California Department of Managed Health Care Releases Draft Guidance Concerning SB 1163

On April 22, 2011, the California Department of Managed Health Care (“DMHC”) released draft Letter No. 8-K, which is designed to provide health care service plans with guidance concerning SB 1163. This follows the California Department of Insurance’s (“CDI”) release on April 5, 2011, of Guidance 1163:2 concerning SB 1163.

SB 1163, effective January 1, 2011, amended the California Health and Safety Code and the California Insurance Code to provide for review of rate increases by health care service plans and health insurers for purposes of determining whether the rate increase is unreasonable. 

SB 1163 was adopted in response to a provision in the federal Patient Protection and Affordable Care Act (“PPACA”) that requires health care service plans and health insurers’ rate increases to be reviewed by the federal government to determine whether the rate increase is unreasonable, unless a state has established its own rate review process. The key implementing provisions of SB 1163 are located at California Health and Safety Code Sections 1385.01 to 1385.13 and California Insurance Code Sections 10181 to 10181.13

California Health and Safety Code Section 1385.08(a) states that the DMHC, “may issue guidance to health care service plans regarding compliance with this article.” This tracks the language found in California Insurance Code Section 10181.9(a), which states that the CDI, “may issue guidance to health insurers regarding compliance with this article.” 

Both Health and Safety Code Section 1385.08(a) and Insurance Code Section 10181.9(a) exempt the DMHC and the CDI from following the formal procedures employed for the adoption of regulations in California when issuing guidance concerning compliance with Health and Safety Code Sections 1385.01 to 1385.13 and Insurance Code Sections 10181 to 10181.13. 

Guidance 1163:2 issued by the CDI purports to define the factors the CDI will consider in determining whether a rate increase is “unreasonable” in the individual and small group markets, in addition to attempting to implement certain procedural aspects of SB 1163 for these markets. 

A comparison of the DMHC’s draft Letter No. 8-K with the CDI’s Guidance 1163:2 reveals that the DMHC has preliminarily adopted many of the provisions contained in the CDI’s Guidance, without modification, and may consider some of the other factors contained in the CDI's Guidance when making reasonableness determinations for these markets.

Commissioner Jones Responds to Federal Government Announcement of New State Grants for Health Insurance Rate Review

by Marina Karvelas

In a press release issued today, California Insurance Commissioner Jones applauded the U.S. Department of Health and Human Services after it announced the availability of roughly $200 million in new health insurance rate review grants

Specific funding is available to support states in their efforts to stop excessive premium increases from being implemented. However, California would not be eligible for this portion of the grant because California law currently does not empower the Commissioner to reject excessive health insurance premium increases.

As discussed earlier in this blog, Commissioner Jones recently issued Guidance 1163:2 which allows the Commissioner to determine, based upon a list of factors, including a federal medical loss ratio, whether a health insurance premium rate increase is “unreasonable”.

The Commissioner however has no power to reject an "unreasonable" rate increase.  

Commissioner Jones is actively supporting legislation that would give him such power and the new federal grants gives him yet another platform to do so.

While California is eligible for some of the grant funding through this program, we would be eligible for more federal funding if California law provided the Insurance Commissioner with the authority to reject excessive premium increases. This again brings to light the need to change the law and provide the Insurance Commissioner with that authority. I am working with Assembly Member Mike Feuer to pass AB 52, which would give me the authority to reject excessive health insurance premium increases." 

We will follow AB 52 and the Commissioner's efforts to reform health insurance rate regulation.

Guidelines for Health Insurers Requesting Rate Increase Issued by California Insurance Commissioner (SB 1163)

by Marina Karvelas

On February 4, 2011, California Insurance Commissioner Dave Jones released draft guidelines for implementing SB 1163 (“Guidance 1163:2”).

SB 1163, signed by former Governor Schwarzenegger on September 30, 2010, responds to the federal Patient Protection and Affordable Care Act (“PPACA”), which requires the United States Secretary of Health and Human Services to establish a process for the annual review of “unreasonable” increases in premiums for health insurance coverage.

