California Insurance Commissioner Dave Jones

“Yesterday, Consumer Watchdog issued a news release about State Farm that includes inaccurate statements and is misleading,” according to an Aug. 10 Department of Insurance statement. “Commissioner (Dave) Jones requests Consumer Watchdog retract its false and misleading news release and respect the Proposition 103 rate setting process in this case.”

In response, Consumer Watchdog defended its news release and issued a short clarification on its website. The matter centers on the arcane nature of California’s byzantine insurance-regulatory system, which empowers the elected insurance commissioner to approve or deny any insurance company’s proposed rate changes.

Before voters approved Prop. 103 in 1988, insurance companies had much more freedom to set their rates and structure their products based on whatever factors they thought were most important. The department enforced some regulations, including making sure that rates weren’t either excessive or insufficient to provide the resources needed to pay any future claims. Consumers could pick and choose among various companies if they didn’t like the price or the terms the company offered.

Prop. 103, however, established limited criteria upon which companies could establish their automobile, homeowners’ and casualty insurance rates. When a company wanted to raise rates, the Department of Insurance would hold hearings and an administrative law judge employed by the agency would issue an order granting, amending or rejecting the request.

Consumer Watchdog’s founder and current legal counsel, Harvey Rosenfeld, was the author of Prop. 103. The measure established the new rate restrictions. It also “authorized a process for consumer participation in the administrative process for setting insurance rates, and permitted consumer ‘intervenors’ to recover advocacy and witness fees and expenses under certain circumstances,” according to the Department of Insurance website.

Consumer Watchdog has since become California’s most prominent “intervenor.” It routinely challenges industry rate requests. In the case at issue, Consumer Watchdog opposed State Farm’s effort to increase rates by 7 percent. The company cited the ongoing drought and the company’s vulnerability to wildfires as justification for the hikes, whereas the consumer group has accused it of overcharging its customers.

Instead of granting the hike, Administrative Law Judge John H. Larsen “ordered” a 5.37 percent decrease for non-tenant homeowners rates, a 20.39 percent decrease for renters’ rates and a 13.81 percent decrease for State Farm’s condominium insurance lines. The rate reductions were ordered retroactively to July 15, 2015, and State Farm was told to pay a 10 percent annual interest rate as part of its refunds, which are expected to total around $85 million.

The Department of Insurance accuses Consumer Watchdog of confusing “consumers and the media into believing that consumers are now entitled to a rate rebate and reduction, when no such order has been issued. … Commissioner Jones has the final authority in the case and will make a final decision at the conclusion of the case, which is still pending.”

Consumer Watchdog agrees that Jones “must decide whether to approve the judge’s decision” and says its news release explains as much. The group links to the judge’s order – and its President Jamie Courts notes that it is titled as an “order.” The dispute centers on timing: the department thinks the consumer group depicted the decision as final, even though Jones has yet to finalize it.

This may be a dispute over who gets the main credit for a rollback. Or it might be an effort by the department to avoid any appearance of a pre-ordained conclusion. Critics have long argued the department works closely with “intervenors.” Administrative law judges are not actually part of the judicial branch, but instead are employees of the agency. They cannot be expected to rule with true impartiality. By chastening Consumer Watchdog, the commissioner may be trying to make clear this is not a proceeding in a kangaroo court.

If Jones ultimately approves the rate rollback, State Farm can still challenge the matter in the (real) court system. If so, the company will have a solid argument. It’s one thing for state regulators to approve or deny proposed rate increases. But it’s quite another for them to order a retroactive rollback of a previously approved rate structure, which would create a precedent that should concern all of the state’s insurance companies.

Of course, Prop. 103 did call for a 20 percent rate rollback – but that portion of the measure was rewritten by the courts. Eventually, the courts upheld a rollback formula for one-time rebates and now is arguing this old rebate case gives them power to order rebates on new rate filings governed under a different section of Prop. 103. That would set precedent. If Larsen’s ruling stands, the industry is bound to wonder how it can determine what rates to set if, years from now, the agency can decide to simply go back in time and mandate massive rebates. Imagine if the state could do that to, say, retailers, restaurateurs or car dealerships.

While the dispute between the department and Consumer Watchdog centers on the ephemeral nature of a news release, the underlying issue could have deep ramifications for the long-term viability of insurance companies that do business in our state.

