CA Approves New Parity Law Expanding Coverage Obligations for Mental Health and SUD Treatment

On September 25, 2020, Governor Newsom signed Senate Bill 855 into law. SB 855 fundamentally alters California’s regulation of mental health and substance use disorder (MH/SUD) treatment, and it applies to all California health plans and disability insurance policies issued, amended or renewed on or after January 1, 2021. This alert analyzes how the bill impacts current law and the operations of health plans and health insurers. All payors operating in California should be aware of SB 855 and its implications for product design, utilization management and other areas of MH/SUD benefit administration.

SB 855 amends existing California statutes and adds provisions relating to coverage of MH/SUD treatment to both the Health & Safety Code (which governs healthcare service plans in California) and the Insurance Code (which governs health insurers in California). Among other changes, SB 855:

1. Expands the scope of coverage mandates in the California Mental Health Parity Act;
2. Mandates a new, uniform definition of “medically necessary treatment of a mental health or substance use disorder”;
3. Prohibits “discretionary clauses” in health plan contracts;
4. Establishes new obligations for payors to arrange for out-of-network coverage of MH/SUD services;
5. Prohibits plans and insurers from limiting MH/SUD benefits or coverage to short-term or acute treatment;
6. Prohibits plans and insurers from rescinding prior authorization for MH/SUD services after services are rendered;
7. Establishes new internal compliance requirements and disclosure obligations; and
8. Establishes new enforcement authority for the Department of Managed Health Care (DMHC) and the Insurance Commissioner.

While the final version of the bill does not establish a private civil cause of action for violation of its provisions, SB 855 authorizes regulatory actions and penalties, and it may also give rise to civil litigation under existing statutes, such as California’s Unfair Competition Law, Bus. & Prof. Code §§ 17200 et seq.

History and Purpose of SB 855

SB 855 was introduced in the California Senate by Senator Scott Wiener on January 14, 2020. The bill posits that prior state and federal legislation—including the California Mental Health Parity Act, the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act (MHPAEA), and the Patient Protection and Affordable Care Act—do not sufficiently mandate coverage of MH/SUD conditions in health plans and health insurance policies. See SB 855 Sections 1(a)–(c). The bill states that it seeks to combat social problems relating to mental health and substance use disorders by expanding the California Mental Health Parity Act to require coverage of all such disorders, including at “intermediate levels of care,” such as residential treatment. Id. Sections 1(d)–(j).

The California Senate voted to pass SB 855 on June 25, 2020 and referred the bill to the California Assembly. After further amendments and passage of a revised bill in the Assembly, SB 855 passed both chambers on August 30, 2020. The bill was enrolled on September 3, 2020 and sent to the Governor’s desk. The Governor signed SB 855 on September 25, 2020.

Notable Provisions of SB 855

The following sections address some notable provisions of SB 855 that health plans and insurers should be aware of.

• SB 855 expands the scope of MH/SUD services that plans and insurers must cover under the same terms and conditions applied to other medical conditions

Existing state law requires health plans and insurers to provide coverage for a specified list of severe mental illnesses on the “same terms and conditions” as other medical services. SB 855 now requires parity of coverage for all mental health and substance use disorders, as defined in SB 855.¹

SB 855 defines “mental health and substance use disorders” as those conditions listed in the most recent edition of either the International Classification of Diseases or the Diagnostic and Statistical Manual of Mental Disorders. SB 855 also broadens the terms and conditions to which the parity requirement applies, mandating parity as to maximum annual and lifetime benefits, copayments and coinsurance, deductibles, and out-of-pocket maximums, but also stating that its parity requirements are “not limited to ... patient financial responsibilities.” It is unclear how the expanded parity requirements reflected in SB 855 will be applied to coverage terms beyond the scope of patient financial responsibility.

As a practical matter, these new provisions may not materially expand the scope of coverage because the federal MHPAEA, which applies to most health plans, already mandates coverage of a similar scope of disorders, as well as parity in coverage beyond patient financial responsibilities. This federal parity standard has proven difficult to apply to specific coverage provisions and has led to significant litigation on the issue. SB 855 similarly may lead to increased disputes concerning parity compliance under the new, complex and expanded state laws.

• SB 855 establishes a uniform definition of medical necessity for MH/SUD services

SB 855 establishes detailed, uniform standards for evaluating the medical necessity of MH/SUD services, which are explicitly modeled on rulings in Wit, et al. v. United Behavioral Health, et al., No. 14-cv-02346-JCS (N.D. Cal.), an ongoing trial-level federal lawsuit.² SB 855 requires all California health plans and insurers to ensure that any plan-specific definitions and utilization review guidelines applicable to coverage of MH/SUD services are consistent with the definitions and coverage standards set forth in SB 855.

