Think Tank

Should State Consolidate Health Plan Regulation? How, When?

As California implements early provisions in the federal health reform law and positions itself for major changes in 2014, an old question is resurfacing: Should California consolidate health insurance regulation in one agency?

California, the only state with two agencies overseeing health insurers, is looking for ways to reduce state spending, and proponents of merging the two agencies say consolidation could save money.

The Department of Managed Health Care oversees health plans — primarily HMOs — that cover more than 21 million state residents. The California Department of Insurance regulates most PPOs and traditional indemnity plans, which cover about 2.4 million Californians.

Although no legislation or formal proposal to combine the departments is in the works, stakeholders have proposed shifting all health insurance regulation to one agency or the other. Last year, during his campaign for office, Insurance Commissioner Dave Jones (D) called for the two departments to better collaborate and possibly merge.

The consolidation debate was brought to the forefront this summer by the release of a new California HealthCare Foundation report examining how the state might best handle health insurance regulation under the Affordable Care Act. CHCF publishes California Healthline.

We asked stakeholders and experts three questions:

  • Should California consolidate health care regulation in one agency?
  • If so, how?
  • When?

The two agencies involved — CDI and DMHC — declined to contribute.

We got responses from:

Put All Oversight in Department of Insurance

California health insurance regulation is the uneven and illogical result of court battles decades ago that split jurisdictions, expensively duplicating regulatory and enforcement work under often differing sets of rules. The dual regulation has plodded along haphazardly without direction or design, leaving large insurers to take advantage of the lack of public accountability at the Department of Managed Care. DMHC is ruled by gubernatorial political appointees, unlike the California Department of Insurance, which is led by an elected insurance commissioner who has a public mandate to protect consumers while ensuring that insurers remain financially stable.

The inefficiency of two agencies overseeing the industry and the widely differing results consumers face leave no doubt that DMHC should be merged into CDI. This view is confirmed by a recent academic white paper from the Institute for Health Law Studies in San Diego. Evidence favoring CDI includes not just its relative efficiency but also its political independence, transparency and legal powers, especially with the advent of federal health reform.

Key points:

  • DMHC is a bureaucracy paralyzed by its political structure. In a review of its achievements over the last decade, DMHC cited as a top victory its ban on rescission of insurance policies after patients became ill. However, DMHC acted only after the media and consumer groups made enough noise to embarrass the governor. In the end, because of the Schwarzenegger administration’s control of the DMHC, even this “victory” favored insurers; only a tiny percentage of the 6,000 patients affected regained insurance. To this day, 10 of the top 11 officials of DMHC are appointees of former Gov. Arnold Schwarzenegger (R) and continue to hew to his anti-consumer policies;
  • CDI has teeth. The elected insurance commissioner has a substantial legal team, expert actuaries to analyze insurance rates and membership in the National Association of Insurance Commissioners, which is writing reams of health care regulations for HHS. DMHC has none of these, and often settles with insurers in ways that let them off the hook cheaply with little exposure of their misdeeds;
  • DMHC is too cozy with insurers. In 2009, DMHC folded to insurers’ pressure to let them reject claims for a well-proven autism therapy, Applied Behavior Analysis, without providing for public input. This private, backdoor making of regulation is not just wrong, it’s illegal. In a recent legislative hearing, DMHC’s political appointees misled lawmakers about a deeply deficient settlement reached with a major insurer on the autism issue. At the same time, CDI heeded independent medical reviewers and told insurers to cover such treatment. In addition, while two insurance commissioners successfully sought health insurance rollbacks over the last two years, DMHC leadership mostly turned a blind eye; and
  • CDI acts aggressively on behalf of consumers while keeping a healthy insurance market. CDI oversight, directed by the reforms of Proposition 103, saved consumers more than $62 billion on auto insurance alone between 1988 and 2006, while creating the nation’s fourth most competitive market for such insurance. When the opportunity arrives to similarly regulate health insurance rates, CDI is unquestionably where consumers will find the experience and expertise they need.

What matters in streamlining health insurance oversight and reducing bureaucratic waste is not whose portfolio is bigger, but which agency has sufficient technical know-how, structural capacity and public accountability.

Framework of ACA Presents Opportunity

Health Access California has supported the idea of a unified regulator for years. It’s not good for consumers to be unsure who they should complain to about their health plan (even if the two regulators work to refer patients to one another). It’s not good for the regulator to only have detailed information about part of the market. It’s never good to have insurers be able to choose their regulator, and go “forum shopping,” based on which has more lenient rules or less aggressive oversight.

That said, there’s a lot in our health system that is indefensible. While there are areas where California has exhibited leadership in consumer protection — independent medical review, timely access, language access, etc. — there are other aspects of our insurance market which resemble the wild, wild West, from denials for pre-existing conditions to “junk” insurance that still leaves people in debt. That’s why there has been a longstanding push for reform in California.

We have a historic opportunity with implementation of the new federal health reform law over the next few months and years. It’s a fair question to ask — whether integrating California’s two health insurance regulators in 2012 and 2013 would assist or distract from the work to implement the Affordable Care Act by 2014. There are some changes that have to happen anyway. Either way, California should have an explicit effort and policy in all the work to get ready for 2014, to align mission, goals, standards, practices, systems, definitions and regulations of the two regulators so that a consolidation is best facilitated.

Politics around the question of which agency should take over — the Department of Managed Health Care or the Department of Insurance — have stymied the significant work to better align the law, process and standards. But we have a new opportunity with the Affordable Care Act.

