Two Significant Health Care Bills Ignite Controversy

Two of the most important health care reform bills passed in this legislative session, AB 1602 (J. Perez) and SB 900 (Alquist), are sitting on the Governor’s desk awaiting his action. However, there may be a fight brewing over whether these bills should be signed into law.

AB 1602 and SB 900 establish the California Health Benefits Exchange, a new state entity charged with making available qualified health plans to individuals and small employers. These bills are a major piece of the national health care reform legislation signed by President Barack Obama this year. Under the federal law, states have an option to set up an exchange by 2013, where consumers can shop for health insurance and low or moderate-income Californians can obtain subsidized coverage.

While many argue that California needs to pass these measures now to prepare for the future, others contend the bills are premature and contain several governance issues, including increased costs to the already cash-strapped state. Hence, the controversy over the whether the Governor should sign these measures.

The Governor’s staff was involved in the drafting of these measures, which were virtually half-baked going into the last month of the session. The measures moved throughout the process with essentially no opposition until the final weeks of August when Anthem Wellpoint and the Association of California Life and Health Insurance Companies voiced concerns and took an oppose position. Now it appears that Anthem Wellpoint and PacifiCare will be asking for the Governor to veto the two measures.

According to their fact sheet, these bills give the Exchange Board broad authority to set-up the structure of the new agency with little guidance and no oversight. Specifically, they argue that these bills:

  • Exempt senior staff of the Exchange from the state’s civil services laws and regulations.
  • Allow the Board broad discretion to pay staff “amounts that are reasonably necessary to attract and retain individuals of superior qualifications” – exempting them from civil service pay caps.
  • Give no fiduciary duty to the Board or senior staff, allowing them to make decisions with no personal liability for their actions. This is troubling because the agency could potentially handle coverage for 4‐9 million Californians and premium payments of $20‐$45 billion annually.
  • Allow the Board to act without transparency and exempt the Exchange from the California Public Records Act and the Administrative Procedures Act.The Board can meet in private, adopt rules without taking comment from the public and enter into contracts without going through the normal state procurement process.
  • Allow the Board to establish its own budget and raise revenue through an assessment, outside of normal legislative budget process. This gives the Board unprecedented authority to:
  • Levy an assessment, without limit, on the cost of insurance bought through the Exchange to cover administrative and marketing costs of the new agency – as well as to establish reserves.
  • Levy an assessment on insurance bought through the Exchange to help offset the costs of enrolling eligible Californians in any state or county health care program.


In addition, opponents contend that the bill would actually limit consumer choice, rather than expand it.Opponents state that provisions of the bill would require the Board to select how many insurance products individuals and small businesses can purchase in the Exchange. This could result in only two or three health insurer choices. Furthermore, by allowing the Board to require insurance products in the Exchange to cover benefits beyond what federal law requires and what insurance products currently offer, the bills could actually result in increase insurance costs to the consumers.


Critics also argue that the legislation stands to place significant new financial pressure on the state’s General Fund in a time where the state is struggling with a huge budget deficit. The bills would do this by allowing the Board to require benefits beyond what federal law requires creates new General Fund costs. Under federal law, states must reimburse the federal government for the cost increases associated with mandates that exceed the federal benefits minimum for individuals who are receiving subsidies. A 10 percent increase from new mandates would result in annual General Fund costs of approximately $800 million. In addition, the bills require the Exchange to enroll eligible Californians (such as individuals who are exempted from the individual mandate) in county indigent care programs. The California Constitution requires the state to reimburse counties for new costs. Critics estimate these costs could exceed one billion dollars annually.


Another significant concern is whether the implementation of the Exchange would do away with the need for health insurance brokers. Some insurance brokers believe their services will still be needed if the Exchange is put into place, but others are very concerned. A major concern of brokers is that insurers who need to reduce expenses to meet medical loss ratios will reduce broker commissions. Another concern is that medical loss ratios could result in fewer choices for customers, likely by way of eliminating limited benefit plans, resulting in fewer options for brokers to shop around for their clients. Lastly, it is expected that the Exchange will allow individuals and employers to access different plans on a website. So, rather than using a broker as a guide, most consumers will go online and check out plans on their own.


As the measures await the Governor’s action, it is expected that others might join opponents in asking the Governor to hold off a year to see if these issues can be fixed. Insurance agents and brokers are expected to weigh in and other insurers could be swayed to ask for a veto.


Stay tuned…