The Good, the Bad, and the Ugly for Consumer Protection in the U.S. Senate Health Reform

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Pre-emption of State Health Benefit Laws Is a Major Retreat; Insurance Rate Justification Shows Promise

WASHINGTON, D.C. — Consumer Watchdog released a list today of the 10 key positive and negative consumer protection provisions of the U.S. Senate health reform bill, HR 3590, which passed an important procedural vote this weekend.

The group lauded the bill’s dramatic expansion of coverage for those currently without health insurance and subsidies to help consumers afford care, but called for amendments as the bill is debated next week.

Consumer Watchdog said that two provisions allowing for pre-emption of state laws by less protective federal standards amounted to a major step backwards in coverage and affordability.  Provisions requiring insurance companies to justify their rates and providing grants to states to develop “prior approval” systems are promising, but need further development to protect Americans from price gouging by health insurers.

“The ‘bad’ and the ‘ugly’ of the Senate bill threaten to undermine the ‘good.’  In particular, provisions of the Senate bill that would pre-empt more protective state standards will result in insurance policies that do not provide needed services and treatments when patients get sick and need health care the most,” said Jerry Flanagan, Health Care Policy Director for Consumer Watchdog. “If the government is going to require all Americans to have health insurance, then the government has the duty to ensure coverage is affordable.  Insurance rate justification and prior approval of rates are essential to achieve affordability.  However, even some of the ‘good’ provisions of the bill need additional clarifications and fixes to ensure that consumers get the coverage they pay for when the health care reform bills become law.”

The List of 10 of Consumer Protections: (details are below)

The Good:
1.  Rate review. Insurers must publicly justify “excessive” rate increases, and federal grants would encourage states to require full  “prior approval” of such increases. (Needs strengthening of prior approval, definition of “excessive.”)
2.  Public Option. Bill retains an op-out public option and allows states to expand access to large employers.
3.  Consumer rebates. Requires insurer rebates to consumers of administrative and overhead costs higher than 20% to 25%.
4.  Minimum “loss ratio.” Insurers in some cases must assure that 85% of premiums are spent on medical care. (Should be expanded to all policies.)
5.  Rescission ban. Insurers may not rescind policies except for “intentional misrepresentation” of material facts as determined by the coverage contract. (Needs much tighter definition.)
6.  Guaranteed issue.
Health insurance must be available to all, renewable for all, and rate differences, such as for age, are limited.

The Bad:
7.  Mandate.
Proof of insurance coverage is required of all Americans, while insurers are still largely free to charge what they want. (To keep insurers in check the bill needs a broader public option and mandatory rate approval to curb prices.)
8.  Poor minimum coverage. Allowable minimum health plan, the “bronze” level, would cover only 60% of overall patient costs, including copays and deductibles. (Should be at least 75%.)
9.  No employer requirement. Employers face only very weak fees for failing to even offer coverage. (Need more realistic requirements in House bill.)

The Ugly:
10. Race to the bottom on state protections.
State benefit requirements would be preempted by “nationwide plans” and multistate “compacts,” which would be ruled by laws of the weakest states; weaker federal requirements would become the norm. Coverage of AIDS/HIV testing, reconstructive surgery, home health care services, and child delivery and mastectomy minimum hospital stays and more would likely be lost. (States must retain freedom to require stronger coverage for all types of policies.)

Rate Increase Justification, State Grants for Prior Approval (page 37, § 2794). 
Insurance rate increase justification, and prior approval of those rates, are essential components of controlling the kind of double-digit health insurance rate increases that led U.S. Representative Crowley (D-NY), and U.S. Senators Durbin (D-IL) and Landrieu (D-LA), to spearhead a letter from 119 Members of Congress asking the health insurance industry to explain the unusually high increases predicted for 2010.  Specifically, section 2794 of the Senate bill provides that:
(1) The Secretary of Health and Human Services, in conjunction with states, shall require health insurance companies to justify unreasonable premium increases prior to implementing them.  Insurers are required to post the justifications on their websites.
(2) The Secretary of Health and Human Services will provide $250 million in grants to assist states “in reviewing and, if appropriate under State law, approving premium increases for health insurance coverage…”
(3) Any state receiving a federal grant is required to make recommendations about whether particular health insurers should be excluded from participation in the Exchange “based on a pattern or practice of excessive or unjustified premium increases.”

