Existing law, the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene), provides for the licensure and regulation of health care service plans by the Department of Managed Health Care and makes a willful violation of the act a crime. Any person who transacts disability insurance without a valid and unrevoked certificate of authority from the Insurance Commissioner is guilty of a misdemeanor, except as specified. Existing law provides that a nonprofit hospital corporation that substantially indemnified subscribers and enrollees, was operating in 1965 under certain provisions of the Insurance Code, and that is regulated under Knox-Keene shall enjoy the privileges under the act that would have been available to it had it been registered under the Knox-Mills Health Plan Act and had applied for a license under Knox-Keene in 1976.

This bill would repeal the latter provision. The bill would further prohibit an entity licensed under Knox-Keene from offering, marketing, or selling health insurance, whether issued on a group or individual basis, to an existing or new customer. By expanding the scope of an existing crime, the bill would impose a state-mandated local program.

Existing law provides that any person or other entity that provides coverage in this state for medical, surgical, chiropractic, physical therapy, speech pathology, audiology, professional mental health, dental, hospital, or optometric services, whether this coverage is by direct payment, reimbursement, or otherwise, and that enters into an arrangement or contract with, or underwrites, a preferred provider organization or specified arrangement is subject to the jurisdiction of the Department of Insurance. Existing law provides that a person or entity subject to regulation under Knox-Keene is not subject to the jurisdiction of the department.

This bill would delete the latter provision that provides that a person or entity subject to regulation under Knox-Keene is not subject to the jurisdiction of the department.

The California Constitution 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.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law, the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene), provides for the licensure and regulation of health care service plans by the Department of Managed Health Care and makes a willful violation of the act a crime. Any person who transacts disability insurance without a valid and unrevoked certificate of authority from the Insurance Commissioner is guilty of a misdemeanor, except as specified. Existing law provides that a nonprofit hospital corporation that substantially indemnified subscribers and enrollees, was operating in 1965 under certain provisions of the Insurance Code, and that is regulated under Knox-Keene shall enjoy the privileges under the act that would have been available to it had it been registered under the Knox-Mills Health Plan Act and had applied for a license under Knox-Keene in 1976.

This bill would repeal the latter provision. The bill would further prohibit an entity licensed under Knox-Keene from offering, marketing, or selling health insurance, whether issued on a group or individual basis, to an existing or new customer. By expanding the scope of an existing crime, the bill would impose a state-mandated local program.

Existing law provides that any person or other entity that provides coverage in this state for medical, surgical, chiropractic, physical therapy, speech pathology, audiology, professional mental health, dental, hospital, or optometric services, whether this coverage is by direct payment, reimbursement, or otherwise, and that enters into an arrangement or contract with, or underwrites, a preferred provider organization or specified arrangement is subject to the jurisdiction of the Department of Insurance. Existing law provides that a person or entity subject to regulation under Knox-Keene is not subject to the jurisdiction of the department.

This bill would delete the provision that a person or entity subject to regulation under Knox-Keene is not subject to the jurisdiction of the department.

Existing law establishes the Medi-Cal program, administered by the State Department of Health Care Services, under which health care services are provided to qualified, low-income persons. The Medi-Cal program is, in part, governed and funded by federal Medicaid program provisions. Under existing law, one of the methods by which Medi-Cal services are provided is pursuant to contracts with various types of managed care plans.

This bill would require the Department of Finance, in consultation with the State Department of Health Care Services, as a part of the annual budget process, to determine if implementation of the bill results in increased revenues under Section 28 of Article XIII of the California Constitution, and the amount of the increase, if any. The bill would declare the intent of the Legislature to appropriate an equivalent amount, if any, to the State Department of Health Care Services in the annual budget act for the purpose of increasing Medi-Cal provider reimbursement rates.

The California Constitution 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.

This bill would provide that no reimbursement is required by this act for a specified reason.

Date of Hearing:

ASSEMBLY COMMITTEE ON HEALTH

Rob Bonta, Chair

ABPCA Bill Id:AB 1434

Author:(McCarty) – As Amended Ver:April 20, 2015

SUBJECT: Health insurance: prohibition on health insurance sales: health care service plans.

SUMMARY: Deletes provisions that a person or entity subject to regulation under the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act) is not subject to the jurisdiction of the California Department of Insurance (CDI). Specifically, this bill:

1. Repeals existing statute providing that a person or entity subject to regulation under the Knox-Keene Act is not subject to the jurisdiction of CDI.

2. Prohibits an entity licensed under the Knox-Keene Act from offering, marketing, or selling health insurance, as defined, including a preferred provider organization (PPO) or other arrangement under which a health insurer (insurer) pays group benefits for expenses incurred on the account of hospitalization, or medical or surgical aid pursuant to an amount of benefit provided by the insurance policy arrangement, as specified.

3. Repeals existing statute applying to Anthem Blue Cross, that provides that a nonprofit hospital corporation that substantially indemnified subscribers and enrollees and was operating in 1965 under the Insurance Code, as specified, and which is regulated under Knox-Keene shall enjoy the privileges under the act that would have been available to it had it been registered under the Knox-Mills Health Plan Act (Knox-Mills) and applied for a license under the Knox-Keene Act in 1976.

EXISTING LAW:

1. Establishes the Knox-Keene Act, the body of law governing plans in the state, and provides for the licensure and regulation of plans by the Department of Managed Health Care (DMHC).

2. Provides for the regulation of insurers by CDI.

3. Subjects to the jurisdiction of CDI, any person or entity that provides coverage, whether by direct payment or reimbursement, for medical, surgical, chiropractic, physical therapy, speech pathology, audiology, professional mental health, dental, hospital, or optometric services, and that enters into an agreement or contract with a preferred provider organization (PPO) or other arrangement under which a disability insurer pays group insurance benefits for expenses related to hospitalization, medical, or surgical aid, as specified.

