LAO 2006-07 Budget Analysis: General Government

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Department of Insurance (0845)

The Insurance Commissioner is elected by voters and oversees the California Department of Insurance (CDI). The CDI regulates most of Californiaís insurance market-the largest in the U.S. with over $115†billion of direct premiums written annually. With nearly 1,300 employees, the department licenses and regulates over 1,500 companies and more than 340,000 agents and brokers. The commissioner has authority under law to review and approve certain aspects of insurance rates, address consumer complaints, ensure that insurance companies remain financially stable, and combat insurance fraud.

The budget proposes CDI expenditures of $198†million in 2006-07. This is $5†million, or 2.3†percent, less than authorized 2005-06 expenditures. Reductions in spending for one-time costs, consulting services, and grants to district attorneys account for most of the budgeted decrease in 2006-07. (The CDI also is requesting a reappropriation of $1†million of unused 2004-05 funds to be awarded to district attorneys to combat health insurance fraud.)

The Insurance Fund, consisting of several accounts (some of which are restricted) that support CDI operations, derives revenues from regulatory assessments and fees. The department projects that the Insurance Fundís total fund balance will be $29†million, or 16†percent of revenues, at the end of 2006-07.

Budget for Health Provider Complaint Unit Should Be Reduced

We recommend that the Legislature appropriate $752,000 from the Insurance Fund and approve five new positions (a reduction of $410,000 and five positions from the administrationís request) to administer two new laws protecting health care providers and consumers. We also recommend that the Legislature adopt supplemental report language requiring the California Department of Insurance to report annually for the next three years on the workload resulting from the two new laws so that lawmakers can consider whether more staffing should be authorized. (Reduce Item 0845-001-0217 by $410,000.)

Background. Under state law, the Department of Managed Health Care (DMHC) regulates health maintenance organizations and two preferred provider organizations (PPOs) that serve more than 80†percent of consumers in the market for health care coverage. The CDI regulates PPOs and indemnity insurance plans serving the rest of this market.

New Laws. The Legislature passed two laws in 2005 that resulted in the request for ten new staff positions. Chapter†723, Statutes of 2005 (SB 367, Speier), requires the commissioner by July 1, 2006 to establish procedures for receiving, processing, and addressing complaints concerning denied health care claims and related health insurance issues. The lawís principal purpose is to give health providers the same rights to file complaints against CDI-regulated insurers that they already had for DMHC-regulated plans. Among the requirements of Chapter†723 are that the commissioner establish a Web page for receiving complaints and provide announcements informing consumers and providers that both this Web page and CDIís toll-free number now handle complaints concerning health insurers.

In addition, the Legislature passed Chapter†441, Statutes of 2005 (SB†634, Speier), which imposes requirements to limit unfair claims practices of CDI-regulated insurers. The requirements are similar to those already in place for DMHC-regulated plans. Chapter†441 requires insurers and agents to disclose certain information on claims practices and potential costs of services to providers and policyholders.

Proposal. In order to address the new requirements of Chapters 441 and 723, CDI requests $1.2†million from the Insurance Fund and ten new positions (consisting of eight compliance officers and two staff counsel). Most of the staff members would work in CDIís consumer services and market conduct branch, which handles consumer inquiries and examines insurance company practices-such as claims handling-for various lines of insurance. The proposal also requests $50,000 in ongoing spending authority to contract with a media firm to develop announcements concerning CDIís complaint Web page and toll-free telephone number.

New Unit Should Be Smaller Than DMHCís. Since the laws are new, it is unknown how many complaints CDI will receive. The DMHC regulates health organizations that serve more than four times as many Californians as those regulated by CDI. The DMHCís comparable provider complaint unit employs eight staff members. We would expect CDI to receive significantly less complaints than DMHC on an ongoing basis, although it may experience relatively more workload in the short term to deal with any built up backlog of complaints. Based on our review, we believe CDI can meet its new responsibilities under Chapters 441 and 723 with five new positions (four insurance compliance officers and one staff counsel). This is a reduced amount from CDIís proposal but still provides proportionately more resources to CDI than DMHC (based on persons served). This recommendation would reduce CDIís request by $410,000.

Recommend Annual Reports on Workload of New Unit. Because the volume of complaints that will be generated by the new laws is unknown, we recommend that the Legislature require that CDI provide reports on its workload for at least the next three years. With this information, the Legislature and the administration will have a better idea of ongoing workload demands. The DMHC already produces extensive reports concerning the number, category, and status of complaints it receives. The CDI should produce reports similar in format to DMHCís, so that comparisons are possible. For these reasons, we recommend the adoption of the following supplemental report language:

Item 0845-001-0217-California Department of Insurance (CDI). The CDI shall submit calendar-year annual reports on or before July 1, 2007, July 1, 2008, and July 1, 2009 to the Senate Health Committee, the Assembly Health Committee, and the Joint Legislative Budget Committee concerning the number, types, and status of health care provider, consumer, and other complaints processed each year under the provisions of Chapter†441, Statutes of 2005 (SB 634, Speier), and Chapter†723, Statutes of 2005 (SB 367, Speier). To the extent possible, CDI should provide this report in a format similar to that used by the Department of Managed Health Care in similar reports.


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