BILL ANALYSIS
AB 2589
Page 1
Date of Hearing: April 15, 2008
ASSEMBLY COMMITTEE ON HEALTH
Mervyn M. Dymally, Chair
AB 2589 (Solorio) - As Amended: April 9, 2008
SUBJECT : Health care coverage: public agencies.
SUMMARY : Requires, for group health plan contracts or health
insurance policies, a health care service plan (health plan) or
health insurer to annually disclose to the governing board of a
public agency the name and address of, and amount paid to, any
agent, broker, or individual to whom the health plan or health
insurer paid fees or commissions.
EXISTING LAW :
1)Provides for regulation of health plans by the Department of
Managed Health Care (DMHC) under the Knox-Keene Health Care
Service Plan Act of 1975 (Knox-Keene) and for regulation of
health insurers by the Commissioner (Insurance Commissioner)
of the California Department of Insurance (CDI) under the
Insurance Code.
2)Generally prohibits a person from acting as an insurance agent
or broker unless the person holds a valid license, and makes
it a crime to act in that capacity without a license granted
by CDI.
3)Defines a "life licensee" as a person authorized to act as a
life agent on behalf of a life insurer or a disability insurer
to transact: a) Life insurance; b) Accident and health
insurance; and, c) Life and accident and health insurance.
4)Authorize licensees to act as a life agent to be of the
following types:
a) Life-only, which license entitles the licensee to
transact insurance coverage on individuals, including
benefits of endowment and annuities, and may include
benefits in the event of death or dismemberment by accident
and benefits for disability income; and,
b) Accident and health, which license entitles the licensee
to transact insurance coverage for sickness, bodily injury,
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accidental death including benefits for disability income,
and 24-hour care coverage.
5)Prohibits life agents, travel agents, and fire and casualty
insurance agents from acting as an agent of an insurer unless
the insurer has filed with Insurance Commissioner a notice of
appointment, executed by the insurer, appointing the licensee
as the insurer's agent.
6)Sets forth various requirements to qualify for, and to
maintain, a license to sell insurance as an agent-broker,
including hours of study, curriculum, bonding requirements,
deposits of funds in escrow or trust under specified
circumstances.
7)Requires, in regulation brokers selling personal lines auto
insurance to disclose their broker fee to the buyer prior to
sale of coverage.
8)Requires, in the Insurance Code, each party to a contract of
insurance to communicate to the other, in good faith, all
facts within his knowledge which are or which he believes to
be material to the contract, and as to which he makes no
warranty and the other party has no means of ascertaining.
FISCAL EFFECT : Unknown
COMMENTS :
1)PURPOSE OF THIS BILL . According to the author, this bill is
necessary to address instances where contracted health care
insurance brokers may have disregarded the best interests of
their clients for an undisclosed monetary gain. The author
specifically points to a recent lawsuit involving the Santa
Ana Unified School District and a class action lawsuit filed
in Alameda County Superior Court with several public entities
as plaintiffs. According to the author, currently, there is
no California law requiring disclosure of broker fee
arrangements. However, the author indicates that annual
reporting requirements under Title 1 of the federal Employee
Retirement Income Security Act of 1974 (ERISA) requires plans
to file an annual report with the Department of Labor which
includes the information required by this bill. The author
states that this bill is needed because ERISA regulations and
requirements do not apply to "government plans."
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2)BACKGROUND . Regulation and oversight of health insurance in
California is split between two state departments. Under
Knox-Keene, DMHC regulates health maintenance organizations
(HMOs) and some Preferred Provider Organization (PPO) plans.
CDI regulates health insurers offering PPO plans and
traditional indemnity insurance. In addition to California's
two regulatory frameworks for health care coverage, the
California HealthCare Foundation estimates that in 2006,
approximately 26% of Californians with employer-sponsored
health coverage were enrolled in self-insured plans.
Self-insurance, also known as self-funding, refers to the
process by which an employer assumes all or part of the risks
for health care costs. Instead of paying premiums to an
insurance company, an employer puts money directly into a
plan, which then pays for the covered benefits when claims are
incurred. Many self-insured plans contract with large
insurers or other administrative services organizations to
administer the self-funded plan, including making benefit
determinations, paying claims, and contracting with providers.
