In November, California voters will decide whether to subject individual and small group health insurance premium rates to prior regulatory approval. California requires property/casualty insurance rates to be approved by the state’s elected insurance commissioner under a ballot initiative approved in 1988, Proposition 103. If voters approve the initiative statute, titled the Insurance Rate Public Justification and Accountability Act (Proposition 45), California would join the majority of states that require prior regulatory approval of health insurance rates before they can be used. Although the November General Election seems a long way off in the middle of summer, it will arrive quickly enough. Accordingly, here are some predictions on what’s likely to happen with Proposition 45:
1) Proposition 45 will be approved by at least a 55 percent yes vote margin. Like rising auto insurance rates in the 1980s that provided impetus to Proposition 103, rapidly rising health insurance rates since the early 2000s have set the stage for voter approval. This time around, the voters are in a far crankier and distrustful mindset following the 2008 economic downturn than they were in 1988, which is likely to result in a larger margin of yes votes than for Proposition 103 that squeaked by with a tiny margin of approval. Demographics will also play a role. Members of the boomer generation who rebelled against rising auto insurance rates in the 1980s are now in their 50s and 60s and pay the highest rates for health coverage under Affordable Care Act provisions that permit health plan issuers to base premium rates on age. Many boomers are also what I’ve dubbed “401 percenters” who earn above the 400 percent federal poverty level eligibility cutoff for income tax credits to defray premiums for plans purchased through the state’s health benefit exchange, Covered California. They must bear the full brunt of higher premiums on their own.
2) Proposition 45 will serve as a de facto 6.9 percent cap on premium increases. Increases of 7 percent or greater would entitle the public to petition the California Department of Insurance to hold a hearing proposed increases to determine if they would result in charges that are excessive, inadequate or unfairly discriminatory. There are a host of consumer groups waiting in the wings that would likely petition for a hearing, particularly since they stand to be compensated if the insurance commissioner determines they have made a substantial contribution to the proceeding including but not limited to Health Access California, the Western Center on Law and Poverty, Consumers Union, the Greenlining Institute and Proposition 45’s proponent, Consumer Watchdog. As long as the underlying health care utilization cost trend stays around 7 percent, health plan issuers will be able to pass along higher costs in premium rates and cost sharing. If the trend exceeds that amount, plan issuers will likely argue that they need higher rates in order to remain solvent and to continue to do business in the state.
3) Because of the uncertainly of intervenor challenges of premium rate increases at or exceeding 7 percent, health plan issuers that want to sell Covered California Qualified Health Plans (QHPs) will negotiate premium increases below that amount. They will do so with two negotiating partners, each with the power to make or break the deal: the exchange as well as the insurance commissioner. Since both Covered California and the elected regulator share an interest in holding down premiums and cost sharing, health plan issuers could find themselves double teamed in a tough negotiating dance. As with now, the dance will begin in early summer once plan issuers have a reasonable amount of data on the prior year’s claim experience and the expected cost trend for the upcoming plan year. The negotiations will culminate in late summer. If they are successful, health plan issuers will make formal 60-day advance filing of rates as required by current California law. If they are not, health plan issuers will have to decide whether they can go without the increase or forgo offering a given plan or plans through the exchange marketplace. That could result in some plan issuers opting to instead offer the proposed plans in the off-exchange market but with the downside of sacrificing access to individuals eligible for advance income tax premium tax credits.
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