BILL ANALYSIS �
SENATE COMMITTEE ON HEALTH
Senator Ed Hernandez, O.D., Chair
BILL NO: AB 1921
AUTHOR: Hill
AMENDED: April 23, 2012
HEARING DATE: June 27, 2012
CONSULTANT: Trueworthy
SUBJECT : Health insurance: transitional reinsurance program.
SUMMARY : Establishes the California Transitional Reinsurance
Program (CTRP) for health plans to be jointly administered by
the California Department of Insurance (CDI) and the Department
of Managed Health Care (DMHC), and requires participation by
health care service plans and health insurers.
Existing law:
1.Provides for regulation of health insurers by CDI under the
Insurance Code, and provides for the regulation of health
plans by DMHC, pursuant to the Knox-Keene Health Care Service
Plan Act of 1975.
2.Establishes the Patient Protection Affordable Care Act (ACA),
which among other provisions, imposes new requirements on
individuals, employers, and health plans; restructures the
private health insurance market; sets minimum standards for
health coverage; establishes health benefit exchanges, and
provides financial assistance to certain individuals and small
employers.
3.Requires, under the ACA, each health insurance issuer that
offers health insurance coverage in the individual or group
market in a state to accept every employer and individual in
the state that applies for such coverage. This is known as
"guaranteed issue." Authorizes a health insurance issuer to
restrict enrollment to open and special enrollment periods.
4.Allows, under the ACA, each state, not later than January 1,
2014, to establish, or enter into a contract with one or more
applicable reinsurance entities to carry out the reinsurance
program, as specified, including that health insurance
issuers, and third-party administrators on behalf of group
health plans make payments to an applicable reinsurance entity
for any plan year beginning in the three-year period beginning
January 1, 2014. Requires amounts collected to be used to make
Continued---
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reinsurance payments to health insurance issuers that cover
high-risk individuals in the individual market (except
grandfathered plans). Allows for states to defer to the
federal Department of Health and Human Services (HHS) to
establish a reinsurance program.
5.Defines, under the ACA, grandfathered plans as health plans or
health insurance coverage in which an individual is enrolled
in on March 23, 2010 (ACA enactment date).
6.Establishes 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.
This bill:
1.Establishes the CTRP in which "contributing entities,"
(licensed health plans and insurers) are required to make
payments to a nonprofit reinsurance entity that carries out
specified duties. Under CTRP, "reinsurance-eligible
recipients," defined as any health plan or health insurance
coverage offered in the California individual market that are
not grandfathered plans, will receive reinsurance payments for
covered individual claims.
2.Requires DMHC and CDI to select the applicable reinsurance
entity based upon a competitive process. Allows DMHC the
option to opt out of the administration of a portion of, or
the entire program and defer to CDI.
3.Requires the regulators to jointly modify the federal
reinsurance benefits and payment parameters by issuing a
California-specific notice of benefits and payment parameters
by March 1 of the year prior to the benefit year. Requires
the notice to contain the following:
a. The data requirements and data collection frequency for
reinsurance-eligible recipients; and
b. The reinsurance attachment point, reinsurance cap, and
coinsurance rate, if different from the corresponding
parameters specified in the federal notice of benefit and
payment parameters.
4.Requires contributing entities to do all of the following:
a. Make payments to the applicable reinsurance entity
according to the procedures established by the ACA, or any
state or federal regulations, rules, or guidance issued
consistent with the ACA;
AB 1921 | Page
3
b. Comply with all reasonable requests of the applicable
reinsurance entity or the Director for appropriate
documentation to establish earned premium for the
reinsurance contribution period; and
c. Comply with any additional requirements as established
by state or federal regulations.
5.Requires reinsurance-eligible recipients to do all of the
following:
a. Submit documentation on covered individual claims to the
applicable reinsurance entity in a format as established by
any federal benefit or payment parameters or any
California-specific benefit and payments parameters;
b. Remit to the applicable reinsurance entity any payments
of reinsurance benefits deemed to be overpayments following
an audit or reconciliation of collections and payments; and
c. Comply with any additional requirements as established
by the ACA, or any state or federal regulations, rules, or
guidance issued consistent with the ACA, or any
California-specific reinsurance benefit and payment
parameters.
6.Establishes specified duties of the applicable reinsurance
entity, including collecting reinsurance contributions from
contributing entities, remitting a portion of payments
collected from contributing entities to the United States
Treasury, receiving and maintaining required claims data on
all covered individual claims submitted by
reinsurance-eligible recipients, coordinating the reinsurance
program with state high-risk pools to the extent necessary as
may be required by state or federal law, and any other duties
as further defined by the ACA, state regulations or any
California-specific reinsurance and benefit payment
parameters.
7.Permits DMHC and CDI to adopt regulations, and requires
consultation between DMHC and CDI in adopting necessary
regulations. Provides that the adoption or amendment of the
regulations is an emergency.