The bill defines “medically necessary treatment of a mental health or substance use disorder” as “a service or product addressing the specific needs of that patient, for the purpose of preventing, diagnosing, or treating an illness, injury, condition, or its symptoms, including minimizing the progression of that illness, injury, condition, or its symptoms” that is:

1. “In accordance with the generally accepted standards of mental health and substance use disorder care”;
2. “Clinically appropriate in terms of type, frequency, extent, site, and duration”; and
3. “Not primarily for the economic benefit of the health care service plan and subscribers or for the convenience of the patient, treating physician, or other health care provider.³”

SB 855 further defines the “generally accepted standards of mental health and substance use disorder care” to mean “standards of care and clinical practice that are generally recognized by health care providers practicing in relevant clinical specialties such as psychiatry, psychology, clinical sociology, addiction medicine and counseling, and behavioral health treatment[,]” which can be found in “peer-reviewed scientific studies and medical literature, clinical practice guidelines and recommendations of nonprofit health care provider professional associations, specialty societies and federal government agencies, and drug labeling” approved by the FDA.⁴

When conducting utilization review of MH/SUD services, SB 855 requires that plans and insurers use “criteria and guidelines set forth in the most recent versions of treatment criteria developed by the nonprofit professional association for the relevant clinical specialty.”⁵ While earlier versions of the bill identified specific sources by name, the final bill does not. In instances where no criteria or guidelines mandated by SB 855 apply, plans or issuers may apply other criteria that are consistent with “generally accepted standards” as defined in SB 855.⁶

• SB 855 prohibits “discretionary clauses” in health plan contracts

SB 855 renders “void and unenforceable” any clauses in health plan contracts that “have the effect of conferring discretion on a health care service plan or other claims administrator to determine entitlement to benefits or interpret contract language that, in turn, could lead to a deferential standard of review by a reviewing court.”⁷

This provision appears to be directed to plans governed by the federal Employee Retirement and Income Security Act (ERISA), which applies to most private employer-based coverage. While discretionary clauses are prohibited in health insurance policies under existing law, discretionary clauses in health plans have been permitted and are very common. As a result, courts reviewing health plans’ discretionary coverage determinations under ERISA-governed plans have generally applied a deferential standard of review. Under SB 855, courts may now conclude that those determinations should be reviewed de novo, without any deference to the decisions of plan administrators.

• SB 855 creates an obligation for health plans and insurers to “arrange coverage” of out-of-network MH/SUD services

SB 855 requires plans and insurers to “arrange coverage” of out-of-network services if medically necessary treatment is not available in network.⁸ This includes, but is not limited to, “providing services to secure medically necessary out-of-network options that are available to the enrollee within geographic and timely access standards.” In addition, health plans and insurers must ensure that “[t]he enrollee shall pay no more than the same cost sharing that the enrollee would pay for the same covered services received from an in-network provider.”

While the full effect of this provision is uncertain—particularly in light of undefined phrases such as “providing services to secure ... out-of-network options” and “medically necessary followup services”—it is likely that this provision will affect the relationship between health plans and insurers and out-of-network MH/SUD providers. Health plans and insurers should anticipate litigation concerning the scope and extent of these new affirmative obligations.

• SB 855 bans limitations on coverage for mental health and substance abuse disorders to “short-term or acute treatment”

SB 855 states that “a [health plan or insurer] shall not limit benefits or coverage for mental health and substance use disorders to short-term or acute treatment.”⁹ The bill does not specify whether it prohibits a plan or insurer from limiting an individual member’s treatment to short-term or acute treatment, or whether it invalidates plan terms that restrict coverage to short-term treatment on a blanket basis. SB 855 does not define “short-term or acute treatment.”

• SB 855 prohibits plans and insurers from rescinding authorization for MH/SUD services after the services have been provided

SB 855 requires plans and insurers to pay for MD/SUD treatment authorized in advance, even if the coverage is subsequently rescinded, canceled, or modified, and even if the plan or insurer subsequently determines that it had authorized the treatment in error.¹⁰ Once a provider renders preauthorized services “in good faith and pursuant to this authorization[,]” the plan or issuer may not rescind authorization “for any reason[.]”

This provision closely tracks other provisions in the Health & Safety Code and the Insurance Code,¹¹ so is unclear what, if any, additional effect this provision will have. This provision may lead to litigation concerning payment of claims in the face of eligibility issues or other problems discovered by the plan or issuer after authorization is granted.

