SUMMARY

Cost Impact Analysis

Introduction
This summary describes the methodology and assumptions that the California Health Benefits Review Program (CHBRP) developed to conduct the cost impact analysis of proposed mandated benefits, as required by SB 1704 (and originally authorized by AB 1996 in 2002).

In SB 1704 (California Health and Safety Code Section 127660 et seq.), California legislators identified two major sets of financial information that they were interested in understanding regarding proposed health benefits mandates: (1) current coverage, utilization and cost, and (2) projected changes in coverage, utilization and costs after the implementation of a mandate.

The specific information regarding current coverage requested by the California Legislature for each mandate includes:

• existing coverage of the service in the current insurance market;
• current utilization and cost of providing a benefit;
• public demand for coverage among self-insured plans; and
• current costs borne by insurers.

The specific information regarding post-mandate effects requested by the Legislature includes:

• changes in utilization;
• changes in the per unit cost of providing the service;
• administrative costs;
• impact on total health care costs;
• costs or savings for different types of insurers; and
• impact on access and availability of services.

Public Demand
Based on criteria specified under SB 1704, CHBRP is to report on the "level of public demand for health care coverage for the benefit or service, including the level of interest of collective bargaining agents in negotiating privately for inclusion of this [mandated benefit] coverage in group contracts and the extent to which the mandated benefit or service is covered by self-funded employer groups To determine the collective bargaining agents' level of interest in negotiating privately for inclusion of this mandated benefit coverage in group contracts, CHBRP queries the large collective bargaining agents, such as the California Labor Federation. Based on their responses, unions do not generally include benefit-by-benefit provisions during the negotiations of their health insurance policies. Instead, they tend to negotiate on benefit "packages" with broad parameters (e.g. premium levels, cost-sharing arrangements, and coverage for dependants). In order to determine whether any local unions engage in negotiations for any particular benefit mandate, they would need to be surveyed individually.

To determine the "extent to which the mandated benefit or service is covered by self-funded employer groups," CHBRP queries the largest public self-funded employer group, the California Public Employees' Retirement System (CalPERS) regarding existing coverage of the proposed mandate. CalPERS benefit coverage is reported in each CHBRP bill analysis.

California Cost and Coverage Model
To respond to SB 1704 cost and coverage evaluation provisions, the UCLA cost team and actuaries from Milliman developed the California Cost and Coverage Model. This model addresses each of these baseline and post-mandate financial impacts. As discussed, the public demand for expanding coverage, is addressed through discussion with unions and California Public Employees' Retirement System (CalPERS) to determine the interest for each proposed mandate. The impacts of mandates on availability, require assumptions about whether there are serious supply constraints that might affect the cost or availability of a service if demand substantially increased in response to a mandate This question is addressed by reviewing existing peer-reviewed and grey literature to determine if supply constraints exists.

The California Cost and Coverage Model is primarily an actuarial forecasting model. Such models are particularly appropriate when substantial behavioral changes in response to mandates are likely to be limited in the short run. To the extent that mandates have a small impact on health insurance premiums and overall health care expenditures, behavioral changes do not need to be modeled and an actuarial forecast should produce a reliable approximation of a mandate's financial impact.

Definition of terms. "Cost" is defined as the aggregate expenditures, or prices paid, for health care services-not as the costs incurred by the providers of health care. The rationale for this definition of "cost" is that legislators are ultimately interested in evaluating the financial impact of mandates on each of the major payers for health care services in the state.

The following elements of cost are included in the model:

• insurance premiums;
• member cost sharing;
• total cost of covered benefits;
• costs paid by patients who have insurance for mandated services not currently covered by insurance; and
• total expenditures for health insurance and uncovered mandated benefits.

"Utilization" is defined as the frequency or volume of use of a mandated service. Utilization is the product of the number of health plan members who use the mandated service and the average number of mandated services they use per calendar period.

"Coverage" is defined as the extent to which the mandated services are covered by insurance- either through a health care service plan (an HMO) or a health insurance policy.

Data sources. To estimate current levels of coverage, utilization, and expenditures for the mandated benefit(s), CHBRP constructed a baseline Cost and Coverage Model using data from four primary sources: (1) the 2005 California Health Interview Survey (CHIS), (2) the 2006 California Health Care Foundation/The Center for Studying Health System Change (CHCF/HSC) California Employer Health Benefits Survey, (3) the Milliman Health Cost Guidelines, and (4) CHBRP Enrollment and Premium Survey. Actual enrollment data from state agencies providing coverage to individuals who lack coverage from private sources are used for CalPERS, and MRMIB programs (i.e., AIM and MRMIP). The distribution of the Medicare and Medi-Cal publicly insured population is also determined by using actual enrollment data.

Coverage and demographic data sources.
The 2005 CHIS is used to identify the demographic characteristics and estimate the insurance coverage of the population in the state. CHIS is a random telephone survey of over 44,000 households conducted in multiple languages by the UCLA Center for Health Policy Research. This survey allows CHBRP to estimate the number of people with public and private sources of coverage, the latter including individual insurance coverage and the employer-sponsored insurance coverage.

