Consumer Federation of California

While most of us face uncertainty with the rollout of healthcare reform, some insurance companies in California have been feeling their oats lately. Here’s how they’re responding to Insurance Commissioner Dave Jones’ warnings that their latest rate increases are unreasonable: Stuff it, Dave.

That essentially was the response of Blue Shield of California and Anthem Blue Cross after Jones flayed their proposed premium hikes ‘ up to 20% for Blue Shield customers and up to 18% for Anthem. The companies moved to implement the increases anyway, although Anthem thought better of it after it started charging the higher rates, and reduced them a bit. Anthem further said it would start passing on to customers a fee related to the federal Affordable Care Act this year, which Jones considered unlawful since the government fee doesn’t go into effect until next year.

Do you sense a trend? Jones does. "They’re continuing to raise rates with impunity," he told me recently. And he knows the reason: State law doesn’t require his approval before a health insurance premium goes into effect.

Jones has been fighting for prior approval of health insurance premiums for six years, dating to his terms as an assemblyman from Sacramento. About 34 states give government officials such authority, although the extent of the pre-approval power varies and not every state exercises it with the utmost vigor.

In California, the insurance lobby repeatedly killed pre-approval proposals in the Legislature, so the issue will appear as an initiative on the ballot in November 2014. That’s an unconscionably long time to wait for a crucial piece of the health insurance reform jigsaw, but on the plus side, if it passes it will be retroactive to last November. Any rate increase deemed to have been excessive in the interim would have to go back to customers via refunds.

Health insurance is an outlier in terms of the authority of the insurance commissioner, whose power of prior approval over auto and property and casualty insurance has probably saved Californians billions on their insurance bills.

But health insurance was left out of Proposition 103, the 1988 ballot measure that gave the commissioner authority over those other insurance lines. Health insurance wasn’t such a burning issue then, says Jamie Court, president of Consumer Watchdog, which created Proposition 103 chiefly to bring auto rates under control. Court’s group drafted the new measure and got it on the 2014 ballot.

The initiative process will lend itself to a lot of misleading commentary by opponents of the measure. In fact, the process is already well underway. To begin with, the opposition is calling itself "Californians Against Higher Health Care Costs," which is a clever, if typically dishonest, way of describing opposition to a measure designed to reduce healthcare premiums.

The backers of the group include the usual know-nothing and do-nothing types such as the California Chamber of Commerce, abetted by industry front groups trying to suppress patients’ rights to sue for malpractice, and hospital and physician groups afraid that their income will be hacked at by insurance companies trying to meet premium approval standards.

The major funders, however, are five health insurers whose rates would come under the insurance commissioner’s control: Blue Shield, Kaiser, Anthem Blue Cross, Health Net and United Healthcare.

That’s what contributes the comic relief to their effort, for their major talking point is that the initiative has been designed by a "special interest group" to give "ONE POLITICIAN control over our health care." (The capital letters are theirs, not mine.)

Let’s unpack this a bit. What they really mean by a "special interest" is a special interest other than them. Here’s how these five insurance companies have protected their own interests in Sacramento: by political contributions totaling more than $8.6 million over the last four years, and lobbying expenditures totaling $18.7 million in the same period.

One would have to say those interests look pretty "special." As an added dividend, they explain all by themselves why prior approval couldn’t get passed in the state Legislature to save its life.

By the way, that ONE POLITICIAN is Insurance Commissioner Jones, who serves at the pleasure of the voters. Direct political donations from those five insurance companies accepted by his 2010 campaign: zero. No wonder they’re unhappy about placing rate approval in his hands.

The downside of going without prior approval of healthcare rates will become only more glaring as implementation of the Affordable Care Act continues.

The landmark 2010 healthcare reform measure eliminates insurers’ ability to reject any customer for health reasons, limits the difference in rates that can be charged older versus younger customers, and requires that at least 80% of premiums be spent on actual medical services.

But it doesn’t provide for any effective oversight of the basic rates themselves. That’s what makes prior approval "act two in health insurance reform," Court says. Without it, health premiums can burst at almost any seam.

The healthcare reform act does offer a few regulatory tools to constrain rate increases, but they’re relatively toothless. Any premium increases over 10% have to be publicly posted. State insurance officials can judge whether they’re unreasonable and post their conclusions online. Jones has used this bully pulpit to persuade some insurers to pare back proposed increases; indeed, Anthem rolled back its rate increase this year ‘ from 18% to an average 14% ‘ after Jones gave the company hell. But public shaming goes only so far; Blue Shield and Anthem plainly are intent on probing its limits.

The federal healthcare law also allows the insurance exchanges, in which individual and small employers will be able to find coverage after Jan. 1, to exclude insurers shown to have a history of unreasonable increases. But the exchanges also need to have as many firms participating as possible so that competition will keep rates down, so they may not want to wield the exclusion weapon too wildly.

Exclusion "is a blunt instrument at best, and I think the carriers know that," Jones says. "That’s why it’s not operating in any way as a deterrent."

There are no consistent figures on how well prior approval works to hold down costs, in part because there’s no consistency in how it’s applied. New York, which has had the rule for two years, says its insurance regulators cut average rate increases to 7.5% from the requested 12.4%. That will save the 2.4 million New Yorkers covered by the requested increases $500 million this year, or an average of $209 each, Gov. Andrew Cuomo announced in January.

What California insurers say is that prior approval isn’t needed here ‘ the competitive market will hold down rates just fine. "We were opposed to pre-approval in the past because we believed it would be a cumbersome and unnecessary process," says Tom Epstein, a spokesman for Blue Shield.

He says Blue Shield had some specific disagreements with the methodology Jones used to conclude that its rate increase was unreasonable. More generally, he contends that the firm’s proposed increase fairly reflected "the underlying costs of healthcare" in the individual and small-business markets, which were affected by the rate hike. Combine that with competitive pressures keeping rates under control, and "the market gives the best price."

Yet if that’s so, the question is why the opponents of the upcoming ballot measure don’t put it that way, rather than attacking the initiative with the usual bucket load of disinformation.

The five insurers and other contributors assembled a war chest of more than $650,000 by the end of last year to fight the 2014 initiative. They’re getting an early start, and surely the sky is the limit; the insurance industry spent more than $60 million in its failed effort to kill Proposition 103 ‘ in 1988 dollars. Get ready: The next campaign will make that one look like child’s play.