Steven Greenhut is Western region director for the R Street Institute. He is based in Sacramento. Write to him at sgreenhut@rstreet.org.

Officials at the Covered California insurance exchange, the state’s implementation of Obamacare, worry passage of Prop. 45 could damage its operations, potentially affecting insurance coverage for millions of Californians. But the board has chosen not to notify California voters of their concerns by formally opposing Prop. 45.

“The initiative could seriously undermine the work that we have underway, our operations, and could compromise the terrific movement and progress that we are making with implementing health reform in California,” said Covered California Board Member Kimberley Belshé at the board’s recent meeting (webcast here).

Board Member Diana Dooley agreed. “I personally have very serious concerns about the interaction of the plain language of this initiative and the work that we’ve invested in making the Affordable Care Act real in California and to some considerable degree somewhat successful,” she said.

Those concerns were confirmed in a report by Executive Director Peter Lee, which found, “Proposition 45 could have a significant detrimental impact on Covered California’s operations….”

Prop. 45

Known as the Insurance Rate Public Justification and Accountability Act, Prop. 45 would require health insurance rates to be approved by the state insurance commissioner, similar to the car insurance rate approval mandated by Proposition 103 in 1988.

Lee’s Prop. 45 analysis cited several concerns:

• “Covered California’s role as an active [insurance] purchaser could be significantly undermined if health plans negotiating with Covered California are reluctant to consider or negotiate on factors other than price because of uncertainty about the subsequent price that will be approved (or ordered) by CDI [California Department of Insurance].
• “If for any reason a new rate were not approved in time for open enrollment, plans would ‘default’ to the old rate for the entire next year.
• “Current timelines under Proposition 103 [if applied to medical care under Prop. 45] would provide significant disruption to the offering of plans for the annual open enrollment.
• “One risk that Covered California needs to be concerned about is the potential of health plans withdrawing in advance of or during the rate regulation process. To the extent a mandatory intervenor hearing process is unresolved in time to meet the open enrollment deadline, a plan’s proposed rate could not go forward.
• “Almost 90% of Covered California’s consumers receive federal subsidies to reduce their net premiums…. [I]f the rate change sets a new ‘second lowest silver’ plan, some consumers could see their costs increase due to the adjustment of the prices used for the tax credit calculation and the potential reduction of the purchasing power of the tax credits.”

Warn voters?

The Covered California board members could have laid out their concerns in a resolution opposing Prop. 45 to help voters make a better informed decision ahead of the Nov. 4 election. But they unanimously declined to do so.

“I think the beauty and the right kind of influence of this board is to remain as apolitical as possible,” said Board Member Robert Ross. “I’m philosophically opposed to taking any formal position on this ballot measure or any other. I think there’s plenty of politics to go around. Let it go on and let’s try to keep it out of the deliberations of this body.”

The board’s decision to remain neutral on Prop. 45 was welcomed by more than a dozen Prop. 45 supporters who spoke at the meeting.

“People will differ in their analysis of whether Prop. 45 will make the world better for consumers or not better,” said Betsy Imholz, representing Consumers Union. “But one thing is indisputable, that the insurance industry is unanimously and vociferously opposed to it. Were you to align with that position, I think it would create a bad public image.

“And were it to pass, I think the public would be watching closely and questioning your implementation of the act. You don’t need that. None of us needs that. We just want to move forward with the very successful work that you’ve been doing over the past several years.”

Elizabeth Pataki, a retired intensive care nurse representing the California Alliance for Retired Americans, agreed.

“Since Covered California is prohibited under California and federal law from spending taxpayer money to campaign for the ballot initiatives, and since you negotiate with the powerful health care industry to ensure Californians must buy health care and have access to that care, as such it’s very important that you avoid taking sides and getting involved in a political fight with consumer advocates on one side and the health care industry on the other,” she said.

“We need Proposition 45 because there have been 185 percent increases in rates, which have caused severe difficulties. Those severe difficulties include working people and retired people going bankrupt. Proposition 45 will apply the same rates as car coverage. It does not undermine the Affordable Care Act. And it’s public, it’s transparent, it’s open. The public can see what’s happening.”

Concerns

Only one person argued that the board should make its concerns public about Prop. 45.