Under the federal act, health insurers must submit to the secretary, and the relevant state, a justification for an “unreasonable” premium increase prior to implementation of the increase.

SB 1163, effective January 1, 2011, requires health insurers to file with the California Department of Managed Health Care or the California Department of Insurance detailed rate information regarding proposed premium increases and requires that the rate information be certified by an independent actuary. 

The bill authorizes the departments to review these filings and issue guidance regarding compliance. It also requires the departments to consult with each other regarding specified actions as well as post certain findings on their Internet Web sites.

In his draft guidelines (“Guidance 1163:2”), Commissioner Jones lists several factors that will be used by the Department to determine if a rate is “unreasonable.”

Under Section A: Unreasonable Rate Increases, the first factor the Department will look at is:

[t]he relationship of the projected aggregate medical loss ratio to the federal medical loss ratio standard in the market segment to which the rate applies, after accounting for any adjustments allowable under federal law.” (Guidance 1163:2, § A, p. 1.) 

The draft guidelines expressly incorporate, by reference, the interim federal regulation effective January 1, 2011, titled “Health Insurance Issuers Implementing Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act,” 45 C.F.R. §§ 158.101-158.232.

The interim federal regulation requires health insurers to spend a certain percentage of consumers’ premiums on direct care for patients and efforts to improve health care quality.

For individual and small group market insurers, this is 80% of the consumers’ premium, and for large group market insurers, it is 85% of the consumers’ premium.

If insurers fail to meet the ratio requirements, beginning in 2012, they will be required to provide a rebate to their customers by August 1 of each year.

The federal rule allows for a State to require a higher medical loss ratio than that required under the interim regulation. The interim federal regulation (pdf), published December 1, 2010, is subject to a 60-day public comment period.

Other factors identified in Commissioner Jones’ draft guidelines to determine whether a premium increase is “unreasonable” include: 

  • Whether the assumptions for the rate increase are supported by substantial evidence;
  • Whether the choice of assumptions or combination of assumptions for the rate increase is reasonable;
  • Whether the data or documentation provided is incomplete or inadequate;
  • Whether the filed rates result in premium differences between insureds within similar risk categories that either are not permissible under California law or do not reasonably correspond to differences in expected costs;
  • Whether itemized changes are substantially justified by credible experience data;
  • Rate of return for prior three years and anticipated for the following year;
  • Insurer’s employee and executive compensation;
  • Degree to which the increase exceeds rate of medical cost inflation;
  • For individual policies, compliance with 10 C.C.R. 2222.12. (Guidance 1163:2, § A, pp. 1-2.) 

In addition to Filing and Notice requirements as well as specific filing forms (Sections B and D Guidance 1163:2), the draft guidelines contain several requirements for actuarial certification. Each of the following must be included in the actuarial certification:

  • The actuary’s qualifications and independence;
  • Opinion that the proposed premium rates are “actuarially sound in the aggregate;”
  • Complete description of data, assumptions, rating factors and methods with rate calculations for each contract or policy form;
  • Statement of opinion whether the rate increase is reasonable or unreasonable, and if, the latter, the justification for the increase; a discussion of the factors listed in § A, and 10 C.C.R. § 2222.10 for individual health insurance;
  • A description of the testing performed by the actuary. (Guidance 1163:2, § C, pp. 3-4.) 

Notwithstanding the above requirements, the Insurance Commissioner currently does not have the authority under SB 1163 to reject health insurance rate increases.

In the last legislative term, Commissioner Jones (formerly an assemblyman) sponsored AB 2578, a strong insurance rate reform bill that would have given the Commissioner such authority (it failed to pass in the Senate).

The Commissioner is currently supporting another effort at such legislation.

Commissioner Jones’ draft guidelines are subject to a 7 day public comment period before they are finalized.

Originally posted to Barger & Wolen's Insurance Litigation and Regulatory Law Blog