To obtain estimates of the percentage of employees by size of firm, CHBRP has historically used the California Health Care Foundation/The Center for Studying Health System Change (CHCF/HRET) California Employer Health Benefits Survey (CHCF/HSC) survey of California employers. Collected annually since 2000, these data provide estimates of numbers of employees working in such firms and their types of coverage, based on a representative sample of California's employers. Coverage categories include conventional fee-for-service (FFS), preferred provider organizations (PPOs), point-of-service (POS) plans, and health maintenance organizations (HMOs). Furthermore, the CHCF/HSC survey also provides information on whether each health plan is self-insured or underwritten.

The model includes two plan types:

1. "Knox-Keene" plans: these include HMO, POS and certain PPO health plans subject to the requirements of the Knox-Keene Health Care Service Plan Act of 1975 are regulated by the Department of Managed Health Care. These plans are included in one category because they are similar in type and regulatory requirements
2. "Insurance" policies: these include PPOs and FFS health insurance products subject to the California Insurance Code which are regulated by the California Department of Insurance. Note that the number of enrollees in FFS products in California is small.

These plan types are divided into three categories of private purchasers (large group, small group, and individual) to represent typical insured plan benefits in California. Because each of these markets is subject to different regulations and market forces, the privately-insured market is divided into large-group (51 or more employees), small-group (two to 50 employees), and individual coverage. In 2006, Knox-Keene plans and Insurance policies are further categorized as "high deductible health plans" (HDHP) and "not HDHP." This distinction is necessary for calculation of the cost impact of proposed mandates since scope of benefits, out-of-pocket costs to individuals, and employer expenditures may vary from low deductible plans substantially.

The model thus produces estimates for each public and private market segment, the latter including Knox-Keene plans and Insurance policies by HDHP and non-HDHP plans, by large and small employers and for those enrolled in the individual market. The public segment captures those covered under CalPERS (HMO), Medi-Cal (Managed Care), and MRMIB programs. The final estimates for California's population divided by market segments are given in Table and Figure 1: Insurance Coverage of Californians, 2006.

To determine baseline coverage for a mandated benefit, CHBRP conducts an ad hoc survey of the seven largest California health plans and insurers. Enrollment and coverage estimates from these insurers vary across assessments because some mandates are limited to Knox-Keene licensed plans (HMOs) or to policies regulated under the California Insurance Code. Coverage for CalPERS, Medi-Cal Managed Care, and MRMIB programs are usually publicly available through the Department of Health Services (DHS), Managed Risk Medical Insurance Board (MRMIB), and CalPERS Web sites.

Utilization and expenditure data sources.
The utilization and expenditure data for the California Cost and Coverage Model are drawn primarily from multiple sources of data used in producing the Milliman Health Cost Guidelines (HCGs). The HCGs are a health care pricing tool used by actuaries in many of the major health plans in the United States. The guidelines provide a flexible but consistent basis for estimating health care costs for a wide variety of commercial health insurance plans. The HCGs are used nationwide and by several California HMOs and insurance companies, including at least five of the largest plans. It is likely that these organizations would use the HCGs, among other tools, to determine the initial premium impact of any new mandate. Thus, in addition to producing accurate estimates of the costs of a mandate, the HCG-based values should also be good estimates of the premium impact as estimated by the HMOs and insurance companies.

Most of the data sources underlying the HCGs are claims databases from commercial health insurance plans. In particular, the data come from health insurance companies, "Blues" plans, HMOs, self-funded employers, and from private data vendors. The data are mostly from loosely-managed health care plans, such as traditional indemnity-style plans and PPO plans. The HCGs are also based on data commonly used by health services researchers.

All the baseline analyses performed by Milliman start with PPOs in the large-group market, then make adjustments to the baseline data to account for differences by type of insurance, size of market, and geographic location. The process of applying adjustments to arrive at estimates of baseline utilization and expenditures in each of the market segments, and the process of estimating changes in utilization due to mandates, are both described in the detailed model description, The California Cost and Coverage Model: An Analytic Tool for Examining the Financial Impact of Benefit Mandates.

Changes in utilization of health care services are driven by several factors, namely: changes in benefit levels; enrollees demand and awareness of benefit coverage; providers' practice patterns; and level of health care management.

Other important considerations:

• Long-term impacts. CHBRP has limited its impact analysis to a one-year horizon in the analyses from the 2003-2005 legislative sessions for several reasons: 1) CHBRP cost impacts model for premium and total expenditure estimates mimics most insurers' internal processes for determining premiums changes in a given year. 2) CHBRP has limited capacity for modeling the long-term cost and health consequences of benefit mandates. To conduct such analyses usually requires sophisticated, disease-specific simulation models that permit analysis of the progression of a disease over the course of individual lifetimes, and allows for individual variability in disease progression, health outcomes, and subsequent costs. 3) Given the specific nature of most mandates analyzed by CHBRP, the long-term cost or public health impact as a result of the mandate are not necessarily addressed in the literature. Given these constraints, CHBRP will make a long-term cost estimate, when the literature and data permit. Please see Criteria and Guidelines for the Analysis of Long-Term Impacts for more information.

Table and Figure 1: Insurance Coverage of Californians, 2006