8.Establishes various definitions, including the term
"California-specific reinsurance benefit and payment
parameters" which means any notice issued by the Director
describing procedures for collecting funds from contributing
entities and making payments to reinsurance-eligible
AB 1921 | Page 4
recipients.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, one-time regulatory and program development costs to
CDI and DMHC in the range of $250,000 (Insurance Fund and
Managed Care Fund) over the 2012-13 and 2013-14 fiscal years.
Due to the compressed time frame of this program, these costs
will likely need to be absorbed within existing resources. Staff
costs potentially exceeding $100,000 (Insurance Fund) to CDI
annually through fiscal year 2014-15 to perform analytical work
to monitor the effectiveness of the program and recommend
adjustment to state-specific parameters. Some level of workload
would likely be performed by CDI in the absence of this bill
pursuant to federal law establishing the program and requiring
input to federal entities from state Insurance Commissioners.
Ongoing staff costs through fiscal year 2016-17 for staff to
monitor the reinsurance entity contract and enforce compliance
with the program among licensed entities potentially exceeding
$100,000 (Insurance Fund and Managed Care Fund) per year between
CDI and DMHC. Up-front and ongoing administrative costs to the
transitional reinsurance entity for operating the program will
be directly funded by a portion of the contributions collected
from plans.
PRIOR VOTES :
Assembly Health: 13- 6
Assembly Appropriations:12- 5
Assembly Floor: 47-24
COMMENTS :
1.Author's statement. The ACA affords states the flexibility, when
implementing the mandated transitional reinsurance program, of
utilizing a federal program or to design a state specific program.
California is such a unique market that the inevitable "one size
fits all" approach of the federal plan will not meet our specific
needs. The plan in AB 1921 is tailored to California and the joint
oversight of the CDI and DMHC will ensure the proper
implementation.
2.Federal health care reform. On March 23, 2010, President
Obama signed the ACA (Public Law 111-148), as amended by the
Health Care and Education Reconciliation Act of 2010 (Public
Law 111-152). Among other provisions, the new law makes
statutory changes affecting the regulation of and payment for
certain types of private health insurance. Beginning in 2014,
individuals will be required to maintain health insurance or
AB 1921 | Page
5
pay a penalty, with exceptions for financial hardship (if
health insurance premiums exceed 8 percent of household
adjusted gross income), religion, incarceration, and
immigration status. Several insurance market reforms are
required, such as prohibitions against health insurers
imposing lifetime benefit limits and preexisting health
condition exclusions. These reforms impose new requirements on
states related to the allocation of insurance risk, prohibit
insurers from basing eligibility for coverage on health
status-related factors, allow the offering of premium
discounts or rewards based on enrollee participation in
wellness programs, impose nondiscrimination requirements,
require insurers to offer coverage on a guaranteed issue and
renewal basis, and determine premiums based on adjusted
community rating (age, family, geography and tobacco use).
Additionally, by 2014, either a state will establish separate
exchanges to offer individual and small group coverage, or the
federal government will establish one. Exchanges will not be
insurers but will provide eligible individuals and small
businesses with access to private plans in a comparable way.
In 2014, some individuals with income below 400 percent of the
federal poverty level (FPL) will qualify for credits toward
their premium costs and for subsidies toward their cost
sharing. California has established an Exchange that is
operating as an independent government entity with a
five-member Board of Directors. The ACA also expands the
Medicaid program to cover adults without children and expands
the income requirements to 138 percent of FPL based on
modified adjusted gross income rules.
3.Risk adjustment, risk corridors, and reinsurance. The ACA
creates three programs to eliminate incentives for health
insurance plans to avoid insuring people with pre-existing
conditions or those who are in poor health, and to reduce
uncertainty that could increase premiums in 2014. This risk
will likely be greatest in the first three years of the
Exchange; however, risk should decrease as the new market
matures and issuers gain actual claims experience with this
new population. The three programs are risk adjustment,
reinsurance and, risk corridors. Risk adjustment is a
permanent program to spread the financial risk borne by health
insurance issuers. Risk adjustment provides payments to health
insurance issuers who attract higher-risk populations by
transferring funds from plans that enroll the lowest-risk
AB 1921 | Page 6
individuals to plans with higher-risk populations. It is
intended to reduce or eliminate premium differences among
plans based solely on favorable or unfavorable risk selection
in the individual and small group markets. All
non-grandfathered plans in the individual and small group
markets are subject to risk adjustment, inside and outside the
Exchange. States have the option to establish a risk
adjustment program, but are not required to do so.
The risk corridor program provides additional protection for
issuers of qualified health plans in the Exchange. Risk
corridors protect against uncertainty in rate-setting in the
first several years of the exchanges by creating a mechanism
for sharing risk between the federal government and qualified
health plan issuers. Qualified health plans with costs that
are at least three percent less than the plans' costs
projections will remit charges for a percentage of those
savings to HHS, while qualified plans with costs at least
three percent higher than cost projections will receive
payments from HHS to offset a percentage of those losses. The
ACA directs HHS to administer the risk corridor program from
2014 through 2016.
