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 ofÂ 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.