Assembly Health Committee Approves Requiring Health Insurers to Justify, Seek Approval for Rate Increases

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Sacramento, CA — The California Assembly Health Committee approved a bill today by Assemblyman Dave Jones (D-Sacramento) that would require HMOs and health insurers to justify their rates and get approval for increases in premiums and other payments.

The legislation is similar to requirements in the auto insurance market under Propostion 103 that have saved drivers $23 billion since 1988. The measure would control the type of administrative waste and profiteering that allowed Blue Cross of California to keep, as overhead and profit, 50% of every premium dollar collected from individual policyholders.

Since just 2003, the Foundation for Taxpayer and Consumer Rights has saved homeowners, motorists and doctors $800.95 million in premiums (see attached chart) under Propositon 103 by challenging proposed rate increases. A similar process for challenging rate increases would be provided for health rates under the Jones bill.

"The legislature has taken an important first step to provide health care affordability for Californians by reining in waste and profiteering," said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights (FTCR),

In addition, FTCR said that the bill, AB 1554, would provide the public more information about where health care dollars are spent. For example, California’s most profitable insurer, Blue Cross, reported $1.3 billion paid to a subsidiary company for "claims processing" as a medical expense. FTCR said that such transfers most be scrutinized to determine that companies are not claiming unjustified medical expenses, or overpaying affiliated companies for services as a strategy to move profit out of California.

Mark Leland, a small business owner from Santa Monica, endured a 264% increase in his health insurance rates in the last five years, including a 69% increase when he turned 40 and another 15% increase this year.

"To find out where my 69% premium rate hike went, I looked into the financials of the Big 5 HMOs in California and I found something the public should be aware of: administrative expenses increased 23% this year. But enrollment in these HMOs is declining, so how can you have these yearly 23% administrative cost increases?" asked Leland.

HMO and health insurance overhead — including administration, profit, advertising, and executive salaries — is the fastest-growing component of health care spending.

For example:

Just five California HMOs (Kaiser, Blue Shield, Blue Cross, PacifiCare, and HealthNet), which account for approximately 80% of the California HMO market, have recorded profit increases of $11.7 billion since 2002.

In addition, 4 of the companies transferred $3.2 billion in profit to out-of-state parent companies since 2002.

The 6 largest HMOs spent $1.6 billion in marketing in 2006 — enough money to provide coverage to 530,000 Californians for an entire year.

Jones’ measure is especially important in light of proposals by Gov. Arnold Schwarzenegger that would require all Californians to buy health insurance but allow insurers to charge whatever they choose. However, FTCR said the reform is necessary regardless of whether those proposals become law.

"This bill should be passed before the Legislature even contemplates requiring all Californians to buy health insurance," said Jerry Flanagan of FTCR. "While HMOs and health insurers have racked up record profits and wasted billions on overhead, millions of Californians have been forced into bare-bones coverage that offers little protection when they get sick, or have dropped coverage altogether."

In addition, AB 1554 would:

– Require health plans to provide detailed financial information to the regulator with each premium increase request.

– Establish a clear legislative directive that no rate, co-payment or deductible shall be approved or remain in effect which is deemed to be "unfair or excessive."

– Allow consumers and consumer groups to intervene in rate review proceedings to ensure that the legislative intent is implemented.

Proposition 103, authored by consumer activist Harvey Rosenfield, founder of FTCR, and approved by voters in 1988, established a similar "prior approval" system for many lines of insurance. During the decade after Proposition 103 was adopted, the uninsured motorist population declined by 38%. Between 1989 and 2004, California auto insurance premiums decreased 7% while premiums in the rest of the country increased 47%.

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FTCR is California’s leading public interest watchdog. For more information, visit us on the web at

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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