December 9, 2011
Pursuant to Elections Code Section 9005,
we have reviewed the proposed initiative
(A.G. File No. 11‑0060) to impose primarily consumer protection-related
requirements on health insurers, as defined broadly by the measure.
Background
Health Insurance. Broadly
speaking, health insurance can be defined as a system for the advance
financing of medical expenses—incurred mainly by enrollees of Health
Management Organizations (HMOs), Preferred Provider Organizations
(PPOs), and indemnity health insurance arrangements—through payments
made by persons, businesses, or other entities into a common fund used
to pay for an agreed upon set of health services, goods, and medical
supplies. Health insurance may apply to a broad or limited array of
medical services and may provide for full or partial payment of their
costs.
Health insurance comes in many forms.
Two of the most common types of health insurance arrangements in
California are as follows:
·
Health Maintenance Organization.
An HMO, referred to as a health plan, is responsible for providing
medical services to enrollees who prepay a fixed amount usually on a
monthly or yearly basis. The HMOs often contract with risk bearing
organizations (RBOs), such as physician groups, to provide health
services to enrollees for a fixed monthly payment. Through these
contractual arrangements, the RBO assumes a portion of the risk for
enrollee health care service costs.
·
Preferred Provider Organization.
A PPO, sometimes referred to as a health
plan, is a type of indemnity insurance where the insurer usually agrees
to pay medical providers, such as physicians and hospitals, for a
portion of the health services related to an enrollee's illness or
injury. Payments to medical providers are based on the number and type
of services provided to the enrollee. A PPO differs from other indemnity
health insurance policies because it typically contracts with medical
providers to provide health care services at reduced rates to the
insurer and its enrollees.
There are other indemnity health
insurance arrangements offered by insurers, such as catastrophic health
insurance, that, although less common than HMOs and PPOs, are available
in California.
Existing Health Insurance Regulatory Structure.
Two departments are responsible for
regulating most health insurance: the Department of Managed Health Care
(DMHC) and the California Department of Insurance (CDI). The DMHC
regulates HMOs and some PPOs, while the CDI regulates indemnity
insurers, including most PPOs. Existing state law imposes a variety of
requirements on health plans and insurers in California.
While health plans and insurers are
subject to different regulatory requirements, both DMHC and CDI are
generally responsible for oversight and enforcement of existing state
law and regulations related to health insurance. Some of the regulatory
activities performed by both departments include licensing and policy
review, monitoring financial stability, ensuring timely and accurate
payments to health care providers, responding to consumer complaints,
and determining whether decisions of health plans or insurers to deny or
limit medical services are adequately justified.
Neither DMHC nor CDI has the authority to stop health plans and
insurers from increasing the rates they charge to their enrollees.
However, both DMHC and CDI review rate information and are charged with
identifying "unreasonable" rate increases and making the public aware of
them. The departments' regulatory activities are funded primarily
through fees or assessments on the regulated health plans and insurers.
Consumer Protections.
Under current law, a number of protections are afforded to consumers
both in laws that specifically apply to health plans and insurers and in
laws that broadly apply to business practices, contracts, and other
areas. For example, businesses and professions law protects against
unfair or fraudulent business practices and deceptive or misleading
advertising. Consumer protection laws are mostly enforced by state
regulatory agencies and the state Attorney General.
Taxation of
Health Plans and Insurers in California.
California levies a gross premiums tax on insurers. California levies a
corporate income tax on certain health plans based on their net income.
Revenues from both taxes are deposited into the state General Fund.
Health Insurance Purchased by State and Local Governments.
State and local governments are
major purchasers of health insurance in California. For example, through
the California Public Employees’ Retirement System (CalPERS), state and
local governments pay most of the health insurance premiums for
approximately 1.3 million government employees, retirees, and their
families. The majority of CalPERS enrollees receive coverage through
health plans regulated by the DMHC.
The state and county governments also
operate programs that provide health care to qualifying low-income
individuals. For example, the 2011‑12 state budget provides
approximately $15 billion from the General Fund to provide health care
to approximately 7.5 million low-income Californians enrolled in the
state's Medicaid program, also known as Medi-Cal. The state contracts
with health plans to provide coverage for most of the Medi-Cal
enrollees. (The remainder of the
enrollees are in fee-for-service Medi-Cal where the state directly pays
providers for their services. Fee-for-service Medi-Cal is not regulated
by either DMHC or CDI.)
California Judicial Branch.
The California Constitution vests the
state's judicial power in the Supreme Court, the Courts of Appeal, and
the trial courts. Trial courts have jurisdiction over all civil cases
including family law, probate, juvenile, and general civil matters.
Appeals of decisions made in the trial courts may be heard in the Courts
of Appeal. Subsequent appeals may be heard by the Supreme Court. The
2011‑12 budget provides about $4 billion for support of the judicial
branch, including $1.7 billion from the General Fund.
Proposal
Generally, the measure adds some health
insurance-related consumer rights, imposes new regulatory requirements
on health plans and insurers, and restates some consumer rights already
found in current law. For example, under existing law, HMO enrollees
have many rights including the right to see their own medical records
and ask for an independent medical review of a decision their health
plan makes about their care. Under the measure enrollees would own their
medical records and their right to independent review would continue.
The requirements of the measure apply to: (1) any contract or agreement
in which a party promises to pay for, or become liable to pay for, any
health care-related services or expense, and (2) any party who, for
compensation, assumes any of another person's financial risk for the
cost of any health care-related services.
Measure Imposes Additional Requirements on Health Plans and Insurers.
