Hidden Perils of California’s Proposed Health Insurance Price Controls

In November, California voters will decide whether to implement state government price controls on health insurance.

Insurance agents and brokers are certain to be asked by their clients whether this ballot measure merits support. Some clients will be naturally skeptical of government health care price controls, while others will be open to the idea, but still have questions regarding the specifics of the proposal. Even clients who are receptive to government price controls should be deeply concerned about the hidden bureaucratic dangers buried in the proposed measure.

California has had government price controls on property/casualty insurance for roughly 25 years. P/C insurance companies are prohibited from changing prices for auto insurance, homeowners insurance and most business insurance without first receiving the approval of the California Department of Insurance.

The measure on the November ballot is superficially simple: It would subject health insurance to the same price control system that has been applied for a quarter of a century in P/C insurance. Supporters of the measure reason that California has developed a strong P/C insurance market under the price control system; hence it makes perfect sense to employ the same system in the health insurance market.

Health insurance is fundamentally different from P/C insurance, and imposing a system designed for P/C insurance into the health insurance market is certain to create major problems. To begin with, the very concept of health insurance involves two completely different systems for paying for health care.

In traditional health insurance, a patient, or more often a healthcare provider, submits a claim to an insurance company to pay for the service that was provided. The more common system in California, however, is the health maintenance organization, in which the insurer organizes a group of doctors and hospitals, and then pays them a flat amount for every insured person. The November ballot measure does not distinguish between these two very different pricing systems, and would apply the same law to each.

CDI has no experience whatsoever with regulating HMOs. In California, HMOs are regulated by the Department of Managed Health Care. Thus, the measure would require CDI to regulate the prices charged by a class of health insurer over which it has never had any regulatory authority.

The November ballot measure would take a law designed originally to regulate P/C insurance, and apply it to both traditional health insurance and to HMO plans. It is impossible to predict how this would work, but it is obvious that a law to set prices for health insurance should be designed with health insurance in mind: to do anything contrary guarantees that major unnecessary problems will likely occur.

Even in the case of traditional health insurance, importing the P/C price control system into the health insurance market will cause havoc. Health insurers and P/C insurers have completely different relationships with the people to whom they make payments. If a house burns down, the homeowner hires a contractor to rebuild the house and the insurance company subsequently pays the contractor. While the insurer may monitor the reconstruction to make sure that the prices are reasonable, and that the work is done honestly and competently, no pre-existing relationship between the insurer and the contractor was developed prior to the claim.

P/C insurance rates are based upon general market prices for services such as home or automobile repair. All P/C insurers face the same basic market prices for the services that they must pay for in insurance claims. These price statistics are available both to the insurers determining what their prices ought to be, and to the CDI in evaluating an insurer’s application to change its rates.

Unlike P/C insurance, with traditional health insurance, there is usually a contract between the insurer and the health care providers to whom they make payments. The insurer may have many provider groups it has contracted with in advance for specific prices, and any individual healthcare provider may have multiple contracts with different insurers. Each contract will usually have different rates for services provided under different insurance plans. CDI has very little experience dealing with this type of a pricing system, and it is unrealistic to think it can simply take its current rate review system and successfully apply it to the economic system used in health insurance.

Even though CDI has no experience with regulating HMOs, the measure would require it to regulate the prices charged by a class of health insurer over which it has no regulatory experience.

The fallout from this will be significant.

Because CDI currently has no regulatory power over HMOs, under the proposed measure it would have no responsibility for the financial soundness of the HMO businesses whose prices it would regulate.

Sound insurance regulation requires regulators to ensure that insurers have enough money to pay claims. Regulators cannot only pay attention to keeping insurance prices low, but must also make certain that the prices are high enough to provide adequate funds to pay for the services that policyholders need.

Under this measure, CDI would have a strong political incentive to keep health insurance rates low, but no incentive to ensure that prices are high enough to pay all claims. Responsibility for safeguarding insurer solvency — that prices are adequate to pay claims — would remain with DMHC, who would have no power to influence prices.

Giving one state bureaucracy (CDI) the power and desire to keep prices low while expecting another bureaucracy (DMHC) to make sure that prices are high enough would be a bureaucratic nightmare.

Roughly three quarters of health insurers in California are now regulated by DMHC. Under the proposed ballot measure, all of these insurers would have two state regulators; one responsible for price levels but with no responsibility for price adequacy, the other responsible for insurer solvency but with no power to make certain that prices are adequate to guarantee that insurers are able to pay claims.

Complicating this even further is the fact that most health insurers are now subject to the federal Patient Protection and Affordable Care Act, “Obamacare”.

The ACA provides an elaborate and extensive federal system mandating how participating insurers must operate. The November ballot measure does not require any coordination between California state price regulation and the federal ACA requirements.

Under the measure, insurers governed by the ACA would be subject to two inconsistent regulatory systems without any obligation that CDI review prices in a manner that accommodates the federal ACA requirements. The measure has the potential to seriously disrupt California’s implementation of the ACA.

Regardless of whether an insurance professional’s clients are inclined to support health insurance price controls in concept, everyone agrees that if price controls are imposed they should make sound regulatory sense for the health insurance industry. The proposed November ballot measure merely takes a system designed for P/C insurance and forces it on the health insurance market.

This convoluted and disorganized system proposed on the November California ballot would cause dramatic disruption in California’s market. This simple-minded, one-size-fits-all proposal is a recipe for disaster.

Topics California Carriers Legislation Market Property Casualty