Santa Monica, CA — In a letter sent today to California Legislative
Analyst Elizabeth Hill, a consumer group urged Hill, who is conducting
an independent fiscal analysis of the state’s health care legislation,
to examine cost overruns hitting a similar program in Massachusetts and
the lack of controls over insurer profiteering in the California
measure. The full letter is available below.
In the letter, the Foundation for Taxpayer and Consumer Rights (FTCR) wrote:
"Proponents will argue that a provision in [California bill]
ABX1 1 to cap insurer overhead and profit at 15% will control costs.
But this cap is only half of the cost-control equation and, without
rate regulation, may actually drive up premiums rather than control
them. Insurers allowed to keep 15% of premium will have incentives to
pay providers more, in order to keep more."
Hill was recently asked by Senate leader Don Perata to provide
a fiscal analysis of ABX1 1, the joint proposal by Gov. Arnold
Schwarzenegger and Assembly Speaker Fabian Núñez that would require all
Californians to prove that they had private health insurance policies.
Under the Schwarzenegger/Núñez proposal, insurers would
receive taxpayer funds with no accountability over the product they
sell or the price they charge, said FTCR.
In the letter, FTCR wrote:
"The only publicly available current analysis of ABX1 1, by
Assembly committee staff, contains no predictions for either cost
increases or expected revenue increases/decreases. Massachusetts,
however, is already struggling to control much higher than expected
costs… Massachusetts estimates that the cost of subsidized plans by
the end of the first year, July 2008, will be $147 million, or 30%,
over budget. A similar increase in California (with at least 12 times
the number of uninsured), would be $1.75 billion."
FTCR also pointed to much lower than predicted employer
contributions in Massachusetts, as well as higher premium costs and
lower benefits than expected. FTCR said that at a minimum, the
Legislative Analyst’s Office should recommend that ABX1 1 be amended to
include premium regulation rules that currently apply to auto and other
property/casualty insurance companies before forcing Californians to
purchase their product. In the letter, FTCR wrote:
"Under Proposition 103, auto and property/casualty insurers
must justify premium increases to the elected insurance commissioner
and receive approval before raising rates. At a minimum it should be
recommended that provisions be added to ABX 1 1 to require health
insurers to abide by the same oversight."
FTCR LETTER:
January 2, 2008
Elizabeth Hill
Legislative Analyst
925 L Street, Suite 1000
Sacramento, CA 95814
Dear Ms. Hill,
We write to point out some weaknesses and omissions in current
fiscal assumptions for the health care reform legislation, ABX1 1, and
hope that you will take some or all into account in the independent
fiscal analysis that Senator Perata has requested.
Under ABX1 1, the state must subsidize coverage purchased from
private health insurers for low income Californians and provide tax
subsidies to individuals earning between 250-400% of poverty and paying
more than 5.5% of their income on coverage. The Foundation for Taxpayer
and Consumer Rights supports the use of subsidies to provide access to
health care for those who cannot afford coverage, but under ABX1 1,
insurers would receive taxpayer funds with no accountability over the
product they sell or the price they charge.
Massachusetts’ real-world experience offers the most striking indicator
of what may happen in California.
1. Spiraling program costs. The only publicly available
current analysis of ABX1 1, by Assembly committee staff, contains no
predictions for either cost increases or expected revenue
increases/decreases. Massachusetts, however, is already struggling to
control much higher than expected costs. For instance:
– Massachusetts estimates that the cost of subsidized plans by
the end of the first year, July 2008, will be $147 million, or 30%,
over budget. A similar increase in California (with at least 12 times
the number of uninsured), would be $1.75 billion.
– There are a higher-than-expected number of enrollees in
subsidized care. Massachusetts’ budget projected 136,000 participants;
178,000 new enrollees are expected by July 2008.[1] This indicates that
estimates of the number of subsidy-eligible uninsured likely to enroll
may be low in California as well.
– Massachusetts’ costs are projected to increase up to an additional 14% next year.[2]
– Massachusetts’ budget for that state¿s health care program was
based on a low-ball number of the uninsured. The Massachusetts
Department of Finance and Policy reported the number of uninsured
Massachusetts residents to be 355,000 while the Blue Cross Blue Shield
Foundation found that number to be 571,000. Other estimates put the
number of uninsured between 500,000 to 650,000. Similarly, a recent
analysis of ABX1 1 cited the number of California’s uninsured to be 5.9
million while other independent researchers have consistently found
that number to be between 6.5 – 7 million.
2. Premium increases. Proponents of the Massachusetts
plan, including Jonathan Gruber of MIT (who also prepared the fiscal
analysis for ABX1 1 and its precursors) predicted that comprehensive
health insurance under state reforms would cost on average about $200 a
month.[3] In reality:
– Only the cheapest policies for the younger insureds are available near that cost.
– A 55-year-old purchasing through the Massachusetts state pool
will pay up to $531 per month for basic coverage. More comprehensive
coverage with lower out of pocket charges costs up to $906 monthly.