“We have substantial experience with Prop. 103,” said Steve Young, representing the Independent Insurance Agents and Brokers of California. “From our position, Prop. 45 was a sham. What it is represented to be is not in fact what it would be. We believe and are sure that there is no empirical evidence to suggest that the Prop. 103 rating law, or especially the public intervention process, has done anything to lower insurance costs in property casualty insurance.

“Our view is Covered California itself already has done and will continue to do more to temper and lower insurance costs for California consumers than Prop. 45 ever could. So our view, while we certainly understand your position, is that it would be appropriate for you to call a pig a pig, and take a position against Prop. 45.”

Although the Covered California board has sought to stay above the political fray, it has found itself mired in it anyway.  Consumer Watchdog, which is leading the campaign for Prop. 45, on Monday sent a letter to Attorney General Kamala Harris seeking an investigation of the agency’s no-bid contracts and suggesting Covered California is in collusion with insurance companies against Prop. 45:

“Covered California has refused for months to release information requested by Consumer Watchdog under the Public Records Act concerning the agency’s communications with insurance industry executives about Prop. 45 …. Californians deserve to know the truth about hundreds of millions of dollars in no-bid contracts and industry influence at Covered California before they vote November 4th.”

Dooley responded to criticism at the September Covered California meeting. “I … am deeply troubled by the politicization of the work that we’ve done and the suggestions that necessarily come up in a political campaign,” she said. “And the characterizations that have been made and may continue to be made that we are not a sufficient steward of consumers.

“I kind of take personal offense at that because I’m here because of my consumer commitment. And I think we have established a reputation of openness and evidence of consumer protection.”

Covered CA problems

In other action at the meeting, Lee told the board that many Californians who called Covered California in the previous month were put on hold for as long as 40 minutes while those whose citizenship was in question were moved to the front of the call line.

The number of suspected illegal residents, who were in danger of losing their insurance eligibility, had grown to 148,000. Prioritizing their cases reduced that to just 10,474 clients whose legal residency is still in question, according to a press release.

Lee told the board that, although the law requires illegal residents be dropped from coverage after 90 days, Covered California has extended their coverage “well beyond that.”

Assembly Bill 2293, by Assemblywoman Susan Bonilla, D-Concord, would severely limit the ability of startup companies to use social networking technology to link passengers with independent, licensed drivers. The startups, such as Uber, Lyft and Sidecar, don’t actually own the cars, only the linking technology.

Though their approaches vary, the services amount to a high-tech version of ride-sharing, as when a college student puts up a sign on a bulletin board, “Driving from S.F. to L.A., need passenger to share gas costs.”

In these new services, a passenger uses an application — or “app” — on his smart phone or computer to set up a ride with the independent car and driver. The tech company charges a fee.

But the new services directly compete with taxis, who are seeking legislative protectionism. AB2293’s weapon is insurance law.

Currently, so-called “transportation network companies” like Uber insure drivers during the times passengers are inside their vehicles. Drivers rely on their personal auto insurance when they’re not carrying passengers. But AB2293 would require the companies to insure the drivers from the moment they turn on their services’ apps in their cars — regardless of whether there’s anyone else in the car. Theoretically, this would cut down on distracted driving and defray costs.

In practice, the politics and economics surrounding the bill are more complicated. California has joined the growing list of states, currently 11 strong, where Uber’s insurance practices have received unwanted attention.

Tilting the scales

Alone, AB2293 isn’t enough to force the new transportation companies out of business. Its insurance requirements, however, are substantial enough to raise questions about whether Assemblywoman Bonilla is using the power of government to try tipping the scales of the market.

Taxis are required to provide primary, full-time insurance coverage. Transportation network companies aren’t. They, like cab companies, provide over $1 million in commercial liability insurance to their drivers. Unlike cab drivers, however, drivers for Uber and similar companies only get to access that insurance as excess coverage, meant to pick up where drivers’ personal insurance policies leave off.

That’s a problem for the business and government entities that craft California’s insurance law. Insurers and the Department of Insurance agree, as KQED reports, that drivers’ personal insurers won’t actually pay up when liabilities are incurred in the course of drivers’ work with Uber, Lyft or Sidecar. That, in turn, makes those services seem cheaper than they are. They can lower their prices to a point that makes them competitive against cabs, while, the argument goes, hiding the cost and the risk run by hoping drivers’ personal insurance will do most of the work in an accident.