4. Exempts persons or entities subject to licensure under the Knox-Keene Act from CDI jurisdiction.

5. Defines health insurance as an individual or group disability insurance policy that provides coverage for hospital, medical, or surgical benefits, as specified.

6. Imposes an annual 2.35% gross premiums tax (GPT) on each insurer doing business in California, as specified.

7. Defines a “health care service plan” (plan) as any person who undertakes to arrange for the provision of health care services to subscribers or enrollees, or to pay for or to reimburse any part of the cost for those services, in return for a prepaid or periodic charge paid by or on behalf of the subscribers or enrollees.

8. Provides that a nonprofit hospital corporation that substantially indemnified subscribers and enrollees, and was operating in 1965 under the Insurance Code, and which is regulated under the Knox-Keene Act, shall enjoy the privileges under the act that would have been available to it had it been registered under the Knox-Mills Health Plan Act and applied for a license under Knox-Keene in 1976.

9. Establishes California’s Medicaid program, Medi-Cal, through which eligible low-income individuals receive health care services.

10. Establishes a managed care organization (MCO) tax, as specified.

FISCAL EFFECT: This bill has not yet been analyzed by a fiscal committee.

COMMENTS:

1. PURPOSE OF THIS BILL. According to the author, we need to close the loophole that allows any insurer to move their health insurance products to DMHC to avoid strong consumer protections oversight of CDI and avoid paying the taxes. The author states that the added tax revenue will strengthen and expand Medi-Cal.

2. BACKGROUND.

   1. Types of insurance. There are various types of full-service health coverage plans and policies available to California consumers today. The two main types of health plans and policies are:

      1. Health maintenance organizations (HMOs), which provide and arrange for health care for enrollees through a network of providers. HMOs generally only cover health services provided by provides in their networks; and,

      2. Preferred Provider Organizations (PPOs), plans in which the health insurer contracts with a network of medical providers who agree to accept lower fees and/or to control utilization. Enrollees in a PPO plan have the option to obtain care from a provider that is out of the PPO network, but generally pay a higher cost in doing so.

Other types of full-service plans include Point of Service (POS) plans and Exclusive Provider Organizations (EPO). POS plans combine the characteristics of an HMO and PPO by designating a network of providers for enrollees, but also allowing enrollees to go outside of the network for health care services. EPOs are a network of providers who have entered into written agreements with a plan or insurer to provide services to subscribers. EPO subscribers may not go outside of the EPO network for care.

Additionally, specialized health plans are available that cover only certain types of care. Examples of specialized plans include dental, vision, behavioral health, and chiropractic plans.

2. Insurance regulators. Regulation and oversight of health insurance in California is split between two state departments - DMHC and CDI. DMHC regulates health plans, including HMOs and some PPOs. CDI regulates multiple lines of insurance, including health insurers, generally PPO plans and traditional indemnity coverage.
   
   Although DMHC and CDI both regulate carriers providing health coverage, each department approaches that regulation differently. At the heart of the difference between health plans and health insurers is the “promise to pay” versus the “promise to deliver care.” DMHC-licensed plans, arrange for and organize the delivery of health care and services through contracted or owned providers and facilities and are required to cover all medically necessary services. Health insurers protect against (indemnify) the expense or charges (losses) associated with illness or injury and typically provide coverage for defined benefits that may be specifically limited in the policy, such as number of visits or annual dollar limits.

DMHC currently licenses all of the four types of health plans previously described. The majority of plans regulated by DMHC are HMOs. However, DMHC also regulates several full service PPOs, including Anthem Blue Cross and Blue Shield of California. DMHC also regulates several specialized PPO plans such as Delta Dental, and Vision Service Plan. CDI primarily regulates PPOs and EPOs.

According to the California Health Benefits Review Program (CHBRP), in 2015, it is estimated that 23.4 million Californians will be enrolled in state-regulated health insurance, 21.3 million of which will enroll in DMHC-regulated full-service plans. According to CDI, in 2014, it had 1.7 million insureds in major medical plans, down from 2.6 million from 2013. DMHC reports that, in 2014, it had approximately 2.6 million enrollees in Blue Shield and Blue Cross full-service PPOs and EPOs. This number can be expected to rise due, in part, to the fact that DMHC has licensed three new PPOs, and one EPO which began enrollment in 2015.

3. The Knox-Keene Act has more consumer protections that the Insurance Code. In recent years, efforts have been made to bring parity between the Knox-Keene Act and the Insurance Code with regard to consumer protections, particularly with the implementation of the ACA and accompanying efforts to apply its insurance market reforms across all markets. Through the regulatory process, the Insurance Commissioner recently established rules regarding provider networks and timely access requirements, two hallmarks of the Knox-Keene Act. However, disparities in consumer protections between the two bodies of law remain. Below is a description of some of the key differences:

1. Balance billing prohibitions for emergency services: The Knox-Keene Act provides that an enrollee will not be liable to the provider for any fees owed it by the health care service plan.  This prohibition protects enrollees and subscribers from being caught in the middle of disputes between plans and providers. In addition, pursuant to existing regulations, balance billing for emergency services is defined as an “unfair billing pattern” and is therefore illegal under the Knox-Keene Act. In addition, the California Supreme Court in Prospect Medical Group v. Northridge Emergency Medical Group held that “billing disputes over emergency care must be resolved solely between the emergency room doctors, who are entitled to a reasonable payment for their services, and the HMO, which is obligated to make that payment. Emergency room doctors may not bill the patient for the disputed amount.” This decision applies solely to emergency providers who have provided services to Knox-Keene Act-regulated plan enrollees.