ERISA regulates any private-sector "plan," created when an
employer or union promises to compensate employees in the form
of pension or health benefits, but does not apply to plans
administered by churches or government employers. Most
private sector health coverage is subject to ERISA. Under
ERISA and related court decisions, federal law preempts state
regulations relating to ERISA plans, except for state
regulation of insurance. Because they are not considered to
be in the business of insurance, generally speaking, ERISA
exempts self-insured plans from state insurance laws.
3)INSURER DISCLOSURE OF AGENT AND BROKER FEES . Whether an
insurer currently has a duty to disclose fees or commissions
paid to an agent or broker who transacted a policy with a
public agency depends on the particular facts of the
relationships among the parties (producer, insurer, insured).
(Producers are the term of art for agents and brokers subject
to CDI licensure.) There is currently no clear, simple
statutory requirement to disclose in all such transactions.
An argument can be made that the requirement in the Insurance
Code that parties to an insurance contract disclose material
information may impose this requirement, but that
interpretation is subject to debate. Many other legal
theories for requiring disclosure have been asserted, mostly
based on case law. ERISA requires insurers to disclose
compensation paid to agents and brokers. However, as stated
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above, ERISA, and thus this requirement, does not apply to
public agency health plans.
4)BROKER DISCLOSURE OF FEES . The question as to the duty of
brokers and agents to disclose to a potential insured the fees
they may be receiving from relevant insurers has been the
subject of legislative and regulatory activity. In 2004, CDI
proposed regulations regarding the fiduciary duty owed to a
client by insurance salespeople who represent consumers as
brokers. The regulations would have clarified that a broker
who fails to disclose to a client all material facts
surrounding the broker's receipt or potential receipt of
income from a third party, when that income derives in whole
or in part from a transaction on behalf of the client,
constitutes a violation of California law. The regulations
were not finalized. While the regulations were pending, SB
938 (Dunn) of 2005 was introduced and would have imposed
statutory obligations on agents and brokers, including
disclosure and fiduciary obligations. SB 938 failed passage
in the Senate Banking, Finance and Insurance Committee. In
September 2005, CDI issued a formal opinion letter to all
licensed producers. In the 2005 memo, CDI takes the position
that when a producer acts as an insurance broker in a
transaction, he acts as a common law agent of the insured.
CDI concluded that as common law agents, relying on statutory
references and related case law, brokers owe fiduciary duties
to the insured, which generally include loyalty, honesty,
integrity, good faith, avoiding self-dealing and full
disclosure. According to the CDI opinion letter, the duties
specifically include duties to avoid undisclosed conflicts of
interest arising from a relationship the producer has with the
insurer, to avoid secret profits by fully disclosing to the
insured all compensation the broker or dual agent will or may
receive from the insurer, and to obtain insurance on the best
terms possible in accordance with the insured's express needs
or desires.
5)BROKER ABUSES . According to the Senate Insurance Committee
analysis of SB 938 in 2005, in October 2004, New York Attorney
General (AG) Elliot Spitzer alleged that Marsh and McLennan
(Marsh), the nation's largest insurance broker, engaged in a
number of illegal acts. Quoting Marsh, the complaint noted
that Marsh boasted, "Our guiding principle is to consider our
client's best interest in all placements." It boasts, "We are
our clients' advocates, and we represent them in negotiations.
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We don't represent the [insurance companies]." In the
complaint, the New York AG alleged that Marsh steered clients
to insurers based upon the amount of money Marsh earned,
through various incentives, from insurers (generally referred
to as contingent commissions). These commissions were
alleged, in at least one instance, to be "above market," with
$800 million of $1.5 million in annual income earned from
contingent commissions. Marsh also allegedly rigged bids so
that it could determine, in advance, who would win a bid for
the business of a Marsh customer, and at what price. By
soliciting fictitious bids, it allegedly succeeded in
protecting insurers from competition.
In November 2005, the County of Santa Clara, San Francisco
Unified School District, San Francisco Community College
District and Tuolumne Joint Powers Authority brought a class
action lawsuit against Marsh, Keenan and Associates and Driver
Alliant Insurance Services. The lawsuit alleged the
defendants participated in undisclosed profit-sharing
agreements and received kickbacks in exchange for steering the
public agencies to purchase insurance products or services,
primarily reinsurance stop-loss coverage, (excess medical
coverage for costs from $100,000 per covered person to the $2
million lifetime limit of the public agency's coverage).
According to the author's office, this lawsuit recently
settled with the plaintiffs receiving $3.2 million in
restitution and an order for the insurance companies to
disclose commissions going forward. Staff was unable to
verify the details of the court settlement in time for this
analysis.
