Report:

Keeping Insurers Honest

How California Can Stop Unreasonable Health Insurance Premium Hikes
Released by: CALPIRG Education Fund

Executive Summary

Of all the problems affecting California’s health care system, none is more immediate than the skyrocketing premiums consumers face year after year.  Understandably, then, Anthem Blue Cross of California’s recent proposal to hike rates on its customers by up to 39 percent galvanized an angry public.

Anthem had to withdraw that proposal in disgrace when a special audit found that it was based on bad assumptions and mistaken math. But when California’s Department of Insurance commissioned a closer study of their rate proposal, they found that Anthem's proposal was riddled with errors and mistakes.  They double-counted the effect of aging on demand for medical services.  They overstated cost growth rates. And they made other errors, that, when added all together, meant that Anthem was calling for rate increases that were on average 10 percentage points higher than was actuarially justified.

 But egregious as the Anthem example is, it is only the tip of the iceberg.  The plain fact is, consumers got lucky.  It took a perfect storm – a huge rate increase, media outlets primed to jump on health care stories, national attention primed by the fight over federal reform, an outraged public, and an insurer’s sloppy math – to trigger the additional scrutiny that found Anthem’s mistakes and reversed the hikes. And absent flat-out errors like the ones Anthem made, the Department of Insurance has little power to rein in the insurance companies.

Fortunately, our state has an opportunity to learn from this near-disaster and make sure it doesn't happen again.  Legislation pending in Sacramento would protect consumers by empowering regulators to review premium increases before they went into effect.  That means proposals based on bad math or that are otherwise unreasonable could be modified to a fairer level.  The legislation would also open up these rate filings to public scrutiny, allowing consumers to know exactly where their money is going. 

How Reviewing Rate Increases Can Help

A majority of states – at least 30 – have some form of this protection, called “rate review.”  And their experience proves that giving regulators the power to reject proposed premium increases that cannot be justified on the facts helps police insurer behavior and lowers costs. 

Oregon provides an especially important example.  Oregon strengthened its existing rate review process in 2009 to prohibit excessive rate increases, taking aim at unreasonable administrative costs, opening insurers’ rate filings to public scrutiny, and empowering consumers to take part in the process.  And these new measures have worked.  The 25.3% rate hike recently requested by Regence Blue Cross Blue Shield was instead downgraded to a 16% rise, realizing significant savings for consumers.  The new review process also appears to be encouraging insurers to adopt reforms to lower medical costs.

And looking at other states, it is clear that Oregon’s success is not an isolated incident:

* Colorado has seen nearly half of proposed increases lowered since it instituted rate review. 

* Indiana and Maryland have both been able to negotiate lower premiums for consumers in half of all increases.

* Iowa regulators have reduced a third of filed proposals, saving consumers an average of 40% off of their premiums in these cases.

* In New Hampshire, an insurer proposed to flat-out double its rates, but rate review helped bring it down to a 12.5% increase.

* Vermont’s rate review system has allowed it to lower or deny 75% of proposed rate increases.

Taken together, the picture is clear – strong rate review systems have a proven track record of lowering costs for consumers.  

Not only can rate review rein in unreasonable premium increases, it can also be used to help drive quality-increasing, cost-saving innovations through the health system.  For example, Rhode Island law now looks beyond the customary criteria of fiscal soundness and consumer protection, to examine whether insurers are adequately compensating providers and encouraging accessibility, quality and affordability.  The state has used this new leverage to put in place a series of standards that include increased payment for primary care providers, coordinated preventive care, and incentives for the adoption of health information technology.

Rate Review Done Right 

However, not all rate review systems are created equal.  There are certain key policies California should be sure to adopt, in order to ensure the maximum possible protection for consumers, and deliver the greatest possible reductions in health care costs.

* Set a Comprehensive Framework: All premium increases should be reviewed by regulators, and the same rules should apply to all plans.

* Providing Strong Negotiating Authority and Setting Robust Standards: Regulators should have broad authority to reject unreasonable proposals.  If regulators can only reject a rate if it violates particular criteria – for example, if the insurer devotes an insufficient portion of premium income to medical care – this will only invite insurers to attempt to game the system.  And regulators should set standards for administrative costs and adoption of cost-lowering policies to help decide whether a rate increase is justified.

* Require Transparency: Rate filing proposals should be comprehensive and open to the public, with exclusions for “trade secrets” determined by regulators and kept to a minimum, if not eliminated entirely.

* Creating a Role for Consumers: There should be opportunities for consumers to comment on the impact of rising rates and to trigger increased scrutiny of a particular plan.  Consumers should also be allowed to submit comments on particular rate proposals, so that regulators have information on the likely effect of the premium increase.

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