The Insurance Code prohibits in-network providers from charging or collecting copayments that exceed what is calculated as a part of the provider's contracted rate, and, with regard to out-of-network emergency services, prohibits copayments or coinsurance to exceed amounts required for in-network emergency care. However, it does not provide a prohibition on balance billing emergency services such as that applied to DMHC-regulated plans.

2. Definition of "basic health care services": The Knox-Keene Act requires plans to contract to provide to enrollees basic health care services defined as physician services; hospital inpatient services and ambulatory care services; diagnostic laboratory and diagnostic and therapeutic radiologic services; home health services; preventive health services; emergency health care services, as specified; and, hospice care. These services are further defined in implementing regulations.

The Insurance Code does not contain such a definition. This is relevant because, although the ACA requires individual and small group policies to cover 10 categories of essential health benefits, this requirement does not apply to in the large group market. As such, large group policies regulated by CDI do not have the same basic health care coverage requirements as plans regulated by DMHC.

3. Non-contracting provider payments: Regulations implementing the Knox-Keene Act specify the way disputed claims, such as claims for payment for out-of network services, will be calculated. For out-of-network providers, the payments should be the "reasonable and customary value" based on specified information, and taking into account factors that provide guidance for providers and plans as a way to help determine a reasonable payment amount. The Insurance Code does not provide criteria for non-contracting provider reimbursement, except for providers whose contract with an insurer has terminated resulting in them becoming an out-of-network provider. Without such criteria, insureds could be held financially liable if the insurers and providers are not able to come to an agreement on the amount owed for non-contracted services.

Other key consumer protection areas that have differences between the Knox-Keene Act and the Insurance Code include grievances and appeals processes, plan and policy compliance surveys, and the scope of independent medical reviews.

4. MCO tax. Insurers are required to pay certain taxes. DMHC-regulated plans pay corporate taxes. Additionally, Medi-Cal managed care plans, all of which are regulated by DMHC (with exception of County Organized Health Systems), pay the MCO tax, which is a sales tax of 3.975% of gross receipts. For 2015-16, the current MCO tax is projected to generate $1.13 billion in non-federal funding for the Medi-Cal program. These funds are matched with federal funds to provide the Medi-Cal program over $2 billion.

In July 2014, CMS issued guidance indicating that MCO tax structures similar to California's were no longer permissible for the purposes of funding the Medi-Cal program, and required state with such taxes to make certain modifications. Based on the July federal guidance and federal regulations, any modified proposal for the MCO tax would need to be generally broad-based and uniform, and not contain hold harmless provisions. As a practical matter, broad-based means that all plans, not just Medi-Cal plans, must pay the tax.  Another important federal requirement is that although some of the plans paying the tax will get their money and more in higher Medi-Cal rates, there must be tax payers who lose, specifically plans that pay more in tax than they get back in higher rates.  This federal requirement is in place so that states do not design taxes where all providers get more money back than they put in, once the match is included.

The Governor’s budget proposes to replace the existing MCO tax with a broad-based MCO tax that would satisfy federal requirements. To meet federal requirements, the new broad-based MCO tax will apply across all managed care plans, including PPOs, regulated by DMHC. The administration estimates that revenues from this tax will offset General Fund (GF) spending for Medi-Cal by $800 million in 2014–15 and $1.1 billion in 2015–16. Additionally, the MCO tax will be sufficient to raise the funding necessary to eliminate a 7% reduction in in-home supportive services hours.

5. GPTs. Insurance companies regulated by CDI are subject to a GPT equal to 2.35% of all premiums written. This tax is in lieu of all other taxes except property taxes and vehicle license fees. Thus, insurers do not pay tax on other forms of income, such as investment income, or income earned from other trades or businesses. According to the LAO, the GPT appears, in most years, to raise more revenue than would be raised by applying the corporate taxes to insurers' net income. Insurers under CDI cannot be subject to the MCO tax.

If a PPO is shifted from DMHC to CDI, as proposed by this bill, that PPO would no longer pay corporate or MCO taxes. Instead, it would pay GPTs. The author and sponsors assert that $300 million in annual revenue would be generated for the General Fund.

The California Department of Finance (DOF) recently released a preliminary fiscal analysis of this bill, and determined that if PPOs and EPOs were shifted to CDI jurisdiction, there would be a net revenue gain of approximately $240 million in General Fund revenues ($300 million increase in GPT, less $60 million in corporate taxes that would no longer be paid). However, approximately $130 million of this revenue would be subject to Proposition 98 minimum guarantees (to fund education), and $3.6 million would be subject to Proposition 2 "rainy day fund" obligations. Thus, $106.4 million would be left as net General Fund revenue. DOF estimates that the impact of this bill on the MCO tax proposal would result in decreased General Fund revenue of $30 million resulting from fewer lives under DMHC's jurisdiction.

The administration also asserts that this bill could be interpreted in that it would apply to all commercial plans, including HMOs, under DMHC's jurisdiction. Under this scenario, DOF estimates a net revenue gain of $1.6 billion in GF revenues, reduced down to $726 million after Proposition 98 and 2 guarantees are applied. However, DOF estimates that the impact under this scenario on the MCO tax would be decreased GF revenue of approximately $1.35 billion, and because of the decreased number of lives under DMHC's jurisdiction, the administration's MCO tax proposal would likely be infeasible. Neither the author nor sponsors have expressed intent for the bill to apply to any plans other than PPOs and EPOs.

