Health care coverage: rate review., the official text

An act to amend Sections 1385.01 and 1385.035 of the Health and Safety Code, and to amend Sections 10181 and 10181.35 of the Insurance Code, relating to health care coverage.

LEGISLATIVE COUNSEL'S DIGEST

Existing law, the Knox-Keene Health Care Service Plan Act of 1975, provides for the licensure and regulation of health care service plans by the Department of Managed Health Care and makes a violation of the act by a health care service plan a misdemeanor. Existing law provides for the regulation of health insurers by the Department of Insurance. Existing law defines “unreasonable rate increase,” for these purposes, to have the same meaning as in the federal Patient Protection and Affordable Care Act, which is that an unreasonable rate increase exists when the federal Centers for Medicare and Medicaid Services makes a determination that a rate increase is excessive, unjustified, or unfairly discriminatory, among other things.
This bill would instead define “unreasonable rate increase,” for the above-described purposes, to mean a rate increase that the Director of the Department of Managed Health Care or the Insurance Commissioner, as applicable, determines is excessive, unjustified, unfairly discriminatory, or otherwise unreasonable, as defined.
Existing law requires a health care service plan or health insurer to submit rates to their regulating entity for review and to demonstrate the impact of any changes in the rate of growth of health care costs resulting from health care cost targets.
This bill would instead require a health care service plan or health insurer to demonstrate the impact of health care cost targets and to demonstrate whether a health care service plan or health insurer’s rate growth meets or will meet the cost target for the rating period. The bill would require, if a health care service plan or health insurer’s rate growth is expected to exceed the cost target for a rating period, the health care service plan or health insurer to include specified information it is rate filing, including, among other things, a detailed list of any proactive steps it is taking, or plans to take, to meet cost targets through rate development. Because a willful violation of these provisions by a health care service plan would be a crime, the bill would impose a state-mandated local program.
Existing law requires the director or the commissioner, as applicable, in determining whether a rate is unreasonable or not justified for purposes of the above-described review, to consider the impact on changes in health care costs as a result of the health care cost targets described above.
This bill would require, in determining whether a rate increase is unreasonable, the director to consider whether the health care service plan has sufficient or excessive financial capacity for the past 3 years, and the commissioner to consider the insurer’s surplus condition for the past 3 years, using specified measures. The bill would require the Department of Managed Health Care and the Department of Insurance, in consultation with the Office of Health Care Affordability, as part of the existing rate review process, to evaluate the affordability standard for an individual and a family of 4, as specified. The bill would require the evaluation to include the annual change in premiums and cost sharing for the prior 5 years, including deductibles, copayments, coinsurance, and any other cost sharing that impact actuarial value.
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.

The people of the State of California do enact as follows:

SECTION 1.
Section 1385.01 of the Health and Safety Code is amended to read:
1385.01.
For purposes of this article, the following definitions shall apply:
(a) (1) “Blended” means a rating method that combines community rating and experience rating methods.
(2) “Community rated” means a rating method in the large group market that bases rates on the expected costs to a health care service plan of providing covered benefits to all enrollees, including both low-risk and high-risk enrollees. Premiums may vary according to the factors in this article.
(3) “Experience rated” means a rating method in the large group market under which a health care service plan calculates the premiums for a large group in whole or blended based on the group’s prior experience.
(b) (1) For individual and small group market products, “geographic region” has the same meaning as in Sections 1357.512 and 1399.855.
(2) For large group market products, “geographic region” means one of the following areas composed of the regions defined in Sections 1357.512 and 1399.855:
(A) An area composed of regions 2, 4, 5, 6, 7, and 8, which consist of the Counties of Alameda, Contra Costa, Marin, Napa, San Mateo, Santa Clara, Solano, and Sonoma and the City and County of San Francisco.
(B) An area composed of regions 1 and 3, which consist of the Counties of Alpine, Amador, Butte, Calaveras, Colusa, Del Norte, El Dorado, Glenn, Humboldt, Lake, Lassen, Mendocino, Modoc, Nevada, Placer, Plumas, Sacramento, Shasta, Sierra, Siskiyou, Sutter, Tehama, Trinity, Tuolumne, Yolo, and Yuba.
(C) An area composed of regions 9 and 12, which consist of the Counties of Monterey, San Benito, San Luis Obispo, Santa Barbara, Santa Cruz, and Ventura.
(D) An area composed of regions 10, 11, and 14, which consist of the Counties of Fresno, Kern, Kings, Madera, Mariposa, Merced, San Joaquin, Stanislaus, and Tulare.
(E) An area composed of regions 13 and 17, which consist of the Counties of Imperial, Inyo, Mono, Riverside, and San Bernardino.
(F) An area composed of regions 15 and 16, which consist of the County of Los Angeles.
(G) An area composed of regions 18 and 19, which consist of the Counties of Orange and San Diego.
(c) “Large group health care service plan contract” means a group health care service plan contract other than a contract issued to a small employer, as defined in Section 1357, 1357.500, or 1357.600.
(d) “Small group health care service plan contract” means a group health care service plan contract issued to a small employer, as defined in Section 1357, 1357.500, or 1357.600.
(e) “PPACA” means Section 2794 of the federal Public Health Service Act (42 U.S.C. Sec. 300gg-94), as amended by the federal Patient Protection and Affordable Care Act (Public Law (111-148)), and any subsequent rules, regulations, or guidance issued under that section.
(f) “Unreasonable rate increase” means a rate increase that the director determines is any of the following:
(1) Excessive.
(2) Unjustified.
(3) Unfairly discriminatory.
(4) Otherwise unreasonable, as defined by PPACA and Section 154.102 of Title 45 of the Code of Federal Regulations as in effect on January 1, 2026.