The transitional reinsurance program, which AB 1921 seeks to
implement, is intended to help stabilize premiums for coverage
in the individual market from 2014 to 2016. All health
insurance issuers, and third-party administrators on behalf of
self-insured group health plans, will submit contributions to
support reinsurance payments to issuers that cover high-cost
individuals in non-grandfathered individual market plans. By
statute, the aggregate national contributions for reinsurance
payments are $10 billion in 2014, $6 billion in 2015, and $4
billion in 2016. The transitional reinsurance program goal is
to help level the playing field across the non-group health
insurance market, to moderate premium changes from the
implementation of insurance reforms both inside and outside of
Exchanges, as well as to set the foundation for the
establishment of the Exchanges. Under the final rules, states
have the option to establish a reinsurance program. If a state
elects not to establish a program, HHS will establish the
program and perform the reinsurance functions for the state.
---------------------------------------------------------------
|Program |Reinsurance |Risk Corridors |Risk Adjustment |
|----------+-------------------+---------------+----------------|
|Purpose |Provides funding |Limits issuer |Transfers funds |
| |to issuers that |losses (and |from lower-risk |
AB 1921 | Page
7
| |incur high claims |gains) to |plans to |
| |costs for |protect |higher-risk |
| |enrollees to |against |plans to |
| |offset high-cost |inaccurate |protect against |
| |outliers |rate-setting |adverse |
| | | |selection |
|----------+-------------------+---------------+----------------|
|Administra|State option to |HHS |State option to |
|tion |operate, | |operate if the |
| |regardless of | |state |
| |whether the state | |establishes an |
| |establishes an | |exchange |
| |exchange | | |
|----------+-------------------+---------------+----------------|
|Participan|All issuers and |Qualified |Non-grandfathere|
|ts |third-party |health plans |d individual |
| |administrators on | |and small group |
| |behalf of group | |market plans, |
| |health plans | |inside and |
| |contribute; | |outside the |
| |non-grandfathered | |Exchange |
| |individual market | | |
| |plans (inside and | | |
| |outside the | | |
| |Exchange) are | | |
| |eligible for | | |
| |payments | | |
|----------+-------------------+---------------+----------------|
|Duration |Three years |Three years |Permanent |
| |(2014-16) |(2014-16) | |
---------------------------------------------------------------
4.Related legislation. SB 728 (Hernandez) would require the
Exchange to develop a risk adjustment system for health
insurance products sold by health care service plans and
insurers in the individual and small group markets within and
outside of the Exchange. SB 728 is pending before the Assembly
Health Committee.
SB 961 (Hernandez) and AB 1461 (Monning) would establish
reforms in the individual health insurance market to update
California laws and implement the ACA. SB 961 is pending in
the Assembly Health Committee and AB 1461 is pending in the
Senate Health Committee.
AB 1921 | Page 8
5.Prior legislation. SB 900 (Alquist), Chapter 659, and AB 1602
(John A. P�rez), Chapter 655, Statutes of 2010, established
the California Health Benefit Exchange as an independent
public entity to purchase health insurance on behalf of
Californians, including those with incomes between 100 and 400
percent of the FPL, and small businesses. Clarifies the powers
and duties of the Exchange Board, relative to the
administration of the Exchange, determination of eligibility
and enrollment in the Exchange, and arrangement of coverage
under qualified carriers.
6.Support. According to CDI, the sponsors, AB 1921will provide
for the establishment of CTRP which will help stabilize
premiums for coverage in the individual market during the
first three years after the ACA's guaranteed issue goes into
effect. CDI argues legislation must be in effect by 2013 in
order to allow time for the selection of and contracting with
a nonprofit entity that would implement the program by the
last quarter of 2013. Congress of California Seniors writes in
support that AB 1921 will strengthen the individual insurance
market during the critical ramp-up of the ACA and will help
prevent the practice of adverse selection. Health Access
California writes in support that while the federal government
would operate the transitional reinsurance program if
California chooses to not participate, the information to be
gained from running a reinsurance program about the market
impacts and shifts will prove valuable to regulators and
policymakers.
7.Opposition. The California Association of Health Plans
opposes AB 1921writing it presupposes it is in California's
best interest to operate its own reinsurance program versus
utilizing the federal option. CAHP contends it is not fully
possible at this time to know which option is best for our
state. The federal government is expected to release a final
notice in the fall containing all the relevant details to make
this determination, including payment methodologies and
parameters. CAHP argues the state should wait for final
guidance to be released before a decision is made on what the
best option is for California.
8.Policy comment. The final rules on the reinsurance program
make it clear that states have the option to defer to HHS to
implement this temporary program. Given the multiple and
complex demands the state regulators are undertaking related
to ACA, is it appropriate to dedicate scarce state resources
AB 1921 | Page
9
to a temporary program?
SUPPORT AND OPPOSITION :
Support: California Department of Insurance (sponsor)
Congress of California Seniors
Health Access California
Oppose: America's Health Insurance Plans
Association of California Life and Health Insurance
Companies
California Association of Health Plans
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