Should State Regulate Health Insurance Premiums?

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Twenty-three years ago, California voters decided the state should have more control over the insurance industry. Proposition 103, approved by a thin margin (51%) in 1988, increased the Department of Insurance's clout in a number of areas — most notably automobile insurance — and changed the status of the California insurance commissioner's job from being a governor appointee to an elected officer.

Absent from that ballot initiative two decades ago was health insurance.

Now the Legislature is considering a proposal to give the state more authority over health insurers.  AB 52 by Mike Feuer (D-Los Angeles) allows the state — either the insurance commissioner or the Department of Managed Health Care — to reject health insurance premium rates if they are deemed excessive.

The insurance commissioner can reject premium hikes in other kinds of insurance — such as automobile — but the state does not have that authority over health insurance premiums.


The Assembly passed AB 52 and sent it to the Senate, where it's expected to come to a vote later this month.

As they did 23 years ago, groups are lining up in favor and against the proposal. According to some stakeholders, the arrival of national health care reform makes the issue more complex.

We asked stakeholders what it would mean for Californians if AB 52 is approved in the Senate and signed into law. More than a dozen stakeholders were invited to contribute, including Republican leaders in the state Senate and Assembly and the California Chamber of Commerce.

We got responses from:

  • Dave Jones, California insurance commissioner
  • Patrick Johnston, President & CEO, California Association of Health Plans
  • Mike Feuer, Assembly member (D-Los Angeles), author of AB 52
  • Judy Dugan, Research director, Consumer Watchdog
  • Betsy Imholz, Special projects director, Consumers Union
  • John Arensmeyer, CEO, Small Business Majority
  • Micah Weinberg, Senior research fellow, New America Foundation

Consumers Need More Protection

Dave Jones
California insurance commissioner


To protect consumers, the most important additional California health insurance reform we need is to give the insurance commissioner the authority to reject excessive health insurance rates similar to how we regulate car and homeowners insurance rates.  Most Californians are surprised (and disappointed) to learn that the insurance commissioner does not have the authority to reject excessive health insurance rate hikes. This is a missing piece of federal health care reform.

AB 52, by Assembly member Mike Feuer, would give the Insurance Commissioner the authority to reject excessive health insurance rates.  It recently passed the Assembly and will be heard in the Senate Health Committee later this month. After repeated attempts during my time in the Assembly, it is my hope that this legislation will finally become law.

AB 52 would go a long way toward curbing the double digit health insurance increases hard working Californians continue to see year after year. To put things in perspective, from 1998 to 2008, group health insurance premiums increased on average by 148%. It's no wonder so many of us can't afford to have health insurance and why more than eight million Californians were uninsured last year.

The five largest health insurers in this country made a combined profit of $11.7 billion last year.  That was a 17% increase over the 2009 profit of $9.9 billion and a 51% increase over the $7.8 billion made in 2008. And recently, health insurers started reporting additional increases in profits for the first quarter of 2011. Further, such increases hurt small businesses as some have seen cumulative increases of 50%, 60% and as high as 80%. Skyrocketing increases such as these force businesses and employees to absorb major costs or search for less expensive — and less comprehensive — coverage options.  Small business owners need the stability that this measure provides through ensuring that rates cannot be raised more than once per year.

Proposition 103, which was passed by the voters in 1988, gave the Insurance Commissioner the authority to reject excessive premiums for auto, property and casualty insurance, and brought rate stability while maintaining a vibrant and competitive market. It did not address health insurance.

AB 52 will give me the same power to reject excessive health insurance rate hikes and protect hard-working Californians from what has become an unrelenting barrage of premium increases. 

AB 52 is Misguided Regulation

Patrick Johnston
President & CEO, California Association of Health Plans


The misguided price controls on insurers proposed by AB 52 might sound appealing, but they won't address the underlying pressures driving up premium prices.