SEC. 2.
Section 1385.035 of the Health and Safety Code is amended to read:
1385.035.
(a) It is the intent of the Legislature in enacting this section to ensure that enrollees and subscribers benefit from reductions in the rate of growth in health care costs as a result of the establishment of the Office of Health Care Affordability.
(b) In submitting rates for review consistent with this article, a health care service plan shall demonstrate the impact of cost targets established under the authority granted by Chapter 2.6 (commencing with Section 127500) of Part 2 of Division 107. A health care service plan shall demonstrate whether its rate growth meets or will meet the cost target for the rating period. If a health care service plan’s rate growth is expected to exceed the cost target for the rating period, the health care service plan shall include the following in its rate filing:
(1) A detailed list of any proactive steps it is taking, or plans to take, to meet cost targets through rate development.
(2) A delineation of factors driving rate increases to exceed the cost targets described in this subdivision, including, but not limited to, medical trends, medical inflation, and pharmaceutical prices, in addition to administrative costs and nonmedical costs drivers, including, for example, consumer aging or supply constraints.
(3) If the Office of Health Care Affordability has published an analysis on a specific cost driver and a health care service plan has used that cost driver to explain a rate increase in part or in whole, the plan shall reconcile its findings to the extent they deviate from any applicable analysis published by the Office of Health Care Affordability.
(c) In determining whether a rate is unreasonable, the director shall consider the impact on changes in health care costs as a result of the health care cost targets set pursuant to Chapter 2.6 (commencing with Section 127500) of Part 2 of Division 107.
(d) (1) In determining whether a rate increase is unreasonable, the director shall consider whether a plan has sufficient or excessive financial capacity for the past three years using all of the following measures:
(A) Tangible net equity.
(B) Working capital.
(C) Payouts to shareholders and investors, if a for-profit entity.
(D) Reserves and investments.
(E) Other measures determined by the department.
(2) If a plan’s financial capacity is excessive, the department shall take into consideration whether the plan has financial capacity to charge enrollees a lower rate than the proposed rate in determining if the proposed rate is unreasonable.
(3) This subdivision shall be implemented in a manner that does not conflict with any financial solvency provision in this chapter.
(e) (1) The department, in consultation with the Office of Health Care Affordability, shall evaluate as part of the rate review process whether the insurer’s rates meet the affordability standard under paragraph (2) for an individual and a family of four with household incomes at 200 percent of the federal poverty level, 400 percent of the federal poverty level, and 800 percent of the federal poverty level. The evaluation shall include the annual change in premiums and cost sharing for the prior five years, including, but not limited to, deductibles, copayments, coinsurance, and any other cost sharing that impact actuarial value.
(2) For the purposes of this subdivision, “the affordability standard” means that the plan contract requires no greater individual contribution to premium, share of premium, and deductible as the amount described in Section 61020 of the Revenue and Taxation Code.
(3) The evaluation of affordability shall be reported as part of the reports made pursuant to this section and Section 1385.045.
(f) This section does not apply to a specialized health care service plan.