But in many areas and cities, that’s not the main challenge facing the transportation network companies. More important, their business activities as a whole are illegal or exist in a legal gray area. That’s why, ironically, some cab drivers oppose AB2293, which could help legitimize their competition and give some legislators an incentive not to regulate them any further. Owners of taxi and limousine fleets, by contrast, have pushed hard to discredit Uber, Lyft and others.

Parity

Bonilla’s bill is intended to bring some parity to the insurance requirements facing taxis and transportation network companies. But according to the companies, it goes so far that it locks an inequity into the system. A Sidecar spokesperson warned that Bonilla’s requirement of $750,000 worth of coverage when an app is “on,” but a driver lacks a passenger, amounts to “more than 20 times higher than what is required of taxi and livery services.” Since Sidecar’s drivers drive their own personal vehicles, the spokesperson continued, “It’s clear there is less risk when there is not yet a passenger in the car.”

Despite the opposition of some cab drivers, AB2293 reinforces the notion that government reflexively protects the established taxi industry from new, outside competition. Since the rise of Uber, the taxi-hailing public has become increasingly aware of how cabs rely on preferential regulation for their dominance.

In some cities, regulatory benefits have given way to outright corruption. On the heels of a scorching expose in the Boston Globe, columnist Edward Glaeser summed up the problem:

“The purpose of taxi regulation is simply to protect passengers against being fleeced by unscrupulous cabbies, and to keep passengers, bystanders, and the environment safe. Yet the system instead has evolved mainly to enrich the holders of government-issued taxi medallions, even as taxi drivers struggle to earn a living and passengers pay some of the highest rates in the country.”

A complicated equation

AB2293 follows on the heels of another piece of legislation, AB612, which would impose a raft of new requirements on Uber and its competitors. Under AB612, drivers would be forced to accept permitting, fingerprinting, drug tests and background checks. Taxi drivers already often must endure extensive licensing requirements and processing.

At the same time as Uber confronts legislative challenges to its business model, the service has encountered new resistance from some of its own drivers. Last month, a sizable protest gathered drivers outside the company’s Santa Monica offices.

Pushing for greater communication and corporate accountability, the drivers have also struck up a relationship with Teamsters Local 986. According to a union press release, Local 986 will offer “guidance and support in forming an association for app-based commercial drivers, including all drivers who utilize the Uber, Lyft and Sidecar technology platforms.”

The shifting balance of support and opposition to those platforms has created a complicated political and economic equation. The University of California, for instance, touched off a related scandal when its head of travel, Belinda Borden, mistakenly fired off an email announcing that all “peer-to-peer” services, from Uber to Airbnb, were now banned from UC employee use.

In fact, the decision is only under consideration. The cost increases it would trigger, however, were enough to draw fire from ex-officio UC Regent and Lt. Gov. Gavin Newsom, who told UC chief Janet Napolitano in a sharply worded letter that hurting the bottom line and stifling innovation made for a bad combination.

With insurance companies and trial lawyers backing Bonilla’s bill, however, Sacramento will have to stand up to several traditionally powerful special interests in order to keep California’s transportation market free and open.

By Chris Reed

California’s mainstream media is for the most part promoting Covered California’s spin that its implementation of Obamacare come Jan. 1 is going splendidly, and that insurance rates will be less than expected. Thankfully, smart blogger-experts have torn this myth to shreds. Rates will in fact soar for many groups of people, with the hardest hit going to be male non-smokers 40 and under.

Now David Hogberg, a health care policy analyst for the National Center for Public Policy Research, has detailed another big, related problem with an analysis headlined “California’s Coming Health Insurance Death Spiral.” Hogberg’s focus is on the likelihood that many young people skip purchasing health insurance because the fine for not having insurance is relatively small and the premium subsidies for the less affluent won’t help much in getting the young to buy coverage.

How Obamacare’s incentives will create an insurance ‘death spiral’

“The two most important regulations regarding whether younger and healthier people will participate are known as community rating and guaranteed issue.