The growing cost of delivering care and the needs of patients drive premium increases. The health care system is dealing with unrelenting cost pressures that drive up insurance premiums.  Ironically, one of the most significant cost drivers was created by the government.  Underpayment for government insurance programs, such as Medi-Cal, and the cost of treating the uninsured drive up premiums by as much as $1,792 more per year for each insured California family. Private insurance is charged more to make up for the billions of dollars lost treating the uninsured and patients with government coverage — a shift in costs that places more pressure on premium prices.

Despite rising costs, the state's insurance market remains very competitive. California's insurance premiums are around the national average, even though this is a high cost state. Only three cents out of every $1 in premiums go to insurance profits. The lion's share is spent on health care: 87 cents out of every $1 go to hospitals, doctors, pharmacies and other providers of medical care.

Most insured Californians get coverage through their employers, who can bargain for the best deals. Only a small percentage of insured Californians — about 7% — get their coverage through the individual market, where increases have been greater. But the new federal health care law and new state law will result in new programs that will help more people afford and gain access to coverage.

California is in the midst of developing a key component of the new health care law, the Health Benefit Exchange, which will create an online marketplace for medical insurance for individuals and small businesses. Consumers will be able to compare the prices of similar plans and choose the one that fits their needs and pocketbooks. By offering coverage to a wider group of people, this exchange is expected to expand coverage and affordability.

The new federal health care law also requires 80 to 85 cents out of every $1 in premiums be spent on medical care. Insurers must pay rebates to policyholders if they violate that law. In addition, California has adopted its own law that requires unprecedented accountability for health plans.

We should give these new laws time to work before agreeing to spend up to $30 million more per year for the Department of Managed Health Care and the Department of Insurance to erect vast new bureaucracies to implement AB 52 — especially now that California is slashing funding to schools and other vital programs.

The California Medical Association, California Hospital Association, California Chamber of Commerce and the California Association of Health Plans all oppose AB 52, a bill that does not help relieve our underlying cost pressures and will be problematic for our state.

Rate Regulation Clearly Needed

Mike Feuer
Assembly member (D-Los Angeles), author of AB 52


California officials can reject excessive automobile insurance rate increases. But when health insurance premiums skyrocket, state regulators have much less authority: they cannot reject even a rate increase found to be unreasonable.  

That's why I introduced Assembly Bill 52, which would better protect consumers by empowering state regulators to reject excessive health insurance rate increases. It requires insurers to seek approval from regulators before raising premiums or out-of-pocket costs.

Today, excessive rate increases place health insurance out of reach for millions of families and businesses, increasing the burden on tax payers, dragging down the economy and, most importantly, threatening families' quality of life. 

For months, insurance companies and their allies have worked to stop this bill. They argue that California's recently enacted rate review process — under which insurers must publicly submit to the state detailed data and actuarial analysis of proposed increases — is enough to protect consumers. While rate review is a step in the right direction, the bottom line is that consumers still have no assurance that rates won't be excessive.

A recent example underscores why. Earlier this year, Anthem proposed a major, double-digit rate increase for more than 100,000 consumers. Regulators at California's Department of Managed Health Care reviewed Anthem's rate hike and determined it unreasonable. DMHC officials repeatedly urged Anthem not to impose the increase. But Anthem went forward with its increase anyway, flouting DMHC's decision.

Clearly, rate review alone provides no guarantee that insurers will rescind rate increases that, upon examination, are found excessive.

Without robust rate approval, California consumers and employers will remain at the whim of insurance companies. 

It's clear why insurers don't want AB 52 to succeed. With health insurance premiums rising much more rapidly than health care costs, there is strong evidence that a vigorous rate approval process can result in lower premiums. States from New York to Colorado have begun rejecting unreasonable rate hikes. And a 2010 Kaiser Family Foundation study found that consumers benefit when states have explicit approval authority and sufficient resources.

AB 52 enjoys broad support from small businesses, organized labor, community groups, and consumer advocates because they recognize that the status quo — skyrocketing rates with no power for consumers — is unsustainable. This bill offers a chance to limit rates to what can be justified by the facts.

