Regulatory Split Costs Policyholders

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Something got lost in the flap about big rate increases for individual health insurance: Some policyholders got a worse deal than others, depending on which state regulator oversees the policy.

A review by the state Department of Managed Care found that 121,000 people whose Anthem Blue Cross insurance policies it regulates are facing a rate increase 3 to 4 percentage points higher than increases facing 70,000 people enrolled in similar policies with the same name that are regulated by the state Department of Insurance.

Few consumers who buy individual policies, as opposed to employer-sponsored plans, may know which agency oversees them. But there can be real differences.

Rates for the Blue Cross policies regulated by the managed-care agency will rise May 1, while those regulated by the insurance department go up July 1, widening the gap. A mid-year change to deductibles paid by people with plans at the insurance department but not the managed-care agency will broaden it further.

There also are rate differences between similar policies offered by Blue Shield that are regulated by both agencies. Managed-care regulators have sent letters to both insurers asking them to explain the disparities and justify the rate increases. Anthem Blue Cross has an April 25 deadline to respond; Blue Shield has until April 27.

Insurance department spokesman Ioannis Kazanis said via e-mail that the department has reviewed rate filings for policies it oversees but not those filed with the managed-care agency.

Some say these disparities highlight the need to consolidate health insurance regulation under one agency.

"Front and center is the fact that more than 100,000 Californians are suffering higher rates as a result of this unnecessarily complex system," said Doug Heller , executive director of Consumer Watchdog, a nonpartisan public interest organization in Santa Monica.

The problem stems from the gray area over who regulates preferred-provider organization plans.

So-called PPOs offer a broader network of providers than do health maintenance organizations, but members have to pay more if they go outside the established network.

The insurance department regulates most PPOs and traditional indemnity plans; the managed-care agency oversees mostly HMOs. Yet managed-care plans launched high-deductible PPO plans in response to market pressure for cheap alternatives and some of the older ones – with a total of 150,000 members at Blue Cross and Blue Shield – are regulated by the managed-care agency.

"It goes back to historical placement of these products," department spokeswoman Lynne Randolph said. "That's all we have left."

Overall, PPO plans regulated by the managed-care agency tend to have richer benefits, including maternity care, said Maureen McKennan, deputy director of plan and provider relations. The law that established the agency requires its policies to offer comprehensive benefits.

That generally means higher medical costs – and higher rates.

The products and membership mix at the two agencies are "quite different and, as such, reflect a very different medical cost," Anthem Blue Cross said in a prepared statement.

Another factor in the cost disparity: The number of Anthem members at the managed-care agency has been shrinking as many healthier consumers move to cheaper policies overseen by the insurance department. Those who are sicker tend to stay put, contributing to higher use of medical services – and higher premiums – according to the company.

Anthem's individual-policy business at the managed-care agency operated at a "substantial loss" in 2010 and will likely continue to lose money this year, even with the new rates in place, the company said.

The same outward migration is occurring at Blue Shield, with sicker members also staying put, Blue Shield spokesman Tom Epstein said in a prepared statement.

"Since the membership transferring out of DMHC had lower average medical expenses than those who remained, the 2010 and 2011 rates reflect the higher per-capita medical costs of those who continued to be covered by our DMHC plans," Epstein said.

This is true even though some of the plans offered at both agencies are virtually identical.

Consumers – and their insurance brokers – are looking for the best deal to fit their needs. Most have no idea which government agency regulates the product.

"We are looking to do what we can for clients," said Eric Greathouse, a local broker with Filice Insurance. "Where we steer them depends on how they use health care, so they don't overpay for a rich benefit design for stuff they don't need. These people are only concerned about the cost per month. The DOI versus DHMC thing? We're not even thinking about it."

For brokers, there is no reference to whom regulates the plan; individual insurance policies are simply listed with one rate for a specific age, said Conny Saab, chief executive officer at PWA Insurance Services in Gold River.

"Obviously, DMHC is a better deal for Blue Cross and CDI a better deal for the consumer, especially since the benefits are the same. Makes me wonder whey we have two agencies if they are not cooperating in their oversight and sharing information."

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