BILL ANALYSIS Ó
SB 1431
Page 1
Date of Hearing: July 3, 2012
ASSEMBLY COMMITTEE ON HEALTH
William W. Monning, Chair
SB 1431 (De León) - As Amended: June 27, 2012
SENATE VOTE : 24-13
SUBJECT : Stop-loss insurance coverage.
SUMMARY : Sets the stop-loss insurance attachment point for
small employers on policies issued on or after January 1, 2012
at $60,000 for individuals and the greater of $15,000 times the
total number of covered employees and dependents, 130% of
expected claims, or $60,000. Specifically, this bill :
1)Requires a stop-loss carrier to offer coverage for all
employees and dependents of employees of a small employer and
not exclude any employee or dependent on the basis of actual
or expected health status-related factor (including but not
limited to: health status, medical condition, including both
physical and mental illnesses, claims experience, medical
history, receipt of health care, genetic information,
disability, evidence of insurability, including conditions
arising out of acts of domestic violence, or any other health
status-related factor as determined by the California
Department of Insurance (CDI)).
2)Requires a stop-loss carrier to renew, at the option of the
small employer, all stop-loss policies written, issued,
administered, or renewed on the effective date of this bill
except for cases of nonpayment, fraud, intentional
misrepresentation, financial impairment, or the carrier ceases
to write, issue, or administer new stop-loss insurance
policies in this state, as specified.
3)Prohibits stop-loss insurance policies issued on or after
January 1, 2012 to a small employer from containing any of the
following provisions:
a) An individual attachment point for a policy year that is
lower than $60,000;
b) An aggregate attachment point for a policy year that is
lower than the greater of one of the following:
i) $15,000 times the total number of covered employees
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and dependents;
ii) 130% of expected claims; or,
iii) $ 60,000.
c) A provision for direct coverage of an employee's health
claims.
4)Authorizes the Insurance Commissioner (IC) to adopt
regulations as may be necessary to carry out the purposes of
this bill, and requires the IC to comply with specified
administrative procedures.
5)Requires a stop-loss carrier that violates the provisions of
this bill to be subject to the remedies and administrative
penalties pertaining to other carriers, as specified.
Requires all fine and penalty moneys received to be deposited
in the General Fund.
6)Provides that nothing in this bill shall affect the ongoing
operations of multiple employer welfare arrangements (MEWAs),
as specified, that provide health care benefits to their
members on a self-funded or partially self-funded basis and
that comply with small group health reforms.
7)Provides that the provisions of this bill are severable, if
any provision or its application is held invalid it shall not
affect other provisions or applications.
8)Establishes several definitions including "attachment point"
which means the total amount of health claims incurred by a
small employer in a policy year for its employees and their
dependents above which the stop-loss carrier incurs a
liability for payment, and "stop-loss insurance policy" which
means a policy, contract, certificate, or statement of
coverage between a stop-loss carrier and small employer
providing individual or aggregate stop-loss insurance
coverage, or both, or any other assumption of risk, to a small
employer for the health claims of its employees and their
dependents.
EXISTING LAW :
1)Provides for the regulation of health insurers by CDI under
provisions of the Insurance Code.
2)Defines a small employer as any person, firm proprietary or
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nonprofit corporation, partnership public agency, or
association that is actively engaged in business or service,
that, on at least 50% of its working days during the preceding
calendar quarter or preceding calendar year, employed at least
two, but no more 50, eligible employees, the majority of whom
were employed within this state.
3)Establishes reforms in the small group health insurance market
such as requiring carriers to fairly and affirmatively offer,
market, and sell all of the plan's contracts that are sold to
small employers to all small employers in the state.
4)Establishes the following risk categories for rating purposes:
age, geographic region, and family composition, plus the
health benefit plan selected by the small employer.
Establishes age categories, family size categories, and nine
geographic regions, as specified.
