BILL ANALYSIS AB 918 Page 1 Date of Hearing: April 13, 1999 ASSEMBLY COMMITTEE ON HEALTH Martin Gallegos, Chair AB 918 (Keeley) - As Introduced: February 25, 1999 SUBJECT : Health Plans: Capitation Payments to Providers. SUMMARY : Requires that health care service plan (health plan) capitation payments to providers be computed appropriately by a qualified actuary; requires health plans to annually update an actuarial report required by regulations. Specifically, this bill : 1)Requires every health plan to annually update the actuarial report required in a health plan application at the time of licensure and amendment as provided in the rules and regulations promulgated by the Department of Corporations (DOC). 2)Requires any actuarial report to contain an opinion of a qualified actuary as to whether the capitation-based payment arrangements are computed appropriately, as specified, and to comply with applicable laws, including DOC regulations. 3)Requires the actuary opinion to be based on standards adopted by the Actuarial Standards Board and DOC. 4)Defines "qualified actuary" as a member in good standing of the American Academy of Actuaries, who also meets any additional DOC standards adopted by regulation. 5)Provides if a health plan intends to pay some or all of its providers on a capitated basis, the health plan must attach, to the actuarial report, a statement with specified information including the percentage of contracting providers who will be compensated on that basis and a description of the method used to determine and adjust the capitation rates. 6)Provides that the statement attached to the actuarial report also substantiate that the capitation rates are adequate to reasonably assure the continuance of the relationship between the plan and provider. 7)Requires that specified financial calculations of a provider AB 918 Page 2 that are analogous to the information required by health plans be submitted to the health plan upon request. Provides that nothing in this bill requires a provider to disclose the personal financial information of the provider. 8)Requires the health plan's actuarial report and the provider's financial information to be made available to contracting parties upon request. 9)Provides that nothing in this bill requires DOC to approve the capitation rates of a health plan or to regulate providers in any manner. EXISTING LAW : 1)Provides for the licensure and regulation of health plans by DOC. 2)Imposes, by DOC regulation, requirements related to health plan actuarial reports. FISCAL EFFECT : Unknown COMMENTS : 1)PURPOSE OF THE BILL . This bill is sponsored by the California Medical Association (CMA). The sponsor points out that health plans charge and receive money up front to pay for treatment to be rendered in the future, and that the actual costs of future health care are uncertain. This poses a risk that requires actuarial evaluation. CMA argues that an actuarial evaluation will determine whether the health plan has adequately "spread its risk" through the use of polling, sufficient stop-loss insurance, and re-insurance, and has the financial wherewithal (such as adequate reserves) for any eventuality. The sponsor notes that when actuaries review health plan capitation rates paid to providers, they are looking for any indication that such rates are not sound. For example, if capitation rates to providers are too low, then there may be underutilization of health care services, or physicians may not be adequately reimbursed for treatments given to enrollees. Evaluations may disclose that excessive risk has been transferred by health plans to physicians. CMA notes last year's bankruptcy of a large medical group and the recent DOC seizure of Med Partners as indications that health AB 918 Page 3 plan capitation payments may not be sufficient to ensure that patients receive the quality and continuity of care they were promised. CMA concludes that this bill sets forth clear guidelines for health plans to follow that protect patient care, is consistent with the treatment of other health insurance products that require actuarial soundness, and assures fair provider reimbursement for quality health care services. 2)SUPPORT . The California Primary Care Association (CPCA) representing community-based health centers and clinics supports the bill pointing out that capitation rates are not regulated and thus market power rather than actuarial soundness prevails. Capitation rates end up being the product of contract negotiations rather than actuarial calculations. CPCA argues that this bill creates a mechanism for evaluating the appropriateness of capitation rates which will provide a check and balance system to prevent abuse. CPCA argues that providers are not given actuarial information on capitation rates which puts them at a disadvantage in negotiating contracts with HMOs. CPCA believes this bill will protect providers from artificially low capitation rates. The California Psychiatric Association (CPA) notes that recent bankruptcies of large medical groups make it clear that in many instances capitation rates paid to physicians are inadequate to ensure that patients receive the level of quality care they have been promised. CPA argues that the bill is needed to enable physicians to review capitation rates to determine whether they are adequate to cover the projected cost of caring for patients. 3)OPPOSITION . The California Association of Health Plans (CAHP) opposes the bill unless amended. CAHP argues that the bill improperly requires the disclosure of confidential, proprietary, competitive information and trade secrets and that such disclosure would put health plans at a disadvantage when negotiating with their contracting providers. CAHP argues that there is no value in having an actuary certifying capitation rates because they are based on negotiations, market competition and individual physician income expectations - there is no "actuarially sound" price for physician services. CAHP concludes that the bill will result in higher costs which would divert funds away from medical care. Health Net argues that the disclosure provisions in the bill represent an inappropriate insertion of the government AB 918 Page 4 into negotiations between plans and providers, and that actuaries should not be making judgments about what level of compensation providers should receive. United Healthcare maintains that the mandatory disclosure of capitation rate setting methodologies is an improper intrusion into freely negotiated contracts and will result in health plans having to provide higher reimbursement rates, sometimes without justification. 4)PRIOR LEGISLATION . This bill is identical to SB 317 (Calderon) that was vetoed last year. In his veto message, the Governor stated, "Providers can and do retain actuaries and employ negotiators now, without legislative mandate, if they feel it necessary to do so. The Department of Corporations is required to intervene if a plan is found to have set capitation rates too low to permit necessary care. But this bill at least implies a larger role for the department as a rate-setter, a role which the enabling Knox-Keene Act expressly forbids." 5)SUGGESTED AMENDMENTS . A number of provisions in this bill require compliance with specified DOC regulations. Those regulations are subject to change at any time, creating uncertainty as to the health plan statutory obligations imposed by this bill. The author may wish to explore codification of regulatory provisions into this bill as opposed to cross-referencing regulations that may be changed. REGISTERED SUPPORT / OPPOSITION : Support California Medical Association (sponsor) California Primary Care Association California Psychiatric Association Opposition California Association of Health Plans (unless amended) Health Net United Healthcare Analysis Prepared by : Michael Shapiro / HEALTH / (916) 319-2097 AB 918 Page 5