Massachusetts Move Toward Health Insurance Rate Regulation Shows Need For National Action, Says Consumer Watchdog

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Small Businesses Hit with Double-Digit Increases Demand State Help; Governor Seeks Insurer Rate Reviews

Santa Monica, CA — The announcement today by Massachusetts Gov. Deval Patrick that he will seek to regulate the cost of health insurance for small businesses raises a warning flag for national reforms, said Consumer Watchdog. The double-digit premium and other increases faced by these businesses shows that insurers, even under universal, mandatory insurance coverage, will continue to gouge maximum profits from the least powerful customers.

“The out-of-control costs in Massachusetts, which depends on the private market to insure all residents, show that insurers will not control costs voluntarily even as medical cost inflation slows” said Judy Dugan, research director for Consumer Watchdog. “In the absence of a strong public alternative to compete with private insurers, or effective rate regulation, consumers are forced to buy health insurance at whatever price the companies want to charge.”

The Boston Globe reports that Deval will:

“[F]ile two bills to expand the power of the state Division of Insurance.
“One bill would give the division more power to eliminate unnecessary administrative costs that could help reduce premiums.
“The second would let the division reject health insurance premium rates for companies if they are deemed unreasonable compared with the benefits offered.”

Patrick’s proposal to give his insurance regulators the power to approve rates before they are implemented is similar to California’s successful model for property and casualty insurers. This “prior approval” system has stabilized and reduced rates for auto and home insurance in the state, saving consumers nearly $62 billion since its passage two decades ago as Proposition 103, according to a 2008 study by the Consumer Federation of America. (see below)

Consumer Watchdog has urged that national health reformers adopt similar regulation, especially in a system in which individuals and businesses will be required to buy private insurance policies.

California’s 20-year-old law requires property and casualty insurers to seek permission through an elected insurance commissioner prior to raising premiums. Members of the public can challenge unnecessary premium hikes, similar to systems in place in many public utility commissions, providing an effective check against any government collusion with insurance companies.

Massachusetts insurers objected to the Patrick plan, saying that medical costs, not insurer pricing, were the problem. But Consumer Watchdog noted that the latest Consumer Price Index shows overall medical inflation is 3.3% in the last 12 months (see below), while the average health premium increase in Massachusetts this year (not including higher copays and deductibles) was 10%. Small businesses faced increases of 20% and more. Premiums have doubled in the last decade and Massachusetts’ market-based reform has not slowed the pace.

Since Massachusetts insurers are largely nonprofit businesses, the situation for national health reform efforts under a free-market system will be even worse, said Consumer Watchdog.

“Congress and the president must not just encourage state regulation of health insurance rates, but set a floor for such regulation,” said Dugan. “Otherwise, government is no more than a customer delivery system for private insurance companies.”

Patrick also asked the state legislature to examine the administrative costs of insurers in the small-business market; such policies often have extremely high overhead costs because the market is so fragmented, by design, said Consumer Watchdog.

See the Consumer Federation of America study of California insurance rate regulations here

Summary of Consumer Federation findings:

The Consumer Federation of America reported in 2008 that the regulation had saved Californians $61.8 billion on their auto insurance alone. That doesn’t mean auto insurers aren’t prospering. California is America’s fourth most competitive insurance market, while completely unregulated Illinois, home of Allstate, ranks 44th. Fewer California drivers are thrown into high-risk pool and insurers’ average profit of 13.9% in the state from 1989 to 2005 is double the national level of 6.5%. The law regulated all major lines of insurance, except for health and workers compensation, which are the only two consistently dysfunctional insurance markets in California.

See the early Boston Globe story on Gov. Patrick’s proposal here.

See Consumer Price Inflation data here.

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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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