Anything Else is Window Dressing

Judy Dugan
Research director, Consumer Watchdog


Health insurance premiums nationally increased by 138% in the last decade while medical inflation rose just 31%, according to the Kaiser Family Foundation. The five top insurers reported first-quarter 2011 profits up from a year ago by an average of 16%. Yet during the recession, an additional two million Californians became uninsured, through job loss or unaffordability.

Insurers are making more profits by insuring fewer people. This alone is reason for the state to enact tough rate regulation, including prior approval of rates before they go into effect. But there's more.

California effectively regulates property and casualty insurance rates but not health insurance rates. Health insurance companies try to blame every penny of premium increases on exterior medical costs, but it's a smokescreen. Weak regulation gives insurers no incentive to trim bloated administrative functions, forgo excessive profits and executive pay or moderate their accumulation of excess surplus funds.

The recent history of outrageous rate increases in California — including math errors found in large rate increase requests by Blue Cross and Aetna last year, and the discovery that Blue Shield, technically a not-for-profit, was holding $3.6 billion in reserve funds (12 times the statutory minimum) — rightly fueled consumer anger and mistrust. Regulators could not order insurers to modify those rates and had only partial success in delaying or reducing them through public pressure. It was regulation by the peasants' torches and pitchforks, neither orderly nor permanent.

California's success in holding down auto and homeowner rates since the passage of Proposition 103 in 1988 shows that rate regulation not only saves consumers money, it fosters a healthy competitive market. The law, which regulates auto, homeowners and business insurance, prevents insurers from passing on excessive administrative costs and profits to consumers, and allows consumers to independently challenge rates and be reimbursed for their time.

As a result, California auto insurance premiums rose by 3.8% over 20 years compared to an average national increase of 42.9% through 2008. At the same time, a study by the Consumer Federation of America rates California the fourth most competitive market in the nation.

Assembly member Feuer's AB 52 would similarly oversee health insurance. Regulators would be required to examine rate requests and approve, deny or modify them before they go into effect. Importantly, consumers would have the right to challenge rates independently, and in defined circumstances be paid for their time and expertise. This is a protection against political influence on regulators.

The 2010 federal health reform law explicitly encourages strengthened rate oversight by the states, but none of its provisions would directly regulate rates. In any case, states ought to remain the primary regulators of insurance and California should be in the forefront. Instead, it is in a backwater minority of states that do not examine and approve rates before they go into effect.

For consumers, there is no doubt that strong rate regulation will protect them from the math errors, overestimation of future costs and surplus accumulation that are driving up insurance rates. Rate regulation is not anti-competitive or anti-business. It simply brings law and order to an unruly, ungoverned private product that determines whether we will have health care or not.

Powerful Arrow in Cost Containment Quiver

Betsy Imholz
Special projects director, Consumers Union


Federal law now requires state regulators to determine whether health insurance rate requests are "unreasonable."  But what good is giving state regulators the power to make this determination if they can't do anything to protect consumers?  AB 52, by Assembly member Mike Feuer, would change that, giving the Department of Managed Health Care and Department of Insurance the power to reduce or deny excessive rate requests.

There is no simple solution to reining in ever-rising health care system costs, but prior approval authority embodied in AB 52 is one essential tool. The evidence showing prior approval authority lowers insurance rates keeps rolling in from states that actively use it to scrutinize rate filings:

  • In Colorado, nearly half of the insurers' proposed rate increases were denied or withdrawn because they were not justifiable during the first six months after a prior approval law was passed in July 2008;
  • Over the past year, the Oregon Insurance Division has approved lower-than-requested health insurance rates in half of the cases it reviewed. Rate increase reductions have saved more than $25 million for Oregon consumers and small businesses;
  • New York state re-enacted a prior approval system for health insurance in 2010 finding that consumers were harmed without it.  Since then, the state insurance department has reduced rate requests by up to 16%; and
  • Maine's Bureau of Insurance has reduced average rate requests there for individual market plans every year since 2002.

Importantly, AB 52 gets to the heart of why rates are rising. It requires plans to explain how they are trying to reduce costs and to provide information to help regulators determine whether rate increase requests are truly justified.

