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jump in individual policy rates that Anthem Blue Cross had planned effective March 1 (the rate increase has since been withdrawn) are providing impetus to AB 2578 after a nearly identical bill stalled in 2009.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

High risk health insurance pools to cover Americans with pre-existing medical conditions who fall short of medical underwriting standards of individual market insurers and managed care plans must be in place within 90 days of the March 23 enactment of the Patient Protection and Affordability Act.  That mandate was put in place by H.R. 3590, Subtitle B, Section 1101.

Going forward, several aspects bear watching.  Among them is how states — the majority of which already have high risk pools in place — implement the pool in their jurisdictions and conform their existing high risk pools to the new federal requirements.

In the interim before the high risk pool mechanism ends Jan. 1, 2014 and health insurance purchasing exchanges that must accept all applicants regardless of pre-existing medical conditions start up, a key question will be the number of people who actually sign up for high risk coverage.  The number in large part will be driven by the size of the premiums.

California’s high risk pool, the Managed Risk Medical Insurance Program (MRMIP), is required by statute to set premiums 125 to 137 percent of standard market rates and has an annual coverage cap of $75,000 and a lifetime limit of $750,000.  Currently the program covers just 7,100 Californians — a tiny fraction of the 1 million potentially medically uninsured Golden State residents projected by Harbage Consulting in 2008.

MRMIP has been limited on the supply side by enrollment caps due to limited funding and on the demand side by relatively high premiums.  HR 3590 requires premiums to be established at a “standard rate for a standard population” that can vary based upon age, an important factor considering a large segment of medically uninsurable are between 50 and 64 years old.  For the oldest members of the pool, premiums are limited to four times those charged the youngest members of the pool.

Standard rates however are on an upward trajectory as evidenced by a sharp increase being implemented for indemnity-based policies by California’s dominant player Anthem Blue Cross.  Those rates if ultimately approved by the California Department of Insurance would be as high as those previously charged those in the MRMIP pool.  For many, they would likely prove unaffordable.  Particularly in a tepid economy that some economists predict won’t fully recover until the high risk pools are slated to end in 2014.

The upshot is HR 3590′s temporary high risk pool may not make much of a dent in the number of medically uninsured not covered through employment-based insurance or government insurance programs.