RECOMMENDATION: Consumer Watchdog, which pioneered the most successful insurance premium regulation law in the nation, Proposition 103, called on the Senate to adopt amendments reflecting key provisions of California’s landmark insurance reform law, including:
• Mandatory justification of any rate increase (including premiums, deductibles, co-pays), not merely justifications of "unreasonable" premium increases.
• Increased amount of funding available for grants to assist states developing ‘prior approval’ systems.  The U.S. House of Representatives bill provides $1 billion in such state grants.
• Mandatory prior approval, which means requiring insurers to seek permission from government regulators, in addition to justifying rate increases, before imposing the new rates. The language conditioning such prior approval on whether it is “appropriate under state law” should be deleted.  In its place, states should be required to adopt Prop 103-styled prior approval in order to maximize saving and decrease insurance company waste and overhead.  Since 1988, California’s Proposition 103 has saved drivers $62 billion while fostering a competitive and profitable insurance market.
• An intervenor system that provides consumers a forum to challenge unnecessary or excessive rate increases.  Since 2003, Consumer Watchdog has saved the state’s consumers $1.7 billion by challenging unnecessary premium increases using the public intervention process.

Click here to read about California’s landmark law to rein in gouging by property and casualty insurers.

Public Option (page 182, § 1323).
The public insurance option is now called the "Community Health Insurance Option." Under the Senate bill:
(1) States may opt out entirely, but also may opt back in later.
(2) The plans under this option, though offered through the state exchanges to individuals and small businesses, are federally administered by the Secretary of HHS.
(3) The public option benefit is limited to the "essential health benefits" described in the law, though states may offer additional benefits. In such cases, the state must fund said benefits.
(4) All enrollees in the public plan are treated as a nationwide single pool (not state by state).
(5) Plans are subject to state "consumer protection and solvency laws, with a federal minimum standard.
(6) States accepting the option shall form a "State Advisory Council" including patients and providers to provide recommendations to HHS on policies, public awareness and payment structures.

RECOMMENDATION: The Senate bill should make clear that any individual or employer can choose to buy coverage under the Community Health Option.

Consumer Rebates if Insurer Overhead Exceeds 20-25% (Page 30, § 2718).  Insurers will be required to provide annual rebates to consumers if the insurer’s overhead costs (administration and profit) exceed 20% for coverage sold to employers and 25% for coverage sold to individuals. States may require lower overhead percentages. Rebates would equal the amount by which an insurer exceeds the overhead limit.

See 85% Administrative Cost Cap.

85% Administrative Cost Cap (Page 204, § 1331). 
Some analyses of the bill say that it requires private health insurance plans to spend at least 85% of premium revenue on medical costs. However, the placement of this language in the bill appears to apply the 85% requirement only to state “alternative programs” for low-income individuals.

The 85% so-called “medical loss ratio” should be applied to all insurers and all coverage.  The required consumer rebates should be triggered if the insurer exceeds a 15% cap on administrative costs and profits, instead of the current limit in the bill of 20-25%.

Prohibition on Rescission. (page 16, § 2712). Under the U.S. Senate bill, health insurers are barred from retroactively canceling coverage after a patient gets sick, a practice known as “rescission,” unless the patient committed fraud or made an intentional misrepresentation of a material fact as “prohibited by the terms of the plan or coverage.”

RECOMMENDATION: The bill must clarify the grounds on which a rescission of coverage is justified, not leave it up to insurers to define in the fine print of their coverage contracts.  For example, if an applicant’s health condition is not a factor in determining whether an individual or group is eligible for coverage under the bill’s Guaranteed Issue provisions, then failure to disclose such information cannot be grounds for rescission of the policy.

Guarantee Issue, Guaranteed Renewability, & Community Rating (page 82, § 2702; page 83, § 2703; page 83, § 2705). The bill bars a health insurer from refusing to sell coverage, refusing to renew coverage, or charging more for coverage due to a patient’s past health condition.