Of course, any law is only as good as the implementation by the agencies responsible. The roughly 35 states with prior approval authority operate in different markets with varying degrees of regulator enthusiasm or capacity. In California, we have a new and active gubernatorial administration and insurance commissioner dedicated to ensuring that health reform serves the interests of all Californians. With a prior approval law on the books, California will join other states that have strengthened rate oversight to help stem ever rising health system costs. That's why we urge the Assembly to pass AB 52.

Necessary Component of Health Care Reform

John Arensmeyer
CEO, Small Business Majority


At the end of the month, the California Senate will vote on AB 52 — a bill that would give the state the power to reject any unreasonable health insurance rate increases. This bill balances the need to address exorbitant cost increases and having a competitive health insurance marketplace that serves the needs of California's small businesses and individuals. That's why the state Senate needs to pass this legislation and send it to the governor's desk for approval.

Federal health care reform provides a number of provisions aimed at lowering small businesses' health care costs, including a rate review process. However, if the state determines an increase to be unfair or excessive, under the new health care law it has no power to stop it from going into effect. AB 52 will change this by allowing state officials to stop the increase before it can be realized.

Some have argued that AB 52 will cause insurance companies or health care providers to leave the state. The size of California's market coupled with insurance companies' record profits and the state's pressing health care needs makes this scenario unlikely. Others have raised a legitimate concern that giving state regulators the power to block rate hikes risks politicizing and oversimplifying the complex issue of health care costs. Recent amendments to the bill, which we support, satisfy some of these concerns, including requiring California's insurance regulators to consider whether the proposed increases are actually based on underlying health care costs.

There are many drivers behind rising health care costs and no one approach will stem them; the state needs many tools at its disposal to help contain costs. AB 52, while not a magic bullet for escalating prices, is one of those tools.

California has a strong tradition of being a national leader and state lawmakers must stay true to that role. They can do so by building on the progress federal health care reform has made by enacting this common-sense law that works for everyone.

There Are Better Ways To Reduce Costs

Micah Weinberg
Senior research fellow, New America Foundation


Proponents argue that health insurance rate regulation could result in billions of dollars being given back to consumers.  The key issue here, though, is not the money that could be given back to consumers but the money that is being taken from them.  The spiraling amounts consumers pay are driven not by insurer expenses — which are now fixed by law — but by payments to health care providers such as doctors, hospitals, and drug and device manufacturers.

The right way to get a handle on rising health care costs, therefore, is to pay for value rather than volume and reduce the burden of chronic disease through addressing the social determinants of health.

Would rate regulation help the process of transforming the delivery system to a focus on health outcomes?

One critical piece of evidence is that seven of the 10 states with the lowest rate of health care cost growth do not have rate regulation.  This suggests that other factors, such as the prevalence of managed care, probably play a much more significant role in improving value for medical spending.  Rate regulation has been applied inconsistently, though, and recent anecdotal evidence suggests it may have resulted in lower rate increases in certain states.  Another important set of questions, therefore, deals with the impact that proactive rate regulation would have on innovation both in the private and public sectors.

Many projects throughout the state have begun to deliver lower rates to consumers through new alliances between insurers, doctors and hospitals that are creating "virtually integrated delivery systems."  Uncertainty around rate regulation — an inherently uncertain process — may make it difficult for these new partnerships to get their rates approved in a timely manner.

It is also unclear how rate regulation would impact the new California Health Benefit Exchange that will be negotiating with insurers on behalf of its enrollees.

Finally, there is reason to be somewhat skeptical of the proponents' history as it relates to Prop 103.  In 1988, the same year that Prop. 103 passed, the California Supreme Court issued a ruling that barred "bad faith" punitive damage awards in auto accident cases.  Fewer large settlements resulted in lower rates.  This is not at all to suggest that limiting consumer redress is good, just that the story is rarely as simple as either side makes it seem.

Hopefully legislators will reason through the arguments and evidence pertinent to this specific issue and will make the right decision for the state.

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