Health Insurance Rates: California Plans to Crack Down, But How Hard?

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As an Aug. 31 deadline nears, state lawmakers haggle over how
difficult it should be for companies to significantly raise premiums.

Insurance analysts say they expect Gov. Arnold Schwarzenegger and state
lawmakers to move quickly — the Legislature is scheduled to adjourn
Aug. 31, and all pending legislation that doesn’t pass by then will die.

"It’s certainly going to be quite an active month in terms of getting a
bill passed," said Shana Alex Lavarreda, director of health insurance
studies at the UCLA Center for Health Policy Research. "This moment in
time, when there is such a strong focus on rate regulation, is the best
opportunity to make this happen."

The Legislature is already grappling with three measures that would crack down on insurance companies.

One of them would prohibit health insurers from raising rates without
regulators’ approval, a requirement that already applies to automobile
and property insurers. Another would require insurers to justify
decisions to deny coverage or charge higher-than-standard rates. The
third would instate a temporary moratorium on rate hikes and then
require insurers to seek permission before significantly boosting

Schwarzenegger calls such rate regulation a "blunt instrument" that
would do little to address the underlying growth of medical costs.

Instead, the governor’s office has introduced a separate plan that would
require insurers to hire independent actuaries to review their filings,
and to post their proposed increases on the Internet.

Schwarzenegger argues that such scrutiny and public pressure will keep
insurers in line. His administration points to the recent example of
insurance giant Anthem Blue Cross, which withdrew a rate hike of up to
39% for individual policyholders in April after an outside actuary found
errors in its filing.

"Our belief is that better consumer information and greater transparency
in healthcare will … make sure that costs are kept in check," said
Jennifer Kent, who handles health legislation for the governor.

Schwarzenegger has asked the U.S. Department of Health and Human
Services for $1 million to pay for his rate review plan. But the
governor and the Legislature must still agree on a final blueprint by
the end of August, the deadline for legislation to clear the state
Assembly and Senate.

As that time nears, Schwarzenegger’s proposal is facing criticism from a broad range of groups.

Insurance industry leaders say the requirement to hire actuaries would
drive up expenses and, ultimately, insurance premiums. "This could get
pretty costly pretty quickly," said Charles Bacchi, a lobbyist for HMOs
and executive vice president of the Cal Assn. of Health Plans.

Consumer groups, meanwhile, say that allowing insurance companies to
pick the actuaries who review their filings would give them too much
influence over the process.

"Insurance companies in California will be getting millions of new
customers, and the least that Californians should get in return is
strong oversight of rates and premiums," said Judy Dugan, research
director for Consumer Watchdog in Santa Monica. "Instead, the governor’s
proposal would prevent effective oversight."

California regulators have long lacked the legal authority to crack down on health insurance rates.

The California Department of Managed Health Care, which oversees HMOs,
has no actuaries on staff because the agency has little authority to
even evaluate rates.

The state Department of Insurance can stop increases only if it
determines that an insurer spends less than 70 cents on medical care out
of every dollar it receives in premiums.

"Beyond that, the department has very little authority to reject rate hikes," said spokesman Darrel Ng.

Under a provision of the new federal healthcare law that takes effect in
September, insurers will have to devote at least 80% of their premiums
to medical care. Schwarzenegger says the requirement will dramatically
curb the insurance industry’s ability to raise rates.

Still, advocates of strict rate regulation believe that California needs
additional protections. They say the only sure way is to force insurers
to ask permission before raising premiums.

"This is the missing piece of national healthcare reform," said
Assemblyman Dave Jones (D-Sacramento), a candidate for state Insurance
Commissioner and author of one of the regulation bills now under
consideration. "We need to give the state the authority to reject
excessive rate hikes."

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Consumer Watchdog
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