“In its strictest form, community rating means that insurers must charge everyone the same premium, regardless of factors such as health status and age. ObamaCare uses a modified form that doesn’t allow insurers to vary rates based on health status.  …

“Guaranteed issue, in its strictest form, means that an insurer must sell a policy to a consumer anytime. …

“Both of these rules give young and healthy people big incentives to forgo insurance coverage altogether. Community rating means young people have a reduced incentive to buy insurance since they will pay a premium that is above the market rate. Guaranteed issue gives them even less incentive to buy insurance while they are healthy because when they get sick an insurer will have to sell them a policy.

“A handful of states tried to reform their individual markets this way in the early 1990s. Of course, many young and healthy people did drop out of those markets as a result. That meant that those who remained in the insurance pools were older and sicker, a factor that drove up the rate of premiums. As premiums rose, even more young and healthy people dropped their insurance. Insurance pools got even sicker and older, and rates continued to rise. The phenomenon became known as the ‘death spiral,’ and was chronicled in the late Conrad Meier’s monograph ‘Destroying Insurance Markets.^‘”

Some of sickest Californians in for sticker shock as well

Hogberg also focuses on a grim detail of Covered California’s plans that hasn’t gotten the attention it deserves.

“California officials treated some of their constituents less equally than others. People who need specialty drugs — high-cost drugs engineered to treat complex, chronic conditions — got the shaft. According to the Associated Press, ‘Such “specialty drugs” can cost thousands of dollars a month, and in California, patients would pay up to 30 percent of the cost. For one widely used cancer drug, Gleevec, the patient could pay more than $2,000 for a month’s supply, says the Leukemia & Lymphoma Society.’

“In response, Dana Howard, a spokesperson for Covered California, said ‘We are trying to keep the insurance affordable across the board. This is just part of trying to manage the overall risk of the pool.^‘

“As a list of specialty drugs from Express Scripts shows, those who need specialty drugs are some of the sickest of the sick, including (but not limited to) transplant recipients and those with blood cell deficiency, cancer, immune deficiencies, and multiple sclerosis.

“Presumably, these are the types of people for whom ObamaCare is supposed to provide the most protection against major health-care costs. So why did California officials — those generous, compassionate, concerned-only-with-the-best-interests-of-their-constituents officials — permit insurers to charge huge co-pays to very sick enrollees in order to keep premiums low?”

The frail and the medically ravaged won’t form picket lines

Hogberg suspects it’s because they’re unlikely to be much of a political headache to the politicians in Sacramento.

“… only about one in 100 users of commercial insurance need these expensive specialty drugs. … Most politicians will have little to worry about from people who take specialty drugs and who are looking to hold someone responsible for the shabby deal they get through Covered California.

“Furthermore, people on specialty drugs are probably too sick to engage in the sorts of activities necessary to make changes in policy –- activities such as get-out-the-vote drives, protests and lobbying. Thus, California’s officials probably don’t have to worry much about specialty-drug consumers stirring up trouble.

“There will undoubtedly be more examples of this inequity as ObamaCare unfolds, because, as government expands more and more into a health care system, the health care available is determined less by need and more by political clout. In general, the sicker one becomes, the less political clout one has. Few people get seriously ill each year, meaning that they are not a substantial number of voters. And most are in no physical condition to be actively engaged in politics.

“So when it comes time to cut costs, guess who is going to feel the brunt of it? Covered California just provided a prime example.”

At least it will deeply undermine faith in big government

The coming disaster that is Obamacare is going to do even more than the IRS and the spying-on-the-public scandals to undermine faith in big government. That will be a welcome development. But the price is going to be immense: costly chaos in health care.

By Chris Reed

Cato’s Michael Cannon has been a tremendous source of common-sense analysis of Obamacare for years. In a recent commentary on why Covered California would put out such a mendacious and dishonest account of Obamacare’s impact on 2014 insurance rates in the Golden State, Cannon made a point that can’t be made enough. Government bureaucracies have an immense motive to lie. If they don’t, they could die.