Health plans sometimes require that a medical professional, such as a
physician, obtain prior authorization before the plan will agree to pay
for a medical procedure or treatment that the medical professional
recommends for a patient. In some instances health plans deny
authorization of a procedure or medical treatment thereby limiting
medical services. The measure changes some of the procedures for and
potential consequences of limiting a medical service. For example, under
the measure, the decision to deny or limit a medical service would need
to be made by a person with the education, training, and relevant
expertise that is appropriate for evaluating the specific issue involved
in the denial, thus requiring health plans and insurers to seek more
input from specialists when making coverage decisions than would
otherwise be required under current law.
Health plans and insurers would also be
required to comply with various provisions of the measure aimed at
increasing the ease with which consumers could understand the health
insurance products marketed by health plans and insurers. For example,
health plans and insurers would be required to provide descriptions, in
layman terms, of the products they market and disclose, in layman terms,
any limitation in benefits.
Some Medical Providers Potentially Subject to Additional Regulations.
Under existing law, RBOs are subject to limited oversight by a health
plan/insurance regulator. Under the measure, all statutes and
regulations governing the business of insurance may be extended to RBOs,
potentially resulting in additional compliance obligations for these
entities.
Expanded State Regulatory Responsibilities.
The measure largely adds requirements to
the Insurance Code, which is enforced by the CDI, but DMHC-regulated
health plans are also subject to the provisions of the measure. Thus,
health plans may be subject to dual regulatory oversight by both the
DMHC and the CDI in enforcing the measure. Additional workload for state
regulators that may result from this measure includes, but is not
limited to, reviewing new policy forms, suspending licenses for plans or
insurers that violate any provision of the measure, and expanding
regulatory jurisdiction to include RBOs that are currently subject to
limited oversight by a health plan/insurance regulator.
Most Persons Given Legal Standing to Enforce the Measure Through the
Courts.
With limited exceptions, the measure gives legal standing to any person
who seeks to enforce the requirements of the measure (including those
that are declaratory of current law) through legal action, regardless of
whether the person has been personally harmed by a violation of the
measure. This is in addition to state agency regulatory enforcement.
Fiscal Effects
Scope of the Measure's Application Is Uncertain.
Depending on the interpretation of the
measure, some of the additional consumer rights and health insurance
regulatory requirements may apply to other insurance products that are
not considered to be health insurance products, such as life insurance.
Even if the measure did apply to these other products, it is not clear
how its provisions would be applied to them. Furthermore, it is unclear
whether the provisions of the measure would apply to health care
services provided through fee-for-service Medi-Cal. For purposes of
estimating the fiscal effects of this measure, we assume that it would
only apply to health insurance regulated by DMHC or CDI. If, instead,
the measure applies to other insurance products and state programs, the
fiscal effects discussed below would be more pronounced.
Likely Increased Costs for State and Local Governments Purchasing Health
Insurance. The measure
contains a number of provisions that would likely increase costs for
health plans and insurers and therefore impact state and local
governments as purchasers of health insurance. For example, some
potential sources of increased costs for health plans and insurers
include:
·
Medical
costs from paying for more costly medical services in response to some
of the provisions in the measure, including provisions that increase the
likelihood of legal challenges to practices of health plans and insurers
related to the provision of medical services. For example, by giving
legal standing to persons who are not personally harmed by a violation
of the measure, health plans and insurers would likely face a greater
prospect of litigation. In response to this threat, plans and insurers
may be less likely to deny or limit certain medical services. To the
extent this results in plans and insurers covering more medical
services, it would likely increase costs for health plans and insurers.
·
Legal
costs associated with lawsuits that could result from giving legal
standing to enforce the measure to an extremely broad universe of
persons, including those who are not personally harmed by a violation of
the measure.
·
Administrative costs from new requirements, such as requiring
specialists to be consulted before services can be denied or limited.
·
Increased
fees resulting from additional DMHC and/or CDI regulatory enforcement
costs, which are to be funded largely by fees and assessments on the
health plans and insurers.
Some or all of any increased cost to
health plans and insurers would likely be passed on to purchasers of
health insurance, including state and local governments, in the form of
higher health insurance premiums. To the extent this occurs, we estimate
these state and county costs would be at least in the millions of
dollars annually.
Likely Minor Net Impact on State General Fund Revenues.
The net impact of this measure on state
General Fund revenues is unknown. On its own, an increase in health
insurance premiums on policies issued by CDI-regulated insurers,
resulting from potentially increased costs imposed on these insurers by
this measure, would generate additional state gross premiums tax
revenues. However, if fewer businesses and individuals chose to buy
health insurance as a result of such premium increases, then the
potentially increased revenues from premium increases would be at least
partially offset by a reduction in revenues due to there being fewer
enrollees. In contrast, on their own, potentially increased compliance
costs resulting from this measure could reduce the taxable income of
DMHC-regulated health plans and could therefore reduce state corporate
tax revenues to some degree. The net impact of these various potential
revenue effects would probably be minor.
Potential Increase in State Court Costs.
This measure could result in an increase in the number of civil cases
filed in the courts, causing increased court costs to process and hear
the additional cases. The magnitude of these state costs is unknown, but
could be significant, depending on the number of cases filed and how
they are adjudicated by the courts.
Summary of Fiscal Effects
If this measure is interpreted to apply
only to health plans and insurers regulated by CDI and DMHC, it would
have the following significant fiscal effects:
·
Likely
increase in costs to the state and local governments, at least in the
millions of dollars annually, associated with increased premiums for
government-purchased health insurance.
·
Likely
minor impact on state General Fund revenues from gross premiums and
corporate income taxes.
·
Potentially significant increase in state court costs depending on the
number of cases filed and how they are adjudicated by the courts.
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