California may get jump on feds with prior approval of health insurance rates

California and federal policymakers are on convergent paths when it comes to regulation of premium rates charged by health plans and insurers.  The California state Assembly this week approved and sent to the upper house legislation that would subject managed care service plans overseen by the Department of Managed Health Care and indemnity insurance policies regulated by the Department of Insurance to a prior approval rate regulation scheme.  Such as scheme has been in place in California since 1989 for property/casualty insurers after voters approved a ballot measure instituting it.  Helping push the ballot measure over the top by the slimmest margin of voter approval was anger over rising auto insurance rates.

Similarly, increasing health insurance premiums and particularly a big jump in individual policy rates that Anthem Blue Cross had planned effective March 1 (the rate increase has since been withdrawn) are providing impetus to AB 2578 after a nearly identical bill stalled in 2009.

The Patient Protection and Affordability Act (H.R. 3590) also authorizes a prior approval rate regulation scheme.  Section 1311(e)(2) of Part II the Act (Premium Considerations) requires “justification for any premium increase prior to implementation of the increase.”  That provision would take effect Jan. 1, 2014 as part of the Act’s requirement that states establish American Health Benefit Exchanges — mandatory on line markets through which individuals and small employers (and by 2017, anyone) can compare and shop for health plans.

AB 2578 is likely to end up on Gov. Arnold Schwarzenegger’s desk by September.  A rational policy argument could be made that a prior approval scheme makes far better sense for an oligopolistic health insurance market than the much more competitive property/casualty insurance markets.  But Schwarzenegger isn’t likely to sign the bill into law.  The lame duck Republican governor doesn’t tend to favor market regulation generally and has voiced concern about the “fragility” of California’s individual health insurance market segment — a segment dominated by just five major players.  Since rapidly rising medical treatment costs limit their ability to compete on price, they primarily compete on risk selection by limiting coverage to healthier individuals and pass through increased medical costs via rate increases.  Schwarzenegger’s veto message will likely assert AB 2578 is not needed given the prior approval scheme contained in H.R. 3590.

If veteran Democratic Governor Jerry Brown is elected governor in November, however, legislation similar to AB 2578 will likely reappear in 2011 and potentially get signed into law effective Jan. 1, 2012.  That would give California a two year head start on the feds and provide federal regulators drafting regulations to implement H.R. 3590’s prior rate approval scheme real world experience on how such a scheme actually plays out in the nation’s largest health insurance market.


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email or call 530-295-1473. 

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Frederick Pilot

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