“Ever since Obamacare became law, I have been counseling states not to establish the law’s health insurance ‘exchanges,’ in part because … to create an Exchange is to create a taxpayer-funded lobbying group dedicated to fighting repeal. An Exchange’s employees would owe their power and their paychecks to this law. Naturally, they would aid the fight to preserve the law. …

“When it came time to speak to the public, rather than level with the public by using an apples-to-apples comparison, Covered California compared the Obamacare rates to average premiums for small-employer coverage. Why choose small-employer coverage as their basis for comparison? Precisely because small-employer plans already incorporate some of the costs that Obamacare imposes on consumers in the individual market. Small-employer plans already cover more of the additional benefits that Obamacare mandates (#2) and also incorporate a degree of community rating (#3). There’s no reason consumers on the individual market could not purchase those, ahem, “consumer protections” if they valued them. But they don’t, which tells us they don’t value them. So what Covered California’s bogus apples-to-oranges comparison actually tells consumers is, ‘See? Obamacare costs no more than this other expensive coverage you don’t want!’ ….

“All of that supports my thesis: officials at Covered California, like those running all the other Obamacare exchanges, owe their power and their paychecks to Obamacare. They will fight to preserve the law, even if they have to deliberately mislead the public.”

Do some reporting? Nah — Sac Bee would rather cheerlead

When will California’s media get around to documenting this mendacity? Don’t hold your breath.

My newspaper editorialized about Cover California’s deceptiveness. Much more typical, alas, was the dumb cheerleading from the Sacramento Bee. It’s just extraordinarily superficial, accepting Covered California’s premise that its insurance will be inexpensive.

“The competition has brought the rates lower than expected – even for so-called ‘young invincibles.’ Some experts have worried that younger people would choose to pay the penalty ($95 or 1 percent of income in 2014, and increasing in later years) rather than buy insurance.

“But with premium prices in line with what employers pay for insurance and federal subsidies for individuals making less than $46,000 a year and families earning below $94,000 – not the excessive rates of the past individual market – that should change. …

“Clearly, insurance plans in California want affordable prices for the under age 34 group, because they tend to be more healthy, offsetting the cost of older, sicker people.”

Lazy and dishonest coverage: The norm for Obamacare

The Bee didn’t even compare Covered California’s rates for the young with the rates they can now get, as journalists for Forbes and other outlets did. Its editorial page just accepted Covered California’s claim the rates were cheap.

This is lazy and dishonest — in keeping with the low standards set during the coverage of Obamacare before it passed.

Katy Grimes: Thursday was “The Great California Shake Out,” earthquake preparedness day. I had the great fortune to be at the CalEPA building for a California Air Resources Board meeting in Sacramento, where we were expected to “drop, cover, and hold on.”

As I huddled on the floor with my notebook over my head, hoping that the carpet was clean, I wondered why there has been such a big media push by the Earthquake Authority.

Last year I contacted the California Earthquake Authority to ask who they are and why they advertise so much. The public information officer I spoke with was uncomfortable with my questions and wanted to know why I wanted to know. Finally I got him to tell me that the CEA is a publicly managed, mostly privately funded organization that provides catastrophic residential earthquake insurance. He was insistent that they are not a public agency.

Anyone who owns a home and lives within an officially designated earthquake area must have earthquake insurance. But I still find it highly suspicious that the earthquake authority is publicly managed and “largely privately funded,” especially since many homeowners are not given a choice about carrying earthquake insurance.

The Great California Shake Out program has plastered the airwaves recently and news lately, along with the CEA’s commercials about its insurance. The Great California Shake Out website is a bit of a mystery until you scroll down to the bottom of the page. The sponsors are FEMA, the Southern California Earthquake Center at USC, California Earthquake Authority, California Emergency Management Agency, the United States Geological Survey, American Red Cross and State Farm Insurance Company.

The other strange group attached is the Earthquake Country Alliance, the organizer of California’s annual earthquake drill, a project of the USC earthquake center, funded by the National Science Foundation and the U.S. Geological Survey. The National Science Foundation doesn’t actually do work, they fund other groups.

It’s all about the publicly-funded grants.

Obviously California earthquakes are real, but do a dozen agencies, boards, commissions and companies need to be involved? It’s a drain on public funds.

And their commercials are stupid.

By Katy Grimes

As the Legislature crammed to clear their plates this week so they could take their summer break, one atrocity after another oozed from the committees in the form of legislation.

One of the worst was SB 1431, which will add to the already heavily regulated health insurance market by prohibiting the sale of stop-loss policies to employers with fewer than 50 employees.

It sounds like a lot of inside baseball, but this group of small employers is already the easy target of heavy regulations and insane California laws. SB 1431 will further penalize this group of innovators, risk takers, and entrepreneurs. Lawmakers have deluded themselves into believing that it’s a good thing.