5)Prohibits a policy or contract that covers two or more
employees from establishing rules for eligibility, including
continued eligibility, of an individual, or dependent of an
individual, to enroll under the terms of the plan based on any
of the following health status-related factors:
a) Health status;
b) Medical condition, including physical and mental
illnesses;
c) Claims experience;
d) Receipt of health care;
e) Medical history;
f) Genetic information;
g) Evidence of insurability, including conditions arising
out of acts of domestic violence; and,
h) Disability.
6)Authorizes pursuant to the federal Patient Protection and
Affordable Care Act (ACA), among many other provisions, states
to establish health benefit exchanges for individuals and
small business to compare health insurance products and
purchase policies from among four categories: Bronze, Silver,
Gold, and Platinum, and for some purchasers, obtain subsidies
and tax credits. Includes requirements on individual and
small group insurers to offer essential health benefits, and
participate in risk adjustment and risk pooling activities.
7)Establishes, pursuant to federal law, the Employee Retirement
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Income Security Act of 1974 (ERISA), which sets minimum
standards for most voluntarily established pension and health
plans in private industry to provide protection for
individuals in these plans. ERISA prevents states from
regulating employer health benefits directly but does allow
states to regulate health insurance purchased by employers.
8)Limits states in their ability to regulate anything but the
reserve and contribution levels of fully insured plans, but
allows states to subject self-funded and partially-self funded
MEWAs to all state insurance laws not inconsistent with ERISA.
Confers limited authority to regulate MEWAs on CDI. Includes
in the definition of "partially self-funded" that benefits are
reimbursable to the MEWA arrangement by stop-loss insurance
only to the extent that benefits exceed $50,000 per claim.
Requires the MEWA to maintain aggregate stop-loss insurance
with an attachment point not greater than 125% of annual
expected claims, and a specific attachment point which is not
greater than 5% of annual expected claims. Authorizes the IC
to define "expected claims" in accordance with sound actuarial
principles, as specified.
FISCAL EFFECT : According to the Senate Appropriations
Committee, one-time costs up to $80,000 (Insurance Fund) to
adopt regulations. Minor ongoing costs to enforce the bill's
provisions (Insurance Fund). CDI may face some costs to review
policy filings and respond to customer complaints under the
bill. However, the bill's provisions are likely to limit the
use of stop-loss policies by small employers, limiting overall
enforcement costs.
COMMENTS :
1)PURPOSE OF THIS BILL . According to this bill's sponsor, CDI,
as federal health care reform goes into full effect, there
will be incentives for some small employers to self-insure and
to purchase stop-loss coverage. This situation could lead to
a significant exodus of small employers from the small group
insurance market, specifically those employers with young and
healthy employees. If this occurs, adverse selection could
leave a majority of the state's small businesses in a small
group insurance pool increasingly subject to skyrocketing
premiums. Even those that self-insure and buy a stop-loss
product may soon end up in this pool if the stop-loss carrier
decides to drop them.
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Without this bill, small group insurance premiums could rise to
unsustainable levels both inside and outside the California
Health Benefit (Exchange). Stop-loss insurers would continue
to consider health status and medical history in offering its
products, cherry-picking which small businesses to sell to and
even which individuals to exclude within a small group.
According to CDI, this bill is necessary to prevent the
state's small group insurance market from falling victim to
adverse selection and unsustainable premium levels, protecting
California's small businesses, its employees, and the success
of the post ACA insurance market.
2)STOP-LOSS INSURANCE . Stop-loss insurance is commonly sold to
large employers that self-insure their employees' health care
coverage but there are also small employers (business having
two to 50 employees) who self-insure. Self-insurance involves
greater risk to the employer since employee health care costs
could exceed expected estimates. In order for employers to
minimize the risk involved with self-insurance, insurance
carriers sell stop-loss insurance which covers claims in
excess of a maximum dollar amount of liability incurred by an
employer with regard to employee health care expenses. This
value is referred to as an attachment point. It can be based
on the health care claims of an individual employee or
dependent, or the aggregate health care claims for all covered
employees and dependents, or based on both: individual and
aggregate claims.