6. Recent litigation. According to the Assembly Committee on Revenue and Taxation, the issue of GPTs is currently the subject of ongoing litigation pending before the California Court of Appeal. Specifically, on July 3, 2013, Michael D. Myers filed a taxpayer action alleging that the Insurance Commissioner, the State Board of Equalization, and the State Controller have all failed to perform their duties under California law to assess and collect the gross premiums tax from Blue Shield and Blue Cross. Blue Shield and Blue Cross, in turn, filed demurrers asserting, among other things, that neither entity is an "insurer" subject to the gross premiums tax. The trial court sustained the demurrers and noted that it was undisputed that neither Blue Shield nor Blue Cross is licensed by the Insurance Commissioner. Mr. Myers has appealed the trial court judgment. Additionally, the Insurance Commissioner argues that the Myers trial court erred in mechanically concluding that because Blue Shield and Blue Cross are denominated as HCSPs under Knox-Keene, and regulated by the DMHC, they are exempt from the gross premiums tax. The Insurance Commissioner contends that Blue Shield and Blue Cross's DMHC-regulated products are subject to the gross premiums tax, and that legislative changes permitting Blue Shield and Blue Cross to sell indemnity products under DMHC jurisdiction did not change the character of those products from "insurance" to something else.

1. SUPPORT. According to the California Insurance Commissioner Dave Jones, and the California Medical Association (CMA), co-sponsors of this bill, and other supporters, existing law allows Anthem Blue Cross and Blue Shield of California to choose the regulator with which to file their PPO products. Supporters state that these companies were granted special separate exceptions which allowed them to sell regulated PPO business under DMHC licenses, thereby creating an uneven playing field among PPOs as they compete in the marketplace. Supporters assert that Blue Shield had its 2014 products disapproved by CDI for non-compliance with the Affordable Care Act and non-compliance with the network adequacy law; and, rather than amending those filings in order to comply with the law, they instead filed the products with DMHC. Supporters argue that Anthem is similarly moving their PPO products to regulation under DMHC. Supporters also state that these special exceptions in law also prevent Anthem Blue Cross and Blue Shield from paying their fair share of taxes; specifically, companies that file their PPO policies with DMHC pay corporate income tax on their net income instead of the gross premium tax of 2.35% on all premiums received that all insurers pay under the state's Constitution, resulting in the GF forgoing more than $1 billion from 2004-2011. Supporters state that California should eliminate these special exceptions allowing these two companies to regulator shop, and in doing so, they will pay their fair share of taxes and generate approximately $300 million in annual revenue that the Legislature could dedicate to improving Medi-Cal provider reimbursement rates.

2. OPPOSITION. Health Access California (HAC) and the Western Center on Law and Poverty oppose this bill unless amended to provide at least the same level of consumer protections that are provided under the Knox-Keene Act, and unless it produces more ongoing revenue dedicated to Medi-Cal than the proposed MCO tax. Health Access states that recent amendments to the bill delete the statement of intent that the funding raised as a result of its enactment should be used to improve Medi-Cal funding, thus clarifying that the GPT would go to the GF and be subject to Proposition 98 which protects education funding, approved ballot measures which create budget reserves, and other provisions of the California Constitution governing GF expenditures. HAC and WCLP state that, by moving a significant share of covered lives from DMHC to CDI, this bill reduces the base for the MCO tax, thus resulting in fewer funds for the Medi-Cal program. The organizations also cite several consumer protections in the Knox-Keene Act that are not similarly in the Insurance Code, including balance billing prohibition, a definition of basic health services, routine medical surveys of plans, broader grievance and appeals provisions, and others. HAC and WCLP state that without equal protections between the two departments, consumers' plans should not be moved to CDI.

Anthem Blue Cross states that that this bill seeks to strip the DMHC of its regulatory authority over PPO products. Anthem Blue Cross states that with the implementation of the ACA, all plan products, regardless of the regulator, must have the same benefit structure, making product filings with two regulators redundant and inefficient. Anthem Blue Cross asserts that there is a lack of justification to arbitrarily move products between regulators, and that further consolidation of its products under DMHC ensures better consumer protections, including a ban on balance billing that is not afforded under CDI. Blue Shield of California (BSC) states this bill reduces funding for Medi-Cal, and would impose hundreds of millions of dollars in taxes on PPO products without any material benefit to consumers. BSC also states that it is striving to break the inefficient fee-for-service model of delivery and establish plans with risk-sharing innovations that would not be allowed at CDI. BSC cites examples of accountable care organizations it has launched which align incentives among plans, providers, and hospitals to reduce waste and deliver better care to its members. BSC states that CDI has no jurisdiction over medical groups or oversight of risk-bearing organizations, and under this bill, these types of system reforms would be imperiled.

Delta Dental states that it provides coverage to approximately 14,000 employer groups statewide through its dental HMO and PPO products, and having its dental plans licensed under the same regulatory framework, thus meeting the same standards for quality, access, grievances, appeals, claims payments and audits makes compliance by the plan and its contracting dentists more efficient.

5. PREVIOUS LEGISLATION. SB 78, Chapter 33, Statutes of 2013, establishes the MCO tax beginning July 1, 2013 through July 1, 2016.

6. POLICY COMMENTS.

   1. Consumers will lose some protections if PPOs are shifted to CDI. Despite ongoing efforts by the legislature, administration, and Insurance Commissioner to bring parity between the Knox-Keene Act and the Insurance Code, there are still significant differences between the two when it comes to consumer protections. As a matter of public policy, ensuring the strongest consumer protections is of the utmost importance, particularly in light of current individual coverage mandates under the ACA. It is important to weigh the practical effects of this bill on consumers, one of which is that PPO consumers would lose access to key protections they currently benefit from as enrollees of Knox-Keene licensed plans. It would be prudent for more work to be done to bring complete parity with the Knox-Keene Act with respect to consumer protections before shifting millions of consumers to the CDI.