Individual mandate (page 320 § 1501). 
The bill requires every American, with some exceptions, to show proof of owning a health insurance policy or receiving health coverage from a public program. (For example, Medicaid or Medicare).  Failure to do so will result in a fine of up to $750.

RECOMMENDATION: A mandatory purchase regime, particularly one without a true public option such as universal access to Medicare and without vigorous cost controls and guaranteed benefits, amounts only to a government-funded customer delivery system for the fragmented, wasteful private insurance market.  The Senate should:
– Adopt a “public option” to the private market that is open to all Americans.
– Adopt a robust health insurance rate prior approval and rate justification system.
– Bar any new federal health care reforms from preempting state laws and regulations; they should follow the model of existing federal law, which promotes a state-federal partnership. (See “Ugly” below).

Low in Price, High in Cost — 60% Actuarial Cap on Basic Coverage (page 112, § 1302(d)).  The bill, responding to insurance industry lobbying, has lowered the overall value of the cheapest "bronze" plan to below that of almost any current employer-sponsored plan. The bronze plan has an actuarial value of 60%, 5% below the previous Senate plan, and 10% below the House plan. That means patients will have to pay, between premiums and out of pocket costs, 40% on average of their supposedly covered costs.

No matter what the premium price, strapped middle-class Americans who buy these plans will get horrible sticker shock on their deductibles and copays when they need to use the policy for anything beyond basic preventive care. Such costs deter families from seeking needed treatment for themselves and their children.

RECOMMENDATION: Bronze plan should provide benefits at 75% of actuarial value.

Employer “Fine” Shifts Burden of Health Care Costs to Individuals and Families (Page 348, § 1513). The bill requires employers with 50 or more employees to provide health coverage or pay a fine of $750 per employee each year.  Those employers would only be required to pay a fine if any of its employees qualify for a subsidy to buy coverage on their own through the Exchange.

RECOMMENDATION: Health insurance for a family of four costs $13,375 each year.  Allowing business owners to choose between paying for health coverage or paying a small fine will result in individuals and families bearing more of the cost burden.  The Senate should amend the bill to require employers to pay a significant share of the cost of coverage in line with the requirements of the House of Representatives bill.

Pre-emption of State Benefit Mandate Laws (Page 219, § 1333).
Insurers may form “health care compacts” (page 219) and “Nationwide plans” (page 222) which would only be subject to the health benefit mandate laws and regulations of the State in which the plan was “written or issued.” Assuming that the proposed new national minimum benefit guidelines (page 102, § 1302) would apply to the compacts and Nationwide plans, the national minimums would become default rules because insurers would certainly choose to be regulated by the weakest state.  As a result, millions of Americans could lose insurance coverage of important medical treatments and services such as AIDS/HIV testing, reconstructive surgery, home health care services, and child delivery and mastectomy minimum hospital stays.

Provisions in the bill allowing states to “opt-out” of permitting Nationwide plans and  “opt-in” to interstate compacts offer little protection.  The 1,000 health insurance lobbyists estimated to be working the federal health reform bill, and the industry’s unlimited capacity to buy votes with campaign contributions, would be marshaled to advance the insurers’ interest at the state level.

Click here to read Consumer Watchdog’s analyses of the pre-emption provisions and the group’s letter to Senate Majority Leader Harry Reid.

RECOMMENDATION:  States have traditionally been the laboratories of innovation in health care and insurance reform.  States also have a greater ability to respond quickly to local needs. The Senate health reform bill should be modeled on existing federal health care laws which provide for a federal-state partnership rather than federal pre-emption of more protective state standards. Minimum federal standards should set a floor, not a ceiling, on state health care protections.  In all cases, including Nationwide plans, heath care compacts, and Co-Ops, states must be free to impose their own required benefits and consumer protection laws if those benefits and laws are more protective than the laws of state where the policy was written or issued or the new federal guidelines.
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Consumer Watchdog is a nonpartisan consumer advocacy organization with offices in Washington, D.C. and Santa Monica, CA. Find 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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