3)ACA . The ACA ÝPublic Law (P.L.) 111-148] was signed into law
on March 23, 2010. On March 30, 2010, PPACA was amended by
P.L. 111-152, the Health Care and Education Reconciliation Act
of 2010. The federal law makes several significant changes to
the group and individual insurance markets 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). The ACA creates three
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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. As a result of
these requirements some employers (with lower risk/lower cost
employees) may have an incentive to offer self-insured plans
to avoid having to pay higher premiums associated with
spreading risk across products and markets.
Section 1254 of the ACA called for a study to determine the
following questions:
a) The extent to which self-insured group health plans can
offer less costly coverage and, if so, whether lower costs
are due to more efficient plan administration and lower
overhead or to the denial of claims and the offering Ýof]
very limited benefit packages;
b) Claim denial rates, plan benefit fluctuations (to
evaluate the extent that plans scale back health benefits
during economic downturns), and the impact of the limited
recourse options on consumers; and,
c) Any potential conflict of interest as it relates to the
health care needs of self-insured enrollees and
self-insured employer's financial contribution or profit
margin, and the impact of such conflict on administration
of the health plan.
4)RAND STUDY . The U.S. Department of Labor (DOL) sponsored RAND
Health to conduct the study to answer some of the questions
described above. RAND found little evidence that self-insured
plans differ systematically from fully insured plans in terms
of benefit generosity, price, or claims denial rates.
However, RAND indicates that there is good data on plan
benefits available from the Kaiser Family Foundation/Health
Research and Educational Trust Annual Survey of Employer
Benefits, but data on claims denial and premiums are
potentially less reliable. RAND found that although data are
limited, they found no evidence that claims denial rates are
higher for self-insured firms, but consumer recourse options
in the event of denied claims are more limited for
self-insured than for fully insured patients. With regard to
concerns about adverse selection in health insurance exchanges
due to regulatory exemptions for self-insured plans, RAND
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found that their COMPARE microsimilation model predicts a
sizeable increase in self-insurance only if comprehensive
stop-loss policies become widely available after the ACA takes
full effect, and the expected cost of self-insuring with
stop-loss is comparable to the cost of being fully insured in
a market without rating regulations. RAND indicates that even
with stop-loss coverage, self-insurance remains risky for
small firms. Under the microsimilation, comprehensive
stop-loss increases in self-insurance are associated with
slightly higher premiums in the exchanges. For firms with 100
or fewer workers, the option to self-insure with comprehensive
stop-loss coverage would result in a 3.3% increase in
platinum-plan premiums in the exchanges. Additionally, RAND
finds that limiting the ability for small employers to
self-insure is associated with a decline in the total number
of individuals enrolled in health insurance coverage. RAND
indicates, in general, regulatory reforms increase prices for
lower-risk enrollees while decreasing prices for higher-risk
enrollees. Because low-risk enrollees tend to have more
elastic demand for health insurance than high-risk enrollees
the net effect is a small decline in coverage and a small
decline in exchange premiums. The RAND study identified data
gaps including that data are not available on the pricing,
prevalence, availability, and contracting terms of stop-loss
insurance policies. RAND states that it would be useful to
better understand the terms of policies that are bought and
sold in the current market before setting minimum standards
for stop-loss insurance contracting terms.
5)NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS MODEL ACT .
The Stop-Loss Insurance Model Act (SLIM) was developed in 1995
by the National Association of Insurance Commissioners (NAIC),
a standard setting and regulatory support organization for
state insurance regulators. According to a 2012 Health
Affairs article "Regulating Stop-Loss Coverage May Be Needed
to Deter Self-Insuring Small Employers from Undermining Market
Reforms," SLIM limits attachment points to a minimum of
$20,000 per person. For groups of 50 or fewer employees, SLIM
limits aggregate attachment points to the greater of $4,000
times the number of group members, 120% of expected claims or
$20,000. For groups over 50, the aggregate attachment point
can be as low as 110% of expected claims. These levels were
set more than a decade ago, at a time when $20,000 was a
logical dividing point, because most employers with few than
100 workers had stop-loss attachment points at or below that
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level and larger employers had higher levels. Medical costs
and insurance premiums have increased considerably since then.
