How To Weaken Health Reform: Regulators Have Little Power Over Health Insurance Rate Increases

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The healthcare law lets the Department of Health and Human Services set standards as to what constitutes an 'unreasonable' increase. But it doesn't give regulators any new powers to reject a proposed increase before it's implemented.

Big, powerful industries facing tougher government oversight — the health insurance industry, say — know that the legislative battle in Congress or state capitals is just the first skirmish.

The more important fight is over the regulations that implement legislative policies. That's the point where laws with teeth in them are taken to the dentist to get them pulled.

That process is already happening in relation to the new federal healthcare law. Forget the fatuous play-acting over "repeal" by the Republican majority in the House of Representatives. The real action is behind the scenes.

Consider what's been happening with a provision in the new law designed to keep health insurers from unreasonably running up premiums before 2014, when they'll come more fully under federal oversight.

The provision required states and the federal government to start scrutinizing rate increases last year, with an eye toward identifying companies guilty of a "pattern" of "excessive or unjustified" rate increases.

Those insurers could be barred from joining the health insurance exchanges due to be set up starting in 2014. Exile from the exchanges would amount to punishment on a nuclear scale, because all individual and small-group policies eventually will have to be sold through the exchanges.

One would think that threat might have been used to discourage rate increases such as the one Blue Shield of California is proposing to implement in March. (Combined with rate hikes last October and on Jan. 1, the March increase would drive bills in its individual coverage line up as much as 59%.)

But it doesn't work that way. The healthcare law allows the Department of Health and Human Services to set standards as to what constitutes an "unreasonable" increase. It doesn't give federal or state regulators any new powers to reject a proposed premium increase before it's implemented.

Regulations the department proposed in December to govern the rate review, however, look a little watery. For one thing, the proposal states that only annual premium increases over 10% should be subjected to further regulatory scrutiny. Any rate hike below that level would be presumptively judged "reasonable."

That might give away too much to insurers right off the bat. HHS acknowledges that all annual measures of healthcare inflation have been running well below 10% for years, sometimes as low as 4.4%. Premium increases in the individual and small-group market, where buyers have the least leverage, have been exceeding 15% a year for the last three years.

Its setting of a 10% threshold, the agency says, partially reflects "industry concerns" that companies would have to justify too many premium hikes.

What are the regulators allowed to do about hikes they think are unreasonable? Not much. If the feds make such a determination, the proposed regulations require the insurer to provide a written "justification" that its increase is proper and post it on its website, along with the federal agency's finding.

If you think it will be hard for an insurer to scare up a justification that sounds convincing even for a rate increase that common sense calls outrageous, just remember that reputable credit-rating firms serving Wall Street certified billions of dollars in mortgage securities as gilt-edged right up until the moment the securities were recategorized as toxic waste.

In any event, requiring "justification" doesn't quite count as regulation. "Increases of 20, 30, 40% are not survivable for real people," observes Drew Altman, president of the Kaiser Family Foundation. "Whether they're justifying it or not, that's not a reasonable increase to ask people to pay."

The proposed federal regulations leave premium reviews to the states, wherever possible. But that's where the real mischief can be done. In Sacramento last year, a bill giving the insurance commissioner authority to reject any increases in health premiums — similar to the authority Proposition 103 gave the commissioner in 1988 over auto and homeowners insurance — was derailed in favor of one requiring only that health insurers "justify" their increases on actuarial grounds, like the proposed federal rule.

"We think that set the clock back," says Jamie Court, head of Santa Monica-basedConsumer Watchdog, which backed the more stringent bill.

Some consumer advocates think the regulators' efforts to require insurers to make more information about their rate increases public will bear fruit, if indirectly.

"As people start to see more, they'll analyze what's going on and ask questions," says Gary Claxton, a health plan expert at Kaiser Family Foundation. "Where that will lead, we don't know. We're early in the public review process."

Some insurers may be able to make their case. Tom Epstein, Blue Shield's vice president for public affairs, says the insurer's planned rate hike won't even fully cover soaring costs in its individual insurance segment, thanks to higher hospital charges and increased pharmaceutical costs, among other things.

Blue Shield is paying for an independent actuarial analysis of its rate proposal and says it will refund to customers any premiums deemed excessive by the analysts.

But the "transparency" required under the federal proposal and existing state law isn't enough. "Rates have been transparently excessive in California for a decade, and that hasn't resulted in any decrease," says Insurance Commissioner Dave Jones.

He may soon get the authority for prior approval of health premiums that he craves. As it happens, the bill that got sidetracked last year was sponsored by then-Assemblyman Dave Jones. It is being reintroduced this year by Assemblyman Mike Feuer (D-Los Angeles), and it's a good bet that if it passes, it will be signed by Gov. Jerry Brown.

"But it will be hard-fought in the Legislature," Jones told me. "Notwithstanding the huge public outcry about the need for reform, the health insurance industry wields a tremendous amount of influence in the Legislature, and in the past has been successful in convincing conservative legislators to oppose this sort of reform."

In other words, there's always another battle to fight.
Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at [email protected], read past columns at, check out and follow @latimeshiltzik on Twitter.

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