The framework of ACA helps work toward consolidation that brings the best of both worlds, not the worst. While there are certainly ways consolidation could present problems for consumers, we think it’s worth moving toward. But consolidation isn’t a goal in its own right — it’s a means, along with other aspects of implementing health reform, to the goal of a strong insurance oversight, a vibrant, transparent, accountable and affordable marketplace, and robust consumer protections.

Status Quo Could Compromise Reform Efforts

Maintaining the status quo in California’s approach to state regulation of health coverage could compromise the state’s ability to successfully implement many of the goals of the federal Affordable Care Act, including the landmark reforms of the health insurance market and the federal vision of improved information, decision-making tools and transparency for consumers.

The California HealthCare Foundation report emphasized that many of today’s regulatory disparities exist because the Department of Managed Health Care and the California Department of Insurance continue to administer two very different statutory and regulatory frameworks. The current frameworks evolved over time and echo many unique and historical aspects of California health care markets, finance and delivery.

Despite the origins, this dual structure has for decades contributed to consumer confusion, added to public and private costs, and obscured the state’s efforts to monitor the coverage products being bought and sold in the marketplace.

ACA compels a re-examination of this legacy system. ACA demands greater accountability and transparency than either regulatory system currently provides. The state has an unprecedented opportunity to reshape its regulatory environment because the new federal standards will narrow the legal distinctions that now drive many of the differences between CDI- and DMHC-regulated health coverage.

While there are virtually no defenders of the current bifurcated system, the question is, what should the state do now? No doubt, reforming and improving California’s complex regulatory structures will take serious discussion, analysis and planning among all stakeholders.

One danger is that, rather than focusing on how to ensure consumers can make a seamless transition to a reformed market, time, energy and resources will be squandered in a debate on the relative merits of the two state agencies at this juncture. This would only be a distraction from the significant gaps between the ACA vision and the reality in both state agencies. That focus is also most likely to result in the same political stalemate that has characterized the debate on this issue for decades.

Alternatively, this could be a time for policymakers and stakeholders to collaborate and problem solve; to get creative; to focus on reducing duplication, maximizing transparency, ensuring consumer protection and institutionalizing consistency in our regulatory system, whether in one department or two.

California consumers need a simpler, more user-friendly system of health insurance oversight, accountable for ensuring that their rights and interests are protected regardless of the type of coverage they choose. ACA offers a chance to redesign the system toward that end. History suggests that we cannot be divided as we assume this responsibility, but rather will need to work cooperatively across all sectors to deliver on the true promise of reform.

Consumers Need One-Stop Shop

California’s dual health insurance regulatory system can create confusion for Californians looking to understand their health care coverage rights and responsibilities. Health coverage products that appear similar can offer different benefit levels and consumer cost sharing depending on where they are licensed. These differences should be reduced under the federal Patient Protection and Affordable Care Act, but not entirely eliminated.

There are pros and cons associated with consolidating California’s health insurance within either of the two state departments now regulating health insurance. An elected commissioner leading the Department of Insurance can be a consumer advocate or allegiant to industry, but as an elected official he or she is accountable to the voters. The Department of Managed Health Care is part of the governor’s administration, but its consumer-centric regulatory framework can act as a strong guidepost for oversight.

The highest priority for any regulatory system should be the protection of consumers. Consolidation would help consumers know where to go to seek help on health insurance matters and create efficiencies in the system. As California moves to implement ACA and the requirement that most Californians obtain health insurance, consumers will have more questions and need assistance as they consider their choices.

The political momentum doesn’t appear to exist to tackle consolidation of health insurance regulation as the state focuses on health reform implementation. But in preparation for ACA, California can create a one-stop shop to help consumers navigate a changing health care system.

I have introduced AB 922 to create an independent entity in state government for consumers, including a consumer help line and patient advocate to assist with the registration of consumer complaints and guide consumers to the appropriate agency for follow up. AB 922 will be heard in the Senate Appropriations Committee on Aug. 15.

Accident of History vs. Thoughtful Policy

We Californians value our uniqueness. But one singularly California attribute works to our disadvantage: California is the only state with dual regulators over its health insurance marketplace. The departments of Insurance and Managed Health Care are very different models and each has its own distinct culture, regulatory framework and statutes to enforce.

The downside to this bifurcated regulatory scheme for consumers is obvious. Polls have shown that consumers are confused about all things health insurance and have little notion of what type of coverage they have — PPO, HMO or POS plan — let alone where to seek redress. Rules differ between DOI and DMHC, making it hard for even some consumer advisers to track what standards apply to a given plan.

In addition to the two regulators, the Health and Human Services Agency, the Managed Risk Medical Insurance Board, and the new Health Benefit Exchange each have a role to play and hold data on plan performance and representations. That’s a lot of cooks in the health insurance stew — all with pieces of information about the health insurance marketplace in California, but not the whole picture.

Federal health care reform provides an urgent reason to fix our framework. ACA leaves states with the primary role regarding health insurance, but also calls for more interaction with the federal government, including interpretation of federal statutes and regulations. It calls for clarity for consumers in choosing plans; for clear complaint mechanisms; narrowing product differences; and re-shaping the insurance marketplace to avoid market manipulations. Coordinated care mechanisms, risk adjustment and improved rate review all cry out for unified approaches.

There can be no question that simplifying and streamlining California’s regulatory scheme and statutes would be preferable for consumers and the functioning of our health policy apparatus. But how can this be achieved? Some states, such as Oregon, have a unified “Health Authority” that allows for a better understanding of the health care marketplace and more logical planning. That would be a tall order for California, but worth considering. At the least, closer coordination needs to occur, perhaps with split duties that capitalize on the strengths of each department through memoranda of understanding. This might also require legislative action.

California should stand out in the crowd for its proactive implementation of health reform, not for our oddball regulatory framework that is more an accident of history than a thoughtful policy solution.