SB 1431, by Sen. Kevin de Leon, D-Los Angeles, would establish a minimum number of health claims for stop-loss policies issued to employers in the small group health insurance market. And it requires guarantee issue for all employees and dependents, and guarantee renewability of the policy for the small employer.

According to the bill analysis, de Leon said, “SB 1431 will protect consumers in California’s small group market as the Affordable Care Act is implemented.” Beware.

Obamacare

The Affordable Care Act, more commonly known as Obamacare, “puts in motion a number of significant small group market reforms and creates a competitive marketplace through the Exchange,” the bill analysis states. “However, 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. The author states this situation could lead to a significant exodus of small employers from the small group market, specifically those employers with young and healthy employees. If this situation occurs, adverse selection could leave in its wake a majority of the state’s small businesses in an insurance pool increasingly subject to skyrocketing premiums, both inside and outside of the Exchange. The author states that 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.”

But the devil is always in the details. The concern de Leon appears to be showing for small employers should have been blown out of the water by the facts during the Assembly Health Committee hearing on Tuesday. But with State Insurance Commissioner Dave Jones at the hearing, it appeared that no one was willing to challenge the facts.

According to Craig Gottwals, an attorney and insurance expert with BB&T–Liberty Benefit Insurancces Services, Inc., if SB 1431 is passed, the sale of stop-loss policies to employers with fewer than 50 employees will be prohibited by the state if those policies do any of the following:

* Contain a specific attachment point that is lower than $95,000 (an absurdly high amount to mandate for a small employer);

* Contains an aggregate attachment point that is lower than the greater of one of the following:

1. $19,000 times the total number of covered employees and dependents;

2. 120 percent of expected claims;

3. $95,000

“This legislation also erroneously contains language referring to stop-loss carriers as providing ‘coverage’ to individual employees and dependents,” Gottwals said.  But that is not what stop loss does.  “Stop loss provides a reimbursement agreement for an employer who has undertaken the task of self-insuring his population.  The politicians wanting to further dismantle freedom and play the harp stings of victimhood undoubtedly used such Orwellian sounding terminology on purpose,” Gottwals said.

This law prohibitively restricts the most innovative and diligent of California’s smaller entrepreneurial businesses by taking away their ability to use creativity and customization to do what is best for their employees, by ramming an over-priced, one-size-fits-all Obamacare-esque approach to health coverage, all the way down to a 2-person company.

Limited choices

Gottwals said what’s left for small employers is limited. “So now a California employer who is intelligent, willing to take some risk, and be creative, will be further penalized and presented with three choices:

1) Stop offering healthcare altogether, which will already be rather enticing in 2014 when the state exchange is set up and the employer has the political cover of “encouraging” use of Obama’s governmental exchanges.

Also, remember, employers under 50 employees will not pay the employer mandate fines under Obamacare.  Hence, an employer can cease offering benefits, and encourage its employees to take advantage of the subsidies available to those making up to four times the federal poverty limit, approximately $90,000 for a family of four.

2) Move out of state to a jurisdiction that does not detest small business and entrepreneurship.

3) Buy an overpriced, first dollar benefit HMO or PPO.  But note, if the employer could afford this option, they would have almost certainly done so already as self-funding is much more difficult, takes more time and has more risk involved. So which employers are self-funding under 50-lives now — those in rural areas with no simple access to an HMO.  Those employers will be particularly harmed.”

What is really going on here?  

California already controls and highly regulates the under 50-employee insurance market for all fully insured products.

The federal government has now taken large control over the over-50 market with Obamacare.

Self-insuring is the only remaining frontier where an employer can extract itself from the myriad of state-regulation as well as some of the dictates of Obamacare (such as the medical loss ratio mandates, possible avoidance of the future Cadillac Tax, and allowance for medical underwriting).

Self-insuring in the under-50 market permits an employer to operate under one, reasonable set of federal laws, the Employee Retirement Income Security Act of 1964 (ERISA), without having to also navigate state mandates, and many of the disastrous dictates of Obamacare.

Gottwals said that it is apparent that California wants to take away the few remaining options small employers still have.  “This law will almost certainly push small employers to a place where they have to stop offering any health care plan, ultimately bringing California one step closer to a single-payer healthcare plan in our state exchange.”