States Step In to Put a Lid on Health Costs

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As a California state lawmaker, Dave Jones sponsored four bills that would have given insurance regulators authority to reject health-plan rate hikes, as they can in 35 other states. None became law. Now that he’s California’s state insurance commissioner, and running for a second term, Jones wants California voters to grant him that power directly.

He’s urging passage of Proposition 45, a November ballot measure that would let him deny proposed insurance rate increases if his office deems them too high. This power would apply to individual and small-business health-insurance markets, which cover about 6 million Californians. Jones argues that states need the ability to keep a lid on premiums as health providers and insurance companies absorb new Obamacare customers. “There’s nothing in the Affordable Care Act or state law that reins in excessive health insurance and HMO rate hikes,” he says. “It’s really the missing piece” of the law.

It’s not the first time state officials have tried to tame health costs. In the 1970s and ’80s, states including Connecticut, Massachusetts, Maryland, New Jersey, and New York began setting hospital prices, similar to the way governments oversee electric utilities. “States have long been on the front lines of health-care innovation, especially when it comes to cost,” says Ceci Connolly, managing director of the PricewaterhouseCoopers Health Research Institute.

Most hospital price controls were undone in the 1990s, when the health-care industry embraced managed care in an attempt to contain costs. In Maryland the rate-setting commission lived on, and this year the state expanded its authority. In addition to determining how much hospitals can charge for individual services, Maryland regulators will attempt to prevent total hospital spending from growing faster than the state’s economy. Deval Patrick, the Democratic governor of Massachusetts, signed a similar law in 2012. A state commission will audit health-care providers and can require “corrective action” if spending increases too much.

An even more radical experiment is under way in Vermont, where a 2011 law authorized the state to build a single-payer health-care system by 2017. So far, it’s gone nowhere. Governor Peter Shumlin, a Democrat who campaigned on the idea in 2010, has yet to say how the system will be financed.


Share of California’s voters who favor letting the insurance commissioner police price increases

Jones’s proposal in California is mild by comparison. Democratic and Republican voters support the ballot measure, with 69 percent in favor, according to a poll published on Aug. 20 by Field Research. Not so thrilled about it: the insurance industry and health-care providers, which are lining up to fight the measure. A No on Proposition 45 committee has raised $37 million, with 98 percent of its funding coming from three of the state’s largest health plans: Kaiser Permanente, WellPoint (WLP) (also known as Anthem), and Blue Shield of California. The insurers directed questions to Robin Swanson, a spokeswoman for No on Proposition 45. “It gives one politician too much power,” she says. Swanson points out that the California measure goes further than laws in other states in one important way: It would enable third-party consumer groups, including the one pushing the ballot measure, to challenge insurance rates in court.

Such challenges could leave proposed premium increases mired for months in hearings and legal challenges, says Jon Kingsdale, the former head of Massachusetts’ health insurance exchange, who was hired by opponents of Prop 45 to draft a report on its possible consequences. If challenges keep rates from being decided in time for Obamacare’s open-enrollment period each fall, “I can’t even tell you what happens,” Kingsdale says. “There’s absolutely no imagination within the ACA for such a development.”

That’s one reason leaders of Covered California, the state’s Obamacare exchange, have been cool to the idea of expanding Jones’s power. Governor Jerry Brown has not weighed in on the issue. The size of Affordable Care Act subsidies is pegged to the premiums in the marketplace, so even Californians buying policies that have been approved wouldn’t know how much they’d ultimately have to pay until every other plan’s rates have been settled. Obamacare’s political opponents might welcome such a scenario. Kingsdale says: “There are lots and lots of people who want nothing more than to gum up the works.”

The bottom line: If passed in November, a ballot measure in California will give the state authority to reject health-insurance price hikes.

Tozzi is a reporter for Bloomberg Businessweek in New York.


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