California legislators are considering a bill, AB 52, that would give the executive branch the power to decide whether health plans should be allowed to increase their premiums at rates that keep pace with medical costs. Health plans may be a politically attractive target, but giving politicians the power to approve premiums causes other problems — and doesn't even hold down rate increases.
Only a year ago, California passed SB1163, which gave the Insurance Commissioner and the Department of Managed Care the power to police premiums and browbeat health plans that submitted increases politicians believed were unjustified. However, it stopped short of giving them the power to roll back premium increases. AB 52 would give them such power but this entails a problem.
Health plans are largely pass-throughs, paying medical claims from providers whose charges have been rocketing skyward. A recent analysis of daily inpatient charges for California hospitals revealed that payments from private health plans increased from $1,954 in 2000 to $5,061 in 2009 — 159 percent — in a period during which consumer prices increased by only 25 percent, nationwide. The charge for a normal (non-Caesarian) childbirth went up from $3,805 to $6,424 — 69 percent.
There is little or no evidence that prior approval of premium increases has protected consumers from unreasonable rate hikes. I have examined data on premiums and premium-review laws for small-group premiums in 43 states in 2006 and 2008. Nineteen states were “file & use,” which means that health plans must submit premium increases to the insurance commissioner, but he has no power to reject them. Twenty states required prior approvals of rate changes by the insurance department, and four were unregulated.
There does not appear to be any connection between prior approval and a lower change in rates from 2006 to 2008, nor the absolute value of rates in 2008. The average increase over the period was 8 percent for both file & use states and states requiring prior approval. The highest increase in the file & use states was 27 percent (in Virginia) and the highest in the states which required prior approval was 25 percent (in neighboring Maryland). Of the 45 states for which premiums were available for 2008, the average rate in 2008 was very slightly lower in file & use states ($345 per month) versus states with prior approval ($351).
Data for the much smaller individual market is available for 29 states in 2007 and 2009. Of the 22 of the states that legislated prior approval of rate increases, four allowed file & use, and three were unregulated. In this case, the states with prior approval had an average increase of 6 percent, versus 13 percent for the file & use states. However, there is no statistical power to this comparison: The highest increase in the four file & use states was 13 percent (in Texas) versus 29 percent in New York, the state requiring prior approval that experienced the highest increase.
On the other hand, aggressive rate review can threaten the solvency of health plans. In 2006 Massachusetts deployed a heavily subsidized insurance exchange (like the Obamacare-compliant one recently established in California), alongside a mandate that residents possess health insurance. The Massachusetts plan is widely, and accurately, described as a forerunner to Obamacare.
Using the power his California counterparts might soon enjoy, the state's Insurance Commissioner refused 235 of 274 (86 percent) requested rate hikes for April 2010, and demanded that plans rebate premiums that had already been paid. But medical costs in Massachusetts increased faster after the new regulations than before. Massachusetts' health plans are hemorrhaging cash, and a senior regulator has described the mess as a “train wreck.” Unless the Insurance Commissioner allows Massachusetts health plans to raise premiums in line with medical costs, insolvency will loom within a few years. What then? Another taxpayer bailout?
The notion that politicians can control health costs is a conceit of the ruling class. Health costs will only decline when patients, not politicians, control more of our health spending directly. This cannot happen until Obamacare is repealed. Until that happy day, Californians should reject politicians' campaign to control insurance premiums.
(This article was also published in PRI's Capital Ideas series.)