   2. Bill would result in less funding for Medi-Cal. By moving all PPOs under the jurisdiction of CDI, this bill would reduce MCO tax revenues and result in less funding for Medi-Cal. The author and sponsors state that this bill would generate $300 million for the GF, and that those funds could be used to boost Medi-Cal provider reimbursement. However, once the revenues go to the GF, they will be subject to Proposition 98 funding guarantees for education, as well as Proposition 2, which establishes the state's rainy day fund. Once these obligations are met, while Medi-Cal could receive some proportion of the remaining revenues after Propositions 98 and 2 are applied, what is left of the revenues could not be guaranteed to be used for the Medi-Cal program. While funding for Medi-Cal is a top priority of many when it comes to health policy, Medi-Cal would have to compete with many other interests to secure the additional funding from the GF. This bill does not provide any provisions or safeguards to assure that the funding would be secured for the Medi-Cal program.

In contrast, the MCO tax generates a direct source of funding for the Medi-Cal program. Further, the MCO tax provides the state with the opportunity to draw down matching federal funds for Medi-Cal. For every MCO tax dollar lost, there will be a matching federal dollar forgone. And, as stated in the analysis, the administration is working to broaden the MCO tax base by including all DMHC-regulated plans, including PPOs, so as to meet federal requirements and allow the MCO tax to remain operative. Shifting PPOs to CDI would remove millions of covered lives away from DMHC, thus reducing the MCO tax base and funds for Medi-Cal, and potentially undermining the proposed MCO tax structure.

3. Bill would not apply solely to Anthem Blue Cross and Blue Shield of California. While the author and sponsors highlight Anthem Blue Cross and Blue Shield of California PPO products as the two main insurers subject to this bill, the bill applies to all full-service PPO plan, specialized PPO plans, and EPOs. As such, the bill would result in not only Anthem Blue Cross and Blue Shield of California's 2.6 million lives being shifted to CDI, but also millions of covered lives currently in DMHC-regulated specialized PPO and EPO plans. For example, according to data provided by DMHC, Delta Dental alone had over 3 million covered lives in 2014, and Vision Service Plan ha 11,970,172. While specialized plans lives tend to overlap, as some individuals have full-service, dental, and vision plans, or some combination thereof, these numbers provide context to the sheer numbers of consumers who may be impacted by this bill. The scope of the bill exacerbates the aforementioned concerns over consumer protections, and to some degree the MCO tax (specialized plans are not subject to the MCO tax and it is unknown how many lives other DMHC-regulated full-service PPO products will enroll in 2015 and beyond). Additionally, it also raises questions as to the capacity of CDI to readily absorb the impact of such a significant increase in the number of covered lives under its jurisdiction.

REGISTERED SUPPORT / OPPOSITION:

Support

California Insurance Commissioner Dave Jones (sponsor)

California Medical Association (co-sponsor)

California Nurses Association

Congress of California Seniors

Consumer Federation of California

Opposition

Anthem Blue Cross

California Association of Health Plans

Delta Dental

Health Access California

Western Center on Law and Poverty

Analysis Prepared by: Kelly Green / HEALTH / (916) 319-2097

Date of Hearing: April 27, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 1434

Author:(McCarty) – As Amended Ver:April 20, 2015

Majority vote. Fiscal committee.

SUBJECT: Health insurance: prohibition on health insurance sales: health care service plans

SUMMARY: Deletes existing statutory language providing that any person or entity subject to regulation under the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene) is not subject to Insurance Code Section 742, which places specified coverage providers under the jurisdiction of the Department of Insurance. Specifically, this bill:

1. Repeals Health and Safety Code (H&SC) Section 1396.5. H&SC Section 1396.5, in turn, provides that a nonprofit hospital corporation that substantially indemnified subscribers and enrollees and was operating in 1965 under Insurance Code Section 11490 et seq. and which is regulated under Knox-Keene shall enjoy the privileges under the act that would have been available to it had it been registered under the Knox-Mills Health Plan Act (Knox-Mills) and applied for a license under Knox-Keene in 1976.

2. Prohibits an entity licensed under Knox-Keene from offering, marketing, or selling health insurance, as defined, including a preferred provider organization (PPO) or arrangement described in Insurance Code Section 10133, whether issued on a group or individual basis, to an existing or new customer.

EXISTING LAW:

1. Imposes an annual 2.35% gross premiums tax on each insurer doing business in California, as specified. (California Constitution Article XIII, Section 28.)

2. Defines the term "health insurance", for purposes of the Insurance Code, to mean an individual or group disability insurance policy that provides coverage for hospital, medical, or surgical benefits. (Insurance Code Section 106(b).)

3. Provides that any person who transacts disability insurance without a valid and unrevoked certificate of authority from the Insurance Commissioner is guilty of a misdemeanor, except as specified.

4. Provides, under Knox-Keene, for the licensure and regulation of health care service plans (HCSPs) by the Department of Managed Health Care (DMHC).

5. Defines a HCSP to include any person who undertakes to arrange for the provision of health care services to subscribers or enrollees, or to pay for or to reimburse any part of the cost for those services, in return for a prepaid or periodic charge. (H&SC Section 1345(f).)

6. Places under the jurisdiction of the Department of Insurance any person or entity that provides coverage in this state for medical, surgical, chiropractic, physical therapy, speech pathology, audiology, professional mental health, dental, hospital, or optometric services, whether this coverage is by direct payment, reimbursement, or otherwise, and that enters into an arrangement or contract with, or underwrites, a PPO or specified arrangement. (Insurance Code Section 742(a).) Any person or entity subject to regulation under Knox-Keene, however, is not subject to this statutory provision. (Insurance Code Section 742(b).)

7. Provides that a nonprofit hospital corporation that substantially indemnified subscribers and enrollees and was operating in 1965 under Insurance Code Section 11490 et seq. and which is regulated under Knox-Keene shall enjoy the privileges under the act that would have been available to it had it been registered under Knox-Mills and applied for a license under Knox-Keene in 1976. (H&SC Section 1396.5.)