SEC. 3.
Section 10181 of the Insurance Code is amended to read:
10181.
For purposes of this article, the following definitions shall apply:
(a) (1) “Blended” means a rating method that combines community rating and experience rating methods.
(2) “Community rated” means a rating method in the large group market that bases rates on the expected costs to a health insurer of providing covered benefits to all insureds, including both low-risk and high-risk insureds. Premiums may vary according to the factors in this article.
(3) “Experience rated” means a rating method in the large group market under which a health insurer calculates the premiums for a large group in whole or blended based on the group’s prior experience.
(b) (1) For individual and small group market products, “geographic region” has the same meaning as in Sections 10753.14 and 10965.9.
(2) For large group market products, “geographic region” means one of the following areas, composed of the regions defined in Sections 10753.14 and 10965.9:
(A) An area composed of regions 2, 4, 5, 6, 7, and 8, which consist of the Counties of Alameda, Contra Costa, Marin, Napa, San Mateo, Santa Clara, Solano, and Sonoma and the City and County of San Francisco.
(B) An area composed of regions 1 and 3, which consist of the Counties of Alpine, Amador, Butte, Calaveras, Colusa, Del Norte, El Dorado, Glenn, Humboldt, Lake, Lassen, Mendocino, Modoc, Nevada, Placer, Plumas, Sacramento, Shasta, Sierra, Siskiyou, Sutter, Tehama, Trinity, Tuolumne, Yolo, and Yuba.
(C) An area composed of regions 9 and 12, which consist of the Counties of Monterey, San Benito, San Luis Obispo, Santa Barbara, Santa Cruz, and Ventura.
(D) An area composed of regions 10, 11, and 14, which consist of the Counties of Fresno, Kern, Kings, Madera, Mariposa, Merced, San Joaquin, Stanislaus, and Tulare.
(E) An area composed of regions 13 and 17, which consist of the Counties of Imperial, Inyo, Mono, Riverside, and San Bernardino.
(F) An area composed of regions 15 and 16, which consist of the County of Los Angeles.
(G) An area composed of regions 18 and 19, which consist of the Counties of Orange and San Diego.
(c) “Large group health insurance policy” means a group health insurance policy other than a policy issued to a small employer, as defined in Section 10700, 10753, or 10755.
(d) “Small group health insurance policy” means a group health insurance policy issued to a small employer, as defined in Section 10700, 10753, or 10755.
(e) “PPACA” means Section 2794 of the federal Public Health Service Act (42 U.S.C. Sec. 300gg-94), as amended by the federal Patient Protection and Affordable Care Act (Public Law 111-148), and any subsequent rules, regulations, or guidance issued pursuant to that law.
(f) “Unreasonable rate increase” means a rate increase that the commissioner determines is any of the following:
(1) Excessive.
(2) Unjustified.
(3) Unfairly discriminatory.
(4) Otherwise unreasonable, as defined by PPACA and Section 154.102 of Title 45 of the Code of Federal Regulations as in the effect on January 1, 2026.

SEC. 4.
Section 10181.35 of the Insurance Code is amended to read:
10181.35.
(a) It is the intent of the Legislature in enacting this section to ensure that insureds benefit from reductions in the rate of growth in health care costs as a result of the establishment of the Office of Health Care Affordability.
(b) In submitting rates for review consistent with this article, a health insurer shall demonstrate the impact of the health care cost targets established under the authority granted by Chapter 2.6 (commencing with Section 127500) of Part 2 of Division 107. An insurer shall demonstrate whether its rate growth meets or will meet the cost target for the rating period. If a health insurer’s rate growth is expected to exceed the cost target for the rating period, the insurer shall include the following in its rate filing:
(1) A detailed list of any proactive steps it is taking, or plans to take, to meet cost targets through rate development.
(2) A delineation of factors driving rate increases to exceed the cost targets described in this subdivision, including, but not limited to, medical trends, medical inflation, and pharmaceutical prices, in addition to administrative costs and nonmedical costs drivers, including, for example, consumer aging or supply constraints.
(3) If the Office of Health Care Affordability has published an analysis on a specific cost driver and an insurer has used that cost driver to explain a rate increase in part or in whole, the insurer shall reconcile its findings to the extent they deviate from any applicable analysis published by the Office of Health Care Affordability.
(c) In determining whether a rate is unreasonable, the commissioner shall consider the impact on changes in health care costs as a result of the health care cost targets set pursuant to Chapter 2.6 (commencing with Section 127500) of Part 2 of Division 107 of the Health and Safety Code.
(d) (1) In determining whether a rate increase is unreasonable, the commissioner shall consider an insurer’s surplus condition, for the past three years using all of the following measures:
(A) Working capital.
(B) Payouts to shareholders and investors, if a for-profit entity.
(C) Reserves and investments.
(D) Other measures determined by the department.
(2) If an insurer’s surplus condition is excessive, the department shall take into consideration whether the insurer has financial capacity to charge insureds a lower rate than the proposed rate in determining if the proposed rate is unreasonable.
(3) This subdivision shall be implemented in a manner that does not conflict with any financial solvency provision in this chapter.
(e) (1) The department, in consultation with the Office of Health Care Affordability, shall evaluate as part of the rate review process whether the insurer’s rates meet the affordability standard under paragraph (2) for an individual and a family of four with household incomes at 200 percent of the federal poverty level, 400 percent of the federal poverty level, and 800 percent of the federal poverty level. The evaluation shall include the annual change in premiums and cost sharing for the prior five years, including, but not limited to, deductibles, copayments, coinsurance, and any other cost sharing that impact actuarial value.
(2) For the purposes of this subdivision, “the affordability standard” means that the policy requires no greater individual contribution to premium, share of premium, and deductible as the amount described in Section 61020 of the Revenue and Taxation Code.
(3) The evaluation of affordability shall be reported as part of the reports made pursuant to this section and Section 10181.45.
(f) This section does not apply to a specialized health insurance policy.

SEC. 5.
No reimbursement is required by this act pursuant to Section 6 of Article XIII B of the California Constitution because the only costs that may be incurred by a local agency or school district will be incurred because this act creates a new crime or infraction, eliminates a crime or infraction, or changes the penalty for a crime or infraction, within the meaning of Section 17556 of the Government Code, or changes the definition of a crime within the meaning of Section 6 of Article XIII B of the California Constitution.