Consumer Federation of California

SACRAMENTO ‘ Saying the healthcare debate here was not sufficiently
focused on curbing insurers’ profits, some lawmakers and consumer
groups are backing a new effort to regulate medical insurance rates the
same way the state controls auto coverage costs.

Gov. Arnold Schwarzenegger has proposed that insurers be
required to spend at least 85% of premiums on actual medical care, as
HMOs in California now must do. But a new proposal by Assemblyman Dave
Jones (D-Sacramento) would go further by requiring insurers to obtain
state approval for annual premium increases above 7%.

"I introduced this measure to make sure affordability is injected into the debate," Jones said at a new conference Wednesday.

Healthcare premiums have grown at four times the rate of wages
and inflation this decade, and many advocates complain the free market
has failed to rein in profits taken by private insurers.

The role of corporate administration and profit in the
escalating premiums is one of the most contentious topics in this
year’s debate.

Many experts say rising costs are primarily due to new technologies and
tests as well as a population that is older and more obese, requiring
greater care. But some for-profit insurers take profits of as much as
10% on every premium dollar.

Aetna Health Plans of California spent 9.8% of premiums on
administration in the fiscal year ending in 2005, according to an
analysis by the California Medical Assn., and kept 11.5% as profit.
Blue Cross of California spent 11% of premiums on administration and
kept 10% as profit, the analysis showed.

Christopher Ohman, CEO of the California Assn. of Health Plans,
called Jones’ measure a "distraction" from bigger problems and said
states with rate regulation, such as Georgia and New York, have
experienced premium increases similar to those in California.

Instead of reducing premiums, Ohman said, the bill would place
"a whole new administrative load on the healthcare premium" because
insurers would have to justify their rates.

Many administrative costs are for projects lauded by advocates of
change. They include putting records in electronic form for greater
efficiency and performing studies on what medical techniques work best.

But insurers also spend large sums on marketing, lush salaries
for top executives and underwriters who help companies weed out
potentially expensive customers.

The Foundation for Taxpayer and Consumer Rights, the Santa
Monica-based advocacy group behind the push for regulated auto
insurance rates in California, reported that insurers’ profits have
grown 170% in the first half of this decade.

The foundation, one of the backers of Jones’ bill, also said that since
2002, four insurers ‘ Blue Cross of California, PacifiCare, Health Net
and Aetna ‘ have sent $3.2 billion of California premiums to their
national parent companies as profit.

Jerry Flanagan, an advocate at the foundation, said that
California’s success in regulating auto rates through Proposition 103
in 1988 showed that such oversight saves money. Between 1989 and 2003,
auto premiums dropped 7% in California while premiums in the rest of
the country increased 47%, he said.

However, a 2004 report by the Rand Corp. said it was inaccurate
to compare the two industries. The report said good-driver discounts,
stronger seat belt laws, strict enforcement of drunk-driving laws and
other changes were responsible for the drop, and that insurer profits
actually have increased since regulation started.

The Rand report was funded by the California Health Care
Foundation, an Oakland nonprofit created as a condition of state
approval for Blue Cross to convert from a nonprofit to a for-profit
organization.

Jones’ bill is endorsed by the Consumer Federation of California,
the California Public Interest Research Group and California Church
Impact. Two Democratic lawmakers with leadership positions on
healthcare, Assemblyman Hector De La Torre of South Gate and Sen.
Sheila Kuehl of Santa Monica, said in interviews that they supported
the idea of regulating insurers.

Del La Torre said healthcare is as essential a service as the
utilities that California regulates. "They deserve the scrutiny we give
to electricity or to water," he said of health insurers.

Kuehl, who has a bill that would abolish private insurers
altogether in favor of a state-run system, agreed that it should be
included in the debate.

None of the major parts of the healthcare sector, such as doctors and hospitals, are backing the proposal.

Dustin Corcoran, the chief lobbyist for the medical association,
said his organization is concerned that regulators could limit funds
that doctors need to provide the best medical care.

"While we are opposed to the legislation, we share the sentiments of the author about insurers’ runaway profits," he said.

The proposal was not included in the plans that the Democratic
leaders of the Senate and Assembly have offered as alternatives to
Schwarzenegger’s proposal. But advocates said all of those plans would
be improved by direct regulation of insurers.

"At least there would be an outside regulatory process that can understand why rates are going up 30% if need be," said Leilani Aguinaldo, a lobbyist for the Consumer Federation.