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Is Rate Regulation Good for California?

Today’s guest blogger is Micah Weinberg, PhD, Senior Research Fellow at the New America Foundation.

The California legislature is considering AB 52 (Feuer), a bill that would allow state regulators to reject excessive health insurance rate increases. Ultimately, this legislation is about social justice since access to healthcare is a basic human right. Skyrocketing health insurance rates make it difficult or impossible for people to afford coverage that finances access to healthcare.

Will giving rate regulation powers to state officials drive insurance rates down and deliver the relief that individuals and businesses so desperately need?

Fortunately, we have a good deal of data we can bring to bear on this question. Roughly thirty-five states already have some form of prior approval rate regulation. Insurance Commissioner Dave Jones and bill sponsor Assemblymember Mike Feuer (D – Los Angeles) repeatedly stated that the evidence shows that regulators in these states have used it effectively to lower rates. In expressing her conditional support for the bill, Assemblymember Susan Bonilla (D – Concord), emphasized that she was depending heavily on this analysis.

A baseline assessment of the connection between prior approval and health insurance rate increases, however, complicates the claim that this power drives down rates. There is no systematic relationship between these two variables; in fact, seven of the ten states that have had the lowest health insurance rate increases do not have prior approval. This list includes California which is right at the middle of the national pack in terms of our health insurance rates in spite of our very high medical costs and cost of living.

But let’s dig deeper. In the hearing, Commissioner Jones referenced an analysis by the Kaiser Family Foundation. He said that it showed that some states that had this power and used it were able to lower rates. This is absolutely a fair reading. There is a rich trove of media reports and case studies, in this analysis and others by advocacy groups such as Families USA, that show that regulators with this power have used it to reject or lower proposed rate increases.

But when the stakes are as high as they are here, we have to be very careful about generalizing from anecdotes. And the authors of the Kaiser Family Foundation study are themselves very careful about the conclusions they draw. They state: “We found that having approval authority over rates does not necessarily protect consumers from large rate increases … Conversely, some states that had little express statutory authority to disapprove rates prior to their use have been able to get carriers to agree to reductions in rates through informal negotiations.”

An example of one such informal negotiation was provided by Commissioner Jones himself a few months ago when he succeeded in getting California insurers to reduce or rescind a series of planned rate increases. He is to be commended for his forceful and successful advocacy on behalf of California consumers, and his capabilities in this area are being expanded by the implementation of bill passed last year that created an enhanced rate review process.

As for the central issue of whether prior approval is associated with lower rates, the authors of the Kaiser Family Foundation study, “conclude that states with prior approval authority over rates appear to be better positioned to negotiate reductions in rate requests filed by carriers.”

If “appear to be better positioned” sounds like some relatively weak tea, it is.

What this is saying is that when regulators battle insurers over rates, those that have prior approval authority come better equipped to extract more concessions in the fight. What it does not show is that these fights – and one expects that there would be many in California – actually result in lower rates overall for individuals and businesses over time.

Indeed, it would be quite difficult to show this because rate increases have not been lower in states with prior approval. Another concern about this bill, therefore, as my colleague Leif Wellington Haase wrote in yesterday’s San Francisco Chronicle is these fights over insurance rate increases may “distract us from tackling the main driver of healthcare costs: the rising cost of medical care as expressed in higher hospital charges, payments to physicians, and the price of drugs and medical devices.”

Given that expanding the capacities of the Department of Insurance and the Department of Managed Health Care in this way will itself come with a hefty price tag, this bill may not survive the appropriations process in the current fiscal crunch. However, a sole focus on the state budget can be penny wise and pound foolish. The state should absolutely invest in giving this authority to these departments if this power would bring down insurance rates on behalf of consumers. This would pay for itself many times over and promote social justice by enhancing the affordability of coverage that provides access to healthcare. On the other hand, even if resources were limitless, we should not invest in developing a capacity that the evidence shows is ineffective.

In this case, strong arguments can be mustered to support the position that rate regulation will bring down health insurance costs, but an objective review of the evidence is at best inconclusive.

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