Schwarzenegger Plan Would Kill Chance to Curb Health Insurance Rate Spiral, Says Group

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If Californians Have to Buy Health Insurance, Insurers Have to Be Regulated, Says Watchdog’s Letter to Gov.

Santa Monica, CA — Consumer Watchdog has called on Gov. Arnold Schwarzenegger to withdraw weak pseudo-reforms of the health insurance industry that would bar strong regulation of health insurers. Schwarzenegger sent his proposals this month to lawmakers who are seeking stronger state regulation modeled on the successful market reforms of auto and homeowner insurance under Proposition 103, demanding that they substitute his legislation for their bills.

“Health insurance companies are lobbying nationally against any strengthening of rate regulation, and in favor of loosening what they can count as health care in new federal standards,” said Judy Dugan, research director of Consumer Watchdog. “In California, their lobbying will pay off if the governor’s business-as-usual plan for weak oversight becomes law.”
See Consumer Watchdog’s letter to the governor at:

See the governor’s press release and legislative proposal at

In its letter to Schwarzenegger, the group said:
“You recently came out in opposition to giving state insurance regulators the power to stop unreasonable health insurance premium hikes before they take effect, as the Department of Insurance does with property/casualty insurance rates. Instead, you called on California to largely wait for the federal government to identify unreasonable premiums, although it has no power to stop them, and to prevent state regulators from barring even unreasonable, unjustified and inaccurate premium increases.
“Your administration has increasingly sided with health insurers in recent years, to the detriment of consumers. We ask that you reconsider your course based on the fact that by 2014 every American will be required to have a health insurance policy. This requires new duties from the health insurers and the state to guarantee that the premiums paid by individuals and businesses are reasonable.”
“We … urge you to change course based on irrefutable evidence about the success of property casualty insurance regulation in California over the last two decades under voter-approved Proposition 103.”
The letter also cites independent evidence for the success of rate regulation of  auto and homeowner insurance. It points out that Schwarzenegger’s proposal would leave the health insurance industry free to set whatever prices it wishes, even if they are unjustifiable or inaccurate.
Schwarzenegger has repeatedly threatened to veto regulation of health insurance rates in recent years, effectively killing it before a final vote, said Consumer Watchdog. But the group noted that the new federal health reform law actively encourages state regulation of health premiums and the U.S. Department of Health and Human Services will provide substantial grants to states that add or strengthen rate regulation.
The letter also said:
“You criticize prior approval rate regulation as a ‘blunt instrument.’ Yet rate regulation, including the state’s power to reject and revise insurer rate changes, is by far the most effective way to protect consumers while preserving a competitive and profitable health insurance market.
 “Far from being a blunt instrument, Proposition 103’s auto insurance regulation, the strongest in the nation, is a sharp scalpel that saved tens of billions of dollars for consumers and has benefited the state economy at a modest cost. A 2008 state-by-state study of auto insurance rates by the Consumer Federation of America found that California rate regulation stands out as a model of consumer protection:
•    California drivers have saved more than $61.8 billion in auto insurance rates since enacting the strongest regulation in the nation, an average of $1670 per Californian;
•    California is first among all states in holding down insurance premiums, with a 12.9 percent increase from 1989 to 2006 compared to an average national increase of 50 percent;
•    California is the fourth most competitive auto insurance market in the nation; Completely unregulated Illinois ranked 44th.
•   Our consumer group alone has intervened to stop $1.72 billion in unnecessary premium hikes between 2003 and 2009.
“The full report compares insurance regulatory systems nationally and finds that consumer prices increase as regulation gets weaker. It is available at

“Prior to Proposition 103, auto insurance rates were set on a “cost plus” basis, which allowed insurers to pass on any costs directly to consumers, and insurers had little or no interest in cost containment. Now, Proposition 103 regulations reward insurers for efficiency, and containment of outside costs is an ordinary part of doing business.
“The state’s health insurers, in the absence of rate regulation, would continue to use cost-plus pricing, with no impetus hold down exterior health costs or bloated executive compensation.”
The letter cited the following serious flaws in Schwarzenegger’s proposal:

  • “In describing your substitute legislation sent to state lawmakers who are backing rate regulation legislation, you claim that you go above and beyond federal law with a requirement that insurers seek an “independent” actuarial review of rate increases. Yet you would allow the insurers to choose and hire the actuaries. Such reviewers would be economic vassals of the insurers—the opposite of independent.
  • “Hiring costly private actuaries to review every rate filing would, in itself, become an “underlying cost driver.” With rate regulation, insurance regulators can identify rates that require additional review and use in-house staff for most examinations.
  • “Under your proposal, state regulators could not examine a rate increase unless it was declared “unreasonable” under federal law, a term not yet defined by federal regulators, or an undefined “outlier.” There is no mechanism for rejecting even excessive rates. …
  • “You note that you would require insurers to make public more information about their rates. Yet under your proposal, insurers would have substantial control over the information that they make public because you would allow them to withhold any information that they consider competitive or proprietary, subject only to the approval of the director of the DMHC, who is your appointee.
  • “[Y]our legislative proposal does not allow regulators to take any action to block or withdraw rates found to be both unreasonable and unjustified, or even inaccurate. The findings may only be posted on a website.

“From the language of your legislative proposal:

"Section 1358.03 (b)
"If the department finds that any rates that are considered unreasonable are not justified, or the rate filing contains inaccurate information, the department shall post its findings on its Internet Website.
(emphasis added)
“Nothwithstanding the more than $1.3 million in political contributions from the health insurance industry that you have received, you have shown the capacity to do what is in California’s best interests despite your political allegiances.”
Consumer Watchdog asked that Schwarzenegger agree to sign a measure that lets regulators review health insurance rates before they go into effect, and stop or modify rates that are unjustified. The most recent bill, AB2578, by Assemblymembers Dave Jones and Mike Feuer, is awaiting final state Senate votes.
 “Instead of doing what the insurance industry wants, the governor should embrace regulation that would reduce health insurance rates while keeping the industry healthy and competitive,” said Dugan. “Schwarzenegger has only months left as governor, and should leave office doing what’s right for Californians, not what’s right for insurance lobbyists.”

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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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