FISCAL EFFECT: Unknown, but potentially significant revenue implications to the extent this bill results in certain entities becoming subject to the gross premiums tax on insurers.

COMMENTS:

1. The author has provided the following statement in support of this bill:

We need to close the loophole that allows any insurer to move their health insurance products to the Department of Managed Health Care to avoid the strong consumer protection oversight of the Department of Insurance and avoid paying premium taxes.

2. This bill is co-sponsored by Insurance Commissioner Dave Jones, who notes the following:

Existing law allows Anthem Blue Cross and Blue Shield of California to choose the regulator with which to file their PPO products. These companies were granted special separate exceptions which allowed them to sell regulated PPO business under Department of Managed Health Care (DMHC) licenses. This special exception allowed these two companies to "regulator shop," thereby creating an uneven playing field among PPOs as they compete in the marketplace. Blue Shield had its 2014 products disapproved by the Department of Insurance for non-compliance with the Affordable Care Act and non-compliance with the network adequacy law and rather than amend those filings in order to comply with the law, they instead filed these products with DMHC. Anthem is similarly moving their PPO products to regulation under DMHC.

These special exceptions in law that allow these companies to regulator shop also prevent Anthem Blue Cross and Blue Shield from paying their fair share of taxes. Companies that file their PPO policies with DMHC pay corporate income tax on their net income instead of the gross premium tax of 2.35% on all premiums received that all insurers pay under the state's Constitution. Filing non-HMO products under DMHC results in a significant loss of revenue to the General Fund. This loophole has resulted in the General Fund forgoing more than $1 billion from 2004-2011. As Blue Shield and Blue Cross move their PPO products to DMHC, the loss has increased from $150 million in 2011 to $220 million in 2014 and to over $300 million if the rest of the covered lives move this year.

3. Opponents contend that this bill "seeks to strip the DMHC of [its] regulatory authority over PPO products in California and drive up health care costs by adding additional tax burdens on health plans." Specifically, opponents note:

Prior to the ACA, significantly different products could be filed at CDI [than] were filed at [the] Department of Managed Health Care (DMHC). However, the ACA now requires all product offerings, regardless of regulator, to have the same benefit structure, making [filing] products with two regulators redundant and inefficient. Further, the consolidation of our products under the DMHC ensures better consumer protections, including a ban on balance billing in certain circumstances, than afforded by the CA Department of Insurance (CDI). Finally, despite what is said by the proponents of AB 1434, the DMHC has a well-established record of regulating health plans and in particular [PPOs]. In fact, it wasn't until the late 80's that the Insurance Code had to be amended to allow for [PPOs] to exist at CDI. It's nonsensical that the legislature would arbitrarily move products between regulators without real justification at this time.

4. Committee Staff Comments

   1. The bifurcated regulation of health care in California: California has two separate regulators of health care coverage: the DMHC and the Department of Insurance.

      1. The DMHC: The DMHC, within the Health and Human Services Agency, regulates the managed health care industry, a form of health care coverage used by nearly 22 million people in California. The DMHC oversees full-service health plans, including all California health maintenance organizations¹ (HMOs) and some PPOs, as well as specialized plans such as dental and vision. Specifically, the DMHC notes that Knox-Keene vests it with the exclusive authority to regulate and license HCSPs, including Anthem Blue Cross (Blue Cross) and Blue Shield of California (Blue Shield). Overall, the DMHC regulates more than 90% of the commercial health care marketplace in California.

      2. The Department of Insurance: The Department of Insurance was created in 1868 as part of a national system of state-based insurance regulation. According to the Department of Insurance, all of its functions, including overseeing insurer solvency, licensing agents and brokers, conducting market conduct reviews, resolving consumer complaints, and investigating and prosecuting insurance fraud, are designed to protect consumers. Among its many duties, the Department of Insurance regulates certain health insurance products. The Department of Insurance is run by the Insurance Commissioner, an elected constitutional officer.

   2. Distinguishing between HCSPs and insurance: The DMHC notes that, as early as the 1940s, HCSPs had evolved as a legally distinct form of health care delivery. To this end, the DMHC points to a 1946 California Supreme Court decision holding that an arrangement to provide health care services for dues-paying members did not constitute "insurance" and was not regulated under the Insurance Code because its principal object and purpose was service rather than indemnity. (Cal. Physicians' Serv. v. Garrison (1946) 28 Cal.2d 790, 809.)

Between 1965 and 1976, private prepaid HCSPs were regulated under a set of Government Code provisions known as Knox-Mills. This act "was designed to regulate plans other than those operated by licensed insurance carriers". (Roseville Cmty. Hosp. v. State of California (1977) 74 Cal.App.3d 583, 585.) The rapid expansion in the ensuing years of HCSPs gave rise to the passage of Knox-Keene in 1975.

Knox-Keene, in turn, appears to recognize this distinction between "insurance" and HCSPs. Fox example, Knox-Keene provides that a person licensed under its provisions need not be licensed under the Insurance Code to operate a HCSP unless the plan is operated by an insurer. (H&SC Section 1349.) Conversely, Knox-Keene specifies that if the DMHC determines that an entity "purporting to be" a HCSP exempt from Insurance Code Section 740 is not, in fact, a HCSP, the DMHC shall inform the Department of Insurance of that finding. (H&SC Section 1346.5.)

3. The distinction between insurance and HCSPs begins to blur: Originally, Knox-Keene's definition of a "HCSP" excluded plans that "substantially indemnified subscribers for the cost of provided services." (Former H&SC Section 1345(f).) In 1980, however, the Legislature removed the indemnity exclusion from the definition of a HCSP. The DMHC notes that this paved the way for Knox-Keene-licensed PPOs² such as Blue Cross and Blue Shield, as well as other products with indemnity features.

