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Rate Regulation: a Powerful Arrow in California’s Cost Containment Quiver

Today’s guest blogger is Betsy Imholz, Special Projects Director of Consumers Union of United States, Inc.

For the first time ever, the California Department of Managed Health Care (DMHC) declared in late April that a health insurer’s rate hike was “unreasonable.” But that won’t keep Anthem Blue Cross from raising its rates. Even though the DMHC and the Department of Insurance now have the authority to determine that rate hikes are excessive, they have no power to stop them from going into effect. As a result, rates will go up an average of sixteen percent on more than 100,000 Californians insured by Anthem Blue Cross.

What good is giving state regulators the power to declare rate increases unreasonable if they can’t do anything to protect consumers?

A bill pending in the Assembly, AB 52 by Assemblyman Mike Feuer would change that by giving our health insurance regulators the authority to deny rate increase proposals found to be excessive. A prior blog post here by Micah Weinberg of the New America Foundation suggests that the evidence is inconclusive about whether “prior approval” is associated with lower rates and that seeking this authority for our regulators distracts from tackling the underlying cost drivers. Consumers Union begs to differ.

There is no silver bullet to reining in ever rising health care system costs, but prior approval authority is one essential tool. The evidence that it lowers insurance rates is rolling in from states that have prior approval authority and that are actively using it to scrutinize rate filings carefully. Colorado enacted prior approval legislation in 2008.   According to the Colorado Consumer Health Initiative,  as a result of the rate reviews that were conducted during the six months after the prior approval law was passed (from July 2008 to January 2009), nearly half of the insurers’ proposed rate increases were denied or withdrawn because they were not justifiable.

Similar findings of lowered rates have emerged in Oregon, a state that has prior approval authority and which strengthened its law in 2010. Over the past year, the Oregon Insurance Division has approved lower-than-requested health insurance rates in half of the cases it reviewed over the past 12 months.  Careful scrutiny of rate filings by the regulator, backed by the threat of disapproval and by active involvement of the consumer community, has meant that rate increase requests have been reduced by approximately 4% on average, saving more than $25 million for Oregon consumers and small businesses.

After a decade without prior approval authority, New York State recently re-enacted a prior approval system for health insurance. A study of that state‚Äôs experience during the period without prior approval authority‚Äîsuch as California currently suffers from– found that lack of such authority harmed consumers.  As a NYS Department of Insurance study concluded, New York’s deregulation of health insurance premiums has resulted in excessive rate increases that force many New Yorkers to pay more for health insurance than they should, and force some to drop coverage altogether. In fact, the study found that without prior approval authority, health insurance profits increased while health insurance became less affordable for small businesses and individuals. In recognition of this, in 2010 New York reinstated the Insurance Superintendent’s authority to approve or disapprove health insurance companies’ proposed rate increases before the rates go into effect.

Perhaps most importantly, the hammer of prior approval authority gives regulators power to probe more thoroughly the underlying causes for rate increase requests in part by forcing insurers to describe what steps they are taking toward cost containment. AB 52 requires plans to explain how they are trying to curb underlying costs, as well as a range of other information designed to tell regulators, their actuaries and the public whether any techniques commonly used in the insurance industry to pad rate increase requests are in operation.

Of course, any law is only as good as the implementation by the agencies responsible. The roughly 35 states with prior approval authority operate in different markets with varying degrees of regulator enthusiasm or capacity. In California, we have a new and active gubernatorial administration and insurance commissioner dedicated to ensuring that health reform serves the interests of consumers and all Californians. With a prior approval law on the books, California would be poised to line up with those states that have used the rate regulation weapon effectively as one of many steps needed to stem ever rising health system costs. That’s why we urge the Assembly to enact AB 52.

For more info on rate review and prior approval see Consumers Union’s Rate Review Toolkit