6)PREVIOUS AND RELATED LEGISLATION .
a) AB 2956 (Coto) establishes legal presumptions related to
instances where a producer licensee is presumed to be
acting as a broker. AB 2956 is currently pending in the
Assembly Insurance Committee.
b) AB 720 (DeLeon), Chapter 270, Statutes of 2007,
establishes two new insurance agent license types, a
life-only agent license and an accident and health agent
license, in place of the current life agent license;
defines the authorities of each license type; and specifies
the requirements for licensure and post-licensing
continuing education.
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c) SB 938 (Dunn) of 2005 would have imposed statutory
obligations on agents and brokers, including disclosure and
fiduciary obligations. SB 938 failed passage in the Senate
Banking, Finance and Insurance Committee.
7)SUPPORT . The Santa Ana Unified School District (Santa Ana
Unified) is the sponsor of this bill and writes in support
that the District has had a past experience where their
contracted health care insurance brokers disregarded the best
interest of the client, the school district, and financially
benefited from undisclosed fees and commissions. According to
Santa Ana Unified, this bill will not directly help the
district but will make sure this never happens again to other
public entities. The California Association of Joint Powers
Authorities (CAJPA) supports this bill stating that public
entities such as city councils, school boards, special
districts, and joint powers authorities have discovered after
the fact that health care insurance brokers, even after
agreeing to commission or other carrier compensation rebates
in contracts, have not rebated those commissions to their
clients. CAJPA believes that this bill will help resolve this
problem with the annual provision of information on who is
receiving commission and fees from the health care contracts.
8)SUPPORT IF AMENDED . The California Academy of Family
Physicians (CAFP) writes that it would support this bill if it
were amended to include numerous requirements that health
plans and insurers disclose detailed information to public
agencies related to their provider network and requirements
for the Office of Statewide Health Planning and Development
(OSHPD), which currently has no authority over health plans or
health insurers in California, to adopt regulations and
acquire, by way of a survey of health plans and health
insurers, extensive information about provider networks,
including full time equivalent provider-to-enrollee ratios by
region. The CAFP proposal includes suggestions for
stakeholder input, participation by the Medical Board of
California, the Osteopathic Medical Board of California, other
health provider licensing boards, and provider organizations,
as well as the requirement that OSHPD seek input from DMHC and
CDI. CAFP argues that the added transparency they are
proposing will allow market forces to drive health plans and
insurers to address the physician shortage throughout their
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networks.
9)COMMENTS AND QUESTIONS .
a) Focus of this bill . Based on information provided by
the author, this bill was initiated because of issues
surrounding the potential conflict of interest for brokers
selling reinsurance products and risk pooling to public
agencies. This bill requires disclosure by health plans
and health insurers, who generally do not sell reinsurance.
Should this bill be amended to include or focus entirely
on disclosure by reinsurance carriers?
b) Role of agents and brokers . While this bill would
impose disclosure requirements on health plans and health
insurers related to broker fees and commissions,
legislative, regulatory and legal activities have generally
focused on the duty of the agent or broker to disclose when
they are receiving payments from both sides to an insurance
transaction. Should this bill be amended to include or be
limited to issues related to the responsibility of agents
and brokers to make appropriate disclosures? The
regulation and licensing of insurance agents and brokers is
outside the jurisdiction of Assembly Health Committee and
would properly be before the Assembly Insurance Committee.
c) Scope of bill . As drafted, this bill would require
health plans and insurers to provide the name, address and
amounts paid "to any agent, broker or individual to whom
the plan paid fees or commissions." Is this the author's
intent? Should this bill be amended to instead require
disclosure related to the specific agents or brokers
involved in transactions directly with the public agency?
d) Technical amendment . Page 2, line 20, after "group"
insert "health."
REGISTERED SUPPORT / OPPOSITION :
Support
Santa Ana Unified School District (sponsor)
American Federation of State, County and Municipal Employees
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California Association of Joint Powers Authorities
California Labor Federation
California School Employees Association
Organization of SMUD Employees
San Bernardino Public Employees Association
San Diego County Court Employees Association
San Luis Obispo County Employees Association
Santa Rosa City Employees Association
United Domestic Workers of America
Support If Amended
California Academy of Family Physicians
Opposition
None on file.
Analysis Prepared by : Deborah Kelch / HEALTH / (916) 319-2097