At the same time, Blue Cross contends that traditional insurers offering disability insurance products also evolved, and sought expanded authority to write products beyond the scope of traditional indemnity products. Specifically, Blue Cross notes:

In response to this need, the Legislature adopted amendments to Insurance Code section 10133, which, over time, allowed insurers to directly reimburse health care providers, and to offer "alternative rates of payment" to providers (enabling insurers to compete with HCSPs offering contracted provider networks). That is, insurers moved away from the traditional indemnity model and began exhibiting attributes of HCSPs.

Thus, Blue Cross contends that the original distinction based on the manner in which care is delivered (i.e., directly or through "indemnity") has been replaced by a focus on the adequacy of care as the "central defining characteristic of HCSPs relative to insurers writing health insurance . . . . "

4. What does this bill seek to do? Insurance Code Section 742 specifies that any entity providing health coverage that enters into an arrangement with, or underwrites, a PPO is subject to the jurisdiction of the Department of Insurance. Insurance Code Section 742(b), however, provides that any entity regulated under Knox-Keene is not subject to this general rule. This bill would, among other things, delete subdivision (b) of Insurance Code Section 742 with the ostensible purpose of placing all PPOs, including Blue Cross and Blue Shield, under the regulatory jurisdiction of the Department of Insurance.

5. What does all this have to do with taxes? The author notes that this bill "would eliminate the loophole that allows only Blue Shield and [Blue Cross] to shop regulators for their PPO products." Specifically, the author's office notes:

In two separate actions, Blue Shield and [Blue Cross] were granted exceptions to sell regulated PPO products under the [DMHC]. All other health insurers' PPO products are regulated by the California Department of Insurance and do not have the option to shop regulators.

When a PPO product is regulated under the DMHC it is taxed more favorably than the PPO products of all other insurers. Rather than paying a gross premium tax like all other insurers, PPO products regulated under the DMHC pay a corporate income tax. This change in tax liability caused by the regulator shopping loophole results in significant loss of revenue and creates an unfair playing field amongst health insurers.

6. California's gross premiums tax: Insurance companies in California are subject to a gross premiums tax equal to 2.35% of all premiums written. The gross premiums tax is imposed by Article XIII, Section 28, of the California Constitution. Section 28(a), in turn, defines an insurer to include "insurance companies or associations and reciprocal or interinsurance exchanges together with their corporate or other attorneys in fact considered as a single unit, and the State Compensation Insurance Fund."

For most types of insurers, this tax is in lieu of all other taxes except property taxes and vehicle license fees. Thus, insurers do not pay tax on other forms of income, such as investment income, or income earned from other trades or businesses. Most other states also have a state-level gross premiums tax.

The special tax treatment of insurance companies is primarily grounded in the economics of the insurance industry. Most businesses calculate their income by subtracting costs incurred in the production of a good or service from the revenues received from sales. Insurance Companies, by contrast, collect their revenues "up front", and subsequently make payments to policyholders based on contingent events that may occur months or years later. Thus, it can be challenging to match up revenues to related expenses. For this reason, a gross premiums tax was adopted. As the Legislative Analyst's Office (LAO) has noted:

In an income tax framework, insurers ideally would be allowed to deduct the current value of all future obligations (claims) covered by the insurance policies they have written when calculating their taxable income for a given year. Because the actual amount of these obligations is uncertain, as are the amount of investment earnings on accumulated premiums received during the intervening period, an accurate determination of the theoretically appropriate amount of taxable income proves very difficult to achieve in practice.

The LAO also notes that the gross premiums tax appears, in most years, to raise more revenue than would be raised by applying the Corporation Tax Law to insurers' net income.

As noted above, the author asserts that a health benefit company's taxation depends on whether its plans are regulated by the DMHC or the Department of Insurance. The author is not alone in this contention. The DMHC essentially asserts that because the constitutional definition of "insurer" is "vague", its interpretation should depend upon the comprehensive statutory scheme the Legislature has adopted for regulating health care coverage. The DMHC asserts that this regulatory scheme firmly establishes that HCSPs, including those that sell PPO products, are not insurers for purposes of the gross premiums tax.

7. I'll see you in court: This very issue, however, is currently the subject of ongoing litigation pending before the California Court of Appeal. Specifically, on July 3, 2013, Michael D. Myers filed a taxpayer action alleging that the Insurance Commissioner, the State Board of Equalization, and the State Controller have all failed to perform their duties under California law to assess and collect the gross premiums tax from Blue Shield and Blue Cross. Blue Shield and Blue Cross, in turn, filed demurrers asserting, among other things, that neither entity is an "insurer" subject to the gross premiums tax.³ The trial court sustained the demurrers pointing to the case of Silvers v. State Board of Equalization (2010) 188 Cal.App.4^th 1215 for the proposition that the term "insurer" in Section 28 of Article XIII of the California Constitution means an entity licensed by the Insurance Commissioner. Moreover, the trial court noted that it was undisputed that neither Blue Shield nor Blue Cross is licensed by the Insurance Commissioner.

Mr. Myers has appealed the trial court judgment. The California Court of Appeal is now being asked to decide, among other things, whether a licensed HCSP in the business of writing HCSP products including PPO products, is subject to the gross premiums tax applicable to insurers.

8. The parties make their arguments:

   1. Blue Cross: Blue Cross is a licensed HCSP regulated by the DMHC under Knox-Keene. Blue Cross asserts that it is in the business of arranging health care services for its members. Blue Cross notes that it arranges health care services, in part, by offering PPO products that are authorized HCSP products regulated by the DMHC. Blue Cross asserts that these PPO products are not insurance. To this end, Blue Cross maintains that it is neither an insurer nor an insurance company and that the Insurance Commissioner is without jurisdiction to regulate it. Thus, Blue Cross asserts that it is not subject to the gross premiums tax, which applies to an "insurer" in lieu of all other state taxes save real property and motor vehicle taxes.