– Insurers in Massachusetts have signaled their intention to
seek double-digit price increases next year, though the state is asking
for voluntary reductions.
– ABX1 1 provides tax subsidies to a higher income level than
Massachusetts, up to 400% of poverty level; cost increases in the
private market will likely reduce state tax revenues more than the
predicted $500 million in the latest Assembly analysis.
– Premium increases in the unsubsidized market will exempt more
families from mandatory purchase, leaving them uninsured. This will
increase the amount of care needed by the uninsured, increasing the
hospitals’ burden of unanticipated and unfunded costs.
3. Revenue errors. Massachusetts was also far off the mark in predicting employer contributions.
– In the program’s first year, 518 contributing employers who do
not provide health insurance owe just $5.3 million.[4] The legislative
estimate was $46 million when the mandate passed in 2006, and remained
an optimistic $24 million when implementation began this summer.
– Given that employer contributions are under $300 a year in
Massachusetts, a similar shortfall in California would cripple the
program immediately.
– Some Massachusetts employers have avoided paying the fee
under rules that exempt employers for providing minimal coverage to
employees. In addition, half the employers surveyed by Massachusetts,
far more than expected, reported that they were small enough (fewer
than 11 employees) to avoid the requirement completely.
California is likely to be subject to similar unpredicted costs and revenue losses.
Proponents will argue that a provision in ABX1 1 to cap insurer
overhead and profit at 15% will control costs. But this cap is only
half of the cost-control equation and, without rate regulation, may
actually drive up premiums rather than control them. Insurers allowed
to keep 15% of premium will have incentives to pay providers more, in
order to keep more.
– Without direct regulation of insurance premiums, the 85/15
requirement in ABX1 1 will not control premium costs, subjecting
California to the same price increases buffeting Massachusetts.
– Insurers will have no incentive to control costs and the
state has no power to directly do so. Higher premiums increase the
dollar amount of the insurers¿ 15% share, while their absolute costs
remain the same.
– Doctors, hospitals and insurers will have common cause to raise rates at the expense of individuals and the state.
– The 85/15 requirement also encourages gaming of the system,
for instance to define as "medical costs" such administrative functions
as phone banks that handle billing questions. This puts upward pressure
on premiums.
– According to the Kaiser Family Foundation, insurance premiums
have increased 78% since 2001, compared to a 19% increase in wages and
a 17% increase in inflation. Yet the risk of similarly increasing costs
appears not to have been factored into proponents’ financing formula
for ABX1 1.
Another issue to consider is the impact of ABX 1 1 on the state
income tax revenue. The bill requires employers to allow workers to pay
health insurance premiums on a pre-tax basis. Such pre-tax spending,
estimated to be $2.1 billion by the governor, could dramatically
undercut the state general fund.
Rate regulation, absent from ABX1 1, is the only proven curb on insurance costs.
Since 1988, property and casualty insurance rate regulation
under Proposition 103 has saved California drivers $23 billion in
premiums.[5] Our consumer group¿s challenges alone have saved
Californians $800 million in auto, home, and medical malpractice
premiums since 2003.[6]
Under Proposition 103, auto and property/casualty insurers must
justify premium increases to the elected insurance commissioner and
receive approval before raising rates. At a minimum it should be
recommended that provisions be added to ABX 1 1 to require health
insurers to abide by the same oversight.
Auto insurance rate regulation has a proven record of success:
– California auto insurance premiums have declined by 7% since
voters approved Prop 103 in 1988, while rates nationally have increased
47%.
– In the fifteen years following the passage of Prop. 103,
California fell from 2nd most expensive state for auto liability
premiums in the country to 21st.
– At the same time, the stability of rate regulation has provided above-average profits for California insurers.[7]
Thank you for considering our comments.
Sincerely,
Jamie Court
Judy Dugan
Jerry Flanagan
Carmen Balber
[1] Alice Dembner, "Success could put health plan in the red;
Mass. program may come up $147m short," Boston Globe, Nov. 18, 2007.
[2] Commonwealth Connector staff report, Dec. 12, 2007.
[3] Julie Appleby, "Mass. residents face required coverage," USA Today. April 4, 2006.
[4] Chapter 58 Implementation Report, Update 10, Dec. 12, 2007.
[5] "Why Not the Best? The Most Effective Auto Insurance Regulation in the Nation", Consumer Federation of America, June 2001.
[6] "Proposition 103’s Impact On Auto Insurance Premiums in California,
15 Years of Insurance Reform: 1989-2004", Foundation for Taxpayer and
Consumer Rights (FTCR), available at: http://www.consumerwatchdog.org/insurance/pr/?postId=8011.
[7] State Average Expenditures for Personal Automobile Insurance
1993-2004, National Association of Insurance Commissioners.
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FTCR is California’s leading public interest watchdog. For more information, visit us on the web at http://www.ConsumerWatchdog.org.
