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Implementing Rate Review in California: Lessons Learned from Other States

At Wednesday’s CPAC briefing in Sacramento, Dr. Richard Scheffler (Professor of Health Economics and Public Policy at UC Berkeley) reviewed findings from his recent study on rate regulation in two states.

A recent Commonwealth Issue Brief found that family health insurance premiums have risen 29% in California since 2003 (from $10,774/year to $13,819/year). The report also measured affordability, finding that percentage of median household income spent on premiums has raised 46% (from 16% to 23%). The following maps show nationwide increases in premiums from 2003 to 2010.

AB 52 (Feuer) was recently introduced in California to regulate insurance rates. Scheffler and his team studied rate review methods in Minnesota and Massachusetts to measure comparative viability in California. The study identified the impact of rate review regulation and reported approximate costs to conduct rate reviews. Currently, more than half of the states have prior approval authority for health insurance rates.  In October, AB 52 was made into a 2-year bill.

California is a dual regulatory state. The Department of Managed Health Care regulates health care service plans (HMOs and some PPOs) and the California Department of Insurance regulates health insurance carriers. In 2010, California passed Senate Bill 1163, stating that rate increases must be reviewed and certified by an independent actuary and posted on the internet. CDI was granted an emergency request to require 80% MLRs in the individual market, effective January 24, 2011.

AB 52 would give both DMHC and DMI prior approval authority in the individual, small group, and large group markets. It would prohibit DMHC and CDI from approving any rate determined “excessive, inadequate, or unfairly discriminatory.” The California Department of Finance estimated that annual cost to be $27.5M. It would include 181 additional staff and a one-time cost of $30.8M.


In Minnesota, plans in the individual and small group markets must receive prior approval authority to increase rates.  The Minnesota Department of Health contracts with the Department of Commerce to review HMO rate filings. DoC determines whether rates are reasonable in relation to benefits. In addition, medical loss ratios are 72% in the individual market and 82% in the small group market (compared to 80% and 85% mandated by ACA). This process has been taking place for over 15 years and the carriers and DoC have a good working relationship with understood expectations.

DoC spends $81,000/year on rate review. Carriers employ 1 full-time person for approximately 5-6 weeks per year per carrier.


Prior review and disapproval authority was passed in 1976 in Massachusetts but not fully implemented. In 2006, the state passed their health care overhaul. From 2007-2009, they experienced high rate increases and issues an emergency regulation in February 2010. The regulation required carriers to file rate increases 30 days prior to effective date, justify the increases and justify differences in provider reimbursements. By April 1, 2010, 235 of 274 filings were not approved. In June 2010, almost all carriers reached settlements with the Department of Insurance.

In August 2010, Chapter 288 of the Acts of 2010 passed, stating that rates would be presumptively disapproved unless MLRs were at least 88% in 2011 and 90% in 2012 (higher than the ACA mandate), administrative expense increases did not exceed the New England medical CPI and contributions to surplus did not exceed 1.9%. Even if the criteria is met, DoI still has authority to disapprove the rate if it is not reasonable in relation to benefits provided or if the rate increase is based on unreasonable increases in rates paid to providers. The relationship between DOI and carriers is still developing since prior approval authority has only been exercised for 1.5 years.

DOI spends $300,000/year on rate review, included $100,000 for DOI staff and $200,000 for actuarial consultants. Carriers employ 1 full-time person for every 6 months per year per carrier.

Lessons Learned from Minnesota and Massachusetts

Scheffler and his team summarized the following lessons for California from their research:

  • Establish clear and objective rate review criteria that are actuarially-based;
  • Design prior approval legislation to correct market failures; and
  • Employ sufficient staff and consultants with actuarial expertise

They found that the advantages of prior approval authority included potentially reduced premiums (particularly where carriers have market power), more information for regulators and opportunities to improve the market, and increased insurance affordability for individuals and families. Disadvantages included potential for reduced competition if carriers exit the market, ability of carriers to circumvent regulation by reducing quality in difficult-to-measure dimensions, and inability to address premium cost due to technology, market power, and fee-for-service payment system.

California might also consider adopting methods used in other states to perform rate reviews so that it is less costly to the state.

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