   2. The Insurance Commissioner: The Insurance Commissioner argues that the Myers trial court erred in mechanically concluding that because Blue Shield and Blue Cross are denominated as HCSPs under Knox-Keene, and are regulated by the DMHC, they are exempt from the gross premiums tax. Specifically, the Insurance Commissioner contends that the true test for determining whether Blue Shield and Blue Cross are subject to the gross premiums tax is not how they are labeled or who regulates them, but whether they are engaged in the business of "insurance." To this end, the Insurance Commissioner points to the case of Metropolitan Life Insurance Co. v. State Board of Equalization (1982) 32 Cal.3d 649, 656-657, wherein the court noted:

In attempting to fulfill the purpose of the gross premiums tax, it is preferable to look beyond the formal labels the parties have affixed to their transactions and seek, rather, to discern the true economic substance of the [ ] arrangement.

The Insurance Commissioner contends that Blue Shield and Blue Cross's DMHC-regulated products are subject to the gross premiums tax, and that legislative changes permitting Blue Shield and Blue Cross to sell indemnity products under DMHC jurisdiction did not change the character of those products from "insurance" to something else. Indeed, the Insurance Commissioner points to the broad statutory definition of insurance, unchanged since the late 19^th century: "Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event." (Insurance Code Section 22.)

9. The Managed Care Organization (MCO) Tax: According to Health Access California, the federal Centers for Medicare and Medicaid Services "have instructed California that it must reconfigure the current MCO tax so that it applies to a 'broad base' of managed care organizations rather than only to Medi-Cal managed care plans as it currently does."

Blue Cross also argues that this bill disregards the Governor's budget proposal to bring the existing MCO tax, which helps fund the Medi-Cal program, into compliance with federal law. Specifically, Blue Cross notes:

The Governor's MCO tax proposal would expand the tax to all lives covered at DMHC, ensuring the continued generation of $1.9B in state taxes and federal matching funds. If you remove the PPO lives from DMHC[,] the revenues from the MCO tax would decrease by millions of dollars . . . .

Blue Shield appears to share this assessment, noting that, "AB 1434 shifts all PPOs to the [Department of Insurance], subjecting the products to the gross premiums tax, which goes to the General Fund, precluding the application of the MCO tax." Blue Shield further contends that this shift would dramatically shrink the revenues that could otherwise be raised by the MCO tax, which, in turn, would lead to cuts to the Medi-Cal program.

10. Wading into uncharted territory: As noted above, the proper taxation of Blue Cross and Blue Shield is the subject of ongoing litigation. If the Court of Appeal determines that Blue Cross and Blue Shield, as HCSPs regulated by the DMHC, are not subject to the gross premiums tax because of their regulatory status, this bill could result in significant changes to the manner in which these entities are taxed. Specifically, under such a court ruling, transferring these entities or products to the jurisdiction of the Department of Insurance would result in these entities or products becoming newly subject to the gross premiums tax and, as such, not subject to corporate taxation or a theoretical expansion of the MCO.
    
    Conversely, the Court of Appeal could determine that the taxation of a HCSP should depend on the nature of its business activities and not the regulatory entity overseeing those activities. In such a case, the Court might determine that Blue Cross and Blue Shield are subject to the gross premiums tax, irrespective of the regulatory framework involved. Given the complexity of all these issues, the Committee may wish to consider whether it might be preferable to await further guidance from the judicial branch.

11. A reduction in consumer protections? The Affordable Care Act (ACA) ensures that health plans offered in the individual and small group markets offer a comprehensive package of services, known as "essential health benefits." Essential health benefits must include items and services within at least the following 10 categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative services; laboratory services; preventative and wellness services; and pediatric services.

Knox-Keene, in turn, generally requires a HCSP contract to provide subscribers and enrollees all of the basic health care services included in H&SC Section 1345(b). (H&SC Section 1367(i).) H&SC Section 1345(b) defines "basic health care services" to include, among other things, physician services, hospital inpatient services, diagnostic laboratory services, home health services, preventative health services, and hospice care.

Organizations like Consumers Union note that the ACA's "essential health benefits" mandate applies irrespective of the overseeing regulatory entity (i.e., the DMHC or the Department of Insurance). Consumers Union is quick to point out, however, that the ACA's benefit mandate does not apply to large group plans and that "large group plans regulated by CDI do not have to offer a standard package of benefits." Thus, critics of this bill contend that moving certain health plans from the DMHC to the Department of Insurance would erode certain consumer protections. As the Western Center on Law and Poverty notes:

While individual and small group plans – regulated by either DMHC or CDI – must cover Essential Health Benefits per federal and state law, the same does not apply to large group plans, making the Knox-Keene Act requirement of providing basic health care services a critical baseline for consumers in those plans.

Consumers Union also notes that plans regulated by the DMHC are prohibited from "balance-billing" consumers for high-cost emergency services performed by out-of-network physicians, while the Insurance Code, which governs plans regulated by the Department of Insurance, permits balance-billing for emergency room services.

The DMHC also notes that Knox-Keene's statutory grievance and appeal processes allow consumers to seek DMHC review of any HCSP denial or modification of a service, while the Insurance Code provides consumers with only the opportunity to request review of medical decisions.

REGISTERED SUPPORT / OPPOSITION:

Support

California Medical Association (Co-Sponsor)

Insurance Commissioner Dave Jones (Co-Sponsor)

Congress of California Seniors

Consumer Federation of California

Opposition

Anthem Blue Cross
California Association of Health Plans
California Chamber of Commerce
California Taxpayers Association
Consumers Union
Delta Dental
Health Access California
Western Center on Law and Poverty
Western Health Advantage

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098