Los Angeles Times

Over the next few weeks, as the healthcare debate heats up in Sacramento and passions start to boil over, expect to hear one four-letter word uttered an awful lot: cost.

Actually, make that cost containment.

The Santa Monica-based Foundation for Taxpayer and Consumer Rights is bent on bringing loads of attention to the issue. And this is not a group that anybody should take lightly — particularly when it has a compelling case to make.

The foundation’s founder, Harvey Rosenfield, was the author of Proposition 103, the 1988 ballot measure that imposed strict regulations on auto, home and other property and casualty insurers, requiring them to justify and obtain state approval for any proposed rate increases.

Now, the foundation is determined to force health insurance companies to take similar steps every time they want to boost premiums. This will be especially crucial if, as Gov. Arnold Schwarzenegger has proposed, all Californians are mandated to purchase medical coverage.

“We see this as the Proposition 103 for healthcare,” says Jamie Court, president of the foundation, which has been quietly drafting an initiative that it aims to place on the February 2008 ballot.

Included in the proposal is a call to cut rates by at least 20% from where they stood on Feb. 5, 2007 — a rollback that mirrors the one passed as part of the landmark initiative 19 years ago. It would also grant all Californians access to the same menu of health-insurance options offered to state employees and politicians.

Court had hoped to avoid a costly ballot campaign and instead have a rate-regulation regime written into the governor’s healthcare reform plan or, failing that, win the backing of Democratic leaders. But hardly anybody — save for Assemblyman Dave Jones (D-Sacramento), who has introduced a bill that would tackle this area — has been willing to engage. For many in the Legislature, the insurance industry is simply too fearsome and deep-pocketed to take on.

At the core of the matter is how much the natural workings of the marketplace can be relied on to keep prices in check assuming that 6.5 million Californians now without health coverage are required to buy it. The governor’s office believes that by pumping billions of dollars into subsidies to help the working poor obtain insurance and by bolstering Medi-Cal, it would spur new efficiencies and relieve cost pressures throughout the system.

“You have to have confidence in a market to do that,” John Ramey, a Schwarzenegger health aide, told a Senate hearing last month.

But it’s hard to muster that kind of faith given the insurance industry’s reckless pursuit of profits. As The Times’ Lisa Girion has detailed in story after story, California’s largest insurers have routinely canceled individual health coverage after policyholders have fallen ill.

Last week, the state’s Department of Managed Health Care fined Blue Cross of California $1 million for such conduct. That’s a pittance considering that Blue Cross‘ parent, WellPoint Inc., earned more than $3 billion last year, but it was a telling rebuke nonetheless. Blue Cross has disputed the state’s findings. Meanwhile, the department has vowed to open investigations into the practices of Kaiser Permanente, Blue Shield of California, Health Net Inc. and PacifiCare Health Systems Inc.

To his credit, the governor has proposed that health insurers provide coverage to people regardless of preexisting conditions. He’d also limit the amount they could charge based on age and health status, as well as require that 85% of premiums go toward patient care (as opposed to marketing and administration).

But given the industry’s behavior, it’s clear that even more vigorous regulatory oversight is needed. “These companies are all for universal health insurance,” Court says, “as long as there are no limits as to what they can charge.”

Court’s scheme wouldn’t stick a hard cap on premiums. But it would oblige medical insurers to enter a public forum and make a cogent argument every time they wanted to raise them.

In the last four years, Court’s foundation has successfully challenged 21 planned premium hikes in the homeowners, earthquake, medical malpractice and automotive insurance markets, saving consumers more than $800 million. Others have also intervened and fought off increases.

Court says he may still tinker with the proposed 20% rollback in favor of a more flexible formula for curtailing “excessive” rates. (Insurers bitterly contested the rebate provision, tying it up in litigation for years, the last time around.)

Either way, as the effort moves forward, you can be certain that the industry will predict a flood of losses and layoffs, as well as an exodus of health plans from the state.

Yet Proposition 103 was supposed to unleash these same dire scenarios — and they never materialized, according to a study by economists Dwight Jaffee of UC Berkeley and Thomas Russell of Santa Clara University. “Good regulation,” they concluded, “is not an oxymoron.”

Russell notes that auto insurers, when faced with the 20% rollback, suddenly found all kinds of fat to trim, helping them to maintain their profitability. “It was like a cold bath” that woke them up, he says.

Some analysts caution that the auto insurance market was poised for rate reductions because of a host of factors that had nothing to do with Proposition 103, whereas medical costs continue to rise at a much faster clip than overall inflation. “The underlying trends are very different,” says Neeraj Sood, a Rand Corp. economist.

Other experts say it would make better sense to create a less restrictive setup in which the government serves as a referee, nudging companies to keep rates under control, rather than acting as a final judge.

But Court is confident that, even in the face of such concerns and what is sure to be heavy flak from the industry, he can field a winner. He anticipates tapping into the public’s growing anxiety over having to pay more for their medical insurance and their anger over the revoking of coverage based on often-secret inquiries by the health plans.

The biggest trick, Court says, is going to be qualifying for the ballot. His team will need to raise up to $1 million and then collect more than 600,000 signatures over the summer. (His organization is bankrolled by legal fees, individual donations and the support of other foundations, but funding for any ballot proposition must go through a separate political committee.)

Chris Ohman, president of the California Assn. of Health Plans, says that any attempt to implement rate regulation in what he describes as an “amazingly competitive” industry “really misses the boat.” Instead, he says, the focus should be on improving affordability by promoting cost-effective treatments, eliminating inefficiencies and encouraging healthy lifestyles.

Ohman also rejects the idea that insurers warrant heavy regulation in light of their dumping of policyholders, painting that as an uncommon occurrence that is being adequately addressed by the state.

“Why do we need to turn the entire industry upside down?” he asks.

My guess is that, come next February, he’s not going to like the way voters answer that one.
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Rick Wartzman is an Irvine senior fellow at the New America Foundation. He is reachable at [email protected].