The battle over health insurance dollars in California came to a head last year when Anthem Blue Cross announced in March that it planned to raise premium rates by an average of 25% and by as much as 39%. Anthem Blue Cross eventually trimmed those numbers down to an average of about 14%, with some increases reaching as much as 20%.
A similar storm of consumer outrage and bad publicity greeted Blue Shield of California's recent announcement that it wanted to pursue a series of successive premium increases averaging 30% to 35%, with some as high as 59%.
Consumer pressure from those events has been pushing state officials to take action to curb health insurance rate increases and to make sure payment of medical claims isn't superseded by insurer profit.
Rate hikes and what the government is going to do about them are the focus of two new efforts in Sacramento. The first is an emergency request by California's new insurance commissioner, Dave Jones, to allow the state agency to enforce the new federal law that requires at least 80% of consumers' premiums be spent on medical claims.
The second front is a bill recently introduced in the Assembly to allow the Department of Insurance to regulate health insurance rate increases.
Both measures increase the enforcement power of the department and the scope of authority of the insurance commissioner.
Insurers, some of whom contend the efforts may be more punitive than substantive, say that giving the commissioner more power is the wrong direction if the real goal is to reduce health care costs.
Root of Regulation
DOI, thanks to passage of Proposition 103 in 1988, regulates automobile, property and casualty insurance rates. It also reviews rate increases for health insurance. Although the agency has the power to regulate cost increases in other forms of insurance, it does not have power to regulate health insurance increases.
The regulatory picture is made a little more confusing in California because oversight of the health insurance industry is divided between two agencies -- DOI and the Department of Managed Health Care.
From the 1940s to the 1960s, the insurance commissioner and the attorney general shared oversight of the health insurance industry in California. In 1975, the Knox-Keene Act shifted shared responsibility away from the attorney general's office and jurisdiction became a partnership between DOI and the Department of Corporations. Now, jurisdiction is divided between the DOI and the DMHC. In general terms, DMHC regulates HMOs and DOI regulates PPOs.
"California is the only state in the nation to split health insurance and indemnity insurance," according to Janice Rocco, deputy commissioner of health policy for the DOI.
If the commissioner gets his request approved to enforce the new federal 80% medical loss ratio rule, that would not be far from what the agency already does, Rocco said.
"Historically the department has reviewed for 70% medical loss ratio in the individual market," she said. "Now that federal law meets 80% for the individual, small group market, we feel it's important to enforce federal standards."
The Emergency Move
Part of the reason Jones wants that enforcement power, Rocco said, is to make sure state law meshes with federal rules. And there is another critical reason, she said: One of the possible outcomes of the Republican effort to repeal national health care reform is to take away funding for enforcement of the law. The idea is, if you don't like the 80% medical loss ratio rule, then you can effectively thwart it by taking away the federal government's enforcement capability.
That is, unless the states can provide their own enforcement of the federal law.
"Understand, insurers are still required to file with the federal government," Rocco said. "And we're just saying you have to continue to meet federal requirements. "The enforcement wouldn't require additional manpower, she said, because the DOI is already tasked with reviewing insurers. Jones filed an emergency request with the Office of Administrative Law, which is expected to rule on it within a couple of weeks.
"We've had a 70% ratio in the past, so this just makes sense," Rocco said. "This will ensure that, in California, 80 cents out of every premium dollar is being spent on health care. And 80% rather than 70%, that's a significant amount of money we're talking about."
According to Anne Eowan, vice president of government affairs for the Association of California Life and Health Insurance Companies, the request by Jones may or may not be problematic, and the association is currently reviewing it to see if there might be unintended consequences created by the plan.
"Our review of the regulations will be on the basis of whether there truly is an emergency to enact the regulations," Eowan said, "and whether the regulations are inconsistent with the federal medical loss ratio market rules."
In general, she said, the member insurance companies in her organization work hard to comply with myriad state and federal measures.
In this case, she said, "If different rules would apply only to the small number of [DOI]-regulated health insurers, there could be potentially serious market disruptions and impacts on insureds that should be considered."
The Legislative Move
At the beginning of the current legislative session, AB 52 by Mike Feuer (D-Los Angeles) was introduced in the Assembly to give the DOI the power to regulate health insurance rate increases.
AB 52 is essentially the same bill as last session's AB 2578, which was authored by former Assembly member Dave Jones before he was elected insurance commissioner. The new bill, AB 52, is still in draft form -- what's called intent language -- and the details may end up being a little different from AB 2578, so that it might garner more support. AB 2578 came up just a couple of votes short of passing the Legislature, in the last hour of the last day of session.
This time around, Feuer said, with a number of high rate increases in the news, it's much more likely to pass. "We want to address the concerns of those who had any problems with it last year," Feuer said.
Rocco pointed out one political point in the new bill's favor. "This year, it may go all the way to the governor's desk," Rocco said. "And," she added, "we now have a new governor."
Insurers Say Costs Are Key
Patrick Johnston, president and CEO of the California Association of Health Plans, said all this attention on rate increases misses the point -- that medical care costs across the board are escalating.
"The insurance plans just negotiate rates with doctors and hospitals and pharmaceutical companies and other medical service providers, and those costs keep rising," Johnston said. "Really, if it is the high cost of medical treatment that forms 87% of the premium dollar, it'd be better to drive down those treatment costs."
Besides, Johnston said, California already passed a rate regulation bill last session -- SB 1163 by Mark Leno (D-San Francisco) -- that requires health plans and insurers to provide much more information on any premium increases, and orders regulators to post that information on a website.
"Legislation that distracts from the big tasks of implementing last year's new laws, including rate review and the [California Health Benefit] Exchange, does not serve the consumers," Johnston said. "And it tends to perpetuate the false claim that prior approval rate regulation will drive down medical treatment costs."
One of the real problems, he said, is the increase in diagnostic tests. For instance, he said, "there has been a fivefold increase in CT scans in emergency rooms in the past five years."
It may be easier and politically expedient to focus on the rate increases by health insurers -- but like most things in health care, it's more complicated than that, Johnston said.
"Regulating insurance rates fails to focus on the increasing charges by hospitals, doctors, the price of drugs and frequency of diagnostic testing. Those four things are causes of increases in the cost of medicine. And yet the political debate focuses solely on the premium rates, and ignores these component cost drivers."
If legislators focus solely on health premium rates, Johnston said, that could spell trouble for patients in California.
"One potential unintended consequence is that, when rate suppression occurs, providers stop offering coverage in a particular market," Johnston said. "And over time, there's less competition. Less competition is what happens in many East Coast states, and their rates are higher."
Rocco is not buying that argument.
"Look, you're talking about rate increases of 39%, 57% -- in one year," Rocco said. "The federal consumer price index has been 4% per year, for years," she said. "That's a huge disparity."
The language of AB 52 is still being worked out. The bill is expected to go to Assembly committee in March.
A ruling from the Office of Administrative Law on whether to allow state enforcement of federal law through DOI is expected by the end of January.