• SB 855 establishes new disclosure and internal compliance requirements

SB 855 also imposes a suite of new internal compliance requirements.¹² Under the new law, health plans and health insurers must:

• Sponsor a formal education program “by nonprofit clinical specialty associations” to educate staff and contractors regarding claims review, utilization review, and medical necessity determinations under the new standards mandated by SB 855;
• Make the education program available to contracted healthcare providers, members, and “other stakeholders”;
• Provide clinical review criteria and training materials to providers and members at no cost;
• “Track, identify, and analyze” how clinical review criteria are used in coverage determinations and in any administrative appeal process;
• Conduct interrater reliability testing to ensure consistency in utilization management and medical necessity determinations;
• Run interrater reliability reports “about how the clinical guidelines are used in conjunction with the utilization management process and parity compliance activities”; and
• Perform remediation functions if the plan or insurer does not achieve interrater reliability pass rates of at least 90%.

Plans and insurers already conduct interrater reliability testing and must meet certain standards for URAC and NQUA accreditation. However, SB 855 may open the door to litigation and regulatory penalties based on inadequate testing or failure to achieve certain results.

• SB 855 establishes new enforcement authority for the DMHC and the Department of Insurance

SB 855 permits the DMHC to assess administrative penalties for violations of new Health & Safety Code Section 1374.721, consistent with its authority under Health & Safety Code Section 1368.04, in addition to other existing remedies.¹³

In addition, under new Insurance Code Sections 10144.5(j) and 10144.52(i), the Commissioner may assess a penalty for violation of either section, up to $5,000 per violation, or $10,000 if the violation is “willful.”¹⁴

Opposition to SB 855

During the legislative process, the DMHC opposed passage of SB 855 unless certain provisions were amended or removed from the bill—including the restriction on discretionary clauses in health plans, the new definition of medical necessity for MH/SUD services, and the requirement that health plans and insurers arrange for out-of-network MH/SUD services—based primarily on overbreadth and difficulty of enforcement.¹⁵ Notably, these reservations from one of the key regulatory agencies tasked with enforcing the new bill did not prevent Governor Newsom from signing it.

Conclusion

Now that SB 855 has been signed into law, health plans and health insurers operating in California should act quickly to ensure that their products and utilization management procedures conform with its provisions. Health plans and insurers should also be prepared for increased litigation and regulatory action based on these new requirements.

_{¹ See SB 855 Section 4, new Health & Safety Code § 1374.72(a)(2); SB 855 Section 7, new Insurance Code § 10144.5(a)(2).}

_{² See SB 855 §§ 1(k)–(m).}

_{³ SB 855 Section 4, new Health & Safety Code § 1374.72(a)(3)(A); SB 855 Section 7, new Insurance Code § 10144.5(a)(3)(A).}

_{⁴ SB 855 Section 5, new Health & Safety Code § 1374.721(f)(1); SB 855 Section 8, new Insurance Code § 10144.52(f)(1); see also SB 855 Section 4, new Health & Safety Code § 1374.72(a)(5); SB 855 Section 7, new Insurance Code § 10144.5(a)(5).}

_{⁵ SB 855 Section 5, new Health & Safety Code § 1374.721(b); SB 855 Section 8, new Insurance Code § 10144.52(b).}

_{⁶ SB 855 Section 5, new Health & Safety Code § 1374.721(c); SB 855 Section 8, new Insurance Code § 10144.52(c).}

_{⁷ SB 855 Section 2, new Health & Safety Code §§ 1367.045(a)-(b).}

_{⁸ See SB 855 Section 4, new Health & Safety Code § 1374.72(d); SB 855 Section 7, new Insurance Code § 10144.5(d).}

_{⁹ SB 855 Section 4, new Health & Safety Code § 1374.72(a)(6); SB 855 Section 7, new Insurance Code § 10144.5(a)(6).}

_{¹⁰ SB 855 Section 4, new Health & Safety Code § 1374.72(a)(8); SB 855 Section 7, new Insurance Code § 10144.5(a)(8).}

_{¹¹ See Health & Safety Code § 1371.8; Insurance Code § 796.04.}

_{¹² See SB 855 Section 5, new Health & Safety Code § 1374.721(e); SB 855 Section 8, new Insurance Code § 10144.52(e).}

_{¹³ SB 855 Section 5, new Health & Safety Code § 1374.721(i).}

_{¹⁴ SB 855 Section 7, new Insurance Code § 10144.5(j); SB 855 Section 8, new Insurance Code § 10144.52(i).}

_{¹⁵ See, e.g., California Assembly, Committee on Health, Legislative Analysis of SB 855 (Aug. 4, 2020), at p. 15.}