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jump in individual policy rates that Anthem Blue Cross had planned effective March 1 (the rate increase has since been withdrawn) are providing impetus to AB 2578 after a nearly identical bill stalled in 2009.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 Patient Protection and Affordability Act was enacted largely in response to a perceived crisis in health care in the U.S. That sense of urgency propelled the reform train forward over objections that the nation’s medical care system would be effectively deprivatized to a greater extent than it was by Medicaid and Medicare more than four decades ago.

But most of the law’s provisions don’t take effect until 2014 and thus don’t provide an immediate solution to what’s seen as an immediate problem. Premium rates in the individual health insurance market — which covers only about five percent of working age Americans but provided much of the impetus for the Act’s enactment — are rising in response to higher underlying medical care costs.

Between now and Jan. 1, 2014 when health insurance purchasing exchanges are set to begin operating with the expectation they will provide increased power to individuals and small businesses to bargain for lower rates, both can expect to see their premiums rise above levels many complain are already unaffordable in a presently busted boom and bust economy.

What this means is health insurance reform isn’t over — because the crisis isn’t over. Expect another round of omnibus reform as the distress in the individual and small business market continues and grows amid concern that the underlying medical cost drivers haven’t been adequately tamed. This will clearly affect the political environment. Policymakers won’t be able to satisfy constituents by telling them to wait until 2014 to see if things get better.