What’s in Proposition 45 — Minus the Hype, Money, Emotion and Controversy

Rate regulation of health insurance has been a tall lightning rod for heated rhetoric and loud controversy each and every time it’s been introduced in the California Legislature.

Bills to authorize rate regulation failed four times in four years in the Legislature. The most recent effort — AB 52, authored by Assembly member Mike Feuer (D-Los Angeles) — died in committee in 2011.

Proponents of health insurance rate regulation took the fight in a different direction, gathering enough signatures to present the issue to voters. The ballot measure, originally expected to be on the 2012 ballot, did not meet certification standards in time and was bumped to this year’s November ballot.

Both sides in the rate regulation battle have emphasized monetary gains to be made by the opposition, and the level of vitriol likely will rise as November nears. The proposition received its ballot number on June 30. Advertising campaigns are expected to hit the airwaves as soon as this month.

A joint Assembly-Senate hearing on the proposition earlier this month generated a few barbed phrases and sharp exchanges but the intent of the hearing was to examine the possibilities as objectively as possible.

“We do not support or oppose any ballot measures,” said Ross Brown, principal fiscal and policy analyst at the Legislative Analyst’s Office who spoke at the hearing. “We’re just here to describe what it would do and its potential fiscal effects.”

The full fiscal analysis from LAO has not been completed. It will be given to the Secretary of State’s office by July 22, Brown said, to be included with ballot measure information.

What Proposition 45 Would Do

Proposition 45 affects the individual and small-group health insurance markets, not employer-based plans. In California, health insurance regulation is bifurcated between the Department of Managed Health Care and the California Department of Insurance. The two agencies review all insurance rate hikes and announce which rates they deem unreasonable — but they can’t do much about it, Brown said.

“The results [of both agencies’ rate reviews] are posted on their websites,” Brown said. “However, DMHC and CDI currently do not have the authority to reject or approve rates before they take effect.”

DMHC oversees large employer-based health insurance and some parts of the individual and small group markets. CDI oversees only small group and individual markets. Rate review of small group and individual policies is split somewhat evenly between the two agencies, Brown said.

The individual and small-group markets cover roughly six million Californians, Brown said, about 16% of the state’s population.

Prop. 45 would give the state insurance commissioner power to reject rate increases but the initiative does not give DMHC the same authority nor does it give the commissioner regulatory authority over large-group rates.

“DMHC would continue to have the authority to review certain rates but the commissioner would have sole authority to approve those rates,” Brown said.

How the Exchange Fits In

Covered California negotiates with health insurance companies to set certain plan characteristics to keep quality and value of plan designs high, including affordability. The exchange offers plans at varying levels of copayments and deductibles, partly with the help of federal subsidies for lower-income enrollees.

Covered California officials are concerned that their negotiating power could be affected by Prop. 45. The board of directors released a 17-page report outlining its concerns last month.

A few highlights from the board’s worry list:

• Plan designs negotiated between Covered California and health insurers, which include premium rates, might be subject to reversal by the insurance commissioner, and that could alter the ability of the exchange to negotiate in good faith with insurers. About 95% of Covered California’s business is under the purview of DMHC regulators, who generally regulate managed care plans, according to exchange officials. They are concerned that DMHC rate review could theoretically be overruled by CDI, effectively changing Covered California agreements after they’ve been negotiated.

• The language in Prop. 45 may open already-negotiated plans up to possible reversal by making the Insurance Commissioner’s rate enforcement power retroactive to Nov. 6, 2012, when the ballot measure was originally planned for a vote. “I think there’s some legal uncertainty about issuing retroactive refunds for certain products that were in effect in prior years,” Brown said. “But it’s possible.”

• Uncertainty arising from possible changes in the market could inhibit Covered California’s second open enrollment effort scheduled to start Nov. 15, less than two weeks after the election.

Cost of the Measure

The fiscal impact of Prop. 45 likely will be clearer on July 22, when the full fiscal analysis by LAO is expected to be released.

Right now, Brown said, the fiscal picture has to be painted with a big brush.

“The most significant fiscal effects of this measure are the impacts on state administrative cost,” Brown said. “And those costs would be paid by fee revenues collected from health insurance companies.”

What is less clear is just how much more work there would be at several agencies, Brown said.

“There would be additional costs for CDI,” he said. Concerns have been raised about that agency’s ability to take on the extra workload if it gains new enforcement power.

Brown said other agencies would have to spend time figuring out how to do things, and might have an increase in staff hours just by dealing with a new and different bureaucratic process.

“It could potentially affect the workload at Covered California or DMHC,” Brown said.

“However, at this point, the likelihood of significant fiscal effects on DMHC or Covered California are unclear.”

At least until July 22.

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