Health Insurance Crisis

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jump in individual policy rates that Anthem Blue Cross had planned effective March 1 (the rate increase has since been withdrawn) are providing impetus to AB 2578 after a nearly identical bill stalled in 2009.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

The enactment of the Patient Protection and Affordable Care Act requiring all Americans to have medical insurance in 2014 follows in the footsteps of nations like Germany and Switzerland that opted not to put in place socialized health care systems like those of Britain and France or Canada’s single payer system where the government pays all medical bills.  Germany and Switzerland mandate all citizens have coverage.  But it’s no bonanza for medical insurers.  They fiercely compete for mere survival and not to earn profits.  If they don’t efficiently administer claims and keep providers and government regulators satisfied, they could find themselves out of business.  For profit U.S. medical insurers could find themselves in a similar market environment within a decade.

Indications of tighter regulation of medical insurance premiums — and ultimately insurer profits — are already emerging in the nation’s most populous state.  Last week, a California state Assembly committee approved legislation that would regulate health insurers like their counterparts in the state that sell property/casualty insurance.  Those insurers cannot use premium plans until regulators first approve them.

AB 2578 would similarly subject premiums, co-payments, and deductibles of both indemnity health insurers and managed care plans to this prior approval regulatory scheme.  If policyholders or plan members would pay seven percent or more above those currently in effect, it would trigger a provision allowing consumer and public interest groups to protest the filing through a public utility commission style hearing.

Nonprofit health insurers already operate in California, most prominently Blue Shield of California.  A de facto shift of medical insurance to a nonprofit business could give Blue Shield a leg up, although it would be under increased pressure to hold down adminstrative overhead.  (Notably, Blue Shield supported California reform legislation proposed by Gov. Arnold Schwarzenegger in 2007 including a requirement that all state residents have some form of medical coverage.  For profit insurer Anthem Blue Cross opposed the bill).

All payers — whether they are in business to make a profit or not — complain they are increasingly squeezed by raging medical treatment cost inflation.  According to Anthem Blue Cross, those out of control costs forced it to sharply raise premiums for its individual insurance products by as much as 39 percent, sparking outrage and giving a political boost to AB 2578.  A similar bill went nowhere in 2009.