The logic behind setting these levels is because if the
attachment point is too low the policy becomes "subterfuge"
for primary health insurance that facilitates "gaming" to
avoid state regulation of health coverage.
A subgroup of the NAIC has been charged with recommending
updates of the current SLIM. The subgroup engaged Milliman to
perform an update to the 1994 study that was used to develop
the SLIM. The recommendation of the subgroup is to limit
aggregate attachment points to the greater of $15,000 times
the number of group members, 130% of expected claims or
$60,000. The subgroup opined that the Milliman report did not
provide ample support to warrant a change to the 110% for
groups over 50.
6)MATHEMATICA STUDY . A recent Mathematica study commissioned by
Health Access Foundation indicates that by regulating the
small group market in ways that force greater risk pooling the
ACA seems likely to reinforce incentives for small employers
to consider self-insurance and for insurers to offer more
self-insurance products. The ACA does not subject
self-insured plans to essential health benefit requirements,
risk adjustment, or risk pooling, and such plans are not
required to pay premium taxes. The study indicates that there
is a significant potential for stop-loss coverage to blur the
line between fully-insured and self-insured plans if the
stop-loss attachment point is very low. The Mathematica study
concludes that the NAIC proposal seems to strike a reasonable
compromise, protecting the small group market while allowing
employer plans to self-insure when they are able to retain
significant risk.
7)OTHER STATES . About 10 states have enacted some version of
SLIM with attachment points ranging from $10,000 to $25,000
and about 10 more states regulate employer stop-loss coverage
in some manner. Delaware, New York, and Oregon prohibit
stop-loss insurance. New York and North Carolina also
prohibit insurers from serving as third party administrators
for self-funded small employers. North Carolina also
regulates stop-loss insurance as if it were typical small
group health insurance. According to the CDI, as of mid-2011,
19 states had laws, regulations, or guidance on the books
pertaining to stop-loss, and 15 states regulate minimum
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attachment points.
8)WHY THE CONTROVERSY ? Why should policy makers be concerned
about the stop-loss attachment point and the ability of small
employers to self-insure? Many opponents of this bill promote
a low attachment point which could have the effect of
incentivizing more small employers to self-insure and protect
themselves with stop-loss insurance. Opponents argue groups
self-fund to have: autonomy and control over the health
benefit plan design, lower administrative costs, more timely
and complete access to claims data to help make more informed
decisions, tailored wellness programs and improved cash flow.
Those who are concerned about employers self-insuring raise
concerns about the impacts on health insurance exchanges and
broader market risk pools and raise concerns among
stakeholders about the tradeoffs and privacy issues for
employees in self-insured arrangements. Stakeholders
indicate that self-insurance may leave consumers less
financially protected in the event that their employers
declare bankruptcy or face financial trouble. Failure by the
employer to pay claims could leave consumers financially
responsible for claims that have been incurred. Employees in
a self-insured arrangement do not have the benefit of consumer
protections or benefit mandates afforded by federal and state
requirements.
9)SUPPORT . Kaiser Permanente, Blue Shield of California, the
Small Business Majority, the Bay Area Council, Consumer
Federation of America, and others express support for this
bill because of concerns about the impacts to the small group
health insurance market should small employers with employees
deemed "healthy risk" be enticed to drop out of the market and
instead self-insure. Proponents believe this bill strikes a
balance by permitting small employers to self-insure and
purchase stop-loss coverage but limiting what types of
stop-loss coverage can be sold. Proponents point to the 2012
Health Affairs article mentioned above, that noted enhanced
state regulatory guardrails around stop-loss products would
help assure the full promise of health reform, stating the
"success of market reforms may well depend on such efforts,
which, if successful, will encourage and enable insurers to
compete based on providing the best value in coverage design
and care management, rather than based on segmenting risks and
exploiting regulatory loopholes."
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10)OPPOSITION . The California Chamber of Commerce, the National
Federation of Independent Business, the Coalition of Small
Disabled Veteran Businesses, and others oppose this bill
because they believe the attachment point should be very low.
Opponents argue that small businesses struggle to provide
health coverage for their employees and it is imperative that
affordable choices be available. Self-insurance combined with
stop-loss coverage for excessive, unexpected claims, offers an
option for some small employers. An unreasonably high level
at which the stop-loss coverage would apply essentially
eliminates self-insurance as an option for small employers.
Opponents state that self-insured employers have the ability
to develop meaningful disease management and wellness programs
because of their direct relationship with claims experience.
Opponents point to the RAND study claiming that it concludes
that limiting self-insurance for small business will reduce
enrollment in the exchanges somewhat, but without
substantially affecting exchange premiums, and that the "death
spiral" was not observed in the microsimilation. Opponents
state that the RAND study found no major differences in
benefit generosity between self-insured and fully insured
plans or to a major threat of adverse selection in the small
group market after the ACA is fully implemented. HCC Life
Insurance Company indicates that the $60,000 specific
attachment point being proposed by this bill is almost 3x
higher than the next highest state, and requests amendments to
allow currently self-funded groups to maintain their
self-funded plan, change the specific attachment point to
$25,000, change the minimum aggregate corridor to a single
test of 120% of expected claims, change the effective date to
2014, and keep the legislation in line with other states.
Opponents point out that the DOL, federal Department of Health
and Human Services, and U.S. Treasury are collecting
information until early July and are expected to publish
findings soon after.
11)OPPOSITION UNLESS AMENDED . Anthem Blue Cross supports the
intent of this bill but raises concerns about the methodology
used to determine individual and aggregate attachment points.
Anthem recommends actuarial science is used to ensure the
attachment points are viable and provide adequate reinsurance
value to small business. Anthem Blue Cross refers to the
Association of California Life and Health Insurance Companies
analysis which suggests a range of $20,000 to $30,000 and the
limit to 120% of expected claims. Transamerica Life Insurance
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Company is additionally concerned about the attachment point
but also raises questions about the effective date of this
bill. Transamerica Life Insurance Company would prefer it
apply to plans as of January 1, 2013 and requests amendments
to more accurately reflect how stop-loss is issued.
12)RELATED LEGISLATION . AB 1083 (Monning ), reforms the small
group health insurance market and conforms state law to
provisions of the ACA. AB 1083 is pending on the Senate
floor.
13)PREVIOUS LEGISLATION . AB 1672 (Margolin), Chapter 1128,
Statutes of 1992 established small group health insurance
market reforms.
14)SUGGESTED AMENDMENT . This bill states that no stop-loss
insurance policy shall contain provisions that have an
individual attachment point of $60,000 or lower on or after
January 1, 2012, and it requires all stop-loss carriers to
renew, at the option of the small employer, all stop-loss
insurance policies written, issued, administered or renewed on
or after January 1, 2012. The sponsor has indicated intent to
grandfather existing attachment point arrangements between
stop-loss carriers and small employers. The committee may
wish to request amendments to ensure an explicit
grandfathering provision is included in this bill.
REGISTERED SUPPORT / OPPOSITION :
Support
California Department of Insurance (sponsor)
Bay Area Council
Blue Shield of California
California Association of Physician Groups
California Teachers Association
Consumer Federation of America
Consumers Union
Health Access California
Kaiser Permanente
SEIU California
Small Business Majority
Opposition
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Association of California Life and Health Insurance Companies
American Institute of Architects, California Council
California Association of Health Underwriters
California Asian Pacific Chamber
California Chamber of Commerce
Coalition of Small and Disabled Veteran Businesses
Diversified Benefit Solution
HCC Life Insurance Company
Independent Brokers and Agents of the West
National Association of Insurance and Financial
Advisors-California
National Federation of Independent Business
Redondo Beach Chamber of Commerce and Visitors Bureau
Self-Insurance Institute of America, Inc.
Southwest California Legislative Council
Several individuals
Analysis Prepared by : Teri Boughton / HEALTH / (916) 319-2097