Think Tank

Timing Right for State To Align Health Insurance Oversight Under One Roof?

California is the only state with two agencies keeping tabs on the health

insurance industry.

The Department of Insurance regulates traditional indemnity health policies and some preferred provider plans. The Department of Managed Health Care, created in 2000 to oversee the Knox-Keene Health Care Service Plan Act of 1975, regulates health maintenance organizations and some PPOs.

Four years ago, as California prepared for changes the Affordable Care Act would bring, policymakers and state health officials briefly considered the possibility that the timing might be right to align the oversight of health insurance under one roof.

The idea didn’t go anywhere then but it resurfaced this summer with the publication of a report from the Health Insurance Alignment Project suggesting the time might be right now. The report by the Kelch Policy Group was commissioned by the California HealthCare Foundation, which publishes California Healthline.

The report concludes:

” … an unmistakable final finding of the Alignment Project is that the ACA presents policymakers with an unprecedented opportunity, and potentially some less disruptive options than in past years, to empower and hold accountable a single regulator with the clear mandate to put consumer protection at the center of health insurance regulation in California.”

We asked legislators, regulators, consumer advocates, health care experts and stakeholders:

Should California align health insurance oversight under one agency? If so, how and when should it happen?

We received responses from:

More Difficult Question: Which Agency?

The Affordable Care Act significantly limited the types of insurance policies that can be sold in the individual market both inside and outside of health benefit exchanges. As a result, it has also brought renewed attention to the unique system of health insurance regulatory authority we have in California.

Every other state regulates health insurance through the department of insurance (or equivalent), whereas our state divides this authority between the California Department of Insurance and the Department of Managed Health Care. The history of our bifurcated regulatory authority dates back to the late 1960s and early 1970s, and the controversies surrounding early efforts by the state to contract with prepaid health plans to provide care to Medi-Cal beneficiaries. These difficulties led to enactment of the Knox-Keene Act in 1975, which placed the regulatory authority for HMOs in the Department of Corporations rather than in CDI.

Why create this separation of authority in the first place? According to a 2001 CHCF report, a major reason is that CDI at the time was viewed as too aligned with health insurers rather than consumers. In 1999, the Legislature passed further managed care reforms and established DMHC as a separate agency to oversee these reforms and to regulate Knox-Keene licensees.

Given this history, has the time come to put authority over all health insurers back into a single agency? Obviously, achieving greater administrative efficiency is a powerful argument in favor. But the more difficult question is, if only one agency should regulate health insurers, which one should it be? And, do the historical reasons for maintaining separate agencies still apply? The simple answer to the latter question is no; California has had a series of insurance commissioners who have demonstrated their willingness to take on industry interests and to fight for consumer interests, including the current commissioner. But bringing all health insurance regulation back into CDI risks diluting the success of DMHC as a separate, distinct agency protecting the rights of Californians enrolled in managed care.

On the other hand, moving all regulatory authority into DMHC eliminates the unique role the Insurance Commissioner can play as an elected, rather than appointed, official. On balance, a single agency exclusively focused on health insurance regulation seems the best option, because of both the size of the market and the unique nature of health insurance compared to most other forms of insurance. This argues for DMHC being the sole agency. Perhaps the Legislature should also consider making the head of an expanded (and renamed) DMHC an elected official to assure the public that the head of such a combined agency will continue to be sufficiently responsive to consumer interests. Otherwise, simply combining all health insurance regulation in a single agency will seem like a gain in administrative efficiency at the expense of a lost, independent voice on behalf of consumer interests.

Time To Align Oversight Under DMHC

California is a national leader in providing coordinated, high-value health care with strong consumer protections. The state’s leadership has resulted in a robust marketplace of managed care business. It began with a regulatory structure enacted 40 years ago to regulate managed care plans such as Kaiser and Blue Shield, known as the Knox-Keene Act.

At that time, the health coverage landscape was dominated by traditional indemnity coverage with little to no coordinated care or consumer protections. By 1999, the Legislature recognized that managed care plans dominated the health coverage market in California and created a new, standalone state department — the Department of Managed Health Care — to enforce the Knox-Keene Act.  

In the early 2000s, the state mounted a significant bipartisan effort to expand access to health care and improve quality of care through a comprehensive state health care reform effort. That effort fell short legislatively, but it resulted in the creation of an invaluable network of reform-minded officeholders, administrators and advocates who were thoroughly familiar with Knox-Keene, now the primary regulatory scheme in California. Having been through the effort to enact a state law embracing universal health care, they were primed and educated to implement federal health care reform when the Affordable Care Act was enacted in 2010. 

Today the DMHC regulates the vast majority of the California health coverage market. With the national adoption under the ACA of a model similar to Knox-Keene, the DMHC now protects the health care rights of more than 26 million enrollees and regulates the largest portion of enrollment in all three commercial markets (91% of the large-group market, 82% of the individual market and 77% of the small-group market).

California’s legacy of two health care regulators can be explained historically, but it makes no sense to health care consumers, who often struggle to track down who in state government they need to contact if they encounter a problem with their coverage. With the national shift to a managed health care delivery model, and the dwindling number of individuals covered under legacy indemnity policies, I believe it is now time for the state to reassess our unduly complex health care regulatory scheme and move to one managed care regulator under the DMHC.

DMHC Already Handles Most, Should Handle All

Fifteen years ago, former Gov. Gray Davis (D) and the Legislature enacted far-reaching legislation on a bipartisan basis to create a new state Department of Managed Health Care whose sole purpose was to protect health insurance consumers and regulate health care service plans through a comprehensive and cohesive set of statutes.

I was honored to be named the founding director of that department. Then, as now, the DMHC was responsible for health insurance oversight on behalf of the vast majority of health insurance consumers covered by state-regulated health insurance offerings. Then, as now, we have a one-of-a-kind patchwork of insurance regulatory authority that allows health insurance companies that offer non-HMO products to “shop” for a health insurance regulator (either the DMHC or the California Department of Insurance) that they believe will provide the best advantages for their particular health insurance business model or practices. 

The Legislature and administrations have contemplated changes to this regulatory framework over the years but have not taken on this issue at least in part because it would be playing Game of Thrones between two elected officials — the governor and the insurance commissioner. 

Then along comes the Affordable Care Act, which created a more level playing field among health insurers through the creation of “essential health benefits.” In my view, this replaced much of the benefit of “shopping” between regulators for the best way to avoid costs with a goal of how to best manage costs. As a result, health insurance companies have made the sound business decision to consolidate their health insurance lives to a very large extent with the regulator that already had most of their business: the DMHC.  

While I have very much appreciated the leadership and expertise of the hard-working individuals in the CDI, the DMHC’s sole focus is health insurance and making sure that consumers receive the benefits they are entitled to. It is a structure that allows the financial oversight and consumer services reviews to take place consistently across all the health insurance company’s lines of business, including Medi-Cal and Covered California. Medi-Cal is California’s Medicaid program.

While one can argue that the private market has done on its own what various Legislatures and governors have not by establishing a de-facto single regulator of California health insurance, additional legislative action would eliminate the last vestiges of consumer confusion about where to call for health insurance issues and as pointed out in the report, eliminate a lot of extra work trying to figure out and harmonize the differences between how the two departments regulate.  

Current System Is Historic Relic

California’s two-regulator approach to health insurance oversight is a relic of history that complicates state implementation of health reform and monitoring of reform impacts. Two regulators overseeing many of the same companies duplicates resources and creates confusion in the market. It is time for California to look beyond the point-in-time record or approach of either department and move toward one state health insurance regulator.

Health Insurance Oversight in California: Observations on the Post-ACA Environment,” research funded by the California HealthCare Foundation, highlights just a few of the challenges, including:

  • The legal and regulatory intricacies of the two agencies complicated the state’s efforts to implement the ACA through consistent consumer protections and comparable rules across markets;
  • The potential for accountability in health insurance oversight is diluted every time policymakers and consumers struggle to identify who regulates a particular California product and which rules apply; and
  • Given the complexity and potential for confusion, diverse stakeholders often pursue contradictory interpretations and policies between regulators to advance a particular interest, a behind-the-scenes practice often hidden from public view.

These challenges are longstanding. However, ACA reforms and the evolution of California public and private markets raise a fresh set of issues and policy choices. For example:

  • ACA standards, and Covered California’s decision to standardize benefits for consumers, narrowed differences between products overseen by CDI and DMHC.
  • Most Californians in state-regulated plans now get their health coverage through managed care — HMOs, EPOs or PPOs.
  • DMHC now regulates most of California’s commercial insurance market and licenses all of the health plans serving Californians in Medi-Cal. 

The changing market offers a new opportunity for California to adopt a more rational approach without the market disruptions that might have occurred decades ago. Significantly, the Knox-Keene Health Care Service Plan Act of 1975, administered by DMHC, has a broader managed care framework and greater consumer protections than the laws administered by CDI. Legislative efforts to set comparable CDI standards have been inconsistent and unevenly successful as noted in “Ready for Reform: Health Insurance Regulation in California Under the ACA.”

California can build on and strengthen Knox-Keene’s landmark managed care framework by empowering DMHC as the state’s single regulator entirely, or for particular market segments. The June report identifies options for policymakers. Based on decades of independent analysis, research and direct observation, this author believes that California is well past due for one health insurance regulator. 

Consumer Protections Should Be Consistent

If we had to start over, it would make more sense to have one, rather than two, health insurance regulators. But most consumers don’t know or care which regulator their plan is under. Their real question is: Can I, and my family, get the care we need when we need it? And just as important: Is the coverage affordable, both the premiums and the cost sharing?

Since 1995, Health Access has advocated that patient protections apply regardless of which regulator is responsible for a health plan. A partial list of consumer protections that apply to both the Insurance Code and the Knox-Keene Act include independent medical review, mental health parity, the right to a second opinion, network adequacy and timely access standards, and language access.

Unfortunately, not all consumer protections apply to those Californians with coverage regulated under the Insurance Code. Gaps include prohibitions on balance billing for emergency care, medical surveys, and, for those with coverage from a large employer, a standard for benefits. Obamacare has narrowed the gap: Since Dave Jones (D) became insurance commissioner, his efforts, and the requirements of the Affordable Care Act, have provided consumers with patient protections from standards on network adequacy and timely access to minimum benefit standards for the individual and small employer coverage.

While both Jones and his predecessor John Garamendi (D) have well-founded reputations as consumer advocates, other elected commissioners have not.

DMHC’s predecessor, the Department of Corporations, was legendarily indifferent to consumers. They had a stockholder bill of rights in their lobby but refused to acknowledge patient rights. The Department of Managed Health Care was created from the fight for the HMO Patient Bill of Rights that Health Access helped lead. That fight, culminating in 20 pieces of legislation in 1999, has been followed by both the ACA and many California-specific measures to improve consumer protections, most applying to both regulators.

And the fight is not done yet. This year, there are measures calling for:

  • Accurate provider directories — SB 137, by state Sen. Ed Hernandez(D-West Covina);
  • Prohibition on surprise bills from out-of-network doctors at in-network facilities — AB 533, by Assembly member Rob Bonta (D-Oakland);
  • Caps on out-of-pocket drug costs — AB 339, by Rich Gordon (D-Menlo Park);
  • Limits on deductibles and out of pocket costs — AB 1305, by Bonta; and
  • A requirement that insurance coverage sold to large employers provides at least 60% minimum value — AB 248, by Assembly member Roger Hernandez (D-West Covina).

The real questions are whether consumers are getting the care they need when they need it, and whether premiums and cost sharing are affordable. The work continues to answer that question in the affirmative.