Insurance Code to
CO-OP insurers.
viii. Requires CO-OPs to comply with the ACA.
AB 1846 (Gordon), Page 9
1. Summary of Arguments in Support
a. CDI supports this bill because CO-OPs would provide
value to consumers by returning surplus revenue to
members in the form of lower premiums, lower
cost-sharing, or expanded benefits.
b. Additionally CDI notes that CO-OPs provide a
critically important opportunity to inject new choices
into the individual and small group insurance markets.
Such competition would generate competition based on
quality and value, and encourage innovation in provider
reimbursement strategies.
1. Summary of Arguments in Opposition
None received.
2. Pending Issues
a. Health Access continues to seek amendments that
would require the CO-OP to be a mutual benefit
corporation in which the policyholders are the
shareholders (like a mutual benefit society that sells
life insurance)
b. This bill is double-referred to the Committee on
Health.
1. Prior and Related Legislation
a. AB 1602 (John a. P�rez), Chapter 655, Statutes of
2010, establishes the powers and duties of the Exchange
with respect to eligibility, enrollment, administration,
and arranging for coverage under qualified carriers.
AB 1846 (Gordon), Page 10
b. SB 900 (Alquist), Chapter 659, Statues of 2010,
establishes the Exchange as an independent public entity
and requires the Exchange to be governed by a five-member
board.
POSITIONS
Support
California Department of Insurance (CDI)/Sponsor
California Asian Pacific Chamber of Commerce (CAPCC)
Oppose
None
Consultant